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Today we look at the upcoming holiday crunch as DTC, eCommerce, and retailers plan for a hectic Q4. With Delta variant infections on the rise, businesses have had to rethink many of their holiday plans. Ports, warehouses, fulfillment centers, delivery networks, and consumers are dealing with daily disruptions due to the Delta variant at both a global and domestic level. As I recently covered the eCommerce slowdown that appeared in Q2 of this year, today I want to cover where so many eCommerce companies should be focusing their attention, the holidays.
And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
China Partly Shuts World’s Third-Busiest Port, Risking Trade - Bloomberg
With the Delta variant running wild globally, ports, warehouses, and logistics have been taking a hit. As the pandemic showed us in early 2020, and because many HBS graduates are running the global supply chain, the developed world has a fragile logistics network. Driven by the needs and demands of Wall Street quarterly expectations, businesses that don’t operate in a particular model and don’t rely on the established supply chain typically get punished by the Street unless a pandemic strikes and throws a wrench into everyone else’s inventory and fulfillment. Because we still rely on such a fragile supply chain, any hiccups to ports or logistic networks in China will have enormous reverberations for the entire eCommerce and consumer spending sector, ultimately affecting the holiday season.
U.S. Postal Service Proposes Holiday Surcharges for Businesses and Individuals - WSJ
Although consumers are no longer as reliant on eCommerce, they have continued to buy more things online (see Tuesday’s newsletter on eCommerce). That genie is not going back into the bottle. Delivery services know that and will change their business model to meet that need without taking an enormous loss. Companies in the past have forgotten about USPS as a critical delivery player because so many companies relied on UPS and FedEx. But as demand across all those other services will surely rise, last year many eCommerce merchants went to the USPS to fulfill their needs. More businesses will have to rely on USPS this holiday to deliver packages to their customers. Hopefully, these price increases will help those packages get to their destination on time, unlike last year.
Amazon lures advertisers from Facebook after Apple privacy shift - Ad Age
The marketing landscape for online merchandisers, especially DTC and eCommerce companies, is still learning how to navigate this unfamiliar landscape. The old days of relying on Facebook’s targeting algorithm no longer exist, which forced companies to create better marketing funnels and channels to deal with this reality. Although the rollout happened in Q2 of 2021, as companies plan for this holiday season, the unpredictability of the advertising landscape is causing so many companies to experiment with different media channels to find what works for them. There is a significant risk of trying to finalize this plan so close to the holiday season. Sadly even if a company figures out their new playbook before Q4, just remember that iOS 15 is dropping in September. Those privacy changes will again cause so many companies to recalibrate their advertising plans.
2 Takeaways
This year the holiday season will be even more chaotic for eCommerce companies.
Last holiday season, the pandemic was flaring up again after a settled down Q3 and the start of Q4. In 2020, Halloween parties were happening but not blatantly advertised, and many physical stores maintained their Black Friday festivities. Many retailers spread Black Friday throughout November to minimize the sizeable crowds rather than isolate it to the weekend after Thanksgiving. While the world was still trying to understand the impact of the pandemic and how it was going to reshape consumer shopping habits for the holidays, most retailers could navigate the balancing act to sell through their inventory and post record Q4 2020 results. This year it’ll be a lot trickier, as Delta and vaccinations continue to drive uncertainty across the globe and domestically. Outbreaks are shutting down ports and warehouses without notice, while domestically, the lack of clear vaccination rules has caused companies to face staffing issues as they try to manage employees and workers. Also, finding labor that will want to work in these warehouses as businesses are no longer testing or offering the same benefits used last year to ensure safety, will cause even more headaches. The holidays inside any fulfillment center have always been chaotic and at maximum capacity. With renewed social distancing, staggered work schedules, and fewer able bodies; the productivity, and output at many fulfillment centers and warehouses will not match the output found in a typical holiday season. With so many more consumers relying on online shopping, online fulfillment operations will be closely watched during Q4.
This will be the most expensive holiday in recent memory for eCommerce
Along with fulfillment obstacles, this holiday will be the first time companies deal with an entirely new marketing landscape. Old growth hack strategies in the past that were reliant upon Facebook or lazy re-targeting strategies will not deliver expected results, as big pocket companies continue to spend on Facebook because they’re able to despite the rising CPMs. And smaller, more innovative, data-driven companies will use their analytical muscle to spend on the best tactics, leaving the remaining retailers in the cold, fighting for scraps and the tiniest incremental return. As CPMs continue to rise on other platforms (Amazon, Snap, Twitter, etc.), any brand reliant on paid media should expect to see a massive bill at the end of Q4. Along with increased marketing costs, companies should also expect increased shipping costs. Finally, as companies try to navigate or recalibrate their work plans, many retailers and eCommerce businesses should expect to increase their overtime budget because Q4 success will most likely fall onto the shoulder of fewer workers working longer hours.
1nsight
To win this holiday season, you need first to get your products into the country and augment transactions with digital add ons.
Leading companies and retailers have forecasted for months that Q4 was going to be expensive and chaotic. The best retailers have already brought in most of the needed inventory (Starbucks has been buying beans 18 months in advance, Home Depot has purchased their cargo ships, etc.). They’ve also built up the needed relationships throughout the year with the right influencers and affiliates that have diversified their media buys and upper-funnel acquisition strategies. They’ve launched loyalty programs that have already earmarked certain inventory allowing them to not rely on expensive shipping.
Many businesses have expected the Q4 concerns I’ve discussed above, especially those who have done eCommerce for some time. While effective companies will mitigate most of those concerns, the best companies will use this time to diversify further. The best example of that is Fanatics, which recently raised $325 million at an $18B valuation. Fanatics, best known as the sports team apparel company, is diversifying itself with gaming, ticketing, and, of course, NFTs. Fanatics is choosing to expand beyond sports merchandising (despite $2.6B from it last year) and doubling down on the other aspects of sports by going further up the sports fan value chain (expecting to make $3.4B this year).
As I continue to discuss the importance of diversification for eCommerce businesses, the upcoming onslaught of the holidays best encapsulates the why. Running an eCommerce business is just hard work, and yields tiny returns. Amazon makes around a 5% margin on its primary retail division. Holding companies or PE firms will often buy profitable and well-run eCommerce companies for around 2-3x earnings. Managing, operating, and running eCommerce businesses and managing any merchandising business is a thankless job, even more so because of the pandemic. As made apparent by the upcoming holiday madness, understanding your consumer and moving upstream in their value chain is the only way to make it worth your while.