Retail sales are a constant presence in our lives and on the TV, computer, and mobile device screens we look at. So, when we shop, where do we go? More and more, directly or indirectly, most consumers wind up buying from one of three e-commerce giants — Amazon, Walmart, or eBay. What is the current environment for these companies and other retailers in the market?
Like many mature industries, e-commerce is beginning to consolidate. Three key trends are driving this consolidation:
- Competition among the large players
- Dominance of the marketplace
- Increasing cost of visibility
Amazon, eBay, and Walmart control over 50% of the domestic e-commerce market, which is more or less the definition of a consolidated market. These and several other players dominate e-commerce by focusing on massive selection, easy search, and low prices. Consumers’ emphasis on low cost leads them to these retailers, who use vast volume and supply to continue reducing prices, increasing selection, and making shopping effortless and convenient.
To maintain their competitive edge among their peers, Amazon, Walmart, and eBay are always looking for differentiation through new products. They look for high-growth, branded companies with key niches to expand and improve their product lines.
Chasing new and different product lines, these giant retailers have consolidated thousands of independent companies to sell products through their marketplaces. While this is a boon for consumers, it creates challenges for the companies in these marketplaces. These arrangements can be seen as a marketing and/or fulfillment expense, but they are actually more like an entry license fee that cuts into independent companies’ profits. But without these arrangements, profits are even harder to come by.
Cost of breaking through
Without the giant retailers’ marketplaces, independent companies can struggle to break through the noise in retail markets. Creating a brand experience and getting noticed is difficult and expensive. These companies need proprietary products and personal service, and a strong online presence. The increasing cost of advertising and the omnipresence of Amazon in retail searches and search results weakens and marginalizes smaller players. Even relatively strong independent companies are being overtaken and swallowed up by other investors that have significant resources to buy, build, and rebuild businesses.
Where to go from here
It is possible to build a lifestyle business on the web — there are thousands of them. But increasingly, businesses in the $20 million to $100 million revenue range are feeling the effects of Amazon, eBay, and Walmart in the market. But better-performing companies in this range can take advantage of this market by selling, often at good prices and good profits for owners. Private equity buyers can take businesses struggling to grow and apply new thinking and new people to achieve new kinds of success.
The bottom line: talk to an investment banker who can help you assess the value of your company’s customers and brand, and maximize that value in a sale or acquisition.