Every once in a while you run into an article or a post online that is deeply insightful and is just perfect in different ways. One such thing that I just read is called “E-Commerce is a Bear“. Andy Dunn, Bonobos’ Founder-CEO wrote it.
The problem with such articles though is that you just don’t know what to excerpt…Naturally, having said that, a couple of excerpts for those in a rush:
1. Amazon’s Competitors – The Track Record:
Only two start-ups have properly challenged Amazon over the past decade: Zappos and Diapers. Amazon, shrewdly, acquired them both. Both companies faced long roads to generating profits in the ferocious low-cost game of competing with Amazon, and both decided if you can’t beat ‘em, join ‘em.
Having spent time with Tony Hsieh and Alfred Lin, the leadership duo who built Zappos, and Marc Lore and Vinit Bharara, the founders of Diapers, I can tell you: these are intense competitors who recognized the best outcome was to join forces with the industry leader.
So if Amazon is the low cost winner of selling brands online, if they are acquiring their best competitors, and if their everyday low prices are available to the entire country via a mechanical turk algorithm which is guaranteed to beat you, how do you compete?
2. Four Strategies To Compete With Amazon
…four strategies in the marketplace to deal with Amazon’s incumbency: proprietary pricing, proprietary selection, proprietary experience, and proprietary merchandise.
(You really MUST read the full article to find out more…Andy helpfully provides examples of upstarts and players in eCommerce that are successfully executing on each of those.)
3. There is little to no EBITDA in eCommerce. Even for Zappos:
Zappos is often given as an example of why e-commerce is awesome. Zappos was awesome for consumers. From what I’ve heard, and I can’t confirm this, at the time of the sale Zappos was generating about $10 million of EBITDA on $1 billion of gross revenue. Assume net revenues were in the $650 million range (~35% return rate), and you have 2% EBITDA margins.
The sale of Zappos to Amazon happened because it had to: it wasn’t a company that was generating enough EBITDA margin to be a viable public company. It didn’t have to happen right then or to Amazon as the buyer, but barring a radical change to the financial reality of that business, it had to happen.
Go ahead. Block off 10m of your time and read the whole thing. Totally worth it.