Since the onset of the COVID-19 pandemic, e-commerce has been on a tear. Lockdowns, a move to remote work and other impacts of COVID pushed a great number of global citizens to spend more of their money online through e-commerce sites and on-demand services.
For companies like Shopify, the period since March 2020 has proven a bonanza. The Canadian e-commerce giant spent last March bouncing between $350 and $420 per share. Today, the company is worth $1,554.74 per share.
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Other players saw their businesses scale as consumers spent more time buying online and less time in stores. Instacart’s grocery delivery business accelerated. DoorDash went public on the back of a demand surge. Roblox usage skyrocketed, sending it to the public markets on a high. The list goes on.
But while some sectors did well, and many have continued to wow investors, the investor-thrilling run that e-commerce companies, in particular, has been on for five quarters could be slowing.
Black Friday and earnings warnings
While I despise astroturfed holidays that revolve around shopping, they can provide useful data points. You will not be shocked that Black Friday was a bit of a bust in terms of U.S. retail foot traffic. New COVID variants will do that, frankly.
But it may surprise you that online shopping as part of the Black Friday fauxliday fell compared to 2020 levels. Not that the declines were severe, but seeing online spending drift to $8.9 billion this year from $9.0 billion last year made me sit up and take note.
Perhaps we should not have been surprised. There were warning signs.
Shopify’s Q3 earnings, reported October 28, 2021, were a letdown. The company’s posted revenues of $1.12 billion missed estimates, despite posting 46% year-over-year growth. Earnings per share and gross merchandise volume also missed analyst guesses.
But there were other forewarnings that we should have picked up on. Amazon’s earnings were also a letdown, AWS aside. The company’s revenue and earnings per share were both misses in the third quarter, with the U.S. commerce giant posting just 15% year-over-year growth in aggregate, bolstered by 39% growth at its cloud computing division. North American sales were up just 10% on a year-over-year basis.
All this brings us to Pinduoduo’s somewhat catastrophic earnings report from last Friday. The company’s revenue growth of 51% to $3.3 billion was a miss of around $670 million compared to expectations. Its shares sold off sharply on the news.
Given those results heading into Black Friday, that we’re seeing somewhat softer e-commerce numbers simply should not be a surprise. The pandemic gaveth, and now seems less inclined to continue to giveth, even if e-commerce itself is still growing.
It’s just that it’s growing more slowly than investors expected. For e-commerce companies, this likely means compressed revenue multiples moving forward. No, the secular shift to online shopping will not reverse. But it is also seemingly reverting to slower growth rates. For startups that either sell to e-commerce companies or engage in online sales themselves, it’s key news.
What about those roll-up plays?
In light of the results above, one particular startup sector that I’m curious about is the various online brand roll-up plays that have raised oceans of capital in recent months.
In TechCrunch’s coverage of Razor Group’s latest fundraising, part of a wave of companies “snapping up merchants selling on Amazon to build in more e-commerce economies of scale,” our own Ingrid Lunden gave a rundown of recent rounds in the niche:
That quick expansion underscores the frenzy of activity that we have seen in this space, as startups amass large piles of capital to buy up, integrate and scale merchants that have built successful businesses around selling on Amazon, by way of the company’s marketplace and fulfillment infrastructure, but might lack the funds, talent or exit strategy to scale beyond that.
Just a couple of weeks ago, Thrasio — one of the big players out of the U.S. — raised $1 billion on a $5 billion valuation; Perch raised $775 million in May of this year, and we know of at least one other competitor to them about to also announce a major round; and these are just three recent, big deals. Others include Heroes, which raised $200 million in August; Olsam ($165 million); Suma Brands ($150 million); Elevate Brands ($250 million); factory14 ($200 million); as well as Heyday, The Razor Group, Branded, SellerX, Berlin Brands Group (X2), Benitago, Latin America’s Valoreo and Rainforest and Una Brands out of Asia.
We’re talking billions of dollars worth of investment in the concept that smaller online brands should be aggregated. But what happens to those brands as their larger market — e-commerce — sees its growth rate slow? Are they still attractive bets? Are they sufficiently winsome as to make the huge sums spent to buy them worthwhile?
In a world where e-commerce was still enjoying COVID-induced tailwinds? Perhaps. But now I wonder.