The last few years have reshaped our world. COVID was a catalyst of political and social change. Some of these changes were temporary (does anyone still make sourdough?) and some were permanent (hooray for the pantsless Zoom meetings). The question we found ourselves asking was whether ecommerce had experienced a temporary spike while retail channels were shuttered, or whether it was a permanent acceleration of this long-term trend.
Post COVID pullback vs. compounding adoption?
Perhaps more than any other sector, ecommerce saw a massive tailwind from changes in consumer behaviors driven by the COVID-19 pandemic. However, as that tailwind has begun to normalize, public investors are panicking over a post Covid pull back in the sector.
Shopify is a prime example. After more than tripling during the course of the pandemic to reach nearly $1,700 per share, Shopify’s stock fell below $400 for the first time since early 2020.
In its latest quarterly earnings call, Amazon revealed the pull back that most feared, “We have too much space right now [in comparison to demand],” said Brain Olsavsky, Amazon’s CFO. Amazon’s supply greatly exceeded demand for ecommerce labor and logistics.
While we acknowledge that current quarters will face tough YoY comparisons, we at Tidemark believe in the compounding adoption of ecommerce. For a period of time Covid made ecommerce the only way for customers to buy, and the only way for brands to get their goods to market. However, Covid catalyzed change far deeper than a one time acceleration in revenues. It taught consumers and businesses to expect to be able to buy online, and made brands realize that ecommerce was not just a specialty channel but at the heart of how they sell products and engage with their customers. It moved omnichannel from a potential strategy to an absolute necessity.
This sector isn’t a new or fledgling interest for us. At Tidemark, the ecommerce enablement space is an area we’ve made many investments in over many years. Our investment experience at prior firms includes front office category leaders like ExactTarget in marketing tech, Sitecore in CMS, Toast in point of sale, Siteminder in channel management, and AppNexus in adtech. We are building on that foundation with three investments out of our new fund in Contentful (headless CMS), Kabaji (a Shopify-eque software for knowledge creators), and Dutchie (POS, channel manager, and fintech for cannabis).
However, even with this background we still feel like we have more to learn, and wanted to use this post to discuss some of our recent research.
Ecommerce is not just core, but everywhere
To get out of the ivory tower and into the mix with customers and industry experts, we recently hit Vegas for the first Shoptalk conference since the pandemic began. Named “retail’s big reunion”, Shoptalk 2022 was the first time many of the leading ecommerce experts were gathering in-person since 2019.
While public investors have shown a bearish view of ecommerce, the Shoptalk conference floor buzzed with a very different story—ecommerce is here to stay. Retailers talked about how ecommerce changed from an interesting channel pre-covid, to being at the heart of how they sell products. They talked about consumers expecting an online option, and that the experience online (e.g., information, transactions, content, catalog) would be synchronous and harmonious to their experience in all channels. Accordingly, the ecommerce effort was no longer owned by the head of ecommerce or head of digital, but a CEO level priority.
While Shoptalk was mainly US focused, it was clear that global patterns were on peoples’ minds. Ecommerce started in the US (RIP Pets.com), but it’s clear the US has much to learn. In LATAM, conversational or message-based commerce has seen considerable growth. Over 70% of LATAM consumers use WhatsApp in their purchasing process, and our own research suggests that 25% of commerce in LATAM takes place on that platform. Similarly, Asia taught us that ecommerce is social, as social selling platforms like Pinduoduo, a Chinese-based publicly traded company that generated over $14B revenue in 2021, have experienced wide adoption. Similarly positioned platforms like Alabama-based CommentSold are seeing strong growth in the US as well. However, the $36B of GMV generated by social selling in the US today pales in comparison to the $360B of social selling GMV being generated in China.
Research suggests that the move to social ecommerce is a result of the consumer preferences of the rising generation. According to NRF, 66% of Gen Z use social media to research products, 47% of Gen Z following a brand on Instagram use that platform to purchase products and 22% of Gen Z use social media to contact customer service.
Companies that have invested in new digital and social channels are seeing it pay back in spades. According to Pacsun’s Co-CEO Alfred Chang “our digital business…doubled in size this past year and is still seeing strong double-digit year-over-year sales growth. Outside of sales, teams were able to see incredible results across all of our digital touchpoints, with explosive growth in the Pacsun app, TikTok and customer file. Together with our stores, we saw total sales growth and profitability hit historic highs.” TL;DR, ecommerce is across every channel, everywhere.
Headless is no longer a preference, it’s a dominant architecture
Historically, headless was the fancy of developer centric organizations because headless functionality is composable. In layman’s terms, this means that an ecommerce capability could be built without being directly tied to the user experience and feel. By separating the front end from the core commerce backend, it allows brands to iterate and improve the look and feel of the front end without mucking around with the core ecommerce functionality.
We appreciate Justin Gage’s simple explanation in Technically: “Anything that’s headless…just means that the frontend is left to you, and is customizable and configurable. A headless ecommerce platform will build these basic backend elements for you, so you can focus on making your store look nice, and get out there and sell.”
Headless used to be driven by developer preference, but is now a business imperative because the front end is in desperate need of an upgrade. Ecommerce has become much more of a strategic channel as more transactions have moved online over the past couple of years. As ecommerce volumes have increased, so have the requirements for storefront performance.
Merchants need the front end to be faster, more responsive, and more personalized in order to drive higher conversion. Higher conversion in turn drives better return on ad spend (particularly given ATT) and ability to win. As a result, merchants want to decouple themselves from templatized front end user experiences like Shopify while continuing to use Shopify on the backend. In short, speed wins and headless is the fastest gun in the West.
Compounding this move to headless is the proliferation of new front end channels. Ecommerce is now everywhere. It’s no longer a single front end on a website, but rather a multi-pronged strategy encompassing numerous channels including web, app, messaging (Whatsapp), social and many others. As Mihaela Mizzenga CTO of Sharper Image explains, “Companies creating web-enabled applications wanted to be able to extend those experiences to other channels without having to rewrite natively for each touchpoint.” In order to create a consistent experience across all customer touchpoints, companies must choose a truly composable commerce stack that can handle both owned physical (instore) and digital engagement channels including messaging (email, SMS, Whatsapp) and social (YouTube, Tiktok, Facebook, Instagram, Pinterest). Furthermore, headless can also provide leverage in channels that have historically been harder to maintain such as third-party retail stores, B2B commerce, marketplaces and business development partnerships.
It’s clear that commerce and front end will no longer be a monolithic stack. Rather the various aspects of a commerce experience will be composable components that can be switched in and out according to a merchant’s needs and preferences. Some of those key components and systems are represented in the diagram below.
However, when you actually get your hands dirty, you realize that an orchestration and integration layer is required to bring together so many disparate systems. Despite the emergence of new players, existing platforms like Salesforce, Magento, Shopify and Oracle will likely be around for years to come. These solutions are similar to ERP systems—extremely mission critical and have high switching costs. Rather than starting from scratch, the orchestration layer can provide the infrastructure to integrate disparate solutions and surround the technology stack with additive systems (this is a strategy that we’ve written about in length). In order to provide maximum value, this orchestration layer will provide APIs for commerce modules (like Mulesoft), but remain transactional and message-aware (like Segment).
And, while ecommerce components have been abstracted from the front end for all the reasons above, it wouldn’t be surprising to see commerce vendors also offer a composable front end (e.g Commercetools buys Frontastic). Commerce is indeed everywhere, but your brand’s store is the anchor to your user experience and strategic to how you show up. And the user experience itself might require tooling, integration and orchestration to really make it sing.
Build for the long term
The post covid pullback may reveal some scary trends, but ecommerce is not only here to stay, it is showing the benefits of compounding adoption. As commerce becomes more deeply embedded in our offline and online experience, it creates an architectural shift. With these big shifts come opportunity, and we at Tidemark are on the lookout for the next commerce platform.
The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.