Transcript
Our transcripts are generated by AI. Please excuse any typos and if you have any specific questions please email info@digitalshelfinstitute.org.
Peter Crosby (00:00):
Welcome to unpacking the Digital Shelf where we explore brand manufacturing in the digital age.
Peter Crosby (00:16):
Hey everyone. Peter Crosby here from The Digital Shelf Institute. Conventional wisdom is that e-commerce is no longer the growth engine of the business when percentage growth rates slumped after covid. But is that really true? Wouldn't some deep dive data be super helpful at this moment to help inform your forecast and budgeting for 2024, Russ Derringer, founder and c e o of Strata thought so and so created an ETAILER index to help retailers and brands predict how much e-commerce will grow in the future and therefore what role it should play in their strategy. Russ joined Rob Gonzalez and me to walk us through the data and what to do with it. Russ, welcome back. It's always a pleasure to have you on the podcast. Thanks for coming back and sharing more great data and smarts with us.
Russ Dieringer (01:03):
Oh, great to be here, Peter and Rob, thanks for having me again.
Peter Crosby (01:06):
Yeah, we're in this moment where everyone's trying to figure out omnichannel profitability and where's the growth going to come from and things like that. And for a long time, e-commerce has been thought of as the growth engine for brands and retailers. That's where the growth was coming from and particularly so in covid. But then there's sort of been a narrative, I think taking place almost presumption from the top level data that that's no longer true or that it's not so much as it used to be. And you did an incredible set of research that you called the eTail Index to really quantitatively measure what's going on with the growth of e-commerce. And it was just so impressive. And I just wanted to have you on, and Rob and I are going to just pepper you with questions. So just maybe for our listeners, just kind of lay out what you are up to with that index and yeah, what were you looking for?
Russ Dieringer (02:05):
Yeah, sounds good. So I had written an article back in maybe first quarter of 2022, actually called the E-commerce winner. And it was sort of talking about this return to store narrative that I felt had really taken over a lot of the conversation inside consumer brands. So that was when it kind of started. So this return to store narrative has really been going on for kind of a while now. This year we developed, as you highlighted, the eTail index. And so the eTail index is comprised of 14 large publicly traded. And when I mean it could be marketplaces like Amazon, it could be D two C platforms like Shopify or BigCommerce or omni enablers like DoorDash and Uber Eats. And the goal in the index was to understand how those companies, this proxy for digital commerce was performing in the market relative to other channels such as brick and mortar. We wanted to understand, yes, everyone can look at the Census Bureau data, which is widely cited. We certainly use that as an input into our research, but the US Census Bureau data is a little bit of a black box. It's hard to know what's driving those numbers. It's a little bit difficult to forecast from a bottoms up perspective. So we created this etailer index to provide consumer brands more insight from a bottoms up perspective on what's driving e-commerce growth in the industry, at least amongst etailers.
Peter Crosby (03:47):
So you put all that data together and what did you find? What are your headlines coming out of that? Is eTail over? Is e-commerce over? Is it just going to wind away and wind down? Are we
Russ Dieringer (04:04):
Done? Yeah, it turns out everyone is shopping inside of stores at this point. No,
Peter Crosby (04:08):
It's all
Russ Dieringer (04:08):
Over. The analysis indicated that perhaps won't be surprising to us three, but e-commerce is not dead. I think a couple of high level findings from the analysis amongst these e-tailers within the index, absolute growth has slowed from the rates it was at prior to the pandemic. However, the growth rates that we're projecting for the index 8.3% over the next five years, that's a compound annual growth rate basis that is approximately four times higher than brick and mortar channel growth over that same timeframe. So it's still a relatively fast growing channel, and these e-tailers combined are two and a half times larger than they were pre pandemic. So even though the percentage growth rate is quite a bit lower than it was pre pandemic, the incremental dollar growth each year is more than two and a half times what it was. So we have a slower percentage growth rate, but bigger dollars and continuing to grow faster than brick and mortar channels by a wide margin.
Rob Gonzalez (05:26):
That's really
Peter Crosby (05:26):
What came out to me. Yeah. Sorry Rob, go ahead.
Rob Gonzalez (05:28):
Yeah, if you compare the actual dollar growth, take percentages aside today, if you compare the projected gross dollar growth for break versus click, what does that show percentage wise, like you're saying is still projected to grow on a percentage basis faster, but has that decreasing percentage normalized it so they expect the same kind of dollars coming from each channel? Or is e-commerce ahead on dollars?
Russ Dieringer (05:57):
So when we look at omnichannel retail and or this etailer index, the analysis sort of all points towards approximately 50 50 from a dollar growth perspective over the next several years. You have to make a certain number of assumptions to model that. But even under conservative assumptions where e-commerce penetration grows 75 to a hundred basis points a year, which is again pretty conservative, that's where the number shake out. And what's been I think, shocking to a lot of consumer brands to hear from us is when you think about Walmart's business this year, a little over 50% of its dollar growth has come from online sales. Kroger, same thing. So it's very few are doing the math and putting numbers to that. And sometimes it can be shocking to be like, what do you mean 50% of the dollar gross coming from walmart.com? That's kind of a shocking stat to a lot of retail leaders, but that's what the numbers suggest.
Rob Gonzalez (07:07):
And just to follow on that, I mean in 2019, the absolute dollar growth was not 50% of the dollar growth for these companies back then. The knock against e-commerce was always higher percentage off a lower base, and brick is still driving it. And what you're saying is what the Covid transformation has done is now it's actually on just a gross dollars basis, it's equal footing in terms of driving growth. That's kind of an incredible finding actually.
Russ Dieringer (07:40):
Yeah, the pandemic, these businesses are so much larger now. The digital businesses are so much larger that they have caught up. A lot of companies will, I think, look at percentage of sales contribution in e-commerce depending on what category you're looking at. Could be 10%. I mean, it could be quite a bit higher if you're in consumer electronics or something, but it's a minority. But we encourage, alright, well where's incremental dollar growth going to come from? And then also, let's not forget about the influence that digital has, but even setting that aside, just where is the incremental dollar growth from and are you betting around that? Are you investing behind that? That's what we encourage consumer brands to be thinking about.
Peter Crosby (08:22):
Well, and that's what part of what's stood out to me and made me want to have you explain this to our listeners is that I've just been hearing from leaders in the digital space that some of their cross-functional conversations with their brick and mortar compatriots who kind of suffered in their suffered during covid when it came to budgets and they're sort of brick and mortar marketers compatriots, and that in some ways this perception of e-commerce not being the growth engine any longer was making budgeting conversations more difficult than they should be or more misdirected than they should be away from continuing to invest in digital the way they thought they ought to. And so that's what I am hoping is that this data will at least inform those conversations as we think about how people invest over the next two or three years, particularly as budgets get squeezed and people are really starting to make some hard choices.
Russ Dieringer (09:28):
And I think there's just too much attention paid to the absolute growth rates coming down for e-commerce. So the pandemic, we obviously saw that big spike in e-commerce growth and then comms became more difficult. But as we level out here into the high single digits low kind of double, double digit rate, that is still, that's less than half the rate of growth that these e-tailers were seeing pre pandemic. But nonetheless, you've got to think about some of these second order effects or additional ways to calculate the importance of e-commerce that are not super complicated, but it's that absolute growth rate, which I think has allowed this return to store narrative to sort of continue and fester and be more persistent inside of organizations than I think is otherwise deserved.
Rob Gonzalez (10:22):
Yeah, I mean, I have a lot of experience in the startup world and in the startup world, you kind of fake it till you make it. So you always talk about growth rates, but you're still a tiny little company and you talk about taking over the world, but you're like a tiny little company. And then at some point when you're big enough, you move from talking about growth rates to move to talking about EBITDA and profitability and things like that. And it's a natural maturation. And it just sounds like that's, in a way, you can look at e-commerce like that where it's caught to a point where it is big enough, it doesn't have to hide behind percentage growth rates anymore. It can actually walk the walk, talk the talk, be integrated with the rest of the business. You focus more on margins and profitability and a little bit less on absolute growth, and it seems like a healthy thing. But that marketing transition from focusing on the growth rates, it sounds like it's throwing some people off.
Russ Dieringer (11:18):
I think an example of that is just with Amazon, I mean, based on our estimates, you have to make some modeling assumptions for their third party marketplace, gross merchandise value. But our estimates suggest Amazon's become the biggest retailer in the US surpassing Walmart. And so you talk about something that went from, we knew it was powerful back in 17, 18 and 19 right before the pandemic, but it's double the size now and it's the biggest retailer in the us again, according to our assumptions, which is pretty remarkable mean. I remember doing talks back in 2015 and 16 about Amazon, and it was treated like this little niche player that, oh, they're doing something over there, but we're not over-investing. But lo and behold, its model is quite powerful.
Rob Gonzalez (12:12):
I was at grocery shop recently and the first night Melissa Burdick from PAC View and Andrew Lee from Alan Group had a cocktail event. And everybody in that event, it was a small event in a speakeasy behind a steakhouse and everybody in the event where the people that were doing Amazon hackathons in 2015 and 16, and nobody in large businesses took Amazon seriously back then.
Russ Dieringer (12:40):
Yeah, very few. Yeah, very few. And now it's the giant, giant in the space and as difficult to manage as it's ever has been, but nonetheless, it's growth at scale. And in the eTail index it is, despite its scale, doing north of 500 billion in G M V in North America is growing at nearly the average rates of the index, which is really remarkable. You have some smaller companies in there, so you'd think it would be much lower growth, but it continues to grow right around that double digit mark and just is so large that the opportunity on Amazon is really enormous.
Rob Gonzalez (13:27):
So shifting gears here, so you got all this data and obviously we're biased to loving the results.
Russ Dieringer (13:36):
That's why I'm on here. I guess biased to believing them,
Peter Crosby (13:41):
But it had gone the other way. I wouldn't be talking to you Ru
Rob Gonzalez (13:43):
A terrible podcast. No, Russ on the podcast. So you take this data to brands and retailers and I mean, again, it's against the narrative on some level, what's the reaction you get? Do people believe it or are they disbelieving? Are they happy you're bringing them the data? What do you get?
Russ Dieringer (14:03):
Yeah, I think so I would break it down into kind of two buckets. I think the e-commerce teams love seeing the quantitative breakdown. They've always had the census data beforehand, but this is just offering another level of granularity, and I think it really illustrated in a quantitative way what they felt and what they were speaking to colleagues about in their organization. So I think it helped them just be more persuasive with colleagues. I think outside of the e-commerce team, I think there is a little bit more of a feeling of surprise. I think a surprise is the right word, not necessarily skepticism because it's hard to argue with, these are the numbers, but certainly a little bit of surprise again because that narrative has taken hold. And so when you see something that just really runs in my quite counter to that narrative, there is this sort of, I don't want to say shock, but there's some surprise with the findings.
Rob Gonzalez (15:00):
Is there any behavior, do they talk about behavior change from that, or is it more just, oh, that's interesting and they go back to whatever they were doing previously?
Russ Dieringer (15:12):
Well, I think it's inside of these big consumer brands, as you both know. I think it's sort of just a continual, sometimes slow, but continual progress towards ultimately putting the right resources behind the right opportunity. So I don't know if it necessarily changes anything that quarter per se, but I do think it helps that organization as they continue to deploy resources towards putting more behind e-commerce. But I think for most large consumer brands, it can take a while.
Rob Gonzalez (15:54):
Yeah, it's basically you're a hundred percent sure that your data is going to show up on a PowerPoint slide in the chief digital officer's budget planning deck, and so the impact will happen, but maybe in a delayed basis.
Russ Dieringer (16:08):
Yeah, exactly. Yeah, we've seen instances of it showing up in decks of that nature. So we know it's having influence inside of organizations, but it can be tough for us to tie it direct action to it, but it helps and it helps support the e-commerce team.
Peter Crosby (16:25):
And this is an index. Usually when you name things index, it's something you're going to do over and over again. Is that your plan to keep an eye on this?
Russ Dieringer (16:33):
Yeah, absolutely. So once it's created, it becomes a little bit pretty easy to update and monitor. So every quarter we're going to be reporting on not just the results of the Etailer index, but then also how our forecast change as we get more information, we incorporate that into the outlook. And so we'll be continually updating this typically once a quarter. We're also going to be adding and building this out even further. So we've been tracking obviously Amazon for a while as a part of this Etailer index, but also Walmart at Target, and we're going to be building out more of an omnichannel index to also compliment this. So we'll be able to look at, okay, which business models are really winning here marketplaces, is it D two C? Is it Omni enablers? Is it the omnichannel retailers? And just keep building it out to really ultimately get to a total full view picture of the retail market. And again, compliment that US Census Bureau data, but provide brands a little bit more granularity in order to understand, Hey, which of our customers should we place our big betts behind? Who's going to drive growth for us, et cetera.
(17:47):
When
Peter Crosby (17:48):
So many of listeners are confronting, the challenge of every channel is a touchpoint and you need to show up in every channel and the numbers of channels keep shifting. And you look at the growth just on TikTok alone and where they're headed, that you have to get serious about something that's now at the scale that it's at and on its way up. So when you look at this data, does it give you the ability to advise brands on where they should be focusing? Could this be one of the inputs into helping them decide where opportunity lies for them?
Russ Dieringer (18:27):
I definitely think it's one of the inputs, and what I encourage brands to do is to map out their own retail customer base, and I identify which ones for them are best positioned to be needle movers. So we look at percentage growth, we look at dollar growth, and we map that out within this etailer index to illustrate the winners and losers. And that's kind of a market level input. But then for an individual consumer brand, depending on what categories you're in, what customer set you have, et cetera, that can vary. And so every brand should be doing that and should really be, I think, investing in that way rather than, I think perhaps too often consumer brands will just look at their sales and say, all right, this customer did 5% of our business last year, so let's commit 5% of our investment to them for this go forward year. But that's backwards looking. It's not thinking about growth, it's not thinking about which of your customer base has real tailwinds. And so it's just a little bit of a different way of thinking, a little bit more forward thinking. We provide that market level. If a consumer brand wants to go deeper, I think if they do the same analysis for their particular customer set, that's the way that I would do it inside of,
Rob Gonzalez (19:49):
And you mentioned one piece of advice along those lines already, which is that Amazon, even despite its size, is be meeting or beating the index growth rate. So whatever you invested last year on average, you should be investing at least at the growth rate more. So that's one way to look at this, where overinvestment in Amazon or at least indexing the growth of investment to the actual projected growth rate is same. What are other areas that brands can think of for investment patterns like that? Are there rules or beyond the Amazon where you're like, I don't see people investing enough in X or their budgeting planning is not taking growth into account in X?
Russ Dieringer (20:39):
Well, what the Etailer Index Illustrated were a couple of areas. So one, we talked about Amazon already growing a little bit slower than the average from a percentage growth rate, but dramatically higher from a dollar perspective. D two C platforms as a whole we're growing quite a bit faster and also significantly larger from a dollar perspective. Now, D two C is very, very fragmented. There's all these little, well little in the context of Amazon, little D two C sites that sum into a very large impact on the market. So consumers want to buy directly from brands. So that was a model that really stood out in this analysis. And then somewhat surprisingly, Omni Enablers, which is a name that we used for platforms like DoorDash and Uber Eats, which were in this original eTail index. We'll be adding Instacart now that they've gone public and have revealed more of their financial information, but they really stand out too from a percentage growth and a dollar growth perspective.
(21:50):
I think if you're in C P G, you've probably underestimated the potential with DoorDash and Uber Eats, and it's still relatively small in those categories, but growing rapidly, they continue to add more grocers and more retailers to their selection, if you will. And based on the forecast that we can see, they are just driving a ton of consumer demand on those platforms, which we think that they're going to be able to leverage into delivering household goods to shoppers. Instacart, like I mentioned, was not included in the original eTail index. It would fit with the large scale. I think, don't quote me on this number, I think they did 28 billion in G M V or something last year. So really sizable G M V, but growing quite a bit slower than DoorDash and Uber Eats. So it'll be interesting to see how those three compete with each other. There's a lot of interesting market dynamics around omni enablers, whether retailers and grocers want to work with them, whether they have to work with them. So we'll see. But as we sit here right now, I think that's an underestimated model amongst consumer brands today.
Rob Gonzalez (23:11):
Yeah, I think it's smart to rebrand Quick Commerce to Omni Enablers because the markets and people pretty down on that. There was a bloodbath of companies in 22 going bankrupt or merging or selling at fire sale in that space. So it, it's got sort of a bad taste to it right now. And of course, DoorDash and Uber Eats and Instacart are amazing companies.
Russ Dieringer (23:40):
It does need a rebrand. But for Uber Eats, DoorDash and Instacart, I mean, they can deliver kind of quick, but a lot of their delivery is not this 15 minute attempt at it. But yeah, I agree. If you're working inside of Quick Commerce and you're trying to raise money or something right now, not a pleasant place to be in 2023,
Rob Gonzalez (24:01):
Unless you do Quick Commerce ai, then you
Russ Dieringer (24:04):
Can, yeah, now you're talking, well see, now you know how to raise money, Rob. Apparently
Rob Gonzalez (24:10):
One skill, I just have one skill.
Peter Crosby (24:12):
That's it. That's it. Just put AI on everything. That's what we've done. I mean, I was talking actually with Andrea Le the other day recording a podcast with her and she was, I think one of the things that makes the Instacarts of the world stand out is their investment in being technology platforms for experience. And Andrea was talking about the being able to sort of meal plan on the fly in Instacart, sort of say, what's the diet that you're looking for and what do you want to, and they'll offer you some meals. And then once they offer you some meals, you turn that into your shopping cart and the next thing you know there's a doorbell ringing with all the food you need for your meal plan for a week. That that is really can be game changing for return, for loyalty, for convenience. It's not just about how fast can I get it there, but how can I help you choose stuff that's good for your life and it becomes increasingly personalized. Those sorts of opportunities I think are really interesting and exciting,
Russ Dieringer (25:21):
And I think the Omni enablers have to continue to innovate in that way in order to be able to continue to get the opportunity to work with these grocers and retailers.
Peter Crosby (25:30):
Because
Russ Dieringer (25:30):
As the Instacart SS one revealed a lot of what drives Instacart's financial model is the advertising piece. The grocers and retailers wouldn't prefer to have an intermediary get between them and the consumer brands and these budgets, but they might be willing to do that if the Omni enablers can offer this incredible user experience and really innovate to grow the pie in Instacart's word. So I think they have to be really innovative. It has to move the sole value proposition, be we have a network of shoppers and have delivery because I think grocers and retailers can replicate that. So hopefully we'll see the omni enablers really develop a unique shopping experiences and use generative AI to do that in the right use cases and that sort of thing. But they kind of have to do it because otherwise the groceries and retailers are going to be more inclined to try to do this stuff.
Peter Crosby (26:40):
When you think about the conversations, I'm sure you're having tons of conversations about annual planning and forecasting and things like that with your clients and everyone trying to figure out what is 2024 going to look like. Do you have any top line reflections on where people's thinking and mood or fear, anxiety, excitement, what's happening out there? Do you mind sharing that with us?
Russ Dieringer (27:09):
Sure. I mean, top level, who knows is what a lot of brands feel like, right? Because of the volatility that's happened. But I think where the industry is kind of getting to is one, we've seen inflation come down pretty dramatically. There's even a lot of talk about the possibility in certain categories for deflationary trends. So you're seeing a lot of more promotional activity, particularly amongst grocery health, personal care categories. So that's starting to pick up. We're not going to get necessarily the huge growth rates in C P G that we've seen over the last couple of years, which are really driven by price. Price isn't going to be there anymore. So now we're going to be comping against this stuff. So I think growth rates in C P G are coming down because of that dynamic around inflation. I think it's going to be a more competitive environment because brands are now needing to invest in price, in order to generate demand.
(28:19):
We've seen a lot of movement towards private label, et cetera. So overall, C P G, grocery health, personal care, more promotional growth rates have come down more competitive. I think discretionary is sort of discretionary categories is really interesting to think about. I don't have the crystal ball, but discretionary categories have been under significant pressure really over the last 18 to 24 months. At what point does that rebound? And then what does that do to growth rates at certain retailers? For example, target has targets, well, total business, but also digital business has steeply underperformed Walmart, a portion of that, a significant portion of that is simply due to the category mix difference between those two retailers. So does Target bounce back? Amazon? I think if discretionary bounces back, I mean, Amazon's grown quite well even with discretionary down. So what happens to its business if discretionary rebounds in 2024? I think that would be incredible for its margins, which are already heading in the right direction. But if discretionary returns, its margin profile looks very good over the next 12 to 24 months, maybe they reinvest that and continue to try to drive growth. But we'll see. So I think discretionary is kind of the most interesting wildcard over the next year. And
Rob Gonzalez (29:41):
What do you put in discretionary? Is it like household goods, d i y, apparel, toys, what goes in the mix there?
Russ Dieringer (29:50):
Yeah, that's what I'm putting in there. Versus consumer staple type products that you're buying every day, regardless of what's going on in the economy.
Rob Gonzalez (30:01):
Yeah, that makes sense. I mean, target is definitely a lot of discretionary. One of my favorite podcasts, my guilty pleasure is Ramit Satis. I will teach you to be rich. It's like couples counseling around money issues. Oh my God, Peter, it's so good. I can't even tell you. But one of the tropes is the target run where a person will go into Target and they've got a budget of a hundred bucks, but they spend 500 bucks and they're like, I don't even know what happened. And so much of it is just, target does an incredible job with their assortment mix, but in times where money's really tight, you can't really get away with that as much.
Russ Dieringer (30:43):
Yeah. So you've seen, I mean, a lot of retailers talk about this. I definitely believe it for Walmart, but you've seen Walmart gain a lot of share with higher income shoppers over the last 12 months. I think digital business really helped them with that because you could be higher income shopper accustomed to shopping at a Target or retailer like that, not really be super enthused about going to a Walmart Supercenter, but now you can just don't even have to go in. You can go to curbside or are you going to get it delivered to your house? And so I think that's really allowed. Walmart, its digital businesses really allowed Walmart to gain these highly valuable shoppers. We'll see if they can hang on to them as inflation ebbs here.
Rob Gonzalez (31:29):
Totally.
Peter Crosby (31:31):
Well, I can't let you go, Russ, without just thanking you for all of this great data, the work that you're doing at Strata, I'd love to give you a chance. I know you're growing, and do you want to give a, I dunno, a 32nd pitch for what's happening over there?
Russ Dieringer (31:50):
Yeah, sure. So first of all, the listeners can find all of our research, which we're publishing multiple pieces a week@stradley.com. And we have a research library that has search functionality, which works really well. So depending on what you're looking for, you should be able to find it from us. We are growing. We're excited about 2024. Our focus is all about closing the e-commerce knowledge gap inside of large to mid-size consumer brands. So we work with e-commerce teams to keep that group inside those companies at the leading edge. And we also help them educate the rest of their colleagues through a range of different formats, whether it be presentations, workshops, courses, that sort of thing. And yeah, it's a busy time of year. A lot of brands are planning their budgets for next year. So we'd love to entertain conversations with consumer brands and become a partner to their e-commerce team to close that e-commerce knowledge gap for next year.
Peter Crosby (32:50):
Awesome. Well, thank you again for coming by and sharing all of this great data and your perspective. We love it and we are grateful.
Russ Dieringer (33:00):
Well, thank you for inviting me and keep up the good work on the podcast, adding value every week. We love it. We listen every week and we're grateful to be here. So thanks for inviting us back.
Peter Crosby (33:10):
Thanks again to Russ for all the great insights. Use it as a cudgel in your next budget conversations. There's always more to know at digitalshelfinstitute.org, so head on over and become a member for free. Thanks for being part of our community.
