E-commerce feels like it’s everywhere. But the truth is that even during a pandemic, e-commerce accounted for less than 15% of total retail sales in the U.S.
According to the United Nations, e-commerce only makes up about 19% of total global retail sales.
E-commerce has a long way to go before it catches up with the rest of the retail space. And that’s why I’m so bullish on e-commerce startups. There’s so much room for disruption and growth. And there’s no shortage of market inefficiencies to fix.
The key for investors is to find e-commerce startups that are about more than “just e-commerce.”
E-Commerce Isn’t Easy
Building a successful e-commerce business is difficult. There are a host of problems to figure out, including:
- How do you deliver the product (the last mile)?
- How do you get the product to the delivery people?
- How do you ensure you have a product that people want to buy?
- How do you get people to discover your product?
- How do you ensure a good shopping experience?
Delivery is an insanely difficult problem to solve. So is fulfillment. Amazon just makes it look easy.
As a result, many retailers outsource packaging and shipping to companies like Amazon and Instacart. Others outsource just the delivery.
Amazon and Shopify make setting up an e-commerce store fairly straightforward. Instacart makes it easier for brick-and-mortar retailers to jump into the game. And many retailers rely on their products being discovered on Amazon, Etsy and social media to generate sales.
But as vast and comprehensive as the current tools are, they don’t come close to addressing the needs of the entire retail market. That’s why despite the obvious convenience of online shopping — especially in a pandemic! — e-commerce represents less than 20% of the global market.
Products like alcohol, prescription medicine and super fresh produce just don’t fit neatly into the current e-commerce universe. And that presents a massive opportunity for startups.
Hidden Logistics
One of the biggest mistakes people make is assuming what Amazon does is easy. It isn’t. Amazon runs one of the world’s most sophisticated logistics operations. The scope of Amazon’s efforts is breathtaking. Consider this timeline:
- In 2015, the U.S. Postal Service, UPS and FedEx delivered more than 97% of Amazon’s packages.
- In 2019, Amazon shipped around 7 billion packages globally. In the U.S., Amazon’s homegrown delivery service delivered about 58% of those packages, according to Digital Commerce 360. Outside the U.S., Amazon delivered 48% of its packages.
- In 2020, Amazon delivered about two-thirds of the packages it shipped in the United States. The rest were delivered by UPS, Fedex and others.
- In the coming years, Amazon will likely ship 80% or more of its customers’ packages.
In order to make all of this work, Amazon has built massive fulfillment warehouses throughout the country. When you order something that’s fulfilled by Amazon, workers at these warehouses pick up the goods, package them and ship them. Amazon’s shipping service then gets them to you.
Amazon’s internal systems are designed to optimize speed and efficiency to make sure customers get the shipments as quickly as possible.
But as big and efficient as Amazon is, there are many things that its system isn’t designed to handle — like two-hour (or even same-day) delivery of prescription medicine.
In order to deliver prescription medicine in just a few hours, you can’t have a warehouse located several hours away from the customer. The medicine won’t get there quickly enough.
You also need pharmacists on site to make sure nothing goes wrong with dispensing the medicine. And drivers trained to deliver prescriptions in a way that meets regulatory compliance.
This isn’t something Amazon is set up for. So it opens the door for startups like NowRx to fill the void.
NowRx is one of our favorite startups in the First Stage Investor startup portfolio. (If you’re not a First Stage Investor member, click here to sign up.) It’s figured out how to dispense and deliver prescription medicines quickly and legally. And just as important, NowRx has figured out how to get patients and doctors to use its service.
So while NowRx looks like an e-commerce play, it’s actually much more than that. NowRx is operating in the prescription medicine space — NOT in classic e-commerce. It’s competing more with Walgreens and CVS than it is with Amazon. So as you evaluate NowRx’s potential, you have to make sure that you identify the right competitors. Otherwise, you could make a flawed investment decision.
Another example of a startup being more than just an e-commerce company is Leap Club. Leap Club is operating in India. It delivers organic fruit and vegetables to consumers within 12 hours of them being harvested. And all of the groceries are ordered using WhatsApp.
Like NowRx, Leap Club’s business is much more than e-commerce. Leap Club has to create and maintain an incredibly efficient supply chain of certified organic food. Getting organic food delivered within 12 hours of harvesting would be a major achievement in the U.S. Doing so in India is exponentially more difficult.
First, Leap Club has to make sure its organic food sources are close enough — and reliable enough — to consistently deliver food within 12 hours of harvesting. It has to understand how much needs to be harvested on a daily basis for farmers to create a viable business. It needs to understand how to get the food from the farms to New Delhi, where it’s currently operating. And because it’s outsourcing final (last mile) delivery, it has to figure out how to get its food into the hands of third-party delivery people in time for them to brave notoriously bad traffic. (Sitting in traffic for hours is a common occurrence in New Delhi.)
This is not your ordinary e-commerce startup. And that’s before you get to the fact that everyone is ordering via WhatsApp! (India is WhatsApp’s largest market.)
The traditional e-commerce playbook wouldn’t work for Leap Club. That’s why it doesn’t have to worry about competing with Flipkart or Amazon. Instead, it has to worry about other organic grocers or even farmers that can figure out the supply chain and logistical challenges of just-in-time organic food delivery.
Rewriting the Playbook
Leap Club and NowRx are just two examples of e-commerce startups doing much more than selling stuff online. They’re sophisticated businesses that throw out the traditional e-commerce playbook because it doesn’t apply to the markets they’re operating in.
And because the traditional e-commerce business models don’t work, legacy e-commerce companies like Amazon will struggle to compete with these startups. Amazon (or Flipkart) just isn’t designed for this.
So as you evaluate startups moving forward, don’t automatically dismiss e-commerce companies because you think they can’t compete with Amazon. Sometimes, e-commerce startups are more than just e-commerce startups. And that’s where the best opportunities lie.