Is Brick & Mortar still relevant in an ecommerce world?
Ecommerce is slowly becoming the dominant retail channel for consumers. I remember only 20 years ago that the streets of London would be full of shops ranging from sports brands, toy retailers, bookstores, restaurants, DIY stores, watch stores and much more. Today most of those stores have disappeared. Toys R Us, Woolworths, Blockbusters, and many more have disappeared from our high streets, replaced by digital equivalents, think Amazon, Netflix, Wayfair. This, of course, isn’t new to anyone. But it paints an interesting point I want to discuss in this article. Can every retailer have its own online ecommerce platform, and are they good investments? The answer is yes and no.
Combining brick & mortar with ecommerce
We all know about Amazon and how you can buy virtually anything on that platform. The company drives the prices down in any category, even if it’s loss-making in the pursuit of a greater customer experience and to gain market share. But I’ve started to see in web 2.0 a focus on individual categories having their own platforms. What do I mean? Well, think about Made.com or Wayfair. Both are ecommerce platforms for furniture. Another example is Etsy, an ecommerce platform that allows creatives to sell their work online, a bit like an old arts and crafts store.
The pandemic shifted almost all consumers to purchasing online as the lockdown forced people to stay at home. And that likely shifted nearly all retail businesses to think about their online presence. Buying online will be an increasingly bigger proportion of people’s spending habits. However, I believe there will be a need for an offline and online distribution channel that complements each other.
If you don’t believe me, then have a look at Zara. The fashion retailer has 68 stores scattered throughout the UK, as well as a strong ecommerce presence thanks to a €3bn investment by management. For Zara, its ecommerce platform provides a lucrative channel for sales. But its physical stores maintain and expand brand awareness.
Having both channels is vital for some retail categories. For example, Warby Parker, the online eyewear company, made 65% of its revenue in 2019 from physical sales. But in 2020, due to the pandemic, that quickly shifted to 40%, with the rest coming from digital online sales. In the end, though, we all need to get our eyes examined. And that can only be done in person with a trained practitioner making a pure online play unviable for this business.
Finding ecommerce stocks to buy now
A lot of new ecommerce stocks are propping up in many different categories today. And it’s hard to keep on top of them and which ones will be great investments. Here at the Money Cog, we’ve looked at a lot of these businesses already. Each business is fundamentally different, but two overarching themes begin to emerge.
The first is a direct-to-consumer focus that firms like Warby Parker, Wayfair, and Ocado have. When looking at these businesses, I pay particular attention to several key metrics. A few of these are customer acquisition cost versus lifetime value, average order value, and customer retention rates. There are undoubtedly plenty more important factors to consider, but I’m essentially looking for evidence of strong brand loyalty. In my experience, this is critical to generating a wide economic moat.
The second focus is an ecommerce platform play that enables businesses to easily establish an online presence. Think Shopify or Etsy. From what I’ve seen, these types of ecommerce firms tend to have greater growth potential as they can benefit from economies of scale. And that in addition to exploring new revenue channels through additional services. Shopify is already working on various financial service solutions that my colleague Zaven explored in his analysis.
So as I stated in my article at the beginning, yes, I think it’s likely that an ecommerce business will eventually exist in nearly all retailer categories. But, brick & mortar will still have a complimentary place in the retail environment.
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Imran Dean does not own shares in any of the companies mentioned. Zaven Boyrazian owns shares in Shopify and Etsy. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.