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Etailers will need to grow to counteract the slowing economy October 31, 2008

Posted by jeremyliew in Ecommerce, recession.

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.


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