In this tough economy, the fastest growing e-commerce sector is … luxury apparel? September 9, 2009
Posted by jeremyliew in Ecommerce.4 comments
One of the most exciting trends in e-commerce over the last couple of years has been the trend towards “shopping as entertainment”. Traditionally e-commerce has been a chore type activity. Customers know what they are looking for (a digital camera, a new laptop) and are looking for the best product and best price with a very “research” based mindset.
This is quite unlike the real world, where a customer might walk around a mall without any particular purchases in mind, and perhaps opportunistically buy something that caught their eye in their wanderings. There is no real “intent to buy” in a trip to the mall. It is more like entertainment time which may, or may not, lead to a purchase.
We’re starting to see this sort of behavior online as well. Swoopo and Gilt are two companies that are enticing consumers to come and check out “deals” without any particular intent to buy. They are injecting the entertainment factor into e-commerce. The Economist discusses the success of Gilt, Rue-La-La and HauteLook in particular:
THE racks of expensive gowns and shoes sit, serene and mostly untouched, on the floors of Saks Fifth Avenue, Bergdorf Goodman, Bloomingdale’s and almost every fancy department store. In a sign of how consumers’ newfound thrift has hurt luxury retailers, Saks Incorporated, the parent company of Saks Fifth Avenue, recently announced losses of more than $50m in the three months to July. Sales are down more than 20%. The recession, it seems, has spelt an end to Americans’ appetite for luxury—at department-store prices, at any rate.
Yet luxury e-tailers, which sell designer goods online at discounted prices, are flourishing. The slowdown has actually helped them, simultaneously producing seemingly endless supplies of unsold inventory and forcing consumers to tighten their belts. That has let American e-tailers such as Gilt Groupe, HauteLook and Rue La La, and their French rival Vente-privee.com, sell last season’s designer apparel for as much as 80% off the original price.
But low prices are not the websites’ only allure. Their sites are open only to those who have received an e-mail inviting them to join from another member. This lends them an air of exclusivity and creates the sort of buzz marketers crave, says Adam Bernhard, the boss of HauteLook. The sites also put new items on sale at the same time every day for a limited period, usually no more than 24 hours. That makes shopping an urgent and competitive daily activity for many members. (Cleverly, the sites do not say how many items of each size and colour they have, so customers feel even more pressure to buy right away, lest they miss out on the last pair of size 37 hazel Jimmy Choo pumps.)
Designers, for their part, can use the sites to get rid of stock quickly and discreetly, sparing them the disgrace of seeing their heavily discounted products lingering on sale racks in full public view. Most consumers do not even know which designers are available through luxury e-tailers until they become members. The sites shield themselves from search engines, so they do not pop up in response to online searches for the brands they offer. That has encouraged grand firms like Cartier to sell their wares through them.
The Economist notes that RueLaLa started in 2008 and expects revenues this year of around $130m, and that Gilt started in 2007 and expects $400m in revenue next year. That is remarkable growth. Compare this to Zappos which was started in 1999 and took 6-7 years to reach those gross sales levels:
These companies are rapidly growing beyond the US and beyond women’s apparel. The Economist again notes:
Rue La La recently launched an iPhone application to make it easy for members to make purchases while on the move. It has also started selling wine, spa services and travel packages in addition to clothes. Vente-privee.com has even sold yachts and apartments…
E-tailers are also looking to expand geographically. Vente-privee.com has operations in Germany, Britain and Spain as well as France. Gilt recently launched a site in Japan that has over 200,000 members.
This opportunity is not lost on other companies in the value chain. Retailers like Neiman Marcus, financial institutions like American Express and even fashion magazines are all offering limited time deep discount sales to their members and customers now. Companies like Shopittome are re-aggregating sales for consumers.
I’m very interested in watching how this space develops. Do readers know of other interesting trends in entertainment shopping?
Launching new businesses from the ashes of failure August 31, 2009
Posted by jeremyliew in Ecommerce, Entrepreneur, bankrucpcy, turnaround.1 comment so far
One of the great stories of Silicon Valley is how Josh Hannah and Jack Herrick bought eHow’s assets at a distressed price after the company went out of business, turned it around with a very low cost model and sold it to Demand Media two years later for a big profit. As Wikipedia notes:
eHow.com was founded in March 1999. The company raised close to $30 million... , hired 200 professional writers, and … employed a 25-person engineering team. By 2001, eHow had created thousands of articles. The professional writing, combined with a TV and radio advertising campaign, briefly made eHow one of the Internet’s top 10 news and information sites. Despite the popularity, eHow was not profitable and was forced to declare bankrupcy when funding ran out.
In 2001, IdeaExchange.com bought eHow out of bankruptcy with the hope of charging eHow’s readers to access how-to instructions. eHow remained unprofitable and in early 2004, IdeaExchange sold eHow to Jack Herrick and Josh Hannah.
Says Josh:
“When I told people what I was doing, they thought I was crazy. Conventional wisdom said content was dead, and there was no way to make money on it. We had a different view. In my experience, the foundation of a great business depends on having a different idea from conventional wisdom and pursuing it in spite of a skeptical market.” says Josh.
Josh and his partner restructured eHow by outsourcing content creation to the community and employing then-new advertising and search engine optimization techniques. In six weeks, they had earned enough from advertising to pay off the cost of the purchase. They increased revenue and traffic 30-fold before selling the company to Demand Media in 2006 for a 400X return.
The NY Times has an interesting article in this Sunday’s magazine which notes that much the same may be happening with Linen’s and Things:
In this instance, control of the Linens ’n Things brand, meaning its trademarks and the like, and its Web site, were acquired for a reported $1 million by a joint venture between Gordon Brothers Brands and Hilco Consumer Capital, divisions of firms with long histories in the bankruptcy business. This entity helped run the Linens ’n Things liquidation, spending four or five months immersed in its unwinding operations in the process. “We learned a lot about the brand and the consumer,” Carlyle Coutinho, vice president of Hilco Consumer Capital, says. “We knew we’d have a very strong e-mail list and a very strong customer base that was very loyal.”Time will tell how loyal shoppers turn out to be to what the Gordon Brothers-Hilco crew concocted: a Web-only version of Linens ’n Things. But a database of five million e-mail addresses isn’t a bad thing for a “new” business to have at its disposal, and certainly not something an online retailer starting from scratch would be likely to have. Nor would a start-up have a nationally recognized name the day it opened…
The proposition of this distinctly Great Recession model is snapping up a valuable asset on the cheap and using the low-labor tools of Web commerce — outsourcing, electronic ordering, etc. — to simulate a version of the original business.The new version of lnt.com that celebrated its “grand reopening” a few months ago may not strike the typical shopper as anything radical. The interesting stuff is in what’s behind the site, or maybe even what isn’t. For instance, the actual operation of lnt.com has been jobbed out to a third party: a San Diego firm called TorreyCommerce that bills itself as “a leading provider of outsourced e-commerce to the home-furnishings industry.”…
Linens ’n Things itself now has few direct employees, or even a full-time chief executive. And while the comeback announcement included a mention of plans to “reinvigorate” the brand, the marketing efforts so far revolve around Internet search ads and promotions sent to the e-mail list.
As companies both big and small go out of business during this great recession, I wonder which of them may yet be reborn by smart, thrifty, scrappy entrepreneurs who know how to keep costs low and, more importantly, variable. Anyone leveraging someone else’s invested capital out of a bankruptcy like this – please email me!
10% of ecommerce sites convert at better than 8% June 17, 2009
Posted by jeremyliew in Ecommerce.add a comment
Internet Retailer shares a bunch of interesting ecommerce stats from the E-tailing group. Notable for me is the conversion rate for retailers in 2009:
Conversion Rate: % of retailers
<1%: 4%
1-3%: 44%
3-5%: 21%
5-8%: 17%
8-20%:
9% >20%: 1%
Don’t know: 6%
How many user reviews is enough, and how many are too many? March 16, 2009
Posted by jeremyliew in Ecommerce, user generated content.Tags: reviews
4 comments
The Economist in their latest technology quarterly review look at how user reviews stimulate ecommerce.
They find that once you have about 20 reviews of a product, you start to see increases in sales conversion rates:
The sheer volume of reviews makes far more difference, according to Google’s analysis of clicks and sales referrals. “Single digits didn’t seem to move the needle at all,” says Mr McAteer. “It wasn’t enough to get people comfortable with making that purchase decision.” But after about 20 reviews of a product are posted, “We start to see more reviews—it starts to accelerate,” says Sam Decker, the chief marketing officer of Bazaarvoice, a firm that powers review systems for online retailers.
His company’s research shows that visitors are more reluctant to buy until a product attracts a reasonable number of reviews and picks up momentum. In a test with Kingston, a maker of computer memory, Bazaarvoice collected reviews of Kingston products from the firm’s website and syndicated them to the website of Office Depot, a retailer. As a result there were more than ten reviews per product, compared with one or two for competitors’ offerings. The result was a “drastically” higher conversion rate, which extended even to other Kingston products that lacked the additional reviews.
Even if some reviews were negative, sales still increase:
Online retailers have generally been reluctant to allow users to leave comments, says John McAteer, Google’s retail industry director, who runs shopping.google.com, the internet giant’s comparison-shopping site. But a handful of bad reviews, it seems, are worth having. “No one trusts all positive reviews,” he says. So a small proportion of negative comments—“just enough to acknowledge that the product couldn’t be perfect”—can actually make an item more attractive to prospective buyers.
However, some books on Amazon now have thousands of reviews, more than enough for a potential buyer to draw an overall conclusion. So why do people continue to write new reviews for these products, even years afterwards?
Mr Shirky suggests that in many cases, writing a review is more like writing fan mail (or hate mail) for a product, and the people who post them do not really expect it to be read.
Whereas new people continue to write reviews long after a book is published, blog comments have quite a different set of behaviors.
“You can probably have a decent discussion until you get to about 350 comments,” says Markos Moulitsas, the founder of Daily Kos, a popular left-leaning political site. But after that, he says, “most outside people will stay away from the thread, and further growth will come from people already inside that thread carrying forth a discussion, debate, or argument.” Such discussion threads are more of a conversation, and the page they inhabit usually has a limited lifespan during which people continue to post—unlike the Amazon pages for the “Harry Potter” books, which continue to attract reviews even today, years after the books’ publication.
Part of this is because the “pivot” of user engagement for a review is the product, whereas the “pivot” of user engagement for a blog is the conversation thread. Since the product is evergreen to new users, it will continue to attract reviews. But a stale conversation in the comments to an old post is unlikely to draw in new comment. It is usually clear that the other debaters have moved on from the conversation, and there is little incentive to speak to an empty room. Knowing what’s the right primary pivot for your social media drives a lot of design decisions.
This is reinforced by design; many blogs alert you to new comments if you’ve commented on a blog post; almost no ecommerce stores alert you to new reviews of products that you have reviewed. As a result, blog comments turn into conversations between engaged participants whereas product reviews. As always, behavior and culture are a function of UI.
Where is there upside in ecommerce in this recession? February 23, 2009
Posted by jeremyliew in Ecommerce, recession.8 comments
Although Internet Retailer is reporting 20% ecommerce growth among the top 500 etailers in 2008 based on their preliminary survey returns, Comscore notes that there was actually a 3% decline in ecommerce sales in q4 2008. The later statistic seems to be more in line with most retailers experience. However, the prognosis is not equally bad across all categories. Comscore notes that some categories (sport and fitness, video games, consumer electronics and apparel) actually saw growth last quarter:
Comscore speculates that this supports more “nesting” behavior in the recession.
McKinsey (free registration required) looks at all consumer expenditure across the last two recessions (not just ecommerce) and also finds some areas that grow while others decline:
Which categories of ecommerce do you think will grow through this recession?
The Supreme Court ruling means that you pay more for things you buy online December 4, 2008
Posted by jeremyliew in Ecommerce, MAP, pricing.7 comments
Amazon launched on the back of its discount pricing of books and music, and changed an industry. Blue Nile (my partner Peter Nieh led an investment in Blue Nile) built a business and a brand on better pricing for diamond engagement rings. Price has always been one of the key value propositions for ecommerce.
However, a supreme court ruling last year could level out price competition and force etailers to compete on other dimensions. Notes Internet Retailer:
Just as millions of consumers are turning to the web to find the lowest prices, online retailers in many categories find they no longer can compete on price. That’s because a growing number of manufacturers are setting minimum prices on their goods, and in some cases cutting off retailers who sell below those prices.
They are taking advantage of a June 2007 U.S. Supreme Court decision known as Leegin Creative Leather Products Inc. vs. PSKS Inc. that gives greater legal protection to such minimum pricing policies…
…many online retailers are finding suppliers mandating minimum prices, particularly on higher-priced goods with strong brands. But manufacturers’ enforcement of these policies—often referred to as MAP, for minimum advertised price—has been uneven. Many online retailers complain that, while they abide by MAP pricing, their competitors do not.
Business abhors a vacuum, and the WSJ notes that some companies have sprung up to help manufacturers monitor for Minimum Advertised Price (MAP) violations where etailers sell at a discount:
Tiny firms like NetEnforcers Inc. — with only 56 staffers jammed into a dim, spare cubicle farm here in Arizona — wield economic power far beyond their size. These companies scour hundreds of thousands of Web sites daily, looking for retailers offering bargains below the “minimum advertised price,” or MAP, set by manufacturers on an array of consumer goods.
When NetEnforcers finds goods like cameras, handbags or ovens for sale at too-low prices, as it claims to do 5,000 to 10,000 times a day, it alerts its clients, including Sony Corp., Black & Decker Corp., Cisco Systems Inc., JVC Kenwood Holdings Inc. and Samsung Inc.
For discounters, the consequences of not respecting MAP are usually speedy and decisive. If the seller is an authorized dealer of the product in question (which means it is bound to honor a MAP agreement), it gets a notice from the manufacturer or NetEnforcers and typically brings its price into line within hours, the company says…
If the seller isn’t an authorized dealer — for instance, a discounter that acquired the goods via a distributor — NetEnforcers says other tactics are used to try to force a lowball price off the Internet. In these cases, they can allege that the discounter’s use of the product’s name or image constitutes trademark or copyright infringement, in an effort to force the seller to stop listing the discount.
While not all industries employ MAP rules, many do, especially industries with high ticket items like electronics. These rules threaten etailers ability to compete on price. Convenience and selection become more important differentiators for online retailers.
Etailers are fighting back through lobbying for new laws notes the WSJ:
Hoping to roll back a Supreme Court decision that allows manufacturers to set minimum prices on products, opponents launched a campaign that will include use of eBay Inc.’s popular Web site to garner consumer support.
At a closed-door meeting whose attendees included representatives of auctioneer eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law. EBay offered free use of its site for the campaign so it can reach many consumers, participants said.
But perhaps more importantly, even large etailers are skirting the edges of the rules:
Some retailers try to circumvent pricing restrictions by listing a product at the MAP price but telling shoppers to click an additional button — or to add the product to their shopping cart — to see a discount price.
Indeed, Circuit City’s online price for the TV moved up to the $1,699 MAP level soon after NetEnforcers noticed the lower price. But more recently, the item had a “see price in cart” notice next to it. Clicking on that opened another window displaying a discounted price of $1,439.99.
This supreme court ruling has turned out to have far reaching consequences for online retailers.
More signs of consumer discretionary spending slowdown, online feeling the impact November 12, 2008
Posted by jeremyliew in Ecommerce, recession.1 comment so far
Last month I wondered which companies might prosper in an advertising recession:
Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.
Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.
Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period…
Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending.
So far it isn’t looking good. Comscore notes:
A review of monthly retail e-commerce growth rates helps to further depict the slowdown in the U.S. retail economy. So far this year, retail e-commerce growth rates have fallen from levels of 18 to 20 percent observed during Q4 of 2007 to a growth rate of only 6 percent in Q3 2008. Since April, we have seen five consecutive months of declining growth rates. September’s 5-percent growth rate is the lowest recorded by comScore since it began tracking e-commerce sales in 2001.
And further:
In addition to reporting this data from comScore’s passively-observed behavioral panel, comScore surveyed more than 1,000 consumers in October 2008 to gather attitudes on the economy. The study revealed that the majority of consumers are fearful of the future, with 82 percent stating they are more afraid about the economic future than ever before. Additionally, only a quarter (26 percent) of respondents said they believe the economy will be ‘better’ a year from now.
Online entertainment sales (music, movies and videos) were the worst affected, down 29% year on year in q3. These is the most discretionary of discretionary spending.
And as for Starbucks, the WSJ notes:
Starbucks Corp. said it will open fewer stores internationally than planned and offered a more pessimistic earnings forecast for the coming year as the coffee chain said fiscal fourth-quarter earnings plummeted 97%… Same-store sales, or those at locations open at least a year, declined 8% in the U.S.
It doesn’t look like we will spend our way out of this recession
Etailers will need to grow to counteract the slowing economy October 31, 2008
Posted by jeremyliew in Ecommerce, recession.add a comment
Earlier this month I wondered which companies might prosper in an advertising recession.
But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.
Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.
Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire.
So far it is looking like history may not repeat itself. As I noted earlier this week, consumer confidence is at an all time low, half the level of the trough in the last recession.
I recently did an informal survey of etailers to see what impact the economic turmoil has been having on them. The results were generally pretty negative. Most etailers that had been in business more than 24 months were seeing results down from their projections since the middle of September. Consumers, watching the decline of their net worth both in the stock market and in their homes, have been deferring many of their purchases. Some of the more dire responses:
“Our August Sales were X. Our September Sales, 2X/3 . The first ten days totaled X/3 but then right after that, sales dropped precipitously for the whole rest of September. My October Run Rate is X/2. My last year October sales were 4X/3. Big difference. Right after all of the banks went bankrupt and the media frenzy kicked in scaring everyone from buying, sales completely tanked to such a low level I could have never imagined it. This is not a recession for me…more of like a depression!”
“We got our asses handed to us starting about [middle of Septemer]. Before that was Ok. And we checked with our vendors who sell through [discount department store] and [big box retailer] and they confirmed — [discount department store] down 45% week over week starting about last monday, [big box retailer] down 35%.
So for us . . .
4 weeks ago: fine
3 weeks ago: fine
2 weeks ago: conversion rates dropped 40%, along with revenue/transactions
past week: the drop has stuck around.”
The exceptions to this trend in the survey are businesses that are actively adding SKUs to their product offering. Growth is the antidote to the slowing economy. This growth could come from adding new stores or product lines, new distribution channels or marketing channels, but it won’t come from the overall rise in online spending that has bouyed the category for the last few years.
Which companies might prosper in an ad recession? October 13, 2008
Posted by jeremyliew in Ecommerce, Lead gen, advertising, freemium, gaming, recession, subscription, virtual goods.14 comments
I have previously posted on which online media companies will survive the ad recession. Clearly, all online media companies will feel the advertising recession, but some companies will hold up better than others.
But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.
Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.
Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire. Compete recently noted the marked drop in “in market auto buyers” over the last two years for example – down 37%:
Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending. Unfortunately, the news for Starbucks isn’t good. Notes Seeking Alpha:
There was a time when getting a coffee at Starbucks Corp. (SBUX) – whether a basic “tall bold” or a souped-up venti concoction – was considered a relatively cheap treat, though those of us with a daily Starbucks habit might think otherwise.
However, a report from RBC Capital Markets analyst Larry Miller indicates that even that daily cup of store-bought java is one of the victims of the credit crunch. Mr. Miller lowered his 2009 earnings estimates – to $0.90 from $0.95, and said:
[The move] reflects our proprietary survey work, which suggests Starbucks sales continue to weaken as consumers are changing their habits and brewing more coffee at home.
This does not bode well for small ticket discretionary spending.
One potential brightspot may be gaming. The games industry has historically been considered counter cyclical. The argument has been that for $50s you can buy a game that will give you 50-100 hours of enjoyment, versus $10 for a 2 hour movie or $5 for a magazine that you’ll finish in an hour. Free to play games make this argument even more compelling. Free to play games may be able to take advantage of cheaper customer acquisition costs in an advertising recession.
For other forms of discretionary small ticket spending, the jury may still be out.
Returns – the scourge of e-commerce May 12, 2008
Posted by jeremyliew in Ecommerce.Tags: returns
7 comments
The WSJ had an interesting article last week about how some consumer electronics companies were working to reduce return rates:
The U.S. electronics industry last year spent about $13.8 billion to re-box, restock and resell returned products, according to a study by technology consultant Accenture Ltd. Especially galling to manufacturers is that many returns are preventable: Only about 5% of returns were because a product was truly defective. Instead, most consumers give up on products for other reasons, such as the device being too confusing to use, the study found.
Return rates are even higher in apparel and shoe retailing than in electronics; in some cases return rates are in the 20-30% range.
The good news is that companies are addressing returns in consumer friendly ways, rather than by trying to penalize consumers. One great example is Sony:
Sony Corp. has taken a different approach with some of its products that makes it harder for consumers to bring them back. The company in 2006 added an option allowing consumers to engrave their name or other message on a Vaio computer. It expanded the program to its digital cameras last year. Sony says the program was started to let customers personalize products, but a side benefit for Sony is that engraved products can be returned only because of defects or other reasons that are the company’s fault.
Return rates on engraved Sony Vaios are negligible, compared with about 5% for non-engraved PCs, the company says, saving more than $1 million so far. “I have a feeling that people are understanding the condition that you can’t return it,” Mr. Abary says. “But also once they have engraved it, they feel like it’s a part of them.”
I thought that this was a very clever approach.
