If you’re an online retailer—more specifically, one that sells through Amazon—you should be a little worried. Business may have peaked during the current economic cycle. But it may not be too late if you want to exit at a strong valuation.
The Wall Street Journal is the latest—if not the most influential—news source to report what most of us already knew: Shoppers are returning to brick-and-mortar stores now that the pandemic has receded while spending less time and money at online retailers.
Citing Census Bureau data, the Journal reported that online’s share of total U.S. retail sales fell to 12.9% in the fourth quarter of 2021, down from 15.7% in the second quarter of 2020, and up only marginally from pre-pandemic levels. More recently, according to Mastercard data, online spending in March 2022 fell 3.3% compared to a year earlier—the first year-over-year decline since November 2013—while spending at physical stores rose a robust 11.2%.
“E-commerce companies that were counting on a broad secular shift are now facing slowdowns,” the Journal commented, as well as “the prospect of expensive investments in bricks-and-mortar retailing while speeding up delivery times.”
Amazon, the 800-pound gorilla of online retailing, with thousands of small Fulfillment by Amazon (FBA) sellers on its site, wasn’t immune. Revenue at the company’s online stores unit fell by 1% in the fourth quarter—"the first year-over-year decline since the metric was first disclosed in 2016”—while sustaining $206 million in operating losses in the U.S., according to the Journal.
But the shift in consumer behavior back to physical stores is only part of the problem. So are supply chain bottlenecks, which are affecting stores of all kinds but “especially problematic” for FBA companies, according to a recent article in Entrepreneur.
“Those sellers that utilize Amazon’s fulfillment centers are limited to how much inventory they can store with Amazon,” the author writes. “The limits are based on how well a seller’s store is doing, so newer sellers typically have lower inventory thresholds. This means they have to order units more often. Because of the manufacturing and shipping delays, Amazon sellers often run out of items without being able to replenish their inventory quickly. This then leads to their Amazon listing getting suppressed.”
“So therein lays the recipe for a perfect storm,” the author concludes. “Unprecedented consumer demand with very little productivity in manufacturing, exorbitant shipping costs, understaffed ports and trucking companies working through backlogged containers.”
Not to pile on more bad news, but it’s also “becoming more expensive to lure in new online customers as advertising costs increase and organic search visits for shopping decline,” the Wall Street Journal also reported. And according to My Amazon Guy, the self-styled “Wikipedia of Amazon knowledge,” U.S. online retailers are also facing growing direct competition from Chinese retailers.
Not surprisingly, all of this has not escaped the notice of potential buyers of online retailing companies, chiefly the so-called aggregators who have been buying up FBA companies in droves over the past few years. According to an article on MarketPlace Pulse, “a few Amazon aggregators have paused acquisitions as increased seller valuations, supply chain disruptions, and struggles to grow acquired brands caused the industry to readjust.”
“The aggregator industry is not as optimistic as it was for most of 2021,” the website said. “Mistakes are more costly than before. Many aggregators bought brands they failed to grow, sometimes failing even to maintain existing sales. Some have found that they are worse at running Amazon seller businesses than the sellers they bought them from. It has gotten a lot harder and more competitive.”
“Slowing growth means that it will be harder to grow at prior levels, as outperforming the market segment enough to wow venture capitalists will become more difficult,” echoes TechCrunch.
“When it comes to ecommerce aggregators or buyers, their biggest assets — cash, ability to scale and operational management — can be the very cards that could make them fall,” the Entrepreneur author notes. “In these tumultuous times, the abundance of outside cash may be in limbo as investors are pressed by other market factors, calling upon them to possibly pull out.”
What do you do now?
So if you own an online retail business, what’s your best course of action? Our advice: Keep executing the best you can. You might consider going direct to the consumer rather than relying on Amazon. The game isn’t over yet. But you also need to keep an eye on the exit door.
“For every story of a struggling aggregator, there are more stories of those executing well,” Marketplace Pulse noted. “For every listed headwind, there are tailwinds too. The industry needs more time to play out - it barely existed two years ago, yet now has nearly 100 aggregators, employs close to 7,000 people, and has attracted $15 billion in funding. Most startups fail, and so will some aggregators too, but that’s not a sign that the model cannot work.”
Indeed, we see the current market tumult as a bump in a long road. No question, much of online retailing’s future growth was pulled forward because of the pandemic, and that it was likely the growth curve would eventually revert to the mean. But we’re confident in the industry’s long-term viability and that the best performers will continue to attract superior valuations from buyers. Aggregators and PE firms still have a lot of capital to spend, but they’re a lot pickier than they used to be. You must have a compelling story to tell about your business.
If you’re interested in finding out how much your business may be worth, call us today for a confidential analysis.