Financial Meltdowns and Internet Retail
These are interesting times to be sure. While some are claiming that there is little relation between what is happening on Wall Street to what is happening on Main Street, there is little doubt that retailers have a lot to worry about.
Want an example of how things trickle down through the economy? Consider my children’s lemonade stand they used to set up in our business park. Last year, they minted money. This year, they never opened. Why? On most days, our building’s parking lot is the only one that has cars in it; the other businesses are down to only a few days a week or out of business completely. Granted, we are in a small business park and most businesses here are related to the construction industry. But it is still a bit sobering.
So let’s consider the possible effects of the national financial crises on internet retail. First, it is probable that a lot of online retailers are going to fail. However, e-tailers that meet certain criteria are going to probably to weather the storms ahead and possibly flourish. Here are the reasons why:
1) Most e-tailers will be able to scale back their infrastructure if necessary and still survive. Online retailers actually need very little money to maintain visibility. Unlike retailers who have to spend thousands/month in rent and utilities, e-tailers only have to pay a few dollars/month in hosting fees to be in front of customers. They might have to scale back new development and design, but if they just focus on taking and filling orders, they can coast quite a while.
I can imagine that some e-tailers will move out of their warehouse and start selling out of their basement again without the customers ever catching on. Today’s CEOs will roll up their sleeves and start packing their own boxes again. Yes, this is possible. Five years ago, I was shipping $2 million/year out of half of my house. And don’t forget that the vast majority of e-tailers do far less business than $2 million a year.
2) Internet retail is still growing even while traditional retail is shrinking. During 2007, internet retail grew 22% while total retail grew only 3.8%. While we may not see 22% growth this year, even in the face of bad times, internet retail is expected to grow.
3) Failing retailers will reduce competition. I believe that large companies are more susceptible to the current financial situation than companies selling less than $5 million/year. Larger companies are likely carrying more debt and will be less able to scale back. While I do not expect to see an overwhelming number of failures, there may be enough to open up some opportunities for smaller e-tailers to take advantage of.
So who will survive? I expect that small companies that carry little debt and are lean on expenses will be able to survive and possibly prosper. If you have been spending to build a customer base and have a lot of debt and infrastructure, you may have tough times ahead.
At Vitabase, we have seen a great year so far; in fact, we have seen extraordinary growth. We had an pretty substantial drop in revenue over the summer that rattled us a bit, but we have recovered nicely. Our strategy is to hope for the best and prepare for the worst. There has never been a time when we need to be working harder, and I suspect the same is true for most e-tailers.