Is there an “online hangover” after the pandemic?
The discussion around online retailing has transformed quite significantly during this year. The societies have opened up and many pandemic induced habits have started to diminish. This has had a big impact on the discussion in the media.
The “new normal” type of headlines have disappeared from the business media since the height of the pandemic.
As a result of this discussion, major online retailers have seen their share prices plummet in 2022. Zalando and HelloFresh have seen their share price halve from the start of the year. Shopify’s share price has dropped a whopping 67%. Even Amazon’s share price has come down by a third.
The rhetoric used in the discussion around retailing has moved from the stressing the future of the online channel to how the pandemic behaviours have died down and the future of online seems to be bleak all of a sudden.
Is the situation this bad for the online retailers?
The bigger picture of online retailing
When considering the question about online retailing, it is good to start with the bigger picture. Has online really declined as much as the media discussion seems to indicate?
From the height of the pandemic to today the share of online has declined. The share has come down slightly from the peak of 15,2% in Q4/2020. In Q4/2021 online represented 14,5% of all retailing. In total in 2021, online represented 13,2% of all retailing in the US.
Online share of all retailing in US
During the Q1 of 2022, online growth has slowed down and was 2,6% in March 2022.
One should note that despite the slowing growth, online is still growing.
The spring of 2021 saw a really rapid rise in online revenues ranging from 25% to 32% in Year over Year growth.
Online growth over time in the US
Due to the this compounding effect of growth, online has been growing throughout the pandemic and post-pandemic times.
In absolute terms online is 35% higher than before the pandemic and online is still growing. It has not declined for a single month in 2022.
Online has grown in absolute terms
One can say that online growth has returned back to historical growth trajectory of approximately one percentage point increase in the share of online. Is it as if the pandemic never happened?
Another perspective to the declining share of online has been the unprecedented growth of store based retailing.
Since March 2021, stores have seen historical levels of growth and sales.
This has also pushed the share of online of all retailing down, because “the other” side of the equation has been growing. The big question is: how long can this kind of bricks and mortar growth last?
The conclusion of all of this is that the wildest scenarios of the “new normal” rhetoric did not materialise and the physical retailing did become important. People returned to old habits.
If the old trajectory of online growth holds, online will continue past 20% of all retailing and further.
It does not happen in the next few years, but soon enough.
How about online retailers?
As mentioned above, the share prices of many online retailers have been hammered during the spring of 2022. It is true that some of the firms that flourished during the pandemic, have faded quickly after the pandemic. Examples of such companies are Wayfair, Peloton, Blue Apron...
On the other hand, some of the retailers that have seen their share price plummet during this spring have suffered despite solid or even good results. Zalando, Amazon, Shopify and especially HelloFresh reported good results, but have still seen their share prices decline.
Growth on top of unprecedented growth
Despite the decline in the share price, all of the four online retailers (HelloFresh, Shopify, Zalando & Amazon) have managed to grow their businesses. All of the companies saw fabulous revenue growth (ranging between 30% to 130%) during the pandemic. Thus, it is only natural that the Year on Year growth number are slowing down.
Growth numbers of different online retailers
Despite the really high growth numbers, HelloFresh and Shopify are still able to grow by 30% and 20% respectively. One should remember that they are not small companies anymore. That makes the rapid growth even more difficult.
To get a bigger picture of the growth of these companies, one can observe how the companies have grown over the last three years. The image below shows how all of the companies have grown on top of a rapid growth spurt. Even Amazon and Zalando that have been criticised for not growing fast enough in Q1/2022, have managed to gain significantly higher index numbers than the overall retail industry (193 & 160 compared to 132).
Sales indices of selected online retailers (Q1/2019=100)
Stores did not disappear and online will continue to grow
The purpose of these figures is to highlight how shortsighted the discussion around retailing (and business in general) can be. As the pandemic raged, some companies became extremely succesful, almost overnight. This lead some analysts to state that the retail industry would not be returning its previous state anymore. Online was supposed rule the future.
As the pandemic faded and stores started to open up, online growth normalised. This again lead some people to say that all of the estimates of the "new normal" are totally worthless and thus the pandemic influences were cancelled.
As in all heated discussion, the truth lies somewhere in the middle ground.
It was somewhat obvious that stores would eventually return to almost normal levels of operation. No one probably would have forecasted that stores would grow as dramatically as they did. That also lead to the relative decline of online.
However, the growth of stores does not automatically mean that online would not grow as forecasted before the pandemic. Online is already the single biggest category in the US retail industry and will continue to grow ahead of the overall industry in the coming years.
Therefore online will take ever bigger share of the market.
If the online growth continues at its historical pace, online will surpass 20% of all retailing before 2030. The historical growth has meant about 0,5%-point increase between 2005-2015 and about 0,8%-point increase between 2015-2018.
The companies which are most proactive to that change and that are ready to let go of some of the historic burdens hindering the move to online, will face difficult times.
On the other hand, there will lots and lots of growth opportunities within the bricks and mortar space also.
After all, it all boils down to which retailers are able to offer best overall value proposition to their customers, online or offline, or in both.