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We’ve lived through a time of economic swings in recent years.
Supply and demand crashed back and forth throughout the peak period of the pandemic, straining systems as it went. There were outward signs of the drama taking place for everyone. For supply, it was empty shelves, the Ever Given ship getting stuck or the massive queue of container ships off of the coast of Los Angeles. On the demand side, charts showing records in the form of exploding ecommerce sales, scores of venture capital dollars invested, and a rising stock market driven by tech and consumer companies were just as plentiful.
Inside the ecommerce businesses that were absorbing the shocks on the front lines, there was another swing that was taking place between growth and profitability, Jordan Jewell, the director of merchant strategy and analyst in residence at enterprise digital commerce platform VTEX, told The Current on the floor of the NRF Big Show 2023.
As Jewell writes in a new VTEX research paper there were three distinct eras of these two important business levers.
Heading into 2020 and the arrival of the pandemic, there was the era of the “old normal." Balance between growth and profits was evenly split. Still, ecommerce was something of a side project to brand and retail leaders during this time, with staffing and funding minimal.
By mid-2020, the era of growth at all costs began, the paper states. Ecommerce sales boomed, and even brick-and-mortar sales grew 5x in 2021 as compared to 2019. With business roaring for everyone, the goal was to get bigger.
But by the middle of 2022, a reset of shopping habits and 40-year-high inflation led to a new era of profitability. Brands and retailers faced a “hangover” when the growth era ended, Jewell said. On top of a pullback in demand, they faced a more expensive digital advertising environment and increased inventory levels.
It was time to look deeper at all of the new capabilities that just came online. As executives dug in, they moved to protect margins.
But again, there was a mismatch. Investments that were made in ecommerce during the growth era didn’t necessarily come with profitability in mind. There’s uncertainty among DTC brands about whether ecommerce is profitable, VTEX found, and a Publicis Sapient study showed that 37% say ecommerce isn’t meaning profit targets.
This presents a question for executives: Where’s the right place to invest now for profitability-minded brands and retailers with more limited options? That’s what Jewell set out to answer through this research. The paper identifies three bets to make:
Get more out of the customers you already have.
Loyal and repeat customers keep coming back, and they may even spend more.
Existing customers can also be encouraged to return organically, through email, brand awareness and experience. This all drives profit higher.
That’s especially important to remember at a time when it is becoming more expensive to acquire new customers. There are more brands on social platforms. Privacy changes made targeting less efficient. And even as the proportion of budget spent on new acquisition goes up, returns can diminish.
“With each incremental ad you buy, you're reaching a customer who has a lower propensity to buy from you, because your core customer has probably already been found,” Jewell said.
On the other hand, an existing customer doesn’t require a new ad, and has already shown intent to shop with your brand.
Make inventory and fulfillment your strength.
While ecommerce received record investment during the pandemic’s height, brands are still developing capabilities.
VTEX found that 55% of brands are still in the early stages of the omnichannel maturity curve.
They are also still in the process of shifting strategy around these capabilities.
“For many brands and retailers, fulfillment, shipping, inventory and order management is viewed as a cost of doing business, not a core pillar of the business,” Jewell said.
For an example of what a difference adopting the pillar strategy can make, just look to Amazon. The company’s vast logistics network gets orders to customers fast and with reliability. That alone keeps them returning.
“It doesn't matter how good your site looks, it doesn't matter how good your email marketing is, it doesn't matter how good your customer service is. If you don't get a product to a consumer when they expect it, the whole customer experience is broken,” Jewell said. “They're very unlikely to come back.”
Engage with customers in new ways.
On ecommerce sites, don’t just optimize. Think bigger about different kinds of experiences that can help to stand out. Don’t just change the color of a button on your PDP. Add a live shopping video to guide a shopper on the journey. Pay attention to where shoppers are spending their time, such as chat platforms like WhatsApp or TikTok. The experiences they have there are drawing them back, and making it a delight to spend time there.
In the end, brands and retailers must strike a balance between getting the basics right and being bold. It’s not easy to do, especially as more channels appear and the requirements of each become particular, Jewell said.
But it helps to have pillars to base your work around, and that’s what VTEX’s research is seeking to provide.
Trending in Operations
Upping marketing spend, growing loyalty members and multichannel sales are key to the beauty brand's strategy.
Digital commerce is helping e.l.f. Beauty pour fuel on the fire.
The brand continues to be one of the shining examples of the staying power of beauty products despite consumer pullback in other areas of discretionary spend. e.l.f. grew net sales 48% in the fiscal year ended March 31 as it reached $500 million in sales for the first time. For the most recent quarter, sales grew by a whopping 78%. The company is seeing profit gains as well, as adjusted EBITDA grew 56%.
With the top-line revenue flowing, the brand was opportunistic about how it invested in marketing in the most recent quarter. After upping spend to 33% of net sales in the quarter, the company ended up with marketing and digital investment at 22% of net sales for the year. That was well above the higher end of its 17% to 19% outlook. In the coming year, it expects 22% to 24%.
The fact that digital and marketing fall in the same category reflects the brand’s approach to marketing. It's a favorite among Gen Z, and has found a home on the social apps that are popular with the generation.
“Our disruptive digital-first marketing engine has built strength across multiple social platforms,” CEO Tarang Amin told analysts on the company’s earnings call. “We are a pioneer on TikTok and are now a four-time TikTok billionaire with our last hashtag challenge garnering nearly 15 billion views. We were the first major beauty company to launch a branded channel on Twitch and the first beauty brand on BeReal.”
As a sales category, digital penetration is now 17%, growing from 14% last year. The channel grew 75% in the most recent quarter.
Amin laid out three factors driving this trend:
Marketing. The marketing investment that e.l.f. made brought strong returns, and the digital-first nature of those ads are bringing people to the brand’s digital sales channels.
Loyalty. E.l.f.’s Beauty Squad loyalty program has 3.7 million members, which is a 25% year-over-year increase. Loyalty members are the biggest driver of the brand’s digital business, accounting for over 80% of sales on the brand’s DTC site.
Multichannel. e.l.f. is the only one of the top five mass cosmetics brands that has a DTC site, Amin said. It is also seeing strong growth at Amazon and other retailer ecommerce websites. The growing presence is “building upon itself,” Amin said.
With digital growth, the brand is seeking to expand capacity in the supply chain that will provide more efficiency and faster delivery, as well. It is shifting to a more distributed ecommerce fulfillment model. Previously, it had one automated warehouse in Columbus, Ohio, which meant shipping to the West Coast could take time. Now, it is moving to a multinode distribution network. With the first couple nodes up and running, there is already improvement in delivery times.
The brand is also adding distribution capacity to its main warehouse in Ontario, California.
As marketing helps more people discover and buy from the brand, the operational improvements will help create a customer experience that lives up to the hype.