What’s in store for the dynamic E-commerce market in 2023?
Amid fears of recession, belt-tightening, and always shifting customer expectations, here’s how online retailers stay one step ahead.
There’s a saying on Wall Street: it’s only when the tide goes out that you find out who has been swimming naked. Said another way: you don’t want to be overleveraged as a business near the end of the economic cycle.
Readers beware. We’re going to say the dreaded “R” word a few times in this article. Of course, no business owner wants to hear the word recession. But online retailers should pay close attention. A majority of economists now expect a recession in the coming year. But fear not. Read on for our bold predictions for the E-commerce market in 2023 and how online retail brands should position themselves to not only survive but thrive in the year ahead.
How we got here
To understand where we are going it’s important to understand how we got here. We’re all familiar with the global recession of 2020 that was not the fault of anyone at all but rather caused by a global health emergency that’s still rattling the world economy. But one of the results of the great lockdowns was that e-commerce led the way for parts of the economy to roar back as people filled up online shopping carts at home.
Some business owners might even remember the Great Recession of 2008 which was the result of the collapse of the US housing market. Small businesses were especially challenged by credit constraints and diminished consumer demand.
But a 2023 recession (if it happens) would be different in a major way: it could be self-inflicted. Policymakers at central banks around the world are stepping in to raise benchmark interest rates in an effort to cool rising prices. Raising interest rates in turn makes it more expensive for businesses to borrow, so in theory, should cool demand in the economy. Why would the world’s economists want to slow down the economy? It’s because inflation is what is really putting consumers to the test right now. Don’t forget to read the article where we break down inflation.
To summarize: the economy is roaring back after the pandemic, and economists are worried that the economy is performing too well and therefore prices are rising too fast. Because consumers are facing record inflation, economists are trying to cool the economy but risk sending us into a recession. All of this is set to make E-commerce an even more dynamic market. After back-to-back years of record growth, what should we actually expect in the year ahead?
Predictions for the year ahead
The dominance of E-commerce is not going anywhere. Even with an expected decreased consumer demand and return of shoppers to brick-and-mortar stores, global retail sales are still expected to reach $6.51 trillion by 2023. Sales made online are expected to encompass nearly a quarter of the total.
But while a global outlook and the long-term viability of E-commerce are sound, online retailers still must be cognizant of their local economic condition and their customer’s demand curve. We expect inflation to stick around for much of 2023 and interest rates to remain high, making it not only more expensive to raise capital for a business but also tougher to be in a retail business because of the impact of inflation on the consumer wallet.
We also expect a wave of layoffs to continue into 2023, as the behemoths of tech from Google to Meta to mighty Amazon, reckon with an overzealous expansion. The rising tide will reveal those swimming naked, like Sam Bankman-Fried’s once unrivaled crypto-currency exchange FTX which recently announced bankruptcy. What does this have to do with retail, you might ask? It will all contribute to a darker economic mood and a more dynamic market in the year ahead. Such forces will only be accelerators to already fast-moving retail trends because the competitive landscape will change fast.
"Investing in tools to understand your business performance becomes even more critical at the end of the business cycle."
Tip 1 - Get Savvy with Predictions
Expect to see some product categories outperform even as overall economic activity could slow in the months and years ahead. Take the travel category for example. As savvy sellers themselves itching for a vacation after two years stuck at home might have the intuition to pivot early to travel products, like travel toothbrushes and carry-on bags. 2023 is set to be a banner year for travel.
At the same time, offices are still about a third less crowded than before the pandemic, according to The Economist. Don’t expect office-related products to fly off the shelf.
As the world grapples with the behavioral change wrought by the pandemic, sellers need to pick the winning and the losing product categories.
Naturally, some categories remain safe havens in nearly any economic condition. Baby products and pet products shine because these categories are less sensitive to price changes. While a frugal consumer might skimp on steak at the dinner table, they are less likely to skimp on products with emotional connections, like goods for their babies or their fur babies. However, look out for heightened competition in those categories.
We love this quote from PepsiCo’s Chief Finance Officer. Speaking to the success that its brands have had in the last quarter, Hugh Johnston told the Wall Street Journal: “In a world where there are many struggles, we are kind of an affordable luxury.”
Pepsi has succeeded by focusing on formats where consumers are less sensitive to price as a way to boost revenue and prepare for a potential recession ahead.
Tip 2 - Listen to customers
Picking winners and losers and focusing on products with lower sensitivity to demand is easier said than done. How do you know where to place winning bets when the preferences of the modern consumer are changing at a record pace?
There’s intuition. Trusting your instincts as a founder can go a long way. Look to the hall-of-fame entrepreneurs from the late Steve Jobs to Elon Musk, for an unrivaled example of intuition leading to complete category disruption.
But to inform good intuition, great founders take care to listen. More important than listening to economists bicker about whether the economy has technically entered a recession or not, is gauging your local conditions and future expectations by listening to customers.
“Investing in tools to understand your business performance becomes even more critical at the end of the business cycle,” says Thomas Braunfels, an M&A Acquisitions Manager at Mantaro. “But the problem is Amazon knows everything about your customer, but you don’t.”
There are various third-party Amazon adjacent tools that can up your game beyond seeing how your products rank and the product skews. Helium 10 is a popular one.
Thomas likes the idea of creating a direct-to-consumer e-commerce shop to complement an Amazon store. It could become a purchasing experience tailored for your most loyal and repeat customers. Even something as simple as a landing page would allow you to have a touch point with customers and gather contact information to give them personalized notes and reminders to purchase again.
Tip 3 – Invest in Customer Experience
It might be tempting to skimp on customer service as a cost-saving measure during economic hard times. After all, it’s a variable cost that’s often not a part of the core product you deliver. However, for e-commerce companies maintaining customer experience is arguably never more important.
Prudent business owners don’t haphazardly slash customer service in response to decreasing customer demand. Back in 2008, the consulting firm McKinsey wrote that companies should rigorously test the assumptions of what makes their customers satisfied. That way they can invest in the drivers that make a difference and cut down the rest. It’s still tried and true advice. Remember that putting the customer first is one of the hallmark ideas of Amazon.
“The most important single thing is to focus obsessively on the customer. Our goal is to be earth’s most customer-centric company,” wrote Jeff Bezos.
At all costs, avoid the discount spiral which can be a crippling route. Instead of lowering prices, think about what more you can do to make your goods or services indispensable.
Last week, an Amazon seller left a lasting impression by including a hand-written note and a promise to honor defects. It was so memorable that I told my friends about it. The product in question? An iPhone case.
Tip 4 – Stay Innovative
There is an old adage that the best time to start a new business is during a recession. What that really means is that it’s an opportunity to prove that your business is indispensable.
“Approach a recession like any disruption,” says Thomas, “it’s an opportunity as much as a risk.”
Many Amazon sellers have a prescient example to use as a case study. Don’t forget the creativity that it took to survive the pandemic. Get ready to whip out the pandemic playbook and recall some key takeaways. Constantly look for new revenue streams and ways to create more customer value at less cost.
“Innovation is how you build an economic moat,” says Thomas, emphasizing the importance of only bringing to market products and services that competitors cannot easily imitate.
Tip 5 – Maintain Perspective
Finally, don’t fear a recession like it’s the end of the world. It’s important to maintain perspective.
While at a macro level the economic activity may decline, at a micro level businesses can and will thrive. That’s where small Amazon FBA businesses run out of a garage rather than huge corporate headquarters can thrive: by staying flexible. At a small scale, it’s still possible to grow using the micro-targeting tools of Amazon. It’s possible to achieve 20x growth in product categories even while the economic outlook is bleak.
It’s also a great hedge to be in a commodities business that’s growing when prices overall are rising. And sometimes it is a job hedge too. It’s really all about diversifying. Starting an Amazon FBA business (even as a side hustle) can give you even more control of your own income and how fast it can grow.
When you’re feeling helpless and think that all hope is lost. Remember, how Amazon.com emerged as a survivor of the 2000s dot-com bubble? “If there’s one reason we have done better than our peers in the internet space over the last six years, it is because we have focused like a laser on customer experience,” said Jeff Bezos in 2001.
If you have an Amazon FBA business, right now it might be the best time to consider exiting with a higher valuation. If you’d like to learn more, click here.