We have to remember that Displate is a somewhat different company than the rest when looking at key trends. We are strictly an e-commerce company, operating across 60 markets and selling mainly to the US and Western Europe. We work in a D2C model and handle complex orders, from production to after-sales customer support. Meanwhile, most companies focus only on a particular part of the process, one or two stages at most.
From this perspective, I see three macroeconomic trends that strongly impact the retail industry on a larger scale, i.e. retail and e-commerce. The first is, let's say, the postcovid trend. As a result of the pandemic, some users moved online. Brick and mortar commerce stalled when people started buying online. In the U.S., the e-commerce sector grew by 32% in 2020. This move online permanently changed consumer habits, including in the days after the second and third wave.
The e-commerce market growth has returned to pre-pandemic dynamics, but the effect of a new, higher base is there. When brick and mortar retail was not working, many traditional retail companies, such as corporations and large retailers, shifted their attention and budgets online. Companies that didn’t have the structures, skills and processes required to function in this world plugged the gaps with money. In practice, there is no hole in existence that a large enough budget can’t fill, which is visible in the struggle for talent in the labour market or the cost of online advertising. Usually, the growth dynamics of budgets for such purposes didn’t usually exceed 10% year-on-year. Now we are dealing with increases of approximately 20%. In the case of companies buying ads in auction models, these increases in some markets and targets exceeded 50%.
However, the price increase doesn’t just affect the CPA or CPC advertising models. We are dealing with a general, upwards inflationary trend. And while this inflation was low in recent years due to many cost-cutting factors, costs across various categories have skyrocketed over the past year. Wages have gone up, which is related to the scramble mentioned above for talent and transportation costs have gone up significantly, especially freight. This is especially important because previously, the unit cost of shipping was a fraction of the total transaction cost. And in six months, the cost of a container on intercontinental routes has increased tenfold. Not to mention increases in raw materials and energy prices, which effectively drive up prices across all other spending categories. The PPI, or producer inflation index, reached 26% in January this year.
The third trend that can be observed in the structure of consumer spending. For many years, consumer spending on services was high and constantly rising. COVID caused this trend to abruptly reverse - goods took the place of services. The situation is slowly returning to normal, but some habits are set to stay longer. We are dealing with a new starting point, and there’s no going back to the way things were. Just as some consumers have started buying online and won’t be returning to brick and mortar retail, some consumer spending will remain on goods rather than services.
Mateusz Godala
CEO Displate
In summary, we have three disruptions: an outbreak of competition, a burst of inflation, and a change in consumer behaviour, which will cause two phenomena to ensue in the medium term.
Many companies, previously operating on low margins, can’t get those margins up. Various reasons for this exist, and often the lack of expense optimisation. So far, the market did not force a need for such optimisation. Access to money was easy; loans were practically free and could be renewed almost endlessly. This eldorado is coming to an end; interest rates and loan costs are rising. As a result, the creditworthiness of companies and consumers is declining.
If companies accustomed to cheap money raise their margins, they will lose customers, who will move to better cost-optimised competitors. And because of higher credit costs, they won't necessarily have a source of new funds. So in the medium term, a siginificant part of businesses will not survive these conditions and will have to either limit their operations or simply disappear from the market.
If we are talking about companies so impacted by the changes that they won’t be able to acquire new customers, they will turn to platforms such as Amazon, Allegro and the like. And you can see that happening right now. When the pandemic happened, the biggest players grabbed the biggest share of the pie. And in the post-pandemic era, whoever can't afford the acquisition will move to the big players who can provide it. And the biggest platforms will gain disproportionately, again.
If we are talking about companies so impacted by the changes that they won’t be able to acquire new customers, they will turn to platforms such as Amazon, Allegro and the like.
Another medium-term trend is competencies related to the use of first-party data. There are changes in the market due to consumer attitudes, less willing to share information about themselves and their activities, which will make first-party data an increasingly desirable commodity. This data has contributed to the explosion of online life, giving rise to all sorts of start-ups, smaller and larger e-commerce, SaaS businesses and the like. Unfortunately, this will come to an end as the well of first-party data will dry out more and more. Of course, the e-commerce industry will continue to use third-party data. However, it's no longer the same, as using such data is not as efficient for the company and is limiting. The companies that collect first-party data, build and monetise their bases and use them to their advantage will come out on top. But they won't be the companies that use the e-commerce platforms mentioned previously because the platforms cut access to their first-party data. That data is a commodity as valuable as oil. And the data collected by platforms can be likened to an enormous oil field. And it's no wonder they don't want to share it with others.
Trends aside, products have their natural life cycle, associated with growth and the emergence of smaller, more adaptable competitors. Platforms offer individual services first and then bundle them together to optimise their offerings, which was the case with cable, for example. At one point, Netflix came along with a simple idea - instead of six cable companies, you can have one service - and they cleaned up. This started the phase of so-called bundling. Now, the VOD market is “unbundling”, with many new services being created based on the same concept as Netflix. But in a few years, a player will arrive and say: one subscription fee will give you access to Netflix, Disney+ and whatever else your heart desires. And then, the market circle back around to the bundling phase again. Currently, one of these phases is naturally occurring across various markets. At some point, the market becomes so defragmented that the player who can centralise it by creating a platform gains a competitive advantage. Over time, it gets too big, and small piranhas emerge to gobble it up - because they are more efficient in the particular business areas in which the titan operates.
Another medium-term trend is competencies related to the use of first-party data.
Industry challenges during a pandemic
You can differentiate two phases over the last two years. The first was the onset of the pandemic, which was quite frightening for the business - we had the prospect of an economic crisis, revenues falling immensely from week to week, and general panic on the market. Fortunately, this state was short-lived, about two weeks, a month at most. And then it turned out that we can do good business. Every cloud has a silver lining - the first stage was good for us in many ways.
At Displate, we had everything under control, and we could react quickly in terms of product, logistics, promotion, etc. After the initial shock phase, this led us to a stage of rapid growth. On top of that, we had already built strong competencies in paid marketing. Thanks to that, when others were withdrawing from the market or trying to adapt to the prevailing situation and regroup, we quickly shifted into top gear and made 300% growth in a year. There was a lot of free-market space in the first six months, and we decided to take full advantage of that, targeting consumers that nobody was competing for.
The postcovid stage is an optimisation stage. We don’t want to feel threatened as a company in an environment where the costs of everything are increasing. This is why this is a period in which we have come to terms with slowing down the growth dynamics, but thanks to that, we could focus on cost optimisation. On a micro level, we have focused more on lifetime value and customer return and loyalty. Now it's time to build branding and organic traffic, which in the long term lowers the cost of customer contact and gets them used to the brand. That is, we have moved away from that typical e-commerce technological sequence - advertising, promotion, targeting, conversion, bang, and we’re done. Instead, we build loyalty through more frequent brand interactions, and these interactions should be pleasant and valuable for the user without the push for quick conversion.
The postcovid stage is an optimisation stage. We don’t want to feel threatened as a company in an environment where the costs of everything are increasing.
Building and maintaining relationships with customers
In today's reality, it's essential to stay in touch with your customers. And to act with compassion. Beyond that, you need to remember one more thing. The ability to understand the user's situation, genuinely like them and take a walk in their shoes. At Bolt, every office worker, regardless of their position, has to sit behind the wheel once a month as a Bolt driver, which puts them in touch, literally, with the app users. I like to know what our customers write and say about us and I also use my company's services. Probably, people at Displate will read this interview, which is tough, but I admit it. I also send my friends to shop with us to check the quality of service.
Considering the adaptation of the broadly understood retail industry to customer behaviour during a pandemic, probably the most significant trend will be the desire to have things at home, here and now. And operating in channels that provide logistics and delivery, such as Allegro Smart. People want things delivered right now so that they don't have to go anywhere to get them. That is, to have them at home or at least in a parcel locker near their house.
Some of the changes that occurred during the pandemic have reversed; some are irreversible. People are working from home more often. I already mentioned the share of goods and products, which will not return to previous pre-pandemic levels. The e-commerce market will become more international. People are more willing to look for products outside their home market. And some platforms make these safe, international purchases possible.
Technological trends supporting internal processes in the company
The most striking trend is remote and hybrid work. I think it will stay with us permanently. Managers will have to think about working effectively and adapt to this model. For example, will it be ok for companies that someone is not at work during the day and works in the evening, or should we still sit at our desks from 9 to 5?
Offices will become more international and flexible because companies hire wherever they can in the fight for talent. But unfortunately, in this situation, some Polish companies will lose because specialists from Poland will find jobs easily in Western companies paying much better rates than what they can get in the country. As for other issues, I’m not expecting a revolution.
Considering the adaptation of the broadly understood retail industry to customer behaviour during a pandemic, probably the most significant trend will be the desire to have things at home, here and now.
