A highly fragmented market or an oligopoly dominated by Amazon?
The German business magazine WIWO boldly stated last week “90% of all pure play e-commerce companies won’t survive”

I disagree. The article, which is based on an interview with Nikolaus Mohr, fails to make a proper analysis of the market forces shaping today’s and tomorrow’s e-commerce landscape. I strongly believe, e-commerce markets will continue to fragment with more than 1 million online merchants in the US alone by 2017.

Mohr is making his argument solely on the fact that the majority of today’s online merchants are far away from being profitable but ignores other driving forces such as entry barriers, information efficiency, economics of scale and technological progress.

Indeed, a big chunk of today’s online merchants is far away from being profitable! Five out of the ten biggest pure-play online merchants made a loss last year. The number looks equally striking for the top100 as well as mid and small-size online merchants.

However, unprofitability is not necessarily an evidence for economic consolidation. To the contrary, it is rather a result of information efficiency in an almost perfectly competitive market. Looking at the most important forces driving concentration and fragmentation only two factors might speak in favour of a consolidation trend:

(1) Economies of scale: Amazon does posses a strong competitive advantage through economics of scale

(2) Brands (heterogenous products): There are companies, which managed to break the vicious circle of discount battles by building a strong brand. However, this equally applies to the dominant Amazon.com as well as newer concepts such as Warby Parker, which was started only four years ago.

I consider economies of scale the only valid argument for consolidation. Do some companies make the leap by possessing economies of scale? Amazon certainly as a cost advantage when it comes to sourcing (both products and advertising space), hosting, logistics and of course better access to capital.

The question of market consolidation boils down to “is e-commerce success a matter of scale?” Certainly today, but technological progress will gradually eat away both scale and funding advantages. For example:

Logistics: There are a bunch of promising tech start-ups working on improving freight quotes, crowd shipping, end-to-end shipping, instant deliver and storage. MyLorry from Berlin does a great job giving merchant access to instant delivery. DoorDash has a great vision revolutionising on-demand delivery. The company just raised $17m from Sequoia.
Advertising: Companies like Richrelevance, Qubit products and Sailthru help online merchants tremendously in catching-up with the likes of Amazon and Rakuten
Hosting is increasingly becoming a commodity. The New York Times just wrote a piece on cloud storage becoming “the technology industry’s next big battleground”.
Funding: Without doubt, Amazon has today better access to capital to finance its expansion. However, new B2B funding solutions such as Kabbage, which raised almost half a billion US$ to offer working capital financing to small businesses, are already levelling the playing field.
Let’s review this piece in 3 years! and let’s see if WIWO has not bitten the dust either! 😉

Epilogue

Other economics factors speaking (mostly) in favour of a fragmented market:

Barriers of entry (and exit) dropped rapidly over the last 5 years. The cost of opening and running an online store dropped dramatically so does the cost for software associated with running marketing, analytics and logistics. Same applies to the barriers of exit. Closing a shop is equally easy in today’s market making it more attractive for new players to take the risk.
Perfect information: Allmost all merchants have access to the same information. Everyone is perfectly informed about prices, utilities, qualities and even production / sourcing methods of most competitors.
Rational buyers: The heavy usage of search engines and price comparison websites illustrates how rational consumers act. Still, some brands like Amazon manage to build a “discount image” despite being on average more expensive than the competition.
– See more at: http://blog.bonusbox.me/bonusbox-blog-english/2014/8/1/e-commerce-in-ten-years#sthash.VLFx8XKd.dpuf


Leave a Reply

Your email address will not be published. Required fields are marked *