John and Amer discuss 2023 as a whole when it comes to e-commerce. Economic uncertainty, post-iOS issues, rising advertising costs, adjusting from the pandemic anomaly, and the importance of profitability are all discussed.
Transcript from video:
Amer: so 2023 coming to an end reflecting back do you feel what we talked about happening in e-commerce going into 2023 last year did it come to fruition do you see specific changes what is your confidence level on on the Ecom ecosystem as a whole from shop fight to marketplaces subscriptions and beyond
John: so I think it went exactly as expected this entire year was you know economic uncertainty and that's what we saw right advertising became more difficult because of the economic uncertainty discretionary spending was down and um you know when people were spending extra money you saw you saw the US's debt overall go up which is which is not a good thing especially since so much of it was cleaned off in the previous couple of years
Amer: so when you say it's exactly the way you went like what are maybe some of the things that stand out to you that you like hey we called out these one two three things and they came to fortune
John: sure so so right away you look at what occurred during the pandemic right we saw this this blip you're looking at Ecom and this chart is just going up and to the right and it's a slow and steady race and then we saw with craziness during the pandemic it just shot up like a like a stock that just drove their quarterly to the best of their ability and there were two you know there were two thoughts during that that period you had the one side that was like oh this is the new normal when in reality they they were incorrect right and you saw a bunch of large companies make that mistake where they over hired and that's a you know one of the causes of of the the mass layoffs we've seen this year and then you had the other court that that saw for what it was it's a blip in the radar and it'll normalize afterwards and if you look at 2019 and then 2023 yes there's that that anomaly in between but it's pretty much on on pace to where it should have been we just had this anomaly that was caused by the pandemic and with that came mistakes of over hiring um you also saw a large influx of new brands new Merchants new hey let's start a business right and and the reality is a lot were not product Market fits but they had success cuz they were a product Market fit when you're stuck in your house shopping online you have nothing else to do right and in the reality of us being allowed to go outside again and go about our lives they weren't product Market fits so I think you had a lot of noise during the the the pandemic Ecom boom and now we've just normalized and I think we'll continue to see this normalization
Amer: now do you think we normalize or do you think maybe the pandemic and leading up to today where we are with at spend acquisition cost and everything did it for certain verticals especially on when we're talking about smaller scale businesses did it maybe oversaturate the marketplace
John: well I think but I think all of all of the above I think we normalized but I think there was definitely oversaturation and you comboed that with a post iOS world and uh a world where meta is going to raise advertising costs to try to make shareholders happy you have all these variables all working at the same time so I think it's it's not a single one it's all of them it's that it's that too you you then at the same time had all these people thinking that I'm going to start a business and Shopify is going to help me do that so you had all these very you know these micro Brands start up some had had success and and became legitimate Brands but with all those other variables many were just their destiny was not a good one their fate was not going to be a good one and they were kind of blinded by variables and blips in the radar that were not normal
Amer: for me and I'll start with the pandemic I always argue and I still believe looking back but especially at that time I always talked about this is an artificial economy and what I mean by ar artificial it's not here to stay of course it really happened we responded the world stopped the market kept going up people kept hiring it just wasn't a normal environment by any stretch of imagination so to me it was this is going to come to a stop and when it comes to a stop there's going to be a shock and I don't necessarily think it stopped I think I was wrong on that I think it kept going but the shock came through some of these things you mentioned advertising costs going up all all of these variables and which makes sense it's supply and demand there's a lot more demand for advertising well
guess what say I'm going to bump on the prices people are willing to pay for it now the other component for me and I think we have two to three years to fix this look at the economic landscape of e-commerce it reminds me especially with the amplified or the accelerated growth in e-commerce because of the pandemic of the dot com boom
John: sure
Amer: everyone and their mom you know built a website with a dot com boom invested into a dot com name website with discuss
John: everybody started a Shopify store in the
Amer: exactly so it's the same thing that's happening so I think what now and I was talking to uh to someone might have even been new I'm not sure but we were discussing of 10 years ago it was kind of like 10 uh uh dot com boom if you build it they will come same thing with Ecom if you build it they will come
John: yeah
Amer: because Facebook was cheap uh new platforms were coming out
John: oh we were we were acquiring customers for for $3 $4 a piece
Amer: yeah now
John: a fraction
Amer: it has swung completely and I think if we continue to focus on which I'm not against it just needs to be done the right way this like enablement for everyone to start a business that's great but it's not sustainable a lot of people are going to invest a lot of money maybe maybe life savings whatever to start an e-commerce brand because a lot of these gurus and drop shippers whatever you want to call them s sell this fake dream and I hope all of them get busted about how easy it is it is hard as hell
John: not easy right
Amer: and it's harder now than ever it was before so what somebody did 10 years ago you asked them to replicate that to today there's no way it's a completely different approach so I think in the next three years and this year showing me that I think we're going to see a consolidation or a down spiral of Ecom based brands that are not going to be able to sustain that and when that happens tech companies are going to get impacted agencies are going to get impacted there's going to be a huge trickle down effect that I think can spin out US Canadian and the global economy out of control if we don't become a lot more responsible of as an economy as a e-commerce economy of how we're handling things
John: yeah I mean I think we're already we're we're already experiencing some of that right it's been going on you look at um Ecom news and some some pretty decently sized well-respected Brands and companies this year have filed for bankruptcy or or or closed down or gotten acquired in a a deal that was not advantageous and a big payday right there there's a lot of that so I think we're already experiencing aspects of it I think we're going to keep experiencing it for probably most of 2024 now you can argue there'll be some some maybe some stimulation towards the back half of the year just because it is an election year in the states and we know how that goes right everybody wants things to look good so sometimes there is stimulation that is is artificial to to cause certain
Amer: so question there with the election year um I think there is stimulation within pockets of the economy but one thing that scares me from the election specifically for Ecom and I don't know if you guys experienced that is the amount of money they pump into advertising because of the ridiculous raising and the billions of dollars that go into these campaigns now does it make harder to compete on a secondary level now and your
John: cost go up
Amer: yeah
John: cost go up in that in that that time period leading up to an election of of that of of that big of election
Amer: so I I I know this is not the topic or reflection uh but I'm going to ask you uh for a prediction and maybe we can go into it uh on a recording next week but just little quick for uh foreshadowing when you know that's going to happen what kind of adjustments you guys make on the marketing end if any or do you guys just write it out
John: um I mean I think it it depends on on on how bad it is right you know for us it's a very basic formula for where and when we advertise and is and it's is it profitable yes continue if it's not we don't right and and we can lean on organic and our email list and and other other avenues right and we can't move the needle with with those with those other avenues as much as we can with ads but if it's not profitable you won't do it and in theory if if more people and a lot of people take that approach then it should normalize the cost
Amer: so I mean do you guys prepar I guess my my the better question would be do you guys prepare with a plan B hey once we exceed a specific acquisition cost and it's too much for us to take on do you guys kind of go like activate Plan B and instead of sending two emails you guys send six emails a week or whatever the case is
John: yeah so so I mean we always have you know a a backlog of things to test other other approaches other copy other offers and some of them are going to work right and it's never going to be the point of we can't acquire a small amount of customers for a certain amount it's never going to be that bad it's going to be is it profitable to scale right because it's we're acquiring a customer let's say for $60 right as we increase that spend and it goes from 2,000 a day to 5,000 a day to 10,000 a day we're not going to maintain that acquisition cost it's going to slowly tick up and the question is how high can we take it right where it's not profitable so I think the problem is just the scalability might not might not be there it's a it's as simple as that so you're just not you're not putting up the the big numbers that you might
Amer: okay okay so according to the report from the Census Bureau of Department of Commerce we've gone as e-commerce up from 1 trillion to 1.1 trillion which is a 7.5% increase compared to last year last year's increase was 99.3% 2021 was 26% 2020 34% so and makes sense because of the co effect that we discussed
John: sure
Amer: looking at 7 and 1/2% depending how you look at the that I guess you could almost argue that's really not even growth because of inflation
John: yeah inflation off has it
Amer: yeah and I read a long time ago and I don't know who to get credit for uh to this for but um it always stuck with me uh I read in a book that and which I 100% agree with if you as a business are not exceeding the uh the market growth 10% % on average 8 10% whatever might be the case you're dying now I don't want to say Ecom is dying I I don't think it that's going to be the case or going to to happen I think there's going to be a slow down and I think the slow down is because of uh confidence of consumers and bunch of other economic
John: yeah I I think I I think that slowdown is is exactly that right it's it's discretionary spending being down because of economic uncertainty it's the arrival of all of these brands that aren't truly Market fit that you know came up during the pandemic it's rising ad costs it's a bunch of bunch of variables right but that's that is that is the end result you know I it's shocking even established businesses that made this mistake of trying to scale and grow too quickly during the pandemic not knowing that it was an anomaly just looking at their financials there's a lot of Ecom brands that are not in in good spots right and whether it it was bootstraps and you're not in a good spot or you raise money and you're also not in a good spot we know that the cost of raising money is vastly different now and much more expensive from you know simply interest rates but but also confidence and and expectations from investors and you flip that side on the on the bootstrap it but it's the same thing if you're if you're bleeding money you don't have anywhere to go and you know as an example I would say probably for the last four or five months on average I'd say three to four deals across my desk potential acquisitions for us um that we can tuck in to our Enterprise and the scary thing is almost every single one of them it's not a good story it might look like a good story but when you dig into the the the the the finances and you start understanding their business a little bit better it's not a good story and it's it it's as simple as this company's going to be dead in 6 months on its own what is is it really worth right and you can look at it in you know other ways of trying to come up with value but there's a lot of Ecom brands that are not doing well that are on life support right now
Amer: yeah and I mean I remember I'm not going to expose too much but we saw the first hints up it you and I were together at one of the conferences and uh we looked at a public traded Ecom company and we looked at the finances and you know we looked at each other and we was like this doesn't make sense
John: they were they were speaking
Amer: Yeah
John: Yeah I know exactly who it was they were speaking and we were both sitting at the table and it was like they were positioning themselves as this expert that accomplished great things and sure they did they went public but a quick look by by by you and I we're not we're not CPAs right we're not Finance guys a quick look there there is something arve and sure enough they were they were one of the companies that went died this year
Amer: yeah and and um and that's a thing and and I see it everywhere I mean I see it with agencies with e-commerce companies with SAS Solutions when they become a kind of like evangelist of their own brand which I think to me is always like a why do you have to evangelize your own self it becomes a big big concern for me and I see a lot of that and I see a lot of Brands unfortunately that that are struggling and some of these brands that we talked about and the brand we just discussed went in public I think it was this false conception of Co trend is here to stay which to me with any experienced uh operator would be able to look at that and say hey sure leverage it while it's here but also know that you know government writing people $5,000 checks or whatever it was and sending it to them every quarter it's not a long lasting strategy for any mature economy and it is a temporary solution whether we agree with it or not is that it happened but everyone should have known that's not going to happen and people are not going to keep getting 10 15 $20,000 to spend as they want it I mean even now when you read things about like the PPP loans and how many people abused it and they bought Ferraris and cars and whatever and didn't go to employees it's I don't know to me the writing was on the wall but it's not surprising to me that we are where we are I I felt and you know I know you and I discussed it a lot that the growth that people are projecting is not going to be there one thing that I I wish would happen more and this is again I'm going to go back to the the pandemic and move forward I think there's a lot of people who run private and public companies and all of that that for their own interest are sometimes not honest with the crowd and these are smart people that I think capitalizing on an opportunity in a false manner it's something we all need to hold each other accountable for
John: 100%
Amer: and not like pump up this dream that if you do certain things at economy I don't care what business you're starting it is not what it is it's always easy to start and do anything when things are great but people in my opinion that start businesses this year next year when things are Rocky and they can navigate starting a business through this environment when things are great they're going to going to remember at tough times they're going to be a lot more careful and protect that hard work but I think all of these businesses not all of them but a lot of businesses start on the up and up when it becomes turbulent and the acquisition cost goes double or lead stop go coming in they don't know what to do because the economy is no longer feeding them they have to go into the economy and you know gather and hunt for the resources and their Elites
John: you know your spot on it's funny so we had a we had an agency that we were using we don't use them anymore I don't want to name them I'm actually like the the individual that that runs it and I'm I'm friends with some of the people there but during um they came on and onboarded with us in the end of 2019 so they got Q4 as this is an ad agency they got our Q4 which is traditionally going to be better than most and then they rolled straight into to the New Year little blip pandemic in February and March it starts right so they they wrote Q4 of 2019 they then wrote uh the beginning of the pandemic then we gave them a Netflix show in July 2020 so they were looking like rock stars and they they thought that they were rock stars but then once the pandemic got over and the Netflix wasn't as going as it was all of a sudden it was rocky and they they weren't as good as they thought but it's just it you see that right there's so many examples of
Amer: why do you think people are not honest with themselves like when we did ads in my previous agent when we sold it like the first question anytime we saw a positive influence on the ad now we might have made changes and we might have done things but we always considered that our change was the least impactful one and the reason we did that is we would then go to the brand or the merchant and say hey guys what what kind of PR what are you guys doing that could have osed this
John: sure
Amer: and sometimes it was literally nothing and it was all of our strategy
John: yeah
Amer: sometimes it was something didn't even know about and maybe somebody posted an article
John: right
Amer: and then we saw a new backlink or something and just spiked it up and then sometimes were just like you said there were strategic thing they were working on that were not digitally driven but influenced a digital landscape so like I I just find it kind of like interesting that agencies Brands too why are they sometimes like in dead moment not honest with themselves and say like hey this is not as good as it is we're glad it is as good but it is being driven by some of these external factors
John: yeah you know they don't no they don't ask the questions right so our current agency actually does when there's you know a blip in the radar to use that term again and we're we're talking about this big optic they ask right away current agency they say hey did you guys do something and that's what you should be doing that's what you guys were doing yeah so I I think they don't do it human nature is not people suck I think 2024 is going to be a challenge I think we'll see more Brands fail we'll see more companies fail more agencies fail um it's it's across the board people will be failing um and it's because they're just not they're not running fundamentally strong businesses
Amer: so for you uh I guess the signals that we're getting from 2023 going into 2024 what are maybe like the two things if one thing whatever you want to say that you would tell Brands make sure you fix this if this is wrong your shelf life is very very low and what would that be just like generally speaking I know every company is a little bit different but like what's maybe that one big signal where you're like when you sit down with your team and you're like okay that doesn't look good we got to fix that what is that maybe one metric that they have to make sure that it's right
John: the reality is this is the time where you have to be profitable I think you have to be profitable on how you're running the business from an Opex standpoint I think you have to be profitable on acquisition I think it's it's not the time to spend money just to spend money if there's not a a a return on the investment
Amer: so basically it's forget the top line right now it's not about Top Line make sure you're focusing bottom line making sure you're creating a cushion for yourself make sure that you you're kind of setting yourself up when it's time for growth not to say that you shouldn't grow next year but you need to balance a little bit more
John: yeah I think that's that's accurate thank you for articulating what I couldn't