Is The Recession Zappos’s Achilles Heel?

zappos-logo1Zappos.com loves selling all kinds of heels, and with two way free shipping customers love buying them.  But two way shipping is only free for the customer, for Zappos it means they lose money every time a return is made.  And it hurts.  Somewhere within Zappos’s corporate office there exists a black book and in this book there are two columns.  On the left are customers that actually buy more because of the free shipping carrot.  On the right are the habitual returners.  So far it’s all good because the money making column is significantly longer.  So far.

With the reality of slowing consumer spending it’s obvious the left hand column is shrinking but my hunch is recession has little affect on habitual returners because they have no disincentive.  I would argue the habitual returner list has not contracted much.  This recession is hurting Zappos more than it’s hurting retailers that charge for shipping.  The question is how long can Zappos hold its breath under water.  Zappos is one of the smartest retailers in the world so if anyone can come out of this it’s them.

A Million Little Pieces

The whole online revolution has got me thoroughly confused. It has led to so many questions:

– In the offline world local specialty stores stand protected. A specialty wine shop in Chicago doesn’t care about a specialty wine shop in Maine. But in the online world the idea of local becomes obsolete, so does this mean Chicago and Maine are on a collision course?

– In the offline world I visit Wegmans for all my grocery needs. Will the online paradigm change that?

For months I had struggled with these questions. And then, this morning, I met Mark Bitterman. Mark is a selmelier. He lives in Portland where he operates a little big shop that sells specialty salt. I would have remained unimpressed but then I visited Mark’s seminal blog saltnews.com. Here he taught me about 60 varieties of salt. I was shocked – I never realized there was an alternative to Morton.

And that’s when it finally hit me.

While the online world does not have room for 20 grocery stores it sure has room for one specialty store for each product category carried by Wegmans. This then, will be the future of etail.

UPDATE: A few weeks ago I started a conversation with The Sticky Toffee Pudding Company.  The company was trying to decide whether they should invest in updating their online store or directly syndicate through a specialized food marketplace like foodoro.com.  They finally decided to go the syndication route.  But this does not mean their online store is any less important.  Here is what I think will happen: many new customers will discover The Sticky Toffee Pudding Company through foodoro.com but after they’ve bought and loved the product they will make all future purchases through stickytoffeepuddingcompany.com.  See, while the web is expanding exponentially our memories are also expanding through tools like bookmarks.  I don’t need to think too hard to remember the website of a product I bought 3 years ago, if I tagged it in my bookmarks I can directly search there.  And as long as search is efficient I’d prefer making a repurchase directly from stickytoffeepuddingcompany.com.  Plus The Sticky Toffee Pudding Company gets to keep an additional 15% in margins, which is what they are paying foodoro.com right now.

The Future Of eTail

Today most eTailers thrive by being niche. The web is a wonderful place to find a store that sells only bonsais, or a site that only deals in bird products. People who shop online today are early adopters and so this marketplace structure works. But the truth is that this year offline sales were the lowest in 5 years and online sales were the best they have ever been. It would seem to me that the mass consumer is now shifting online. This exodus presents a problem for niche retailers – a big problem. With larger offline retailers following their customers online, niche retailers will start getting pushed back in Google search rankings – both organic and paid. As a result no one will find them, as a result they will die out. I don’t think a beauty manufacturer with a product line of 6 items could sell online for much longer. The same goes for the other 98% of companies that have managed to make money online so far.

Mass consumers are very different from early adopters. Early adopters don’t have to be told about what they need because they do their own research. They are also far more motivated to find products for their needs, so they tend to look beyond page 5 on Google results and use a healthy array of search terms. An ugly, non-user-friendly site with little product description but the right product will do. Mass consumers will never fall for that.

To survive, niche retailers need to do 2 things well- Expand their product lines and improve customer retention. As search gets taken over by the big boys, niche retailers can forget about getting too many new customers. So they need to focus on their existing customer base and use them to promote their brand. At the same time they need to expand their product-line to better satisfy customer needs.

Unfortunately, for most etailers even this will not suffice and most will die a slow, painful death in or around 2012. My personal prediction is that someone is going to set up a department store online, and while its possible that Macy’s, Kohls or any one of their offline competitors does this I suspect the idea will be launched by someone entirely new. Comparison shopping and social shopping engines do have a head start but unless they start building a personality I think their days are numbered.

Online Consolidation

I’ve often feared that the highly niche model of online selling will become more and more rare as ‘mass’ consumers migrate online. If the Ice.com news is an indicator this process has already started. IR reports Ice.com (No. 182 in IR 500) has raised $47 million in new working capital. According to the report this will help build their eCommerce infrastructure and target new merchandising niches in affordable luxury goods. You can read the rest of the article at the IR site by clicking here.

Update: Etsy.com which is an etailer of all things handmade has just finished raising $27 million for ‘growth’. This in addition to $6 million it raised previously.

Like it or not the online marketplace is contracting. For good reason.

Related article: The future of eTail

Email Marketing Open Rates Down, Down, Down

This year email open rates slipped another 3% and now stand (temporarily) at 16.11%.

I think marketers need to be cognizant of the fact that the amount of media people consume is going up while the hours in a day are not. Last month I started (finally) using the Google reader; as a result I now have access to more targeted blogs. Thanks to better targeting technologies we have less free time to idyllically read email promos from hardcore commercial retailers.

Retailers need to rethink their entire email marketing strategy. This drop in open rates is, without a doubt, a secular trend.