Design Talk by MV no. 9 - A Brief (But in Depth!) History of How Recession Era E-Commerce Bloated the Retail Paradigm

I decided to cut no corners on this one. Today’s Design Talk is about the twists and turns of buyer-vendor relationships in the era of the e-comm bubble. Why were there so many “discount” product websites that failed, when before they were being touted as the next, most successful thing since sliced bread? What went wrong? Find out in this week’s brief micro-history.

Over the past couple weeks, I’ve been addressing some of the ways the Internet and e-commerce are affecting brick and mortar retail, its livelihood and its people. First there was the wave of creatives being displaced, then stats proving the “aliveness” of retail, and an elucidation of the inner workings of the real estate business putting up smoke and mirrors to perpetuate misconceptions about inflated commercial footprints. This week, I’ll focus on how the actual product – the buying and selling between vendor and retailer – is affected by the dot com disruption.

In 2008, the Great Recession hit. It was this lurking, sly character that seeped in and before we knew it, we had all fallen prey to it. In the same way we can hold on to hope that the dark times we live in today are simply the foreshadow of sunny days ahead, there was some brightness that came of the black hole of recession: new economies were forged within the Internet marketplace. These, though, had problems of their own…

Because of the paradoxical tech financial windfall at the same time as the overarching recession, loads of venture capital was being poured into new, online marketplaces that could offer interesting design product (or fashion, or small tech items) for less: flash sale sites. This allowed for the new e-comm businesses to poach or recruit creative directors or market editors whose jobs were precarious in a recession-era print publishing world, prompting extra buzz about the beautiful, selective “curation” each site was presenting. This also blessed them with significant sums in their budgets for marketing, which got them even more press, thus a lot of attention from consumers hungry for anything touted as a “deal.”

It seemed like a heavenly trinity, a perfect relationship between vendor, buyer, and consumer.

It was a moment that allowed for a whole business model to be predicated on this coincidental recession, which had left brands with excess inventory they couldn’t seem to sell to now-thrifty consumers. These new online “retailers” would swoop in and place big orders of product that brands, at this point, were willing to sell at significant discounts to a new, unproven, “innovative” marketplace. So, at this point, these discount e-comm sites have arisen to prominence (or at least visibility) and are selling the same products found in brick and mortar spaces, but with discounts that, because their overhead was so much lower than a physical store, they could afford.

Almost universally, these discount e-comm platforms committed to significantly promoting the designers of their products (be it clothes, kitschy tech, product, furniture, toys, or the like). Because of all their press, the sites had amassed huge email lists, loyally singling out and promoting each new designer or product. This generated great sales for those highlighted on the e-marketing, validating the continuation of these brand-“retailer” relationships.

Again, a seeming win-win-win all around.

 Within the first couple years, though, the discount sites began to feel pressure from their investors. They began oversaturating their e-marketing blasts (which were previously very finely curated) and unique product launches, resulting in diluted sales per brand – not to mention a compromise of curatorial and editorial integrity. Eventually, only very small quantities were being sold of any single product or design. There was simply too much to choose from.

 At the beginning, these “buyers” wrote purchase orders for the large quantities of product that recession-hit brands were sitting on; the designers or brand owners were paid upfront, and the online platforms stocked inventory of the goods and shipped them from their own warehouses to fulfill online orders. Soon, the online platforms realized this was a losing business proposition. Even when it came to discounted product, consumers were less hungry than they’d anticipated. The e-comm “retailers” were now sitting on a large stock of stagnant goods. In essence, they bit off more than they could chew.

As brands and designers caught on to the effects of the recession, recovering from its punches and recalibrating their business strategies, they stopped producing the same large amounts of inventory from before. They began making smaller batches of work or relied on a made-to-order structure, offering lead times and receiving consumer payments upfront.

The mutual benefit of the e-comm promotion and quick sales model was dwindling. E-comm “buyers” found that they could no longer negotiate the large margins that their platforms were predicated on, and brands/makers were no longer sitting on stock they needed to clear out for cheap. Brands also realized they were compromising their relationships with their brick and mortar stockists who, beholden to their storefront overhead costs, were unable to slash prices just to move product like the online marketplaces were doing.

This shift in back stock quantities led to the “bright idea” of online platforms requesting drop ship terms of their brands, or vendors. (To break down the idea of “drop ship” terms: the e-comm “buyers” would submit “purchase orders” for product, but not purchase the goods upfront. Instead, the purchase order was an agreement by the designer to have “x” amount of merchandise on hand in anticipation of a sale, after which the online “buyer” would only actually purchase the goods sold in that one transaction. On top of it all, the brands were also responsible for fulfilling the order and shipping it out to the consumer.) This shift in the buyer-vendor relationship reduced the e-comm site’s role to that of a laissez-faire middleperson, transferring all the economic risk and all the burden onto the brand. Despite the progress and exciting innovation of the e-comm model, brands found themselves exactly where they’d left off: sitting on a large amount of inventory.

Design companies were burned by this cycle, and by these e-comm marketplace relationships. This is the story that arcs through the recent histories of so many small designers, manufacturers, craftspeople, and brands in their relationships with flash sale sites like Gilt Groupe, Fab, Amazon’s MyHabitat, and others. Because we’re still figuring out the ways in which the Internet affects our lives – the everyday and the infrequent, the unnoticed and the blatant – it’s an important arc to learn from.

Next week, I’ll continue this mini-series on the Internet’s relation to retail, and how it has its fingers in all the little nooks and crannies of the offline commerce paradigm. I’ll tackle changing buyer behavior and the different levels of oversaturation we’re each confronted with as consumers. And I appreciate you sticking with me through it all. This is the foundational (recent) history that I think can help us each understand the successes and the destabilizations that are characteristic of today’s retail marketplace, which is important as negotiators and as shoppers in this robust, confusing current economy.

Sincerely,

As told to Emily R. Pellerin