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This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
Several factors driving share price declines
Over the past two weeks, sentiment around the major public ecommerce companies turned skeptical as the result of several factors.
- As the economy returns to a more normalized balance of online vs. physical retail, in-store share of wallet has gained at online’s expense.
- People are traveling and getting out more, so purchases of travel and experiences have increased at expense of ecommerce.
- Segment purchases have shifted to reflect more time spent out of home.
- Inflation has reached levels not seen in decades impacting profitability.
- Supply chain issues continue, especially as China pursues a zero case policy.
- The war in Ukraine has increased inflationary pressure on energy and food and caused broader investor doubts.
- Companies are struggling to accurately predict demand and supply needs causing over spend in certain fulfillment and OpEx categories.
Given all these related drivers of ecommerce sentiment, last week saw some of the most volatile trading of the post-pandemic period, with the primary underperformer being the tech sector. All publicly traded major ecommerce platforms that reported over the last couple of weeks called out sales softness that began in the February & March period and has continued through April. Ecommerce platforms, social media platforms, and to a lesser extent online DTC names in the Bainbridge index have been pulled into the orbit of Amazon, Meta, and Shopify.
This article samples recent earnings commentary from Amazon, Etsy, Shopify, and Wayfair as well as Airbnb and Pinterest to highlight how leaders are grappling with these forces.
(Chart by Bainbridge)
Mobility and reopening
“Another shift is happening in commerce, beginning in February many people celebrated the easing of omicron…with travel, dining out, entertainment and in person shopping. This new mobility moderated the explosive growth in online activity”
-Shopify CEO Tobias Lütke
“As the pandemic has shifted to an endemic, people have regained their mobility and with that comes so many more choices for where to spend their hard earned dollars. In the near term Esty will have to fight harder to continue to grow share of wallet”
-Etsy CEO Josh Silverman
In Q1 2022, gross nights booked grew 32% compared to Q1 2019 despite ongoing pandemic concerns, the war in Ukraine, and macroeconomic headwinds… As of the end of April 2022, we had 30% more nights booked for the summer travel season than at this time in 2019, and the growth from 2019 is higher the further we look out this year.
-AIRBNB Shareholder Letter, Q1 2022 Earnings Report
Apple mobility statistics through April 2022:
Geopolitical impacts in February
Inflationary pressures have been recognized as a key headwind by most consumer-facing businesses, affecting sales trends as well as labor and inputs. Rising costs had already been building momentum as the US consumer price index YoY change moved above 7% in November 2021. Restoration Hardware’s earning’s call back in March was one of the first signs that spending trends had been significantly affected by the spike in energy prices due to the war. All earnings calls we reviewed for this writing saw management mention the war as a primary point of macro uncertainty, especially on their European businesses and ad spending:
“What we are hearing in March and in April, we've heard folks have seen their business significantly stepped down. And particularly different retailer pockets, we're hearing about warehouses being full, retailers really having trouble on sell-through, different things.”
-Wayfair CEO Niraj Shah
“Although President’s Day was strong, and we knew March would be a more difficult comparison YoY given stimulus in March 2021… but a new headwind developed. Geopolitical events slowed Europe revenue with international dropping 31% YoY. US revenue only dropped 10% (In Q1 ’22).”
“(Total Company Net Revenue) QTD is down mid to high teens, with the US trending stronger than Europe.”
-Wayfair CFO Michael Fliesher
“February was the start of deceleration, which saw follow through into April. Have seen no increase in CPC over the last few months.”
- Etsy CFO Rachel Glaser
“Continue to monitor the impact of higher CPAs (on ad customers).In general higher pricing is driven by industry wide dynamics and recent trends in our user base. In Q1 we observed that higher pricing lowered budget utilization from small and medium sized advertisers that are more price sensitive.”
-Pinterest CFO Todd Morgenfeld
US Consumer Price Index, YoY % change:
(Source: US Bureau of Labor Statistics)
Fulfillment staffing challenges
Fulfillment by Amazon was described as carrying surplus capacity by management as the “omicron hiring wave” left the network overstaffed with above average wage rates while facing declining customer activity later in the quarter. Amazon’s intent is to continue to carry this extra capacity, costing approximately $2 billion in additional costs in Q1 2022 vs. prior year. Amazon’s strategy is to grow into the capacity and mentions it will be imperative for the holidays. Of note, Shopify increased its fulfillment capabilities with its $2.1B purchase of Deliverr.
"In the second half of 2021, we were operating in a labor constrained environment. With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees out on leave, and we continued to hire new employees to cover these absences."
"As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity. This lower productivity added approximately $2 billion in costs compared to last year."
-Amazon CFO Brian Olsavsky
Delivery speed performance is now approaching levels not seen since the months immediately prior to the pandemic in early 2020 and we now have the widest selection ever available for Prime’s fast delivery
-Amazon CFO Brian Olsavsky
“Product availability has improved by around 10% since the trough, and delivery speeds have increased by 10% for small parcel and 20% for large parcel.”
“Supply chain pressures have not abated to 2018 and 2019 norms but has improved”
“Rising energy prices are a headwind to shipping and fulfillment costs.”
-Wayfair CEO Niraj Shah
The forces described by the public companies are going to impact DTC brands as well. So, what should you do?
- Do your annual and quarterly plans reflect the new consumer reality? Are you being too aggressive in sales forecasts? Tying up capital in over-ordered inventory is going to hurt if forward months don’t produce the sales and cash you were expecting.
- Is your margin structure right? You can absorb inflationary pressures for only so long. Inflation ripples through your business in multiple places as COGS increase, fulfillment costs increase, shipping costs increase, returns costs increase, OpEx increases… Are your prices correct and is your margin sufficient to generate profits? Think of it this way, if you tie up capital in inventory, it takes longer to sell it, you have to spend more to advertise and then you make less profit for every dollar in sales, you are heading for a cash crunch in the future.
- Re-examine capital plans. Private capital markets are influenced by public markets. VC appetite for DTC had already declined from the heyday a couple years ago. With recent share price declines, private markets will be even more skeptical. So, if your capital plans call for a big fat round in the near future, spend time coming up with your Plan B.