Here’s what I learned this week

There’s some spicy takes on the ecommerce market in the last week.

I posted:

Ecommerce is making less and less financial sense these days.
For most ecommerce businesses the goals look something like this:
Sell $10,000 per day which equals revenue of $3,650,000 per year.

Which sounds great, until...those "big expenses":
1. Ad Spend
2. Product Costs
3. 3PL and Shipping

Most brands are targeting around a 3-4x blended ROAS or in other words making $3-$4 Revenue for every $1 in Ad Spend.

The truth is that new customer acquisition is expensive.

More expensive than it's ever been in the past.

Businesses with good repeat customers are the only ones that are really staying afloat right now.

And if you don't replenish the top of funnel, then there's no one to resell to.

Few brands are tracking new customer v. repeat customer ratios with this push to be first order profitable, they are reducing the amount of new customers and over time, this is going to put too much pressure on them.

Reaching new customers is not only becoming harder but a lot more expensive.

There's rising competition of cheap goods.

The costs from independent goods are just higher than mainstream brands.

Which requires some degree of differentiation that you can't find already in the mass market, which is also harder to come by with commoditization.

The stuff that mainstream brands sell at Costco is really good quality.

Value for price is off the charts.

Product costs have remained pretty consistent, but they still cause a lot of pain even at 5-6x multiples which is absolutely insane in my opinion.

Then there's shipping of the product to a warehouse, then the costs of fulfilling a product and covering shipping costs for orders over a certain amount.

For small businesses, assuming it's free shipping over $100 it's more like 15% off with the shipping costs and the pick and pack depending on the size of the package.

It's death by a thousand cuts.

So what used to be a decent business model with cheap social media reach, ads, and distribution has turned into a crowded marketplace with rising costs and greater competition with well healed well known brands.

The numbers above only really work if you're a solo founder and know how to do everything yourself.

The average brand makes about 10% net revenue as profit.

So above you're at $365,000 per year which is a great salary, but you have to have an extremely well oiled machine going and if you need to add people to the mix it's going to become pretty painful really quickly.

2 people?

That's $182,500 per person per year.

3 people?

That's $121,666 per year or just over $10k per month.

Let's bring this full circle, we had the goal of making $10,000 per day, but at the end of an entire year of doing most things properly, our entire salary would be just 12 days of sales for 3 people.

Then there’s this peach from Fan Bi:

Fred Wilson popularized "Rule of 40" for software businesses.

Is it applicable to 2024 eCom, what about a "Rule of 30"?

ie are the following good benchmarks?
- growing 30% and breakeven
- growing 15% and EBIT 15%
- growing flat and EBIT 30%

Hitting a "Rule of 30" probably puts you in the top decile of eCom businesses, "Rule of 10" probably the top quartile.

A controversial take is the median 2024 eCom business probably has a "Rule of Negative" 😬 .

But you should really read this article that Sean Frank posted about that quotes Fan Bi:

Here’s what Sean Frank had to say about it:

Good, accurate reporting on the modern state of DTC

1- if you raised money in 2021/2022 and haven’t grown 300%, your valuation is down

2- if you own equity in a business on 2021 marks, that equity is probably underwater

3- Brands are valued at 10x EBITDA BEST CASE (they need to be hitting the rule of 40)

4- No profit? doesn’t matter what the growth is, investors aren’t interested

5- no one is selling off revenue

6- Don’t invest in DTC rounds in 2024 unless it is based on a trailing 12 months profit multiple

7- great brands are selling for less than inventory value

8- you cant sell for a higher multiple than what public companies are trading for

9- most founders/execs from this era own equity worth zero because of liquidation preferences

10- this had to happen and will be a good thing for the brands that survive

So the barriers to entry are very low and the barriers to exit are incredibly high.

This is the reality of all businesses in 2024.

Outside of professions or the need for specialized skills, seems like it’s easier than ever to set up shop and see what happens.

What it did though was put a lot of pressure on good businesses that had to compete as their costs went up with other upstart businesses that fizzle out on the regular basis.

I want to go back to my post though because there was a good comment exchange on it:

Abhishek asked:

What is the profitable way or the future of ecom according to you?

I’ve written about this before but I’m more convinced now than I have been in the past.

This is the toughest question of them all.

1. As seen on TV style product that is a genuine invention that solves a common problem, cheap to manufacture, cheap to sell

Race to create before it gets knocked off.

2. Community driven brands, where the community comes first, focused around video content focused on hobbies or shared interests.

It's a long haul on this one, but I see huge upside in video over time.

3. Super Niche high end products where there's a waitlist because of availability of the artisan that command a higher price that normal goods just because of the person behind them.

See number 2 for how to grow that following.

4. Club membership to gain access to something that others don't have access to

Require a real login, combine 2,3, with 4 and you probably will have a higher likelihood of success. Make money on the dues and events rather than the merch, keep it small.

5. Super high end materials, not mass produced crap

Produce items for existing collectors but make them 10x better than what's on the market.

If I were to dabble into a physical product it would be something along those lines.

There’s a lot of niche communities that spend ungodly amounts of money on products. The question is what can you make from an artisan point of view where people would pull out their checkbooks and not worry about the price?

The real problem is most people just make variations of the same products without paying attention to things in enough detail to make them actually stick out.

Design isn’t enough anymore.

I’m not saying there isn’t room, but we’re talking artisan level craftsmanship and attention to detail in a product that would benefit every family in the country at a price point that allows it to be accessible.

The truth is the ecommerce decline we’re facing was due to overwhelming optimism that doesn’t match the market realities.

There’s an inverse graph that no one is looking at.

Temu’s rise v. ecommerce company’s margins.

Temu hit the US market in September 2022.

Then there was the Superbowl commercial in January 2023.

In 2023, they did $15.1 billion dollars in revenue.

In 2024, they are on pace to hit nearly $40 billion in revenue.

So while ecommerce as a sector has gone flat, Temu is growing at a rate that is too big to ignore.

So this got some press, but most of you don’t know that Temu is actually a subsidiary of Pintuotuo which is publicly traded on the Nasdaq.

Yeah, that “Chinese” company that everyone thinks is stealing data in much the same way that Amazon, Facebook, and Google have been doing for years is raising red flags.

THE FOLLOWING IS NOT FINANCIAL ADVICE

I do not currently hold a position in PDD Holdings.

I do know trends though and Temu is going only one direction and it’s accelerating it’s pace as it grows.

There’s a good chance that PDD barring some trade regulations which won’t matter because Temu is opening warehouses already in the US will come close to hitting $200 per share by the end of the year.

For those doing math with me, if they hit $200 that’s a 600% gain for PDD since launching Temu.

I’m going to ignore the Covid run up in 2020 and deflation in 2021, there business was nearly all China driven at that time.

Now we have Amazon working on a cheaper marketplace.

https://www.cnbc.com/2024/06/26/amazon-plans-discount-store-in-bid-to-fend-off-temu-and-shein.html

They need to get this up and running before the next run up for Temu, in a few more sales cycles on the low end market they will be too far behind.

You know I love context.

Walmart.com opened to third party vendors in 2009.

In 2023 they hit $100 billion in revenue for their ecommerce arm.

Temu entered the US market in 2022 and is on pace to do $40 billion this year.

At it’s current pace Temu will hit $100 billion next year, meaning they’ll get there in an astounding sub 4 year time frame.

That’s nuts.

But with everything there are downsides to what’s driving all this manufacturing boom, simply put we don’t need all this stuff.

It’s become easier and quicker to make any number of items these days which is also causing an excess of goods to be made.

There’s something else going on that not too many people are talking about, with condensing product margins, more and more brands are cheapening out their products.

So a lot of established brands that simply save a few cents here and there and their product quality has dropped, all because of margin issues.

While we’re talking about saving margins.

There’s a very long history in the United States of using prison labor to cut costs. Which is part of the fight against labor practices in China. Cheap labor no laws to protect workers leads to exploitation.

The moral argument

Should we be supporting companies and brands and organizations that systematically outsource labor to their advantage in the perpetual chase of profits?

When I talked about the idea of investing in PDD my lovely wife said no. In fact, she won’t invest out of principle in any companies that as she deems it causes misery.

Facebook - Nope.
PDD - Not going to support forced labor and cheap labor and exploitation.

But a lot of the largest home grown companies in the US have ZERO qualms with using prison labor in the US where we currently have 1.9 million people incarcerated.

As much as we harp on other countries for bad labor practices, we’re no better right here at home in the US.

In a world where it’s profits above people and excessive creation of things and consumption, sometimes I question my own sanity.

Closing thoughts on DTC currently

Things are going to be a bloodbath.

People thought I was crazy when I started saying this 3 years ago, but like Enron, something wasn’t adding up.

There’s no value in brands today, not small ones at least.

Large ones are going out of business or filing for bankruptcy too.

In truth, I think the next wave of ecommerce will be selling excess inventory from defaulted on orders created directly from manufacturers.

By the way from the article about Taylor Offer of Feats now runs a website where you pay a membership to buy DTC products for 80% off that need to be sold.

There are some other plays I like in DTC.

Buy stock for 5 cents on the dollar and resell it, with margins that make sense.

One product, super high quality stores that only add a new product once a year or very infrequently.

Artisan level stuff that actually takes skill.

I do think a lot of stores are going to go out of business though, a lot of brands have zero real equity in their branding and will be forgotten, and you’ll see a surge in relaunches of nostalgic brands instead.

Nostalgia is real, production is cheap, there is harmony between these two, just not sure where it lands quite yet.

The Takeaway

You can’t beat math.

Have a great week!

-Jon

Catch up on past posts: https://ecomwithjon.beehiiv.com/

You can learn from me: jonivanco.com