#159 - Back To Basics

2023 Q3 E-commerce Review

Dec 10, 2023

Hi 👋 - The third quarter saw a continuation of recent e-commerce trends, only more pronounced. The rich? Richer. Consumer discretionary? Softer. The rising-tide-lifts-all-boats environment of the pandemic has been replaced by a dynamic where market share shifts and category exposure are driving performance. Below, key themes and trends from third quarter e-commerce earrings. As always, thanks for reading.

A note on growth rates – unless otherwise noted, all growth rates mentioned are on a year-over-year basis.

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The Rich (Continue) Getting Richer

The e-commerce Covid hangover is over, but that doesn’t mean it’s smooth sailing for everyone. While 2020 and 2021 saw a rising-tide-lifts-all-boats dynamic, performance today is divergent, with market share shifts and category exposure driving performance. On a sequential basis, growth rates improved broadly during the third quarter. However, there’s a wide dispersion in the absolute level of growth. In general, companies that sell essentials, like Amazon and Walmart, are outperforming those heavily exposed to consumer discretionary, like eBay, Etsy, and The RealReal.

Source: Company financial reports. Notes: Amazon Online Stores includes only first-party e-commerce. Amazon doesn’t explicitly break out third-party e-commerce growth. However, third-party seller services revenue grew 18% Y/Y, suggesting overall e-commerce growth well in excess of first-party sales.

The rich in e-commerce keep getting richer, as Amazon, Shopify, and Walmart continue gaining market share. Shopify’s GMV growth accelerated to 22%, the briskest pace since the pandemic. Walmart also grew e-commerce sales over 20%1. For comparison, US e-commerce sales grew roughly 8% in the third quarter.

In contrast, marketplaces like eBay and Etsy just eked out growth, due to subdued discretionary spending. Online furniture seller Wayfair deserves a gold star for bucking the trend here, growing revenue modestly in a market that’s down mid-teens. The company believes it’s gaining share from a broad range of competitors on the back of wide selection, competitive pricing, and speedy delivery. If e-commerce is a bear, furniture is the bear’s den right now.

Q4 Outlook – Tougher Sledding

While growth improved broadly in the third quarter, fourth quarter outlooks were squishy. Similar to third quarter results, discretionary exposure weighed on fourth quarter guidance. Although share gainers like Amazon and Shopify remain chipper, many businesses sounded lackluster. eBay, Etsy, The RealReal, ThredUp, and Wayfair all expect slower growth. The words “tempered” and “muted” permeated third quarter earnings calls.

Source: Company financial reports. Note: 2023 Q4 growth rates reflect the midpoint of guidance.

These outlooks are colored by softness that emerged late in the third quarter. For example, Etsy’s growth slowed in September and October. CEO Josh Silverman called out the toughest macro climate he’s seen since joining the company in 2017. This is due to pressure on discretionary spending (particularly for low income households), a highly promotional environment, lingering inflation, slumping consumer confidence (despite a resilient labor market and steady GDP growth), and stiff category headwinds. Home & Living, Etsy’s largest category, continues to shrink and is an example of how category mix and discretionary exposure are impacting performance.

Source: Etsy, 2023 Q3 Investor Presentation, November 1, 2023.

Wayfair saw a similar trend, with fourth quarter-to-date trends softening versus the third. ThredUp echoed this. So did eBay. Here’s eBay CFO Steve Priest on the company’s fourth quarter outlook2:

Although our third quarter volume trends were slightly better than expected, we did observe softening consumer demand in September that carried through October. This macro softness was most pronounced in Europe, particularly in the UK and Germany, our second and third largest markets, respectively. We have also seen tapering demand in the US market quarter-to-date. Given these trends, our base-case expectation is a continued pressure on discretionary demand will lead to a relatively muted seasonal uptick in volumes during the holiday season.

While not explicitly mentioned, a fear among e-commerce investors is that low-average order value e-commerce sites are losing share to Shein and Temu, Chinese e-commerce players who are aggressively entering the US and spending on customer acquisition like interest rates are still zero3.

Consumer Behavior – Staying Thrifty

Shoppers are grumpy, but still spending. Like the second quarter, consumers are willing to pull out their wallets, but they need to be coaxed to spend. They remain price conscious, value-oriented, and hunting for deals. This is due in part to the economic environment, where the rising cost of necessities like food and gas leaves less for other items, coupled with sour consumer confidence.

Amazon’s perspective on the state of the consumer was similar to the first and second quarters. That is, consumers remain cautious on price and are trading down. eBay is seeing thrifty behavior too. The company noted that people looking to stretch their dollar are increasingly turning to refurbished goods and cross-border orders, where moves in exchange rates can create deals. Here’s CEO Jamie Iannone4:

The bigger point for eBay overall has been the shift in strategy to focus on used, non-new, and refurbished. Because when customers face these inflationary environments, they're continuing to look at eBay for better value. Our refurbished5 business is up double-digits because people are getting like-new products for 40% off. Our used business is growing faster than our new business because the demand that people see and the values that they can get on eBay.

Similarly, fashion resale site ThredUp is benefitting from higher income shoppers trading-down. In contrast, the company’s core budget shopper has pulled back relative to a year ago.

Consumer Discretionary – Watch Out Below

The most salient theme to emerge from the third quarter was softness in consumer discretionary spending. These headwinds aren’t new. Goods like couches and Pelotons have been on the losing end of a trade to services like airline tickets and meals out since the world reopened from Covid. However, third quarter commentary – both from e-commerce and traditional retailers – suggests that things have deteriorated.

Thanks to its enormous selection, competitive prices, and speedy shipping, Amazon’s top line proved immune. However, below the surface, sales of essentials displaced discretionary items, where management noted softer demand. Delivery speeds are helping Amazon win share. The company recently reconfigured its distribution centers from one national network to eight regional networks. This resulted in faster shipping speeds, unlocking higher purchase consideration for a wider range of categories, increased purchase frequency, and share gains in everyday essentials and consumables. As someone who just bought cough drops on Amazon, I can attest first-hand to how faster shipping opens up new types of spending. (Bye, Duane Reade.) This dynamic offset discretionary softness.

Now everyone was so lucky. eBay flagged that highly discretionary goods have been more acutely impacted by rising interest rates and inflationary pressures. Etsy rang the bell as well. Here’s Etsy’s CEO Josh Silverman6:

As you all know, there's been significant pressure on consumer discretionary product spending as high inflation, elevated interest in mortgage rates, splurges on Yolo experiences, and declining savings balances have meant that there's little left over for many consumers after paying for food, gas, rent, and child care. These issues are magnified for lower-income buyers and we feel the impact on the Etsy marketplace. We're also experiencing an increasingly competitive retail environment with a very heavy emphasis on deep discounting and in some cases, competitors investing at potentially unsustainable levels in marketing and promotions.

While executives should refrain from saying “yolo,” everything else checks out.

Leaner & Faster

After a booming 2020 and 2021, the e-commerce industry spent much of 2022 retrenching. Businesses recalibrated to a softer demand environment. For many, this meant layoffs, culling underperforming projects, and honing unit economics. The benefits of these actions started to emerge in the first half of 2023, and continued in the third quarter. Companies are operating more efficiently, for example:

Amazon reported a record quarterly operating income. This is due growth in ads, AWS, and e-commerce as well reduced costs, including lower delivery costs from a revamped distribution network.
The RealReal increased take rate, expanded gross margins, and reported its best quarter of EBITDA margins as a public company as it moved away from uneconomic low-value orders.
Revenue growth at ThredUp outpaced operating experience by 17 percentage points, resulting in over 11 percentage points EBITDA margin expansion year-over-year. (On the flip side, the company spooked investors by pushing out its timeline for achieving EBITDA breakeven.)
Shopify’s operating expenses decreased over 20%, due to lower headcount and the sale of its logistics business to Flexport.
Wayfair produced free cash flow for the second consecutive quarter. Over the past year and a half, Wayfair has taken over $1 billion of expenses out of the business.

While companies are still working through 2024 budgets, efficiency will likely remain top of mind. For example, Amazon is investing heavily in warehouse robots which will ultimately help save on labor. Similarly, eBay expects to grow expenses more slowly than revenue in 2024 and Wayfair expects to deliver significant EBITDA growth despite a complicated market.

Companies are girding themselves for potentially choppy waters in 2024.