How Will a Recession Impact E-commerce Enablement?
Special thanks to Taylor Jones and CJ Ekstrom for co-authoring this article
In the early days of Peterson Ventures, we invested in companies that pioneered the DTC brand movement with Seed investments in Allbirds, Cotopaxi, and Bonobos among others. Over the past ten years we have seen the long tail of e-commerce brands expand rapidly. Platforms like Shopify have enabled entrepreneurs everywhere to start their own e-commerce businesses. As investors in the early DTC e-commerce wave, we developed a deep understanding of the pain points around building and scaling this next generation of e-commerce brands. As a result, we invest actively in the companies that are building technology to empower these merchants — platforms such as Loop, Rebuy, Trendsi, Via, and Particl.
As our e-commerce enablement portfolio grows and the macroeconomic outlook appears uncertain, we’ve been asking ourselves, “How will an economic downturn affect e-commerce enablement companies?”
Mixed macroeconomic messages
If you are an e-commerce enablement founder, you are likely hearing mixed messages. On one hand you’re hearing:
Legendary VCs warning of an impending downturn worse than ‘00 and ‘08,
BigCommerce and other tech companies conducting major layoffs
And the rate of e-commerce penetration slowing post pandemic:
But on the other hand, you’re seeing:
Record breaking numbers from Black Friday / Cyber Monday (“BFCM”)
Tobi and Harley tweeting out record BFCM numbers for Shopify
Fellow e-commerce enablement founders share record breaking BFCM numbers
Consumer confidence remaining strong, hitting an eighth month high in December:
Overall, not bad! US consumer demand appears to be holding strong.
So what is going on? Should e-commerce enablement founders be preparing for a recession and a slowdown in consumer spend? Or is it business as usual for their merchants?
Frankly, we aren’t sure. We aren’t economists. But a few things we know:
The Fed appears to be hell bent on taming inflation with consistent rate hikes. This will inevitably slow down the economy as the cost of capital becomes more expensive.
With record inflation, layoffs picking up, deflating asset bubbles (stocks, housing, automotive, etc), and further Fed rate hikes ahead, many economists are predicting at least a mild recession is on the horizon.
What can the last significant recession teach us?
In the event we are headed into a recessionary environment, is there anything e-commerce enablement founders can learn from the last significant recession, the Great Financial Crisis (“GFC”) of 2007-09? Sadly not much. e-commerce was still a nascent category, accounting for just 3.6% of total U.S. retail sales in 2008. Shopify was only a few years old at the time generating just $1.1M revenue in 2008.
But there are a few learnings to keep in mind:
Consumer spending declined: during the GFC, both retail and e-commerce experience saw sharp declines in sales growth, consumer spending slowed, and consumer confidence hit all-time lows.
Consumer behavior evolved: Consumers began looking for lower-priced products and flocked to discounted merchandise. During the GFC, this shift in purchasing habits was reflected in the strong performance of discount retailer stock prices, which outperformed both the S&P 500 and premium retailers during this period; Dollar Tree (+10.9%), Walmart (+11.1%), TJMaxx (+32.9%) vs. S&P 500 (-25.8%) and Nordstrom (-26.5%).
Amazon accelerated: Final takeaway from the GFC is that Amazon demonstrated exceptional resilience and growth. The company's revenue increased significantly, from $15Bn in 2007 to $25Bn in 2009, representing a 65% increase.
In Jeff Bezos’ 2008 Shareholder Letter, after Amazon’s stock was down 33% in 2008, he said, “In this turbulent global economy, our fundamental approach remains the same. Stay heads down, focused on the long term and obsessed over customers.” He referenced their continued focus on customers and providing “low prices, vast selection, and fast, convenient delivery” and the opportunity ahead with new capabilities like Prime, Kindle, Fulfilled by Amazon, and AWS.
In his 2009 Shareholder Letter, after the stock was up 147% in 2009, Bezos said, “The financial results for 2009 reflect the cumulative effect of 15 years of customer experience improvements: increasing selection, speeding delivery, reducing cost structure so we can afford to offer customers ever-lower prices, and many others.”
Amazon’s long-term orientation and culture of customer obsession enabled them to stay focused in the midst of choppy economic waters. E-commerce enablement founders and CEOs could take inspiration from Amazon’s approach as they seek to accelerate coming out of a recessionary environment.
Predictions for e-commerce enablement in a recessionary environment
With the lessons of the past in mind, if we are indeed headed for a recessionary environment below are some trends we expect to see in the e-commerce enablement space.
Budget cuts and tool consolidation
If merchants start to feel softening from their customer bases and sense revenue slowing, they will start to think of ways to reduce expenses and will likely scrutinize spend on their tech stack.
Merchants will still rely on their mission critical tools, but they may not upgrade or look to reduce their usage to reduce costs. However, for tools that aren’t mission critical and fit in the “nice to have” category (i.e. tools without a clear, measurable ROI), merchants may take a hard look and ask, “why am I paying for this again?” This phenomenon isn’t isolated to e-commerce, but is happening across SaaS.
Merchants may also look to consolidate their tools – while in the past they may have been fine using a number of point solutions, they may look for opportunities to use a platform-like product that offers many solutions to “bundle and save.” For instance, a merchant may move to consolidate tools with a product like Gorgias that offers a number of solutions.
Lastly, merchants may make the hard decision to move from a premium product to a more affordable solution, prioritizing price in the short-term over going with a best-in-class solution.
Decrease in ACVs due to consumption-based pricing
If you look at leaders across the e-commerce enablement space, most base their pricing on usage of the product. Examples:
Klaviyo: number of contacts + email sends
Postscript: messages sent
Gorgias: tickets
Recharge: % of revenue + per transaction fee
Rebuy: % of revenue + orders
Okendo: orders
Loop: returns
If merchant sales volume declines, revenue per customer could also decline for e-commerce enablement companies due to 1) pricing being tied to merchant revenue or orders or 2) merchants conscientiously pulling back on product usage to save costs. For instance, since Klaviyo bases pricing on the number of contacts, merchants could be conscious of customer list cleaning to reduce their monthly bill.
Repositioning around value
E-commerce enablement will need to be crystal clear on how they help merchants 1) grow top-line revenue or 2) expand gross margins. If it isn't clearly apparent how a product directly impacts the top or bottom line, it will be easy for merchants to not prioritize making a new purchase right now.
One of our portfolio companies, Loop, has done of good job of adjusting their marketing messaging by leading with how their Shopify returns/exchanges product helps merchants save money and increase profitability:
Tools tied to revenue will thrive
The hardest tools to cut will be those that are directly tied to revenue. If a large portion of a merchants revenue is tied to SMS marketing, they likely aren’t cutting Attentive or Via. If subscription revenue is core to a merchant’s strategy, they likely aren’t cutting Recharge.
If acquiring new customers proves challenging for merchants, they may seek ways to monetize their existing customer base and increase repeat purchases. For instance, one of our portfolio companies, Rebuy, enables brands to intelligently cross and upsell relevant products throughout the customer buying journey. Rebuy customers see a 10-30% increase in AOV after implementation. When a product delivers this type of revenue impact to a merchant, it will be much harder for a merchant to let go of the product.
Merchants will increase appetite to explore tools that open up new acquisition channels
Since April 2021, brands have been weathering the storm associated with Apple’s iOS 14.5 IDFA change. Customer acquisition costs have risen and ROAS for historically reliable acquisition channels like Facebook have declined. And now if a recession sets in, brands’ hunger to find new, efficient customer acquisition channels will only increase. Brands will likely clamor for anything that opens up new routes to find new customers.
For instance, we have been intrigued with products that allow brands to take advantage of the consumer shift toward short-form, video-based content on platforms like TikTok, Instagram Reels, and YouTube Shorts. “Shoppable video platforms” like Videowise, Go Gander and Kahani enable brands to leverage UGC to offer shoppable experiences in short-form videos.
Long-term opportunity ahead in e-commerce enablement
There seem to be signs that inflation is slowing and the Fed is signaling that they may slow rate hikes. Perhaps we’ll avoid a recession, the US consumer will remain strong and e-commerce will remain a bright spot as valuations for the broader software market are reset.
If nothing else, we recommend e-commerce enablement founders conduct scenario planning if we are indeed headed for choppy economic waters and take a close look at burn, runway and budgets to create a buffer for a potentially tough 2023 ahead.
Regardless, we continue to be bullish about the broader e-commerce enablement market and the opportunity for technology to power the future of commerce over the long-term. Just as Amazon accelerated out of the GFC, we predict category leaders will extend their leads coming out of an economic downturn, and we continue to pursue the opportunity to back e-commerce enablement founders building the category leading products of the future.