I like think of internet retail as having two phases.
The first phase was to replicate high street superstores online. Large warehouses replaced physical stores and purchases were made via web browsers instead of by visiting in person. The internet retailers had three structural advantages; warehouses can be bigger than shops, warehouses are cheaper than shops, and delivery is more convenient than going shopping (for some goods). Hence they are able to compete with high street retail on range, convenience and price.
This model works best for product categories where people know what they want – like books, music and electronics. Amazon is the standout winner.
The second phase is to offer a vastly greater range and solve the problem of discovery. Generally that will mean not holding stock. Because the range is now very big there is too much choice for consumers and it’s critical for companies in this space need to offer quality curation. Without quality curation the customer experience will suck and the businesses won’t enjoy huge success. These ecommerce 2.0 companies therefore compete on range and discovery. Note that they lose a little on convenience because they don’t hold stock and delivery is slower. A key enabler is brands and manufacturers being set up to dropship, something that is only happening now.
This model works best for product categories where people don’t know what they want – like fashion and sports. There are no standout winners yet, but there are some good startups. Thread and Lyst are two examples that we’ve invested in (the latter back when I was at DFJ), and we’re looking at another one right now in the gardening space.
I’ve described a simple sequential two phase model here. Reality is a bit more complex with some phase 1 businesses that take stock still doing a great job of curation (e.g. Net-A-Porter) and some companies offering vast range but without curation (e.g. Amazon MarketPlace).
All this is on my mind this morning after reading Benedict Evans’ latest post Lists are the new search.
He makes a couple of points that are relevant to my two phases of internet retail model.
The first is that Amazon’s potential might be limited by its lack of curation. They have a 25% share of the print book market in the UK and USA and it’s possible that a good portion of the other 75% doesn’t start from knowing what book they want to buy. Independent book retailers excel at discovery. They put books on tables for people to choose from and their staff are able to make in person recommendations. Apparently only a quarter of Amazon’s book sales are from its recommendations platform.
That suggests that even in the categories ‘dominated’ by Amazon there’s an opportunity for new businesses that excel at curation.
The second point is that hand crafting tight lists of products and automating the matching process is a method for scaling curation. Gathering enough information about the user to quickly route them to a perfect list is the key to making this work. Apple Music and Spotify both have a partially manual recommendation process like this, as does Thread.