Online retail is no longer the hot, new thing. We are almost 30 years into the eCommerce revolution and much of the promise of online retail has not come to fruition. As this article argues, “The fact is that even today in 2023 it remains extremely challenging to find a consistently profitable, large-scale internet retailer that generates a satisfactory economic returns on capital employed.”
So the question is, who is benefiting from the eCommerce revolution?
Unsurprisingly, the biggest winners have been Google, Facebook and their big tech peers. As online retailers have scaled, they have not enjoyed the economies-of-scale that were expected. Instead, retailers have found themselves paying more and more of their revenue towards online ads. Operating leverage decreased rather than increased with scale.
This article illustrates this point by looking at a number of Australian eCommerce players – Redbubble, Kogan, Adore Beauty and Temple & Webster.
How are we to understand this as investors? These eCommerce players are always looking for the next customer through their online ads with Facebook and Google. And with so much competition on these online ads marketplaces, each additional customer is a little more expensive than the last. Meaning until these eCommerce platforms can generate their own demand (i.e. have customers go directly to their website like Amazon) they’ll have to keep paying more and more of their revenue to Google and Facebook in order to keep growing.
That in itself isn’t a problem. Plenty of eCommerce sites have built large and very profitable businesses by paying more and more to Facebook and Google. But it should temper our expectations around the profit margins these websites will deliver. It seems retail in all its forms – online and bricks and mortar – will remain a very low-margin game.
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