Next 1000 | Digital Commerce 360

How an apparel brand eliminates polybags

April Berthene — Tue, 30 May 2023 18:02:45 +0000

No one likes polybags. And even though the single-use plastic pieces serve a necessary purpose for protecting garments for online apparel merchants, brand manufacturer Toad & Co. still wanted to get rid of them.

“Polybags are the worst thing in the world. Everyone hates them but they are a necessary evil,” says Steve McCann, marketing director at Toad and Co.

Polybags are the clear plastic bags the nearly all apparel items are shipped in. But brands can’t just get rid of them without a replacement. Retailers need something to shield a garment from the elements as it makes its way through a warehouse on a belt, being picked, packed and shipped and making its way on a ship, truck or van or all three to a store or to a shopper’s doorstep, where it may encounter rain, snow and sleet. If the product gets damaged at any point, it will be thrown out.

“The lifecycle of ruining a garment versus the lifecycle of a polybag is much worse,” McCann says.

Since Toad and Co. started selling online in 2014, the brand went from using one traditional polybag, to optimizing the design to be more sustainable in five different sizes. It aims to eliminate polybags completely by 2024.

Shipping a ‘better’ polybag

The brand’s first iteration of making its polybags more sustainable was shrinking the standard width of each polybag to better fit its garments. What’s more, instead of using one larger polybag that would hold any of its products, it invested in polybags of different sizes so that each bag fits the garment, reducing the plastic required. It also thinned out the plastic to further minimize the amount of plastic used.

Steve McCann, marketing director at Toad and Co.

In addition, Toad and Co. changed the location of the airholes on its polybags. It moved them from the bottom of the bag to the top and alerted shoppers these polybags could be reused to pick up dog waste, McCann says.

And even after all these efforts, the retailer is working to eliminate all these polybags.

One alternative packaging retailers use is a compostable polybag made out of plant-based materials. These bags, however, have mixed reviews from vendors and merchants. While compostable materials could be better environmentally than single-use plastic, it’s challenging for consumers to get the bag to the proper facility. A consumer would have to drop them off at a collection point that takes this specific material. If a consumer throws out this material it could emit more methane in a landfill than other types of trash, according to several vendors, analysts and retailers. And if a consumer puts the bag in the normal recycling bin, it could clog and contaminate the normal recycling process, causing the entire batch of recycling to end up in a landfill.

Toad and Co. switches to paper polybags

Because of these issues, in 2020 Toad & Co. started working with packaging vendor Vela to pilot its paper polybags. They are made of Forest Stewardship Council-certified paper and can be recycled with mixed paper. This makes them much more likely to actually get recycled than a compostable bag. FSC is a nonprofit organization that ensures the paper is from a forest that is responsibly managed for environmental, economic and social benefits.

After piloting the paper polybags with a few products, the retailer confirmed they were sturdy enough to protect its garments and of the same quality as a traditional polybag, and began rolling them out across all of its products. Once the brand hits a certain minimum order volume of products at each of its factories, it makes the switch to using this product. As of Q2 2023, about 82% of its products use the alternative polybag and by spring 2024, 100% of them will, McCann says.

Toad and Co.’s shoppers have not commented on the switch in materials, but its wholesale accounts have reacted positively, McCann says. When brands ship items to stores, just like to a shopper’s home, each garment is encased in a polybag. Store employees open each bag and hang the garments up.

“They see it more so than anyone else, this is so much waste and so much plastic,” McCann says.

About 50% of Toad and Co.’s sales are direct-to-consumer online and the other half are wholesale to retailers, he says.

A more dramatic alternative: reusable packaging

To further lower its carbon footprint, Toad and Co. also gives shoppers the option to have their orders shipped in a reusable package. With vendor LimeLoop, Toad and Co. rents weatherproof bags. The bag are made of recycled polyester, mostly old billboards, on the outside. They have a zipper closure instead of tape and are recycled cotton on the inside.

For each LimeLoop medium bag, a retailer reduces 92% of carbon dioxide emissions and 99% of water use compared with shipping that order in a medium size cardboard box, according to LimeLoop. Similarly, for each LimeLoop small bag, a retailer reduces 42% of its carbon dioxide emissions and 9% of its water use compared with a polymailer plastic bag, according to the vendor.

The retailer piloted LimeLoop in 2018 and was one of its first clients. Its relationship ebbed and flowed throughout the years, as Toad and Co. has paused and resumed the service as it replatformed its ecommerce site and moved warehouses.

Here’s how it works: On the checkout page, shoppers can choose four shipping options, free standard, free standard with a LimeLoop mailer bag, paid second day or paid next day. If a shopper selects the LimeLoop option, her order will arrive in a reusable bag with instructions on how to return the bag. Once the shopper decides if she is keeping her entire order or is returning items, she visits ToadandCo.com to print a free return label. She puts the label it in the front sleeve of the bag and can drop it off in any U.S. postal service mailbox.

Toad and Co. commits to less packaging by sending orders in reusable bags.

Toad and Co. shoppers use LimeLoop

About 12-15% of Toad and Co.’s online shoppers select the LimeLoop package option, and 20% of those who chose LimeLoop as their fulfillment method, choose it again, McCann says. These are healthy numbers, McCann says, especially when considering how many new customers Toad and Co. has, he says without revealing more. For non-LimeLoop orders, Toad and Co. ships products in a 100% recycled paper mailer with water-based inks to ensure shoppers can recycled the bag.

Unlike thinning its polybags and increasing the number of polybag sizes it uses, the LimeLoop sustainable packaging is highly visible to the customer and something Toad and Co. receives a lot of positive feedback on, McCann says.

“It’s something that people when they look out their window, they get it. They get how many boxes they get from Amazon that you can’t even fit it all in your recycling bin anymore,” McCann says. “[Shoppers] understand it’s an issue, but they don’t see anyone doing anything about it. But they also love the convenience of [online shopping] and are not willing to change the convenience aspects. I think when brands have an option and it’s different and it’s addressing the issue, they love it and grab on to it.”

Printing the return label is a barrier for shoppers to using the service, McCann says. It is still working on the logistics of getting its systems to talk to each other to include the label with the package and how that would work if a shopper decides to return any number of items. LimeLoop says most of its clients include the return label with a package. LimeLoop has 45 online retail clients, mostly small businesses with annual revenue less than $5 million.

Challenges in getting the LimeLoop bags back

It takes about two weeks from when Toad and Co. ships an order to when it receives the bag back, a speed the retailer is continually trying to get faster, McCann says. The more it can reuse the bags, the better.

If Toad and Co. can use a LimeLoop package twice in one month, it breaks even in cost compared with traditional packaging. Otherwise, this shipping method is more expensive, McCann says without revealing more. LimeLoop rents the bags to retailers for about $1 per bag per month, and they can be used at least 200 times, the vendor says. So far in 2023, Toadandco.com has hit the twice-a-month frequency for each bag.

“Our benchmark KPI is that turnaround time,” McCann says.

When Toad and Co. first started using LimeLoop bags, it had trouble getting shoppers to return the bags, as some thought they were theirs to keep.

“The biggest part of the pilot learning was about the returns and how to communicate with customers,” McCann says.

In surveys, Toad and Co. learned that shoppers may take a few days to open their package once it arrives and then a few days to try on items and then decide what they want to keep. Then they have to print a label, which they may have to leave their house to do, and then put the bag in the mail. This all takes time.

About 12-15% of Toad and Co.’s online shoppers select the LimeLoop package option.

Toad and Co. learned that it needed to communicate urgency about returning the bags and educate shoppers in its emails about the importance of sending the bag back quickly in order for the process to be a sustainable option.

Communication with customers

In the five years since piloting the feature, industry standards have changed around communication with shoppers, McCann says. Previously, Toad and Co. hesitated to email customers more than three times a week, but now it has no issue contacting shoppers every day, McCann says. It can automatically send reminder emails via LimeLoop, as its systems know which customers haven’t returned their bags yet.

The vendor says some of its clients charge a few dollars as a deposit to customers to use the LimeLoop bag that retailers refund once they receive the bag back in the mail.

“This helps to keep the reusable packages always in motion and many clients utilize this feature,” a LimeLoop spokesperson says.

Bernardine Wu, executive managing director of digital strategy at digital consultancy OSF Digital, says LimeLoop is an interesting packaging vendor to watch, as it provides a sustainable packaging initiative that can scale and make an impact.

Integrating LimeLoop

It took a few months to integrate LimeLoop into all of the systems, McCann says. The retailer has done this twice, once when it launched, and then again in 2022 after a few months of program pause while it replatformed to a Shopify ecommerce site and moved warehouses.

When a shopper selects LimeLoop, the warehouse needs to know which order is selected for that package, as does its ordering platform, and shipping and return vendors. All of these integrations have to be built into its systems.

The merchant also had to learn how many shoppers would actually choose this option and how that correlates to how many LimeLoop bags it needs. Initially, Toad and Co. had 400 bags and it would frequently run out of them. Then, it couldn’t offer the option to shoppers until it received a bag back. In 2022 it invested in more bags for now a total of 2,800 and it no longer runs outs of bags.

Even though the system seems complex, Toad and Co. is happy with the program and the customer response. When Toad and Co. communicates to shoppers about the program either via email or on social media, those communication pieces always receive lots of feedback, McCann says.

While it wants to encourage more shoppers to choose this option, it is going to leave it at that, an option, McCann says.

“We can encourage and education and let people make an educated decision on what they want to do,” McCann says.

Toad and Co. is No. 1623 in the 2022 Digital Commerce 360 Next 1000.

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Bedding brand aims for luxury unboxing without extra tissue paper

April Berthene — Thu, 18 May 2023 13:51:24 +0000

Bedsheets brand Beflax was looking for a way to give its shoppers a luxury unboxing experience, but it did not want to use extra materials that customers quickly discard.

Beflax sells $300 linen sheets, and sustainability is one of its brand values. Many online luxury shoppers have come to expect an online package to arrive with ample tissue padding sealed with branded stickers, paper filler and ink branding on the box, says Katerina Rothman, founder and CEO of Beflax Linen.

“I want to give the best experience to customers,” Rothman says. “They are paying on average $300 per set, and people want to see the value — even in the box when they are receiving and opening it. There is still a missing link in the majority of consumers. Even if they are more sustainably minded and ecofriendly, they still want to have this luxury experience of all this tissue paper and opening a nice slick box.”

Initially, Beflax shipped its orders in an unbranded cardboard box — Rothman refused to use a plastic bag — with recyclable craft tape instead of plastic tape and extra tissue paper to connote a luxury unboxing experience.

Katerina Rothman, founder and CEO, Beflax Linen

“It’s against my principles to put the product into plastic bags or plastic tape over the boxes,” Rothman says.

Often, when a box is branded with too much ink, it can no longer be recycled. Rothman was close to signing a contract for custom boxes that included Beflax branding while still recyclable, but she decided against it.

“The price was good, but the part was killing me — there was no guarantee the factory in China was working up to ecofriendly standards,” Rothman says. “And it logically didn’t make sense to me to ship products from across the world.”

Beflax is based in Denver and manufactures its linen sheets in Portugal.

How shipping with LimeLoop works

In Q3 2022, a colleague introduced Rothman to LimeLoop packaging. The vendor provides reusable ecommerce packaging to retailers. The bags are made of recycled polyester, mostly old billboards, on the outside, have a zipper closure instead of tape and are a recycled cotton on the inside. On the outside, the package has a sleeve for the retailer to insert the shipping information, instead of using a sticky label.

After a few weeks of negotiating and a month of implementation, Beflax started using the LimeLoop bags as its packaging. Here’s how it works: Beflax ships all its products in one of three sizes of reusable bags to the shopper. The shopper receives the product, which includes a card for how to return the bag. The bag will have the return shipping label on the back of the main shipping label, which the shopper will flip over on the front of the package. The customer then mails this bag using any U.S. Postal Service box, and it will make its way back to Beflax.

Beflax ships all its products in one of three sized reusable LimeLoop bags for a luxury unboxing experience.

The bags can be reused at least 200 times. After that, LimeLoop will recycle them again into new reusable packages. Beflax rents the bags from LimeLoop for $1 per bag per month. Currently, Beflax rents 50 bags, which it can use multiple times per month. Beflax, which launched in 2017, has annual revenue around half a million dollars, Rothman says.

On average, it costs Beflax $16-18 to ship the product and about $4.50 for return shipping. Beflax absorbs some of these costs as it charges shoppers $15 for shipping. (Beflax provides free shipping for a consumer’s first order.)

Reusable packages works in practice for Beflax

The cost for Beflax is comparable to what it would cost the brand to purchase traditional shipping materials, including unbranded boxes, tissue paper, tape and sticky labels, she says. And the main return on investment, Rothman says, is that it’s the right thing to do.

For each LimeLoop medium bag, a retailer reduces 92% of carbon dioxide emissions and 99% of water use compared with shipping that order in a medium-sized cardboard box, according to LimeLoop. Similarly, for each small LimeLoop bag, a retailer reduces 42% of its carbon dioxide emissions and 9% of its water use compared with a polymailer plastic bag, according to the vendor.

Beflax has not conducted a poll about how shoppers feel about using the LimeLoop bags. Rothman, however, is confident the bag provides a luxury unboxing experience, describing the bags as slick with very nice inside fabric. The inside of the bags are so soft that the brand doesn’t wrap the sheets in any additional packaging, such as a polybag, Rothman says.

Beflax has not had an issue with shoppers returning the bags in the three quarters it has used the bags. If a customer is ever slow to return its packaging, Beflax contacts her reminding her to send it back, and she does.

Beflax also sells its products on Wayfair Inc., Etsy Inc. and Amazon.com Inc. Because Beflax doesn’t receive the customer information when selling on these platforms, it does not use the LimeLoop bags and uses its previous, disposable packaging, without the extra tissue paper. It’s too big of a risk to send out bags without the shopper information, Rothman says.

Brands search for more sustainable but luxury unboxing

“Retailers and brands should focus on the approach that makes most sense and is most viable to their business, but at the same time, it is important to make sure that sustainability initiatives are aligned to the customer values, and it has to be a sincere and prioritized effort,” Wu says.

LimeLoop launched in 2018 and has 45 online retail clients, mostly small businesses with annual revenue less than $5 million. It does have some enterprise clients, with a handful in the pipeline, a spokesperson says without revealing more.

EcoPackables is another ecommerce vendor that provides sustainable packages to ecommerce merchants, including recycled plastic, recycled cardboard and compostable materials. EcoPackables has been in business for four years and has more than 100 enterprise clients, such as Ted Baker and Revolve, and more than 2,000 small businesses, many of which are Etsy sellers, that use its products. It does not count many luxury sellers in its client roster, however. Founder and CEO Shervin Dehmoubed says this is because many higher-end brands are reluctant to give up the extra tissue paper “garnish” in their packages.

“The reason why we don’t do high-end packaging is it goes against our ethos. The amount of waste in that packaging is crazy,” Dehmoubed says.

But Dehmoubed is hopeful that this might change as more brands want a better sustainability story and more consumers demand it. In fact, it may even come down to social media influencers not doing unboxings with confetti coming out of the box but to having recycled paper in there one day, he says.

Toad and Co. reduces packaging with LimeLoop

Similarly, apparel brand Toad and Co. also thought deeply about its packaging and wanted it to tell its brand story in a robust and rich way, says Steve McCann, marketing director. For example, many new or luxury brands, such as Apple Inc. will tell their brand stories within the packaging and will include a booklet highlighting the products’ features or other details about the brand for a luxury unboxing.

“You say, ‘I want this for my brand,’” McCann says. “Then you ask yourself, ‘Is this what my brand stands for? And you say ‘No, that is so much waste.’ And how do we get beyond that? How do we still have that story while being minimal and being responsible?”

And so, Toad and Co. went minimal, with no inked boxes, no attached hang tag and no booklet describing its brand. Instead, it gives shoppers the choice between recycled paper mailers and reusable LimeLoop bags.

About 12%-15% of Toad and Co.’s online shoppers select the LimeLoop package option, and 20% of those who chose LimeLoop as their fulfillment method choose it again, McCann says. These are healthy numbers, McCann says, especially when considering how many new customers Toad and Co. has, he says without revealing more.

“When brands have an option and it’s different and it’s addressing the issue, they love it and grab on to it,” McCann says about the LimeLoop bags.

Toad and Co. is No. 1623 in the 2022 Digital Commerce 360 Next 1000.

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Jewelry online retailers category snapshot [Next 1000]

Farnia Ghavami — Tue, 02 May 2023 17:35:07 +0000

Trends and Facts from the Next 1000 Jewelry online retailers: Next 1000 Jewelry online retailers grew 4.5% in 2022 Next 1000 Jewelry online retailers sold over $608 million in goods in 2022 Total retail sales for Jewelry in the U.S. grew 2.6% in 2022 Total retail sales for Jewelry in the U.S. reached $39 million […]

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Why not going direct-to-consumer is the best move for Cleancult

April Berthene — Tue, 11 Apr 2023 15:24:39 +0000

Ryan Lupberger, co-founder and CEO of Cleancult, wants his cleaning products to be everywhere. And the consumer brand manufacturer took a leap closer to achieving this in March, when it rolled out its products in 3,000 Walmart Inc. stores.

Cleancult sells nontoxic cleaning products, such as soap and laundry detergent, in a cardboard carton. Shoppers then transfer the product into a glass bottle, which the brand also sells. Cleancult’s mission is to reduce plastic consumption, and it has 15 patents on the machines it uses to create its cartons.

Cleancult is not the first brand to tackle reducing plastic packaging in the cleaning industry, as other brand manufacturers sell cleaning products in 1-ounce concentrated glass bottles or sell products in powder form. This appeals to eco-conscience shoppers, but many consumers are not ready for this step, Lupberger says. While concentrated products are lighter, require less packaging and are more sustainable to ship than traditional products, it requires effort for customers at home to create the final product, which is a barrier, Lupberger says. Although Cleancult customers need to purchase a glass bottle in addition to its cleaning products, Lupberger says this is not a barrier to purchase.

Cleancult’s products are packaged and shipped without plastic.

“We want to go after the 99%,” Lupberger says. “We have to meet them where they are with ready-to-use formulas and ready-to-use bottles.”

“How do we change the category, but not change consumer behavior?” he adds about its goal to make choosing its plastic-free products easy for shoppers.

Cleancult.com launches and then pivots to physical retail

Cleancult launched in 2019 with its direct-to-consumer website Cleancult.com.

“I really hoped D2C would work long term,” Lupberger says.

But things quickly changed. As online sales skyrocketed during the pandemic — especially for cleaning products — so did costs. Digital marketing costs to acquire customers and shipping carriers raising their rates were the largest increases, he says. Digital marketing costs increased roughly 50% from 2019 to 2021, Cleancut says. Plus, what once cost the brand $6-$7 to ship now costs it $17-$18.

Plus, post-pandemic, many consumers resumed their normal shopping habits, including buying their cleaning products in stores. And so, Cleancult shifted priorities to get its products in more physical stores instead of working to acquire digital customers. In 2021, Cleancult debuted in a handful of regional grocers. In 2022, it expanded to Walgreens, CVS, and Bed Bath & Beyond, and this year is Cleancult’s Walmart debut. Cleancult also sells on the Walmart and Amazon.com Inc. marketplaces.

Amazon is No. 1 in the 2022 Digital Commerce 360 Top 1000 database. The Top 1000 ranks North American web merchants by sales. Walmart is No. 2. Amazon is No. 3 in the Digital Commerce 360 Online Marketplaces database, which ranks the 100 largest global marketplaces. Walmart is No. 9.

Ryan Lupberger, co-founder and CEO of Cleancult.

“A lot of categories shouldn’t live online,” Lupberger says. “Fundamentally, the cost of shipping big, bulky, low-price items, doesn’t work very well.”

Subsequently, its sales shifted from 100% via its direct-to-consumer website, to 90% its own website in 2020, 70% in 2021, 65% in 2022 to likely 20% in 2023, Lupberger says. Cleancult includes sales made on the Amazon marketplaces in its direct-to-consumer sales figures.

Even though sales are growing 50% year over year for its total business, sales are flat on Cleancut.com.

This shift in sales is fine with Lupberger, as its ecommerce site and Amazon business do not make money.

“It’s break even at best,” he says.

But its ecommerce site still serves a purpose, including building a community and testing new products and scents, he says.

“If they find us in store and believe in the Cleancult brand, join the website. But if they need a quick shipment, buy on Amazon. And if they are grocery shopping, they can pause their subscription and buy from the grocer,” Lupberger says.

Plastic-free shipping packaging

For shoppers who do buy direct from Cleancult.com, the brand works to ensure the products are shipped in the most sustainable way, such as by offsetting the carbon from the freight and by using paper instead of plastic.

“We can’t use plastic. It can’t ruin our value proposition,” Lupberger says.

Cleancult uses corrugated paper to pad its products, which is typically two to three times more expensive than a plastic polybag filler. It also pads its glass bottles with carboard beds to ensure the products are not touching anything and there is space for crushing.

The brand uses Forest Stewardship Council certified paper for its product cartons and shipping boxes. FSC is a nonprofit organization that ensures the paper is from a forest that is responsibly managed for environmental, economic and social benefits.

Cleancult has four box sizes, and 99% of its orders arrive in one box. This means an order with multiple products is not split up into multiple shipments.

The last person who packs the box is the last quality control to ensure it is packed correctly, with none of its products touching. While this is important to its plastic-free ethos, it’s often thankless.

“[Shoppers] don’t notice it when it arrives,” Lupberger says.

But shoppers do notice when there is plastic in the shipping box by mistake. This can happen for some of its Amazon.com orders, which is shipped via Fulfilled By Amazon. Cleancult provides Amazon with its own carboard boxes to use to ship directly to shoppers. Sometimes, however, a warehouse employee may put that box inside another box with a polybag in it, or its box is added to another part of a larger order and plastic is added. Then, shoppers contact Cleancult with negative comments, even though this is outside of its control, Lupberger says.

Cleancult is No. 1963 in the 2022 Digital Commerce 360 Next 1000.

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2022 web sales vary by merchant category

Digital Commerce 360 Staff — Fri, 17 Feb 2023 14:07:54 +0000

Of the 14 merchandise categories Digital Commerce 360 tracks in its Top 2000, most fared well in their web sales compared to the overall group. Ten categories grew faster than the overall Top 2000’s growth rate of 4.2%, while the remaining four grew below this rate. The Top 2000 includes data from two Digital Commerce […]

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Shipping carriers deliver this holiday season

Abbas Haleem — Tue, 07 Feb 2023 14:35:38 +0000

Overstock Art made a bold change during the 2022 holiday season: It pushed back its shipping cutoff date by one week. OverstockArt.com’s sales were struggling in the second half of 2022, and it needed to have strong holiday sales, says Amitai Sasson, vice president of ecommerce for the web-only art merchant. The fourth quarter typically […]

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PlayOsmo.com sports the highest traffic growth in 2022

Digital Commerce 360 Staff — Wed, 18 Jan 2023 21:53:51 +0000

Traffic growth for Osmo’s website, PlayOsmo.com, is 262.7% in 2022. PlayOsmo.com traffic growth is almost double the rate of the second-highest traffic grower in the Top 2000. The Top 2000 includes data from two Digital Commerce 360 databases: The Top 1000 and the Next 1000. The Top 2000 is Digital Commerce 360’s ranking of the […]

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Retail chain growth hits 4.9% in 2022

Digital Commerce 360 Staff — Tue, 17 Jan 2023 21:48:44 +0000

Retail chain growth was the story of 2020, but brands will beat them out for the second year in a row. In 2022, consumer brand manufacturers in the Top 2000 will grow their collective web sales the fastest among all merchant types, Digital Commerce 360 projects. The cohort’s 8.5% year-over-year increase, while significantly muted versus […]

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Three-year growth shows brands, retail chains made biggest strides

Digital Commerce 360 Staff — Mon, 16 Jan 2023 21:45:29 +0000

When considering three-year growth for 2022 versus a pre-pandemic 2019, brands will receive the largest COVID-19 boost of all merchant types at 87.5%, Digital Commerce 360 projects. Further, retail chains will be second with an 84.3% three-year stacked growth rate. Web-only retailers and direct marketers are at least 20% behind brand manufacturers. Nike Inc. and […]

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Keeping Score: Can online retailers scale profitably?

Don Davis — Fri, 30 Dec 2022 12:00:33 +0000

Keeping Score is an occasional column by Digital Commerce 360 editor at large Don Davis, who has been covering ecommerce since 2007.

Don Davis, editor at large, Digital Commerce 360

I’m finding it hard to be optimistic about the financial future of online retailers, especially those that aspire to be large companies. And it turns out I’m not alone.

Other analysts also see that online-only retailers face stiff headwinds as shopping returns to normal post-pandemic. Consumers are going back into stores, leading to slower online retail growth. In addition, capital is more expensive and the Amazon-driven pressure to offer free and fast shipping is not receding.

There are plenty of online retailers turning in steady profits, but many of them stick to relatively narrow niches and generate repeat income from loyal customers, without spending a lot on new customer acquisition. Pure-play web retailers that have expanded rapidly and gone public are struggling to show steady profits, and investors are bearish on their prospects.

Where in the past it was assumed growth would lead to profitability, investors are requiring profitability now.

Stuart Rose

Mirus Capital Advisors

That has implications for startup e-retailers as well as those that already are public companies. Venture capitalists invest in hopes of reaping big rewards, often through a successful IPO. If public online retailers fare poorly on Wall Street, the IPO prospects of other web merchants are poor, and that discourages investors from placing their bets on similar companies.

Online retailers’ stock prices plummet from pandemic peaks

Unfortunately for e-retail entrepreneurs hoping to attract capital, four major online-only retailers that have gone public in the past decade performed poorly on the stock market in the past year. They are: Chewy, Stitch Fix, The RealReal and Wayfair. What’s significant is that these are all successful companies that leverage the reach of the internet in innovative ways.

Chewy and Wayfair showed it’s possible to sell bulky items — pet supplies for Chewy and furniture for Wayfair — effectively online. Stitch Fix provides the kind of personalized fashion advice shoppers expect from their local boutiques, and does it at a scale enabled by the web. And The RealReal took the local consignment shop and turned it into a large, thriving online business.

They all won loyal followings and spots in the Digital Commerce 360 2022 Top 1000 Retailers database, a ranking of North America’s leading retailers and brands by online sales. Wayfair is No. 7, Chewy No. 14, Stitch Fix No. 46 and The RealReal No. 530.

Three of the four did very well during the pandemic as online shopping soared. The exception was The RealReal, which lost ground as health concerns made consumers leery of buying used clothes.

The success of Chewy, Stitch Fix and Wayfair during the COVID-19 lockdowns drove their stock prices in early 2021 to peaks far above their pre-pandemic levels. But it’s been a different story in 2022. Looked at collectively, these four leading online retailers’ stock prices are less than 13% of their 2021 peaks.

To be sure, it’s been a bad year for the stock market, and particularly for technology companies that benefited from the pandemic. The S&P 500, a broad market index, was at only 75.2% of its 2021 peak in late December 2022 and the tech-heavy NASDAQ at 64.3%. Even Amazon.com Inc.’s stock price has fallen to 44.4% of its top 2021 price. But the four online retailers have fallen much further, to an average of 12.6% of their highest price in 2021.

Rising capital costs impact ecommerce companies

It makes sense that the stock prices of companies that went up sharply during the pandemic would fall more sharply when the stock market turns down. But this steep drive in stock price also reflects investor concern that the leading publicly traded online retailers are still not profitable, years after going public.

Not profitable, that is, on a net income basis that counts all expenses, including those that don’t require a company to shell out cash in a given financial period. Startups that raise a lot of money to build their infrastructure and attract new customers often strip out those non-cash items, which include equipment depreciation and awards of stock options.

But those are real expenses. Equipment eventually must be replaced, and depreciation tracks that. Stock options are exercised, if a company’s stock price goes up, which dilutes the value of the company that issued those stocks.

When the economy is booming, investors tend to look for revenue growth and figure profits will come eventually. But that changes when the economic outlook is gloomy.

And that’s the kind of environment we’re in now, says Stuart Rose, a partner at Mirus Capital Advisors, a mid-market investment bank focused on mergers and acquisitions in consumer products and other industries.

“Investors are taking a more cautious approach to investing,” says Rose, who has been involved in buying and selling direct-to-consumer retail companies for decades. “Where in the past it was assumed growth would lead to profitability, investors are requiring profitability now.”

One of the factors making it hard to sell profitably online, Rose says, is merchants that are trying to up with Amazon’s perk of offering free and fast shipping to tens of millions of members of its Amazon Prime program. This perk is largely funded by its highly profitable Amazon Web Services cloud computing business. And rivals’ profit margins are eroded as they seek to offer free or low-cost delivery. Amazon is No. 1 in the Top 1000.

“Amazon almost singlehandedly built the current remote retail environment, which effectively destroyed what was a profitable direct-to-consumer segment,” Rose says. “Low prices, free shipping, two-day or overnight service, were all funded by their fundraising capabilities or the profitability of their other businesses. They ruined the game for hundreds of small to mid-sized businesses.”

Rising interest costs limit growth of online retailers

Besides competition from Amazon, there are several other factors that investors believe will make it hard for many online retailers to grow rapidly in the years ahead, says Eric Roth, managing director, consumer, at private equity firm MidOcean Partners.

He says some larger, publicly traded online retailers took advantage of the combination of low interest rates and surging online demand during the pandemic to borrow money at low costs to attract new customers and to build their technology and logistics infrastructures. But raising money is a lot more expensive now that interest rates have risen significantly, he says.

Plus, growth is challenging for e-retailers and direct-to-consumer brands that offer a limited range of products.

“How many different ways can you make a shoe, a pair of pants or a shirt that you don’t have to tuck in?” Roth says. “Some of these companies have run out of new ideas.”

How can online retailers compete successfully?

That’s not to say there is no future for online retailers, say experts like Roth and Rose.

E-retailers have to keep innovating and introducing new products that capture consumers’ attention, Roth says. He points to Nike as an example of a brand that has consistently out-innovated its rivals. But, he notes, few online retailers have the research and development resources of Nike (No. 10 in the Top 1000).

Opening stores is another way to grow, Roth says. In this, he agrees with analysts at Forrester Research who say direct-to-consumer brands born on the web will only survive if they open their own physical stores or sell wholesale to store-based retailers.

Roth notes some born-on-the-web brands like Bonobos have grown by opening stores without taking on a lot of inventory risk: Consumers can see and try on clothes in the stores and then their selections are shipped from warehouses to their homes.

“People can treasure hunt in the store, but it’s still an inventory-light model because they ship products to you,” he says. “In-store, people can look for their size and the features they want, the way people still want to do.”

The other path to success for online retailers would be to sell more to the customers they acquired during the pandemic. But e-retailers haven’t yet shown they can do that.

“At least the market is not giving them credit for it,” Roth says.

Rose says online retailers should jettison money-losing parts of their business.

“I have found that even unprofitable businesses have a subset of the total business that is profitable,” he says. E-retailers that are struggling, he says, “must find that part of the business that is profitable and discard the rest. They will end up with a smaller and healthier business.”

Mid-tier online retailers compete with expertise and service

Many of the online retailers that have been around the longest have survived by simply not trying to grow beyond their narrow, but profitable, niche. In fact, the retailers ranked in the 2022 Digital Commerce 360 Next 1000, those ranked from 1001 to 2000 in online sales, increased their collective web revenue 22.8% in 2021 over 2020. That exceeded the 15.7% growth of the larger Top 1000 retailers and the 14.4% increase in U.S. online retail sales.

Often, mid-tier online retailers survive by offering unique products and real expertise in their fields. Examples include educational playthings merchant Fat Brain Toys (No. 709), South American apparel importer Peruvian Connection (No. 686) and sewing supplies retailer Lion Brand Yarn (No. 1002 in the Next 1000). Note that these are all private companies that don’t need to show the kind of continuous growth that brings success on Wall Street.

And sometimes online retailers succeed with superior service, offered year in and year out, earning them loyal customers who come back to buy, even if they don’t offer the lowest prices.

A prime example is another privately held company, Crutchfield (No. 232 in the Top 1000), which began in 1974 as a catalog selling car stereo equipment and now offers a full range of consumer electronics. My good friend Brian lives in Charlottesville, Virginia, where Crutchfield is based and operates a physical store, and his recent experience shows how to build customer lifetime value.

Brian was looking for a new TV and a sound system to go with it. His first stop was the Crutchfield store where he found knowledgeable associates who spent time showing him a variety of products and answering his questions. He then went to Best Buy, where he couldn’t find an associate in the TV section to help him, and quickly left.

Then he went online, where he found better prices than Crutchfield for the TV he wanted, and a 50% off sale on a compatible sound system at Costco.com. He went back to Crutchfield where the same associate he had spoken with previously helped him again, and pretty much matched the price of the TV. But when he heard how much Costco was asking for the sound equipment, the associate said, “Brian, grab it.”

But Brian had a concern: Would Crutchfield install both the TV and the sound system, even though he bought the stereo equipment elsewhere, he asked. “No problem,” the Crutchfield employee said. And so they did, for a reasonable $150.

Brian is thrilled with his new TV setup. And Crutchfield not only got part of his business this time, but it also earned the right to be his first stop next time he’s looking for electronic equipment.

That’s how retailers earn consumers’ trust and stay in business, regardless of interest rates or stock market fluctuations.

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