E-commerce stocks were some of the biggest winners in the second quarter, with such companies as Shopify, Wayfair and Etsy reporting year-over-year revenue growth of about 100%, thanks to consumers ordering things online in the pandemic. A decade of e-commerce adoption took place in a matter of months.
But this dramatic shift in consumer buying behaviour wasn’t matched by the physical supply chain on which e-commerce relies. Price increases announced by United Parcel Service Inc and FedEx Corp recently should raise some doubts about the ability of e-commerce darlings to keep growing enough to please investors.
What's going on here, at least in the short term, is a classic case of supply bottlenecks emerging in response to a rapid increase in demand. As consumers began spending again in April after the initial shock of March’s shelter-in-place orders, they shifted some purchases online – either because it was perceived to be safer than shopping in stores, or because some stores weren't even open. While this was bad news for brick-and-mortar merchants, some e-commerce companies were big winners.
Shopify Inc, a service provider for online businesses, reported revenue growth jumped 97% from a year earlier in the second quarter. Wayfair Inc, which sells furniture and home goods online, saw its revenues grow 84%. Etsy Inc, powered in part by sales of homemade masks, grew revenues 137%. All three companies enjoyed expanded profit margins, with revenues growing at a faster rate than costs.
But three months ago, neither these companies nor the package-delivery services on which they rely had planned for this kind of growth. As Amazon.com Inc’s Jeff Bezos has said, the current quarter's financial results are largely due to decisions, plans and investments made a few years ago. And as Amazon has gotten bigger, it has boosted investments both in the fulfillment centers that warehouse its goods and in its own network of delivery services to ensure it's not overly reliant on third-party companies such as UPS and FedEx.
The question is how other e-commerce platforms and merchants will perform during this year's holiday season, when they're likely to get crushed by unplanned record demand, both from the secular growth in e-commerce and the temporary impact of the pandemic.
UPS and FedEx – large, established transportation companies with decades of experience – have thought about it ahead of time and raised their prices accordingly, to ensure they can provide a high level of service to merchants willing and able to pay, and perhaps to decrease demand from more cost-constrained sellers. Large companies that sell either offline or online —not just Amazon, but also Walmart, Home Depot and the like are more likely to be in a position to pay or find their own delivery solutions than newer companies or smaller sellers, which rely on the bigger online platforms for their business.
Sourcing inventory to meet demand may also constrain growth this holiday season. In one example, online used-car seller Carvana Co last week noted how inventory shortages due to shuttered auto factories have hurt sales. The company is trying to buy cars from customers to replenish its stock. Widespread product shortages, with production struggling to keep pace, may be inevitable for the balance of the year for many e-commerce companies, preventing consumers from getting everything they want online, and perhaps leading to some unwelcome fourth-quarter financial results.
To the extent these challenges are contained to e-commerce, online sellers may be tempted to raise prices to pay for added delivery costs or more expensive inventory. But that also risks chasing away price-sensitive consumers who still have the ability to go to stores if products there are cheaper.
Over time, as Amazon has shown, these problems are fixable. To the extent 2020 levels of e-commerce demand are sustainable, UPS and FedEx will make investments to meet it, and Amazon and other e-commerce companies can do the same. Inventories will get rebuilt if the demand is there. Pricing will adjust to make all this happen.
But with the holiday season only a few months away, it's largely too late to make big investments to meet this year's demand. After a banner second quarter, investors may be extrapolating surging revenues and profit margins out to the end of this year and beyond. But they should prepare for the short-term unwelcome scenario of surging cost pressures, stressed supply chains, widespread product outages and angry customers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider. – Bloomberg