It’s no secret that e-commerce is growing. Consumers are increasingly choosing to shop through mobile and desktop devices, which shifts retail spending from brick-and-mortar stores to online channels.
The U.S. Department of Commerce recently reported that e-commerce grew 15% to $391B in 2016. Despite this powerful secular trend, not all online retailers are benefiting to the same degree. According to data from Internet Retailer, Amazon took 46% of U.S. e-commerce growth in 2016 and held a commanding 31% share in the U.S. So the total market might have grown 15% in 2016, but after Amazon took its share, other online retailers grew their businesses by only 12% collectively.
Consumers are choosing Amazon because of the superior shopping and delivery experience, which is centered on Amazon’s large product assortment and its Prime program. Investment firm Robert W. Baird estimated in mid-2016 that, of the approximately 400 million products available for sale on Amazon, roughly 46 million are available with free two-day shipping to Amazon’s roughly 50 million Prime members.
This large product assortment and rapid delivery program are a potent combination of choice and expediency that has conditioned consumers to expect those same capabilities from other retailers. Fulfilling orders for 400 million products is no easy task, and according to their SEC filings, Amazon has invested over $25 billion of capital into building a network of hundreds of state-of-the-art fulfillment centers across the globe, not to mention a global computing network through Amazon Web Services as well.
How can other retailers compete with Amazon? At CommerceHub, we help retailers like Home Depot, Costco, Best Buy and QVC grow their online businesses by tapping into the product inventory and fulfillment capabilities of over 10,000 brands and distributors through the cloud. In a way, our platform is analogous to Amazon’s own Web Services offering, because retailers are able to achieve the benefit of offering millions of incremental products for sale without the capital investment and expense of product inventory or warehouse operations—and retailers need those incremental products because that is what drives revenue growth.
Across our network of retail customers, we have observed that retailers see an average 12% increase in gross merchandise value (“GMV”) for every 10% increase in the number of unique products sold. Put simply, retailers are able to grow their top-line revenue, and contribution margins, by increasing the number of products they offer to consumers—just like Amazon.
Further, intelligently adding new products to the assortment is critically important because we have observed that retailers lose 46% of their products every year to end-of-life, stock-outs, or the termination of supplier relationships. This churn places a significant burden on retailers to not only replace those products, but also to expand the total size of their product assortment.
To better understand the relationship between assortment expansion and revenue growth, we analyzed over $10 billion GMV [gross merchandise value] worth of drop-ship transaction data from over two dozen CommerceHub retailers. Overall, these retailers grew their drop-ship businesses 17.5%, well in excess of the 12% average growth of the market excluding Amazon. We found that, on average, if retailers had kept the same assortment size in 2016 that they had in 2015, they would have only grown their GMV by 5%. In other words, we estimate that over 70% of retailer GMV growth can be attributed to product assortment expansion.
Product assortment drives revenue for retailers and rapid delivery drives great experiences for consumers. Retailers that increase their product assortment and provide an array of low-cost and rapid delivery options are well on their way to effectively competing with Amazon. Combining expanded assortments and rapid delivery with omnichannel capabilities, such as ship-to store, further differentiates brick-and-mortar retailers against Amazon.
Building out these capabilities requires investment, and we are increasingly seeing retailers shutter physical stores to shift capital spending to the online channel. This reallocation of capital makes sense because with flat or declining same-store-sales, revenue growth will come from the online channel.
The challenge for retailers is that adding the capabilities described above requires coordination among multiple teams, including operations, merchandising, fulfillment and transportation. How can retailers create a strategy and successfully execute? It helps to start the process from the perspective of the consumer and the reason why they visit a retail site—product assortment.
The following three recommendations can help retailers jump start their assortment planning process.
Focus on Products that Complement the Existing Assortment
Retailers spend millions of dollars cultivating their brands and setting expectations with consumers. Expanding the size of an assortment doesn’t imply going outside of those brand expectations. Consumers don’t expect a home improvement retailer to sell silk stockings, but silk curtains will certainly fit the consumer’s expectations for finding every product related to the home.
Analyze Competing Retailer Assortments
Keeping up with Amazon is challenging, and retailers need to leverage data and analytics to make smart decisions on how to grow their product assortments. Finding new product ideas is time-consuming, and few retailers are in the position to expand their buying and merchandising staffs. Savvy retailers are using automated tools to analyze the product assortments of their competitors—not just Amazon—to discover new products that they are not yet selling.
Leverage Existing Supplier Relationships
Sourcing new supplier relationships is challenging, and there are only so many trade shows to attend. We analyzed product and inventory data from our retailer network and discovered that many of our retailer customers were only selling a subset of the products offered by their suppliers. These products represent the most accessible opportunity for retailers because they already have the fulfillment relationship in place with the supplier. This tactic is even more effective when combined with the competitive assortment analysis recommended above.
The e-commerce market in the U.S. is facing cutthroat competition, and consumer expectations are high. Retailers that follow the data and focus on satisfying consumer expectations will have a better chance of capturing a greater portion of the retail sales that are shifting into the e-commerce channel.
CommerceHub’s services include drop-ship fulfillment and product content management.