E-commerce is not that big

In the US, e-commerce sales is less than 10 percent of total retail spending, slowly growing 14-15 percent a year. If not for Amazon, which is growing 25 percent a year and has most of the market, US e-commerce spending would be half of that, barely growing at all.

Walmart, still the biggest retailer in the world, which NYC and other big city people might think doesn’t even exist anymore, is still growing 1-2 percent a year.

In this age of e-commerce and drones and bike delivery, how come e-commerce is actually only a small part? And why even Amazon is opening physical stores?

The thing is, e-commerce is not as big as you think. And in most of the world, especially Europe, it’s not big at all.

Why would anyone buy online?

Buying in brick-and-mortar stores

When talking about startups, we ask what is the problem they are solving. No problem (or a made up problem) - no market. So here is a challenge for you - what problem is buying online solving?

Think about that.

In the US, and most other developed countries, buying online is a convenience. Many years ago physical stores launched websites, mostly in search of a bigger audience. Thanks to the pressure of Amazon it has also become an easy way to get the price, but in terms of access to goods it didn’t change much. Even today most of the US population can drive down to Walmart and get the same products.

That’s why Amazon has been investing into same day delivery, maybe potentially even drone delivery. Because those sound like good features to have, good convenience features. But if some crazy government in the future - a future which might even be now - decided to ban all online sales it wouldn’t be a big deal. Yes it would be a step back, but everyone would just go back to buying in physical stores and that’s it.

But if you took a long flight to Asia, things are different there.

Why people buy online in China? Because that’s the only way. Traditional retail infrastructure is underdeveloped, and as millions of people got wealthier they had no access to products they wanted. Especially in China, e-commerce solved an actual need, not a convenience. Alibaba, which runs Tmall and Taobao, and JD.com both came in to solve this problem. These two companies process 80 percent of total China’s online sales, and are continue to grow.

Very quickly China’s e-commerce became the largest market in the world (yes, larger than US), and it is still growing faster than in the US. India, which in a lot of ways is years behind in this, is the next one to grow. They’ve been having issues worthy of a whole article on its own, but most analysts would agree that in less than 20 years Indian will become second largest e-commerce market, pushing US down to third.

In E-Commerce: Not As Big As You Think article on Seeking Alpha there was a line:

China is the one emerging market where E-Commerce is in fact booming. At $659/year, China is competitive with far wealthier markets such as Canada and Sweden. That Chinese figure, in fact, means that nearly 10% of Chinese GDP is spent on E-Commerce, a far higher figure than you find anywhere in the developed world.
– Ian Bezek

As I said, China’s market is biggest, and for a good reason.

Mobile is key

Shopping mobile

In China, most e-commerce happens on mobile. Both Alibaba and JD.com report that as much as 80 percent of their sales are done on smartphones and tables. To gain perspective of just how much that is, China’s National Bureau of Statistics said that total e-commerce spent in 2016 was $751 billion. So as much as $700 billion was done on mobile phones. The Census Bureau of the Department of Commerce said that total US online sending was $341 billion.

In China people using smartphones spent 2x that of total US e-commerce. That’s quite a difference.

Amazon and eBay never published their mobile spending, but since comScore estimates that roughly 20 percent of US e-commerce is done on mobile, Amazon is probably at 25-30 percent. When comparing this to mobile spending in China, and other Asia countries too, US mobile sales are tiny.

There is an easy explanation on why. In the same way e-commerce was a solution to fix lacking retail infrastructure, mobile phones were a solution to fix non existing access to the internet. It’s hard to understand just how important mobile phone was to countries like China. Many people, tens or hundreds of millions of people, went from having no access to the internet, to having mobile access. There was no personal desktop machines or personal laptops.

Those people are using mobile phones to buy online not because that’s some kind of a local trend, they do it because it’s the only way they have it. In the US though, just like buying online, using a mobile phone for e-commerce is a convenience. Slowly people are doing it more often, but it’s going to take a very long time to get past 50 percent of total online spent mark.

World speaker

I think India and Latin America are the most interesting.

Latin America is a hard one to track because how volatile some of the currencies are. And how much certain governments are struggling. There are at least two players to keep track of - Linio by Rocket Internet group, and MercadoLibre. Both of these operate in multiple countries, in Spanish and Portuguese languages. MerchadoLibre is the only public company, really strong in Brazil and Argentina. Their number of items sold has been skyrocketing lately.

India is interesting because it’s going to be the 2nd largest e-commerce market, and yet so many things are yet to be developed. It’s also a country where a lot of foreign investment is competing with local companies. Amazon India is spending billions of $ on growth, and is already a top 3 player in the market. But there is also Flipkart and Snapdeal, and now Paytm, which have been invested into by big foreign companies. Flipkart is closing a round right now with eBay playing a major role in it. Oh, and what about demonetization which happened last year, while a lot of e-commerce sales were delivered with cash-on-delivery, all rendered impossible overnight?

In both of these regions, e-commerce is too solving much more than convenience. A very big part of the solution is payments for example. MerchadoLibre runs MercadoPago payments service, a local PayPal alternative, which already processes more volume than MerchadoLibre marketplace itself. Paytm in India has been growing super fast in the last 6 months too, as people are in-a-way forced to figure out mobile wallets.

As big as China is, e-commerce has been struggling to grow as fast as it did before. After linear growth in active buyers for years, Alibaba’s active buyers growth has really slowed down. Many factors are affecting this.

The key conversion in China market is cross-border trader. A surprising demand exists for foreign goods in the Chinese market. Cross-border e-commerce market is growing faster than overall e-commerce, and some analysts think that “by 2020, a quarter of the population, amounting to more than half of all digital buyers, will be shopping either directly on foreign-based sites or through third parties”. This the trend in China, and to some extent all e-commerce markets - globalization and cross-border trading.

If a Chinese manufacturer can figure out how to sell on Amazon.com, a US brand should be able to figure out how to sell in China. It’s a hard problem, full of counterfeit, copyright, market fairness and other issues. But with US market only growing slowly, the next group of winners are going to be the ones to crack the global trade market.

What about the US market?

Amazon is the king, only Walmart is the likely to have any impact to this. In this market of e-commerce being a convenience, Walmart has the best access to last-mile delivery to majority of the population.

Over the next few years there is going to be a lot of multi-channel retail investment. E-commerce companies opening physical stores, physical stores figuring out e-commerce. The simple fact is that e-commerce is not that big here, and thus just doing that for a lot of companies is not enough.

What if Amazon acquired a gas station chain, as a way to gain thousands of physical locations close to the majority of the population? Wild speculation, but if Walmart has an advantage because of their stores being used as pick up points, Amazon could get there too if they really wanted.


What about Amazon drones? Well…

It’s a great looking concept video, but I stick to my original question - what problems is it solving? I’ve seen many great examples of drone use, for delivery too, in not as developed markets. Some of the medical delivery startups are fascinating and are already working well. I fail to see why any of this would matter for delivering paper towels to US households. It might be a feature some time from now, but right now it is completely irrelevant.

Instead US e-commerce will slowly keep growing, fueled mostly by Amazon. Niche markets will see successful apps (think fashion). But don’t discount retail stores just yet.

*all illustrations done by Frits from hikingartist.com