When Shopify CEO Tobi Lutke laid off 10% of his workforce (about 1K people) this summer, he published a public essay explaining why:
“Before the pandemic, ecommerce growth had been steady and predictable. Was this [Covid] surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix - the share of dollars that travel through ecommerce rather than physical retail - would permanently leap ahead by 5 or even 10 years.”
He accompanied the above statement with this chart:
Tobi then explained that Shopify’s bet on ecommerce seemingly hadn’t paid off with ecommerce adoption reverting to the pre-pandemic trendline.
We had just published an essay on our belief that, while ecommerce was seeing a near-term headwind, it was on a long-term compounding growth path. Generally, if you publish research contradicting one of the world’s preeminent experts on a topic, you should triple-check all your work—so we did just that.
There are two important nuances when forecasting the ecommerce trendline. First, where and what is considered ecommerce? And second, how far can digital go?
Where and What is Ecommerce?
It is February 12th and you realize you forgot to book the restaurant for Valentine's Day. Catastrophe! Disgust! Divorce! You immediately jump on OpenTable and book the only available table: 4:30 at an English pub with 2 ½ stars. This merchant integrates with OpenTable via Toast, so you preview the menu online. From there you sit at the restaurant, eat greasy fish and chips, apologize for the error (you are not forgiven), and then pay at the table via QR code. What type of transaction is this? Every portion of the transaction, sans consumption, is done digitally. Does it qualify as ecommerce?
This silly example illustrates just how hard it is to say what is pure ecommerce versus what is omnichannel.
The academic formula for calculating the percentage of retail as ecommerce is:
Ecommerce volume / total retail volume = % of volume that is ecommerce
Our perspective is that whether you call it ecommerce or omnichannel, digital services are eating larger and larger portions of the transaction experience. It means that ecommerce-esque experiences are occurring in places you never would expect.
In-store ecommerce in retailers like Nordstrom happens when the associates order, manage, and mend clothing all from one central interface. They can help you order online while you wait to pick up your last order. Restaurants can use dynamic menus to surface past favorites. Maybe these transactions could be classified as ecommerce, or maybe not, but this is something fundamentally different from the analog retail transaction of yesteryear.
Simultaneously, ecommerce is changing regulated industries it could never touch before.
Ten years ago, Colorado and Washington broke with national sentiment by legalizing recreational cannabis use. It was national news and featured heated debates. Now, 37 states have done the same and it feels like no one cares! Buying weed used to mean buying something that was half stem and seeds from your brother’s stoner friend (joke!). Now you can purchase (and pay) online and have it delivered directly to your house via Dutchie. Disclosure: Dutchie is a Tidemark portfolio company.
Amanda Whelan, CFO of marketing automation provider Klaviyo, is seeing similar dynamics with their customers. Amanda explains, “We have a new partnership in the adult beverage space that makes it easier for customers to handle the tax and compliance challenges of that space—creating opportunities for ecommerce (and adult beverage drinkers!) across the country.”
Amanda also told us about another Klaviyo customer in the digital health space that is “using data from quizzes to customize healthcare plans.” Tesla did the same for cars. By cutting through regulatory capture, you can buy a $100K vehicle all from your browser without having to deal with a single salesperson. Even the largest transaction that most consumers will ever make, the purchase of a home, is being digitized by iBuyers like Opendoor.
It doesn’t matter what label you give this stuff. A fundamental reorganization is occurring in how consumers find, purchase, and receive every type of good in their life—it isn’t just books anymore.
We are even seeing early signs of ecommerce happening in the sleepiest of B2B segments like automating custom manufacturing. It turns out that you can build a public company like Xometry to help companies turn a design file in CAD into a finished product, all online. Fundamental industries like telecom or financial services are becoming ecommerce-enabled, where the entire relationship is managed digitally. Filling out a bunch of DocuSigns? Probably not an ecommerce transaction. One-click checkout? Maybe.
The further you stretch the numerator in the equation, the more difficult it is to pin down what is happening. If you layer in geographical differences, the confusion is even worse! Each country will have marginally different definitions of ecommerce versus traditional retail, making comparison incredibly difficult. Even if the difference is just a percentage point or two, it can result in a large difference when you are dealing with trillions of dollars running through the system.
Look at this random data set we grabbed off Google—do these exclusions make sense? Why did they occur? Are all data sets following similar rules of what categories to keep or dismiss?
All of these examples show the complication of saying what the true state of ecommerce is. If this is so messy, why are we still so confident that ecommerce is currently compounding?
The Digital Age
Rather than view ecommerce as a monolith, we view it as a variety of seeds that have been planted all over the economy. Some of the most fertile soil was reached first—Bezos notoriously had no real interest in books but felt like that market was the easiest place to get started to build his Everything Store. Others have taken twenty years to start to bear fruit.
A certain percentage of goods will always be sold in person. However, we believe that eventually, virtually all categories of goods will have ecommerce components. Every day, we meet with companies that are using the internet to sell goods in ways that we didn’t believe were possible. We see exciting digital transformations in how teachers and coaches engage with their students with Kajabi. Disclosure: Kajabi is a Tidemark portfolio company. As Amanda at Klaviyo pointed out earlier, we’ve even seen ecommerce finding its way into healthcare. In addition to purchasing plans through digital channels, the healthcare delivery model has transformed with the loosening of telehealth rules due to Covid.
And we can’t forget about traditional retail, which is still in the early innings of ecommerce adoption in many ways. For example, we spoke with Faisal Masud, CEO of headless ecommerce leader Fabric and a former executive at Amazon, who observes, “the retail industry trails Amazon by ~15 years in just simple back-office automation. I built autonomy in inventory, returns, and pricing at Amazon back in 2008-2010 that still doesn’t exist at any retailer in the US market. Sounds crazy, but it’s really this bad!”
Consumer brands are also finding new and innovative ways to bring the retail experience home. We heard from ecommerce messaging leader Attentive that their customer Igloo is using their platform to proactively check in with subscribers while they’re browsing Igloo’s site to answer questions. Kizzy Ezirio, Igloo’s Director of Digital User Experience, explains, “When I take a peek at the conversations happening over text, I just love what I see…we’re bringing the in-store experience into the phone, and that’s a huge benefit for our SMS subscribers.”
In LATAM, we heard from Santiago Sosa, CEO of Nuvemshop, that even perishable goods are being sold online. He marvels, “Bife de Chorizo (a famous steak dish served in Argentina) and Peixe Fresco (fresh fish, this one is a story from Sao Paolo)—I never thought we were going to be able buy those online.”
Back to that Trendline
Our response to Tobi’s assertion that ecommerce has reverted back down the trendline? It is kind of true. However, we think it is also a matter of the denominator changing—consumer in-person spending has bounced back in a major way.
We also have reason to be optimistic from a recent batch of ecommerce data. Q2 2022 numbers suggest that ecommerce adoption is once again growing after two consecutive quarters of decline.
Debating total ecommerce penetration rates is important. However, what gets us excited is the future. Shopify helped bring a whole generation of SMB retailers online—we are excited to partner with the technology companies helping merchants from ever more diverse areas do the same.