Evaluating markets for ecommerce category killers

By November 9, 2015 2 Comments

Alex Malorodov (@amalorCBS), an MBA candidate at Columbia University who recently completed a summer internship at Gotham Ventures penned a great post about ecommerce category killers on CBInsights last week. His conclusions came from analysing seven top ecommerce category killers: Dollar Shave Club, Harry’s, Warby Parker, Frank & Oak, Bonobos, Casper and Helix Sleep.

The bit I liked best is that Alex found they all operated in markets with favourable conditions, which he lists as:

  • Total Addressable Market > $2B in US: offers opportunity for new entrant to gain share and build brand prior to incumbent retaliation;
  • High Concentration: > 50% of the market is controlled by ≤4 incumbents;
  • Limited Brand Allegiance: existing companies focus on selling product rather than lifestyle;
  • 3rd-Party B&M channels: incumbents typically distribute their offerings primarily via brick-and-mortar locations of other brands; little focus on e-commerce distribution;
  • High Headcount: > 60,000 employees each for the incumbents; and
  • High Price Point: the incumbents generally enjoy high margins and distribution involves several middlemen — a structural mitigator to lower prices.

The first one of these says that the market must be big enough, and the next five are characteristics of markets open to disruption.

The only thing I would add is that the incumbents offer a ‘so-so’ product. That’s arguably captured in the limited brand allegiance point, and Alex goes on later to say that the seven companies he analysed all offer great customer experiences and have high Net Promoter Scores, showing the importance of offering great product. ‘Great product’ is a relative concept though and unless there’s space to be way better than the competition life will be difficult. That difference can be price point – e.g. Dollar Shave Club and Warby Parker –  or it can be product quality – e.g. Frank & Oak and Harry’s.

Alex’s analysis ports well to the UK and Europe, and the biggest challenge we have from a venture perspective with many ecommerce ideas is potential market size. If a market is $2bn/£1.3bn in the US then if we pro-rata based on population is will be $400m/£265m here, which, depending on margins, is on the small side to build a £100m+ business. (10% net margin on a 10% market share yields profit of £2.65m – a good business, but probably not a £100m exit.)

Hence we either look for larger UK markets or the ability to expand internationally.