Talking Shop: The Transformation of Commerce (Part II)
The Picks and Shovels of Commerce
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I decided to not send a newsletter last week—it didn’t feel appropriate given what’s happening in Ukraine. It’s difficult to think about consumer tech at a time when millions of lives are being impacted in such a massive and terrible way. You can read our Index statement here: We Stand With Ukraine.
It’s been interesting to see this called “the first TikTok war”—a war that’s pain and bloodshed are instantly visible to billions of people online. This New Yorker piece is worth a read. The roles played by smartphones and social media in this conflict will no doubt have ripple effects we can’t yet predict.
This week, I’m sharing Part II of my two-part series on the future of commerce. Let’s jump in 👇
Talking Shop: The Transformation of Commerce (Part II)
I began Part I by sharing a chart of how the pandemic inflected e-commerce penetration. It took 10 years for e-commerce to grow from 6% to 16% of retail sales; it took just eight weeks in March and April 2020 to gain the next 10 percentage points.
But that chart isn’t the full story. We’ve seen a regression in e-commerce penetration as the world opens up. We’re back on the long-term trend-line:
Some sectors and products aren’t natural fits for e-commerce. Luxury and high-ticket items (jewelry, for instance) will likely always have an offline component. And if I had a dollar for every time my aunt says some variation of: “I just like to feel my own produce at the grocery store—I can’t trust Amazon or Instacart to choose the right avocado!” 🥑
But e-commerce will continue it’s steady march, eating away at the retail pie. And it’s a big pie: the global retail market is $25 trillion, with e-commerce comprising only about $9 trillion (~35%) today. For perspective, the global advertising market—which is the lifeblood of behemoths like Alphabet, Facebook, Snap, Twitter, and Pinterest—is around $700 billion. Digital advertising is half that.
In Part I, I explored #1 through #5 on this list. This week, I’ll explore #6 through #10.
For each aspect, I’ll explore what’s changing and examine a few companies powering those changes.
Commerce is becoming climate-conscious.
Consumers vote with their feet, and consumers (Millennial and Gen Z consumers, in particular) are flocking to brands that emphasize sustainability. You see this in the brands that break through today: direct-to-consumer brands like Allbirds and Everlane, for instance, have sustainability in their DNA. Old-guard names like Patagonia and North Face are enjoying resurgences because of their environmentally-friendly ethos.
Sustainable commerce will be one of the most important trends of the next 50 years. I expect it will soon become easy for any consumer to understand the carbon footprint of what they buy and to track the full lifecycle of a product and its supply chain.
New companies will power this. Sourceful, for example, is a company we work with at Index that offers a platform for sustainable sourcing. Sourceful works with brands to source eco-friendly packaging, merchandise, and components. About 83% of a consumer industry’s carbon footprint lives in its supply chain, and 84% of people think that brands have a responsibility to be more sustainable. Sourceful solves this, allowing brands to control and reduce the footprint of their supply chains.
Another company powering sustainable commerce is Patch. Patch is an API-first marketplace for carbon removal. Put more simply, Patch lets businesses buy carbon offsets so that they can get carbon neutral or carbon negative. To summarize the two sides of the marketplace:
Demand-side: Businesses that want (or, increasingly, need) to get carbon neutral or negative and must purchase offsets to do so
Supply-side: Carbon removal developers—people whose job is to sequester CO2 (reforestation, direct air capture, etc.), selling their capacity to sequester carbon to businesses
Businesses use the Patch marketplace to link up with developers for offsets. This often means offsetting commerce’s carbon footprint.
For instance, Patch works with Farfetch, the online luxury marketplace. The fashion industry is responsible for about 10% of global carbon emissions each year; mitigating climate change means getting fashion brands onboard. Brands on Farfetch can now use Patch to understand their estimated footprint, and then take steps to invest in carbon removal or offsets.
Patch also works with Afterpay, the “Buy Now, Pay Later” platform, to integrate into the Afterpay app. Afterpay customers can view their estimated carbon impact based on their historical spend, and then choose from a range of projects to purchase carbon removal or offsets.
💰 E-Commerce Enablement
Speaking of Afterpay, Afterpay—along with BNPL counterparts like Affirm and Klarna—is an example of innovation in “e-commerce enablement”. I wrote in Part I that the arc of commerce bends toward more convenient, affordable, and consumer-friendly experiences. That’s bearing out.
Or take Primer, which offers no code automation for payments. Payment flows become highly-customizable and efficient, all built using easy-to-use drag-and-drop interfaces.
Tangential businesses tackle other parts of e-comm enablement. Shogun, for instance, is a headless commerce platform that lets you spin up custom storefronts. Companies like Okendo and Yotpo make reviews a frictionless experience for both merchants and customers. And Shippo powers a seamless shipping experience.
The underlying infrastructure of commerce has been one of the most dynamic spaces in commerce, and the arc will continue to bend toward efficiency, convenience, and consumer power.
Secondhand commerce is exploding. Ebay was always the 800-pound gorilla in the space, but has been picked apart over the years by more specialized marketplaces. My friend Justine Moore made this instantly-iconic graphic of Ebay’s unbundling:
Many of these are secondhand marketplaces, and many have become large businesses.
GOAT, for instance, is a company we work with at Index that has grown to 30 million users, 100,000 unique products, and 2 million listings. We recently shared the GOAT origin story on our website, and I love this anecdote:
The team needed to attract sellers despite having few buyers, and buyers despite having few sellers. So they used a growth hack. They bought some pairs of shoes and put them on the marketplace. To make it look like the shoes came from many sellers, they went to The Home Depot, came back with a variety of individual floor tiles, and photographed the shoes on them.
Secondhand fashion is one of the fastest-growing but least-talked-about industries. Resale is a $40B market expected to double to ~$80B by 2025 and to triple to ~$120B by 2030. About a quarter of the secondhand market is apparel, which will grow 40% per year through 2025. In 2019, secondhand apparel grew 21x faster than traditional apparel and in 2020, 36 million Americans sold items secondhand for the first time.
Both riding and accelerating this trend are secondhand fashion marketplaces like Depop, Poshmark, thredUp, and Curtsy.
These marketplaces are embraced by young, thrifty, environmentally-conscious consumers. Some of these consumers even make a living as professional resellers. I’ve written in the past about Bella McFadden, the first person to make over $1 million selling on Depop. She’s sold 40,231 items (!) through her Depop store, which has 379,000 followers.
There are also innovative business models building on the demand for secondhand.
Archive, for example, is a white-label peer-to-peer marketplace that lets brands own the resale experience. Archive launched with MM LaFleur as its first customer—you can see here Archive’s white-labeled site on MM’s website:
By bringing resale in-house, brands 1) control the brand experience, 2) communicate sustainability, and 3) acquire younger, thriftier customers. I expect to see a significant portion of commerce shift to resale in the coming years, much of it through brand-controlled channels.
Secondhand is closely aligned with sustainability. With fast fashion going out of…well…fashion (sorry), partly because of its environmental footprint, secondhand is booming. By 2030, the secondhand fashion industry will be nearly twice the size of the fast fashion industry.
Beyond sustainability, resale appeals to consumers as a cost-conscious and convenient form of commerce. Bringing resale online often turbocharges that convenience and price-transparency. Take Carvana, the largest online seller of used cars.
This year, Carvana is expected to become the 7th-largest U.S. retailer by online sales, leapfrogging Costco and Wayfair. Costco was founded in 1976; Carvana was founded in 2012.
Just as commerce transactions are moving online, products are themselves becoming digital. Already, 75% of dollars flowing through the ~$200 billion gaming industry are from micropurchases of virtual clothes and accessories. (By 2025, it will be 95%.) In Fortnite, you can buy Balenciaga skins to outfit your avatar.
Increasingly, those items will live on-chain. What if you could wear your Balenciaga hoodie from Fortnite over into Minecraft, or Twitch, or Instagram?
In 2021, dozens of brands launched NFTs:
One approach that will become more common this year is that of digital twins. When you buy a physical product, a brand will automatically grant you a digital, tokenized version. This digital twin may act as a collectible, or it may have utility, acting as a sort of loyalty program or ticket to a gated experience.
A hotly-debated question last year was: What will be Shopify for NFTs?
Increasingly, it seems the answer is simple: the Shopify for NFTs is…Shopify. Three months ago, Shopify began allowing merchants to list NFTs on their storefronts, powering a new form of on-chain digital commerce. Platforms like Novel build on this, allowing anyone to create, mint, and sell NFTs on a branded Shopify storefront.
In addition to new infrastructure for NFT commerce, there are net new brands being created. RTFKT, for instance, is a “metaverse fashion house” that creates tokenized digital sneakers and apparel. RTFKT (pronounced “Artifact”) was acquired by Nike last year. It’s interesting to think about what Nike’s arsenal of iconic brands will look like 10, 20, 30 years from now: Jordan, Converse, Air Force 1…and RTFKT?
As we spend more time in digital spaces, we’ll spend more money on digital commerce to better express ourselves. In the past, I’ve shared my Zoolander-esque avatar made by Genies.
Genies recently launched a platform called The Warehouse, in partnership with Dapper Labs (the company behind NBA Top Shot), to power digital commerce for outfitting Genies with NFTs. Part of the future of commerce is digital, and part of it is on-chain. Just as we’re crazy about shopping for physical items in the real world, we’ll partake in digital commerce with the same zeal.
We’re seeing more focus shift to the post-purchase experience—how a brand engages with you and maintains a relationship after you buy something. Controlling the post-purchase experience is key to building customer loyalty and driving repeat buying behavior.
Companies building in this space take many forms.
Wonderment, for instance, is an order tracking platform for Shopify that provides order updates and shipment tracking—nipping the onslaught of “Where’s my order?” questions in the bud. Relatedly, Malomo lets brands hyper-personalize the order tracking experience.
Rebuy shows your customers personalized discounts to incentive them to transact with you again. Disco offers a post-purchase portal that shows your customers other brands, extending the customer journey and giving you the opportunity to do the same on other sites; this also acts as a customer acquisition channel, building on that topic from Part I. And Batch allows brands to add a QR code to their packaging, driving seamless repeat purchase behavior.
Post-purchase also intersects with creator-led commerce, which I also covered in Part I. An interesting example is Kale, which lets any consumer be a creator. After you make a purchase, you simply post about the brand on your Instagram or TikTok—and you get paid for the engagement you generate. If you make an expensive purchase, Kale enables you to “pay off” that purchase by giving the brand online attention.
Innovation in commerce is diverse and wide-ranging—from Shopify plug-ins, to payment flows, to metaverse fashion houses. Commerce is being rapidly digitized. And everyone wins: it’s never been easier to launch a brand, to open a storefront, or to shop. Every aspect of the transaction experience is being reimagined from first principles, built in a more efficient, flexible, and affordable way.
Sources & Additional Reading
Read about how Patch works with Afterpay and Farfetch here
Read about Index’s investment in Sourceful here
Here is the GOAT origin story I mentioned
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