Has E-Commerce Peaked?

Three years ago, as lockdowns forced consumers to move much of their spending online, a golden age for e-commerce appeared to be dawning. Optimistic investors convinced that shoppers would keep buying on the internet, lifted valuations of e-merchants to frothy heights. Retailers of old and new raced to expand delivery networks.

Today those heady days look like a distant memory. On August 3rd Amazon, the world’s largest online retailer, reported 11% year-on-year growth for the second quarter of the year, excluding its cloud-computing division. That was better than expected—and provoked a roughly 10% jump in the company’s share price. Yet it was a fraction of the 42% sales growth that Amazon reported for the same quarter in 2020, and slower than the giant’s pre-pandemic trend. The same day Wayfair, an online purveyor of furniture that surged amid covid-19, reported its ninth consecutive quarter of declining sales.

A slowing economy is only partly to blame for the reversal. After spiking in early 2020, the online share of retail spending in America has remained stagnant at around 15%, roughly what it would have been had the pre-pandemic trend continued uninterrupted (see chart). The story is much the same in Britain, France and Germany, according to figures from Euromonitor, a market research firm.

In certain categories, including clothing and furniture, e-commerce penetration in America has tumbled from its pandemic peak, according to td Cowen, an investment bank. Consumers have flocked back to physical stores to inspect their dresses and dressers in person.

The share of American grocery shopping online, which jumped from 4% in 2019 to 7% in 2020, is still edging up—but at a statelier pace. Last year it reached 9%. Many shoppers, it seems, still cherish the human interaction of the till or the butcher’s counter. Few appreciate the squashed or under-ripe produce that arrives in the delivery van, or luck-of-the-draw substitutes for ordered fare that was out of stock. Retailers, for their part, struggle with the tricky economics of selling groceries online. Grocery is a business with wafer-thin operating margins of between 2% and 4%, according to Bain, a consultancy. Adding the cost of personnel picking products from store shelves and drivers ferrying them to customers quickly turns it into a loss-making endeavour. Relying on automated fulfillment centres instead of stores helps only a little; Ocado, a British online grocer following that strategy, oscillates between losses and the slimmest of profits.

One solution, notes Stephen Caine of Bain, is to boost margins by selling advertising; plenty of advertisers are happy to pay to show off their wares to e-shoppers. Last year Amazon generated $38bn of sales that way, some 9% of its total, excluding cloud computing. Yet most retailers, Amazon included, rely on added delivery fees to make online grocery delivery stack up. That, in turn, slows adoption. Fully 47% of Americans would do more of their grocery shopping online if delivery fees were lower, according to one survey by McKinsey, another consultancy.

For now, much of the growth in online grocery shopping will be in kerbside pickup, reckons Mr Caine, with customers collecting pre-picked goodies from stores to save on delivery fees. Amazon’s $14bn acquisition of Whole Foods, a posh supermarket, in 2017 was an admission that physical stores would remain central to the grocery business for the foreseeable future. Brick-and-mortar retailers, with their vast store networks, continue to dominate the category. Walmart, the mightiest of them all, sells 17% of Americans’ groceries, according to GlobalData, a research firm. Amazon’s share is less than 2%.

Meanwhile, competition in more mature areas of e-commerce is heating up. Shein, a Chinese online fast-fashion retailer popular with Gen z shoppers in the West, is expanding into things like electronics and furniture. This year it launched a marketplace for third-party sellers. Its mobile app already has a third as many monthly active users in America as Amazon’s. Temu, a tendril of Pinduoduo, a rising e-commerce star in China, has also grown rapidly since launching in America last year.

Another challenge comes from TikTok, a Chinese-owned short-video app beloved by youngsters. To monetise its users’ hours of scrolling, TikTok lets businesses squeeze ads and live demonstrations into their feeds, with links to purchase products without leaving the app. This model of “shoppable entertainment”, as TikTok calls it, has fuelled the success of Douyin, its sister app in China. Douyin now sells more clothes and accessories than small, the Chinese e-commerce platform operated by Alibaba, a local tech champion.

TikTok harbours similar ambitions in the West. Last October it was reported to be readying its own fulfilment network in America. Rumours are swirling that it will soon begin purchasing products from China and selling them to consumers itself; an experiment is already underway in Britain. TikTok’s aspirations would be thwarted if the American government bans it outright on national security grounds, which many politicians are calling for. In that event, Reels, a TikTok lookalike offered by Meta, a homespun tech giant, could perhaps take the place of the disruptor.

A final challenge to the West’s e-commerce incumbents is brands’ growing appetite for selling directly to consumers. Euromonitor reckons that direct-to-consumer sales now account for 16% of e-commerce, a share that has quadrupled over the past eight years. More access to shoppers’ data helps brands to speed up innovation, notes Michelle Evans of Euromonitor. By cutting out the middleman, it also often improves margins. Shopify, a Canadian e-commerce platform, has built a booming business selling tools to make it easy for companies to build online shops. On August 2nd the firm reported an Amazon-trouncing 31% year-on-year growth for the second quarter.

Well-known brands like Nike, a sportswear heavyweight, are among those to have embraced the trend. Direct-to-consumer sales have risen from 17% to 42% of its total revenue over the past decade, with more than half of those sales generated online. Upstart brands such as Allbirds and Casper, makers of shoes and mattresses, respectively, have also shunned traditional wholesale arrangements, harnessing the web to sell to customers directly. More recently, though, the newcomers have been opening physical outposts for consumers to touch and feel products. The digitally native brands, too, may be preparing for a world without much more e-commerce.

The Economist