No Pain, No Gain: How to Navigate the E-Commerce Evolution

E-commerce is on the cusp of a massive change. With more than 15 years of digitalization behind it, the old ways of doing things will soon no longer be acceptable.

For years, e-commerce players have faced the same vital decision, courtesy of economic and business theorist Michael Porter. Imagine a crossroads. One clear path is marked "cost leadership" and the other "differentiation." In the middle is an unnavigable quagmire that leaves brands stuck, neither competing on cost nor offering unique products and services. Have too many players strayed into this murky middle? We think so.

Back to the Future

Let’s wind back the clock for a second. Until recently, pure-play e-commerce was booming as customers shifted from offline to online. With an immature supply chain, brands didn't compete with pure players, and the major marketplaces weren't spending heavily on Google or search engine optimization. Plus, pure players could purchase long-tail stock cheaply thanks to low interest rates. Meanwhile, marketplaces continued to develop at a different pace — depending on the vertical and geography.  

The tide has now turned as the market has matured and growth has weakened. Rather than drawing shoppers away from physical stores, players are now focused on stealing market share from other e-commerce businesses. This is an ultra-competitive industry, with dynamic pricing algorithms and small margins. In other words, there’s not much room for error. And it’s showing now more than ever — particularly for omnichannel and pure-play e-commerce.

As well as sluggish economic growth, pure players have been impacted by the direct-to-consumer boom. Brands are now investing in loyalty programs, SEO, and AdWord strategies. Furthermore, they're prioritizing differentiation. Granted, many still struggle with distribution, but they'll master this soon.

Now, let’s look at costs. In this area, pure players are being squeezed by marketplaces, thanks to their superior scale (and less exposure to inventory risk). Players like Amazon.com and Alibaba have everything consumers need at a low price, and they can provide frictionless service. But we’re also seeing the creation of new marketplaces by retailers such as Walmart. Meanwhile, in the world of fashion, stock-based European market leader Zalando has added a vertical marketplace to its business in an effort to "own" the fashion customer and cut CAPEX on stock.

Stuck in the Middle  

So, where do these market changes leave omnichannel and pure-play e-commerce? Porter would argue that these businesses are stuck in the middle. We would say that they’ve lost their competitive advantage. Many are now on the verge of financial peril with massive stock volumes required and margins that don’t add up. With a stormy economic outlook, this isn’t a problem that can be solved by enhancing efficiency or implementing new digital processes and systems. It’s existential.

This also applies to omnichannel players selling third-party products. The assertion that customers interact across channels is clearly accurate, but it's by no means a strategy for e-commerce success.

Revisiting the Porter Framework

To survive the e-commerce evolution, pure and omnichannel players must differentiate or go niche. The most forward-thinking businesses have already begun this journey. An excellent example is sports retailer Decathlon, which no longer relies on large companies such as Adidas and Nike but has built its own high-performing brands and private labels.

The following are some options at pure players’ disposal:

• Build a community. One approach is to start building brand affinity by adopting a differentiated brand strategy and becoming a community-driven business. However, this takes years, and for some established players, it’s frankly too late.
• Lose the dead weight. Another approach is to focus on category management. Pure players must understand which customer segments are profitable and which are only creating "empty" revenue. This also extends into marketing. Pure players should only be buying ads for profitable products and customers.
• Become a specialist. The third option is to go completely niche. This can be difficult, since many marketplaces are expanding their assortment and the cost of stock continues to rise.

The bottom line? This is the end of an era for e-commerce, but it’s also the beginning of a new one. As the e-commerce evolution continues, all players should have one eye on the worst-case scenario for their business. This is particularly important for pure and omnichannel players. Those that will thrive going forward are already revising their go-to-market strategies and innovating themselves into stronger positions. If you haven’t already, it’s time to start now.

Carsten Pingel is vice president of commercial strategy and data transformation at Valtech, a global digital agency.