Black Friday Data Shows E-commerce Growth Slowing

The Rise of E-commerce During and After COVID-19

The beginning of the COVID-19 pandemic catalyzed significant growth in the e-commerce sector. Global lockdowns, the widespread adoption of remote work, and related circumstances led to a substantial increase in online spending by consumers worldwide.

This period, starting in March 2020, proved exceptionally profitable for companies like Shopify. The company’s stock price fluctuated between $350 and $420 per share during that initial month.

Currently, Shopify’s value has risen to $1,554.74 per share, demonstrating remarkable growth.

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Numerous other businesses experienced rapid expansion as consumer behavior shifted towards online purchasing and away from traditional brick-and-mortar stores.

For example, Instacart’s grocery delivery service saw accelerated growth. DoorDash successfully launched its initial public offering (IPO) fueled by increased demand.

Roblox also benefited, with a surge in user engagement propelling its entry into the public markets. This trend extended to many other companies within the digital space.

Potential Slowdown in E-commerce Growth

Although certain sectors thrived, and many continue to attract investor interest, the impressive five-quarter run experienced by e-commerce companies may be decelerating.

The sustained period of investor enthusiasm surrounding e-commerce may be coming to an end, signaling a potential shift in market dynamics.

Black Friday Performance and Financial Warnings

Despite a personal aversion to manufactured shopping holidays, they offer valuable insights into consumer behavior. As anticipated, U.S. retail foot traffic during Black Friday was lower than usual. The emergence of new COVID-19 variants undoubtedly contributed to this outcome.

However, it may be unexpected to learn that online shopping during the Black Friday period experienced a decline compared to 2020. While the decrease wasn't substantial, the drop in online spending from $9.0 billion to $8.9 billion this year prompted closer examination.

Looking back, indications of this trend were already present.

Shopify's third-quarter earnings, released on October 28, 2021, fell short of expectations. The company reported revenues of $1.12 billion, despite achieving 46% year-over-year growth. Both earnings per share and gross merchandise volume failed to meet analyst predictions.

Further warning signals were evident in Amazon’s financial results. The company’s revenue and earnings per share also missed targets in the third quarter. Growth for the U.S. commerce leader was 15% year-over-year overall, with its cloud computing division driving growth at 39%.

North American sales only increased by 10% compared to the previous year.

These developments culminate in Pinduoduo’s recent, considerably disappointing earnings report released last Friday. The company’s revenue growth of 51%, reaching $3.3 billion, was approximately $670 million below anticipated figures. This news triggered a significant sell-off of its shares.

Considering these prior results leading up to Black Friday, the observed moderation in e-commerce figures should not come as a surprise. The pandemic fueled a surge in online shopping, but that effect now appears to be diminishing, even though e-commerce continues to expand.

The rate of growth, however, is slower than investors had projected. This likely translates to reduced revenue multiples for e-commerce businesses. The long-term shift towards online shopping isn't reversing, but its growth trajectory is normalizing.

This is crucial information for startups that either provide services to e-commerce companies or conduct online sales themselves.

Examining the Roll-Up Strategy

Considering the previously discussed findings, a specific area of the startup ecosystem that warrants attention is the emergence of online brand roll-up ventures. These companies have secured substantial funding in recent months.

TechCrunch’s reporting on Razor Group’s recent capital raise, which is part of a trend of firms “acquiring Amazon sellers to achieve greater e-commerce scalability,” featured a summary of recent investment activity in this space, as provided by Ingrid Lunden.

The core idea involves aggregating smaller online brands, backed by billions of dollars in investment. However, as the growth rate of the broader e-commerce market decelerates, questions arise regarding the continued appeal of these investments.

Do these acquisitions still represent sound financial decisions? Are the brands compelling enough to justify the significant capital expenditure required for their purchase?

During the period of accelerated e-commerce growth fueled by the pandemic, the strategy may have been viable. Now, however, its long-term success is open to debate.

The Shifting E-commerce Landscape

The initial premise of the roll-up model hinged on capitalizing on the rapid expansion of online retail. A key assumption was that consolidating smaller brands would unlock efficiencies and create a more competitive entity.

However, the current economic climate presents new challenges. Consumer spending is becoming more cautious, and competition within the e-commerce sector is intensifying.

This altered landscape necessitates a reevaluation of the roll-up strategy. The benefits of scale may be offset by the headwinds facing the industry as a whole.

Key Considerations for Roll-Up Ventures

Several factors will determine the success or failure of these ventures. These include:

• Brand Differentiation: Can the acquired brands maintain a unique identity and appeal to consumers?
• Operational Efficiency: Are the promised synergies and cost savings actually realized?
• Market Adaptation: Can the roll-up companies adapt to changing consumer preferences and market dynamics?

Without addressing these critical areas, the substantial investments in roll-up plays may not yield the anticipated returns.