The Current, delivered daily.
After last week’s focus on prices, this week’s release of economic indicators from the federal government put overall retail sales in the spotlight. It includes a quarterly look at ecommerce sales. In both cases, the trend is upward.
Here are the numbers from the US Census Bureau:
- In the first quarter of 2022, US ecommerce retail sales totaled $250 billion in the US. This was an increase of 2.4% over the fourth quarter of 2021. In a year-over-year comparison, sales rose 6.6% over the first quarter of 2021, the data showed. This measure was adjusted for seasonal variation, but not for price changes.
- The data showed that ecommerce sales in the first quarter of 2022 accounted for 14.3% of total retail sales.
- In all, retail sales for the first quarter totaled $1.7 billion, an increase of 3.7%, the Census Bureau states. These sales increased 10.9% from the prior quarter.
There are signs that an increase is continuing in the new quarter. In a separate report this week, the Census Bureau shared estimates that showed overall retail sales increased .9% from March to April. When compared to April 2021, sales grew 8.2%.
Non-store sales, which is a monthly Census Bureau measure that includes ecommerce sales, rose 2.1% month-over-month in April. This was after a gain of .4% the prior month, and 12.7% year-over-year.
This overall data paints a picture of health for retail sales generally and ecommerce specifically. That's welcome, especially at a time of continued macroeconomic turbulence.
“April retail sales demonstrate consumer strength and willingness to spend despite persistent inflation, supply chain constraints, market volatility and global unrest,” NRF President and CEO Matthew Shay said in a statement. “While consumers are facing higher prices, they are preserving their budgets by shopping smart.
However, when zooming in on the businesses of the retail channels where many of these sales are made, it’s clear that the picture is more complicated. First quarter earnings reports from major ecommerce platforms point out the following:
- Amazon’s retail sales fell 3% year-over-year in the first quarter, to $51.1 billion, and the company reported its first overall loss since 2015. The company is now cutting back on hiring for 2022, according to an email that leaked to Business Insider.
- Walmart’s ecommerce business grew 1% in the first quarter, as the company overall reported a 25% drop in profit. The ecommerce growth was similar to the fourth quarter of 2021.
- Shopify’s Gross Merchandise Volume (GMV) of $43 billion was 16% higher than the first quarter of 2021. This was lower than the 43% posted year-over-year growth rate posted in the fourth quarter of 2021, and the 114% year-over-year growth in the first quarter of 2021.
- Home-focused ecommerce platform Wayfair reported a loss of $319 million, compared with a profit of $18.2 million in the first quarter of 2021. The company’s revenue was also down 14%, to $2.99 billion. The company is now instituting a hiring freeze for 90 days, Bloomberg reported.
With share prices of many of these platforms dropping, there were warnings that ecommerce may be facing a downturn. But the federal data adds an interesting piece to the puzzle. To be sure, spending is down from the early pandemic highs of spring 2020. After declarations that ecommerce accelerated 10 years in three months, it's easy for this to feel like a comedown.
But the latest federal data continues to suggest that ecommerce sales are leveling off, even as they continue to grow. Dollar totals have increased each quarter. Reaching $250 billion in ecommerce sales in the first quarter means ecommerce sales are on pace to reach an annual total of $1 trillion in 2022. This would mark the first time sales crossed this milestone.
When it comes to the share of overall retail, ecommerce sales figures are landing on a higher plane than they were pre-pandemic.
Notably, with the release of new quarterly data, the Census Bureau this month also revised upward its estimates of ecommerce share of total retail for the fourth quarter of 2021. This metric is closely watched, as it shows how big a place online shopping holds in the overall retail environment.
Originally, the Census reported the ecommerce share for Q4 2021 at 12.9%. Now, it is reporting that figure is 14.5%. For one, that means the share decreased slightly this quarter to 14.3%. But in the wider view, it means that, as a share of total retail sales, ecommerce sales have been between 14 and 15% since the first quarter of 2021. This is well above the 11-12% range where it stood in the last pre-pandemic quarters, and points to the trend curve of the last decade swinging up.
Ecommerce share of total retail, 2013-2022. (Chart: US Census Bureau)
This is down from the huge spike that came with the initial wave of COVID-19 in the spring of 2020. But the share has receded to a higher level than it was pre-pandemic, returning to steady growth.
When sales spiked in 2020, the ecommerce platforms saw their growth rise with it. Consumers migrated to shopping online amid lockdowns, and they sought to buy goods with many services and experiences shut down. Macro factors continued to have an effect for another year, with a round of government-issued stimulus checks and continued pandemic precautions in the spring of 2021 extending these consumer trends even as vaccination began.
“We definitely had pull-forward in growth over the last year or two given all the stimulus and change in consumer behavior,” said John Furner, CEO of Walmart US. On Shopify’s earnings call, CFO Amy Shapero said the big growth of Q1 2021 was due to COVID stimulus and lockdowns.
The supply chain issues and inflation that followed, in turn, would figure to create a tougher environment for retail as a whole. That extended to ecommerce, which arguably is even more dependent on supply and shipping working well than in-store settings. Add to it that inflation is making it more expensive to keep these sales engines running. Rising fuel and transportation costs were cited by leaders at Amazon, Target and Walmart as eating into margins.
In the first quarter, a more dramatic move toward reopening was layered onto that. As the Omicron variant surge subsided, more US municipalities moved away from mask restrictions and lockdowns. That's creating a correction that tends toward in-store experiences. Walmart CEO Brett Biggs cited the return to stores as a reason behind the company’s 1% ecommerce growth.
In the big picture, however, sales continue to grow. The overall retail sales number has now increased for four months straight, and March's number was revised upward to 1.4% from the original estimate of .5%. It reflects how consumer spending has continued to remain strong despite the rising prices that come with inflation.
“We're not seeing softness,” Amazon CFO Brian Olsavsky told analysts.
To be sure, there is a shift in what shoppers are spending on as they return to pre-pandemic habits. Take Target, for instance. Despite a disappointing earnings report overall that showed a 52% drop in profit, revenue was up 4% to $25.2 billion for the quarter, indicating consumer spending remains strong. CEO Brian Cornell said toy sales were up as children’s birthday parties resumed, fashion and beauty ticked up amid a return to in-person activities and luggage sales were up 50% amid a return to travel. However, more going out meant discretionary spending on items like TVs and home appliances was down.
“Despite the fact that they might have worries about inflation, they're in charge,” said Christina Hennington, Target EVP and chief growth officer. “And they're making decisions based on their preferences and what they value, which means going back out, if that's what they want to do, traveling because they've missed it, seeing their friends and family again. And it's about moderating those behavior shifts and accommodating our assortment and our messaging and our relevance based on how those shifts happen.”
Cornell said the company was expecting these shifts, but they came more dramatically than expected in the first quarter. The changes in demand require planning, and businesses didn’t have time to prepare.
Consumer habits will be closely watched. It remains to be seen whether there is a direct correlation between whether a more permanent return to going out means a shift to going out to the store.
As they look forward, retailers' actions don't seem to be in line with preparations for a downturn in ecommerce. In fact, they’re still betting on it for the future. At Walmart, advertising revenue, which is an outgrowth of its ecommerce business, grew 30% in the first quarter, while data monetization business Walmart Luminate grew 75%, marking one of the company’s bright spots. And there is increased blending between the in-store and ecommerce experience. Target detailed plans to renovate 200 of its stores to expand fulfillment capacity for same-day pickup.
"These projects make changes within the four walls of the store to add capacity for same day orders and incorporate features to enhance our pickup and drive-up capabilities," said COO John Mulligan. "When warranted, these remodels include the addition of walk-in coolers and freezers near the front of the store, adding reliable capacity for our team to fulfill fresh, refrigerated, and frozen items through our pickup and drive-up services."
As his company reported record sales over the two years of the pandemic that continued into the first quarter, Home Depot EVP for merchandising Jeff Kinnaird told analysts that more than 50% of ecommerce sales were fulfilled at stores, and the company just launched a $150 million venture fund to invest in new technology.
Looking ahead, there are signs that a rebound for the platforms could be on the way. Walmart leaders said early signs in the second quarter are good for ecommerce. Wayfair CEO Niraj Shah said the first quarter showed 10% improvement in item availability and 10-20% faster delivery times, indicating supply chain conditions are improving. Shopify said it expected growth to be highest in the second half of the year. Meanwhile, Amazon has a stronger logistics network after its pandemic-era buildout, and Shopify is strengthening its own, in part through the acquisition of Deliverr.
The last two years made predicting anything difficult, but it seems like a good bet that the current behaviorial shifts are unlikely to be permanent. After all, these macroeconomic forces are constantly shifting. But no matter what arrives, digital adoption is only likely to continue, and ecommerce will be driving steadily upward along with it.
Trending in Economy
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.