E-Commerce Companies Can Prosper During this Downturn

As the recession proceeds, analysis of business-to-consumer e-commerce sales data shows that while the sector is not immune to the recession (2008 was the first year that e-commerce did not grow on a YoY basis since 2000), it is growing faster and is experiencing less margin pressure than physical retail.  Public companies like Amazon, Netflix, and GSI Commerce posted strong results for 2008 and took market share from their competition.  It has also been reported that 2008 sales for the 131 online retailers have grown by 21 % YoY.  Excluding the top five e-retailers in this group the rest still grew by about 10% during the same period.  Anecdotal evidence, including data from our own domestic and international ecommerce portfolio companies, suggests that many private e-retailers enjoyed similar strong results.  These results can be attributed to customer behavior, investments made by merchants, and decreasing customer acquisition costs.

During these recessionary times consumers are using the Internet extensively to search for deals (for example, Google, Yahoo and Microsoft report that searches around online coupons are skyrocketing; a recent survey by JP Morgan reported that price is today the most important factor when consumers choose an online retailer), for comparison shopping as they attempt to identify the best possible prices on the items they still buy, and for its overall convenience factor.  In addition, shopping sessions and amount sold per session are growing on a YoY basis.  Demographic data suggests that while younger buyers still dominate, the use of ecommerce by older consumer groups is rising.  Finally, while ecommerce’s penetration in product categories such as computer electronics, and media (books, music, and video) is over 25%, penetration in categories such as cosmetics, apparel, home furnishings is still less than 10%, implying that there is lots of room for growth.

Noting these trends, retailers are investing more heavily around their ecommerce infrastructure and merchandize choices (creating a virtuous cycle for the further growth of their ecommerce sites), while curtailing investments in other parts of their operations (including physical stores).  These investments in conjunction with continued broadband penetration, improving shipping infrastructure and e-payment methods are expected to continue benefiting e-retailers for years to come and further strengthen the consumer behaviors noted above.

Merchants are also benefiting from the drop of customer acquisition costs (online advertising and lead acquisition). This is due to the drop in CPM and CPC rates (in some categories more than others), as reported by Efficient Frontier, to the availability of more online advertising inventory, and to the decreased competition in keyword auctions.  I expect that these trends will continue during 2009 and possibly 2010.

A final reason for optimism on the short- and longer-term growth of ecommerce companies comes from the increasing use of analytics by e-retailers.  Until recently ecommerce analytics were being used consistently and effectively only by the leading e-retailers.  In most cases, these e-retailers had to develop proprietary analytic applications.  More recently, packaged software applications incorporating analytics to understand consumer behavior within a site and across sites, analytics that drive the optimization of a site’s content in order to improve consumer response rates and merchandise turnover, keyword optimization to improve online advertisement response rates to search queries, price optimization to maximize profit margins based on customer purchasing behavior, etc. are starting to be adopted by the broader group of e-retailers and are leading to significant improvements in the performance of these companies.

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