E-commerce shifts
#233 Merchants face a rapidly changing e-commerce environment
Shopping Season 2023 was a Western showdown. Consumers battled inflation, Google battled Amazon, and Amazon battled Chinese low-cost retailers. Independent of who wins, e-commerce is changing.
BFCM
Data around this year’s BFCM (Black Friday / Cyber Monday) reflects three critical e-commerce trends between merchants and buyers:
E-commerce is growing
200 million shoppers leveraged -30% discounts on average over the most popular shopping day of the year, Black Friday (BF), and the second most popular one, Cyber Monday (CM). In comparison, 142 million shoppers are estimated to hit the stores on Super Saturday, the Saturday before Christmas.
2023 was the first BFCM in which more people shopped online vs. offline and more on mobile (51.2%) vs. desktop. You’d expect more people to hit the stores as in-person events are hot goods after the pandemic years. But that was not the case. Google Trends shows a 4-point increase in searches for “black friday” in 2023 compared to 2022.
E-commerce is making up 14.9% of total retail but growing much faster. In Q3 2023, online retail drove +7.8% more revenue than in Q3 2022; total retail sales grew only +2%. Adobe estimates online spending was up +8.5% for online stores compared to +1.1% for offline retail over the 2023 BFCM season.1
E-commerce is getting more competitive
BFCM is a make-or-break event as it makes up 20-50% of their annual revenue for retailers and merchants.2
Merchants had to pay more to get less this year. Higher competition and slower purchases increased ad spend on Amazon by +30%, and the average CPC by +18%. Average ROAS decreased by -8% for Black Friday and -5% for Cyber Monday.3 To turn a slower year around, online stores started discounting earlier, which in return led 55% of consumers to shop earlier.
From Adobe Analytics:
Across major marketing channels, paid search remained the biggest driver of sales for retailers across Cyber Week (27% of online sales). Direct (21%), organic search (17%), email (15%), and affiliates/partners (12%) were also major contributors. Revenue directly attributable to social media remained at less than 5% of total sales during Cyber Week, but that share has grown 6% YoY.
One forgotten player: publishers. The media industry has been struggling and seeks refuge in affiliate marketing. As a result, BFCM is also important for publishers, and the fight is intense. For example, Mashable altered some headlines up to 14 times, as reported by NewzDash.4
Consumers buy despite economic headwinds but “trade down”
A positive surprise: consumers demonstrate resilience to higher inflation and interest rates like a boxer who doesn't get tired. Lower prices (-6% on average) paired with higher sales mean a lot of demand was net new.
However, consumers are “trading down”. They spend money but buy cheaper products whenever possible. BNPL (Buy Now, Pay Later) usage was up +42.5%, and most buyers chose standard shipping times to save money.
Another sign: growing consumer debt. As I wrote in the Lending Tree Deep Dive, credit card loans are at an all-time high.
Credit card loans are still lower than in 2010, after the last recession, indicating favorable growth opportunities in the space even though credit card interest rates are at an all-time high.
Strong e-commerce growth, robust consumer spending and higher competition are trends that play into the hands of four companies: Amazon, Google, Shein and Temu.
The 3rd wave
Temu and Shein are part of the third wave of Chinese retailers that succeeds platforms like Wish or Alibaba. The first wave produced in China for American sellers, the second wave sold on American shopping platforms, and the third wave markets directly to consumers and builds its own platforms.5
Temu and Shein offer super low-cost products that they market with billion-dollar budgets on Meta and Alphabet, just like TikTok when they started. It’s important to know that 3rd wave retailers focus on the US and Western markets with products from Chinese merchants. 50% of both companies’ revenue comes from the US.
Temu launched in the US in September 2022 and is on track to drive $14 billion GMV in 2023 and aims to double next year, making it the fastest-growing retailer in history. Valued at $193 billion, it’s worth more than Alibaba and grows at a much faster rate.6 Shein’s GMV is around $40 billion, Shopify drove $56.2 billion in GMV in Q3 of 2023 alone, and Amazon should make $800 billion this year. Temu is young but has bare potential.7
The rise of the Chinese 3rd wave changes e-commerce in 3 critical ways:
1/ Low-cost retailers thrive in high-interest rate environments, as we have it right now because consumers want to save money. At the same time, established retailers and merchants can struggle if they’re selling higher-priced product segments. It’s a double-whammy for some brands that may lose market share to 3rd wave retailers.
Considering product cost and macroeconomics is critical in business operations and marketing because with less revenue comes lower marketing budgets and growth rates. Anecdotally, I’ve heard from many e-commerce brands that they’re reducing budgets while Temu spends one billion dollars on social media marketing.
A good example is Nike, which saw a ~13% stock value drop when it announced a lower revenue outlook in its Q3 earnings. Despite selling 10% more over BFCM in 2023 than in 2022, investors punished the sports fashion brand for headwinds in China (and EMEA).
2/ Merchants play a key role in growing competition between US and Chinese e-commerce super platforms. US merchants have a hard time competing with prices from Chinese retailers. Half of Amazon's sellers already are from China. Shein launched a marketplace in May 2023 and today has ~10k sellers on its platform - all from China.
But for some merchants, more retail platforms are opportunities to advertise. In 2022, Amazon's global ad revenue was $38 billion, almost double from 2020. If Temu and Shein can grab more market share, they could build viable advertising marketplaces and competition to Amazon, Alphabet and Meta.
3/ Temu and Shein also compete with each other.
In organic traffic, Temu is quickly catching up to Shein.
Temu already passed Shein in total traffic. But the company, which is operating in 47 countries, is taking heavy losses. US orders cost Temu 30-35% of the average $37 value, global orders 40%. The big question is how long Temu can keep burning cash for growth in an expensive and competitive environment.
According to Similarweb, Temu scaled from 0 to 100 million monthly US visitors in 9 months, which is more than Aliexpress (~30 million), 40% of Etsy and 25% of Walmart.
But it’s still a long way to reaching Amazon’s organic traffic, which sits at around 600 million - roughly 100x more.
An old competitor to Amazon, Temu and Shein is rising: Google.
Introducing Google shopping marketplace
Google’s metamorphosis into a shopping marketplace is complete. Two ingredients were missing: product filters that turn pure search pages into e-commerce search pages and direct checkout. Those ingredients have now been added, and the cake has been baked.
Just in time for the shopping season, Google made product filters permanent for queries with clear intent after testing the feature for about a year. What used to be the Google Shopping tab is now the default for Search.
Google replayed its boiling frog playbook: habituate users with small features and slowly expand. Google first showed paid listings (PLAs), then organic listings, and now a full product search page.
For merchants and retailers, the new marketplace layout can significantly disrupt organic traffic. Google has highlighted the importance of the Merchant Center for paid and organic listings for a while now, likely to prepare merchants for the coming transformation. Within this change, classic Search is becoming less important and marketplace optimization more important.
Another reason merchants can expect disruptions is direct checkout. Since June, Merchants can connect their free listings directly with their checkout page. In Search, users can choose between visiting the Merchant’s site or going directly to the checkout. Google has been relatively quiet about the feature.
Typically, all traffic from free listings goes to a merchant’s product details page and from there, some shoppers make a purchase. The checkout feature allows shoppers who are ready to buy to go directly from a free listing to a merchant's checkout or cart page. This allows merchants to retain traffic to their product details page while also making it easy for shoppers who want to buy now.8
Together with Google Pay, users and merchants encounter very little friction in transactions.
Reality is that Google had few options. Amazon had been eating their lunch with a growing ad business that hits Google where it hurts: e-commerce. Shopping is lucrative in part because conversions and returns are easier to measure than in industries like SaaS.
Google needs to fight for advertising revenue from e-commerce, but it also cannot betray its function as a search engine. Despite attacks from Amazon, Shein and Temu - or even TikTok and Meta - Google needs to keep linking to those platforms. It will be interesting to see how Google can balance the two. I’m not sure Amazon & Co are happy to see Search shopping filters. In theory, they could get off Google. Over 60% of Amazon’s traffic comes directly despite being an SEO powerhouse.
The other challenge is that Google is not in the logistics business. It relies on partners like FedEx, USPS or UPS to get products to the customers and on merchants to ship their products to partner warehouses. Shopify recently got out of the logistics game because it realized how different it is from SaaS, but it got into the game in the first place because it knows how vital one-day shipping is.
Brace for impact
The 3rd wave of Chinese retailers, in combination with Google’s marketplace transformation, bears 3 consequences.
1/ US + EU retailers should brace for competition with Chinese merchants that likely undercut prices. Since competing with someone who has much lower production cost is futile, Western merchants should focus on customer retention, building strong brands and doubling down on quality.
2/ Organic Search in e-commerce is thinning out. Merchants and retailers have already been cutting paid spend, but just relying on organic is challenging. Instead, paid social channels and influencer marketing might offer refuge. New e-commerce platforms could be viable advertising channels as long as products aren’t expensive.
3/ Affiliates are getting squeezed by Google, too. Google cracked down on aggressive link-building and AI content tactics. SGE will skim informational traffic, and the marketplace will skim organic traffic as a whole out of e-commerce. The shift move is Google’s Perspective tab, which may allow affiliates to build creator channels (blog, newsletters, Youtube channels) and regain visibility they can arbitrage to merchants.
It's a really interesting perspective that SHEIN and TEMU are only a tiny fraction of Amazon.