Then and Now: The Post COVID-19 Phase of E-commerce
The immediate impacts of the pandemic
The arrival of COVID-19 shocked the globe and impacted every aspect of our lives. In a very short time, it caused dramatic shifts in consumer behavior and created both challenges and opportunities for the e-commerce industry. While it's almost impossible to cover all the ways that the pandemic affected online retailers, a few stand out for their reach and what they mean for the future as a return to normalcy arrives.
Huge growth in e-commerce
COVID-19 forced many physical stores to close down and drove shoppers online for products in record numbers. Obviously, the shift in behavior benefited Amazon, as sales in the broader e-commerce marketplace exploded by nearly 50 percent compared to pre-COVID-19 levels. This remarkable growth, and the fundamental change in consumers' buying behaviors driving it, led brands to adjust their strategies for reaching customers accordingly.
The venture capital market was on fire
COVID-19 caused tremendous disruption across many industries, but technology companies were one of the few to actually benefit. Simply put, social distancing meant people spent much more time online. They were working remotely, buying products remotely, and playing more video games remotely. This shift toward internet-supported activities gave rise to a huge crop of venture capital-backed companies to meet the demand, many of whom face uncertain futures as the market shifts back toward normalcy.
Supply chain concerns
The substantial growth in demand for products led to supply chain shortages. Products were out of stock, and the cost to get more to the shelves skyrocketed. The costs of shipping goods from overseas increased exponentially while fuel prices increased last-mile delivery costs substantially. The added expenses immediately impacted brands as they were forced to either raise their prices or reduce their margins. Inflation was real. Many of the brands we work with saw supply chain costs jump from five percent of revenue to 10 or even 15 percent, gutting profitability along the way.
What comes next?
While the past three years have been dominated by COVID-19, we believe a new phase is on the horizon, and it's critical for brands to understand how these trends will impact their businesses. Here's what we think our clients should be preparing for.
Brands shifting focus to profit more than revenue
With a possible recession on the horizon and business investors for new ventures drying up, brands will begin to value profits more than just seeing their revenue grow. As we mentioned, the VC market funded an enormous number of new direct-to-consumer companies. However, many of these overspent to get ahead of each other.
With funding for these startups tightening, it's likely that many will go out of business while the surviving ones will cut costs to reach profitability. We've already seen one instance of this in the recent liquidation of Packable, the largest seller on Amazon, which had previously raised over $250 million and had plans for a public offering. As businesses leave the marketplace, we expect to see reduced competition and higher product prices going forward.
Bigger brands take market share
Many startups that resulted from the e-commerce boom and ample VC funding also relied on an ability to launch new products on Amazon quickly. Unfortunately, the game plan for some of these brands was to violate Amazon's terms of service by using black-hat tactics like fake reviews and orders to trick Amazon's algorithm into treating the products as if they were in high demand.
Thankfully, this is all changing in the post-COVID-19 world. The combination of Amazon cracking down on these violations, larger companies having more financial resources and better-established supply chains, and fewer investment dollars going into funding startups will lead to bigger and more prominent brands regaining lost market share. At Amify, we are already seeing the positive effects of less competition for many of our clients.
Amazon is shifting from a retailer to "an extension of a brand's website"
In the past, many brands avoided the Amazon marketplace out of fear it would sacrifice their customer relationships or that Amazon would copy their product and they would see their sales crater. However, with Amazon accounting for roughly 40 percent of e-commerce sales in the U.S., brands now realize they need to meet the customer where they want to shop. In fact, in the face of declining sales, Peloton recently announced a new partnership with Amazon to sell its popular exercise equipment via the site. We expect to see this approach continue to flourish, with other companies joining the trend shortly.
Supply chain moderation
Supply and demand is a simple economic concept. COVID-19 caused a considerable increase in product demand while limiting supply due to the shutdowns it caused in China and other places where numerous products are made. The good news is these issues can be resolved with time, and we are already starting to see some improvements.
With the world recovering from the impacts of COVID-19, factories are running again and increasing their capacity to meet demand. In other words, the supply is going up. At the same time, demand for products is softening in many areas due to inflation. For example, mortgage rates have risen from three percent to nearly six percent over the past six months. Additionally, the demand for houses in many areas is down by as much as 30 percent. In addition, some companies are announcing significant layoffs. These factors will lower demand for products, which then reduces costs. As a result, it seems likely that supply chain costs will moderate over the next year, giving a much-needed boost to margins for many brands.
E-commerce returns to trendline growth
Between 2010 and 2019, e-commerce consistently grew by 10 to 20 percent. Then COVID-19 caused a massive 50 percent jump in 2021, which nearly flattened in 2022. As we look to the future, online retailers should prepare for a return to the expected 10 to 20 percent growth that existed before COVID-19. Of course, this would be welcome news to many brands which experienced stagnant growth in 2022 due to the reopening of physical stores and renewed interest in traveling and leaving the house instead at the expense of online shopping.
Amify can add to your brand's agility
No one can predict exactly what lies ahead, but failing to prepare for the future is still a mistake that too many businesses make. Whether it's global events, new technologies or changes in policy, success often hinges on a brand's ability to respond quickly and effectively.
Let Amify’s team of more than 60 e-commerce experts be your partner for whatever comes your way next. We help clients manage more than $200 million in merchandise each year and have a proven track record of operating nimbly in a rapidly changing marketplace. Find out how we can guide your business to its next stage of success with a free consultation today.