Thread by @digitallynativ

Yesterday I posted about the profitability headwinds facing eCom, resulting from a shift of consumer purchasing behavior away from transacting offline (due to COVID-19 restrictions) to online retailers and brands.

Feedback was mixed, so I will unpack my point a bit more 👇🏼

The framework of my point, which I believe was also widely misunderstood, is that when I reference future profitability, I’m focusing on the [aggregate] of eCom sales, and the [mix] of products being sold within that aggregate

Not any single brand/category, or outliers

Let’s examine pre-COVID eCom performance of a few major retailers.

First up: Walmart

Walmart eCom grew by 37% last year which was driven largely by grocery, but at $50B in revs their eCom segment continues to be unprofitable as noted below in a CNBC report by @laurenthomas

Next up: Amazon

Amazon generated $160.4B in eCom merchandise sales (of $280B top-line Revs).

Amazon doesn’t report Ecom specific net income, but overall Amazon generated earnings of $14.5B in 2019

Important context:

AWS Net income: $9.2B
Prime Membership Fees: $19B

So Amazon’s profitability is driven by AWS and Prime Memberships (not to mention their growing $3.6B advertising revs)

Like Costco, they subsidize unprofitable eCom sales by passing on the costs to their customers via membership fees ($118/yr, 150M members)

[Costco: 90.3M]

Lastly: Chewy

The largest eCom Pet retailer IPOd in June of last year

In the most recent quarter (Q4) Chewy generated 1.35B in sales and lost $61M

In fact, the retailer has never posted a single dollar of profit in its history

So we have Amazon, Walmart and others (like Chewy) churning out massive GMV with no net income to speak of.

Why is that?

The math is simple relative to retail:

⬇️AOV
⬆️Variable Costs
⬇️Gross Profit

Higher logistics and fulfillment costs in eCom drive the delta in var costs

COVID-19 is shifting consumer spending in three ways:

1/ Lower discretionary spending
2/ Lower aggregate spending
3/ Shift of purchasing behavior from offline to online

In addition to the shift in channel mix and overall lower retail sales volume, consumer behavior is creating a mix shift by category of spend:

1/ increased grocery
2/ increased consumables
3/ decreased durables
4/ decreased luxury

This mix shift is critically important to the profitability argument:

Grocery and Consumables are typically commodities with no pricing power: lower prices, lower margins

Durables & Luxury goods carry greater perceived value-to-price relationship: higher prices, higher margins

While COVID-19 has somewhat arbitrarily created DTC winners and losers, the broader point is:

a) in terms of analysis and projecting the future, luck is a disinteresting variable

b) Lower aggregate retail sales at lower margins will ultimately hurt eCom, DTC and the economy

Why is it bad for DTC?

Many brands will be forced to a) lower prices and/or b) expand to marketplaces (Amazon, Walmart, etc)

This creates downward pressure on gross margins

Demand shocks for the few thriving DTC categories will swing to supply shocks, and pricing pressure

Much of this anticipated impact depends on how long the COVID crisis stretches on in the US and how deep it’s impact is felt on employment, consumer sentiment, social interaction and psychology

There will be big wins and big losses

But let’s not lose sight of the bigger picture