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The current state of eCommerce

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It is no news that eCommerce enjoyed tremendous growth due to the pandemic-related restrictions. In 2020, US eCommerce grew by more than 30%. This is more than twice the average growth rates of previous years. The growth rate went back to 15% in 2021 – a positive but less positive growth. In other words, the pandemic resulted in a blip that lasted for 18 months.

Did eCommerce really gain during the pandemic?

At PipeCandy, we used quarterly unadjusted retail and eCommerce data provided by the US Census Bureau from 2010 to 2019 to forecast how the proportion of eCommerce in total retail would have grown through Q1 0f 2022. These [exponential] forecasted figures assume that the pandemic never happened and is based purely on the 2010 to 2019 trends. We plotted it against the actuals. The graph reveals that eCommerce did benefit heavily from the pandemic and currently enjoys a greater share of total retail than it should have.

What does the future look like?

While it is indeed true that eCommerce currently accounts for more of total retail than it should have, it should be noted that eCommerce is losing its pandemic gains. We compared the actual share of eCommerce in total retail and the forecasted figures. The difference between these two values was as high as 4.8 percentage points in Q2 of 2020, from which it has continuously declined to a mere 0.5 percentage points difference in Q1 of 2022. This means that the share of eCommerce in total retail is almost where it would have been, had the pandemic not happened – the gains of the pandemic are almost washed out. If we take into account the raging inflation, the difference could vanish.

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What do other economic indicators say?

High inflation rates

Inflation is at its highest in forty years. On one hand, supply has been limited due to shipping issues and manufacturing problems. On the other hand, prices have increased in every step of transportation; and, the cost of customer acquisition, and labor have risen, all contributing to inflation. Truck drivers' shortage, which also contributes heavily to inflation, is expected to stretch into the future as there are not as many young people to sign up for the role as older people retire.

Global freight rates

The FBX Global Container Index was at USD 1,556 for the week ending June 5, 2020 whereas it was at USD 7,851 for the week ending May 27, 2022. In less than two years, the freight rates have increased by 400%. The Freightos Baltic Index (FBX) Weekly is an ocean rate index for China-US ocean freight, based on 1.5+ billion price points.

The impact of increased shipping costs on the prices consumers pay at the cash register builds up more gradually, hitting its peak after 12 months. As such, the inflationary effect of shipping costs is expected to build through the end of 20222. The effect of hikes in shipping costs would be more pronounced for countries that rely heavily on imports.

Domestic shipping rates

In March 2020, transportation prices had increased by 16.5 points to 65.5, driven by the demand for cleaning wipes and toilet paper. In April 2020, the fall in consumer demand led to a fall in demand for transportation and transportation prices, post which transportation prices elevated and stabilized. Following a fall of 24 points over the last two months, the current transportation prices are on level with that of March 2020.

With the rise in fuel prices, domestic shipping has become costlier. For instance, Amazon has recently introduced a 5% fuel and inflation surcharge while other parcel carriers, on an average, have hiked rates by 5.9%.4

Unemployment rates are low

At 14.7, the unemployment rate was at its peak in April 2020. The unemployment rate fell month-on-month and reached the pre-pandemic levels in March 2022. For the past three months, the unemployment rate has remained at 3.6. As unemployment rates fall, the pool of available labor shrinks. Shortage of labor leads to an increase in employee compensation.

Wages are rising

Companies that shell out more in wages will then transfer the increase in cost to the prices. Given the increase in other factors involved (capital, shipping, raw material sourcing), if the rise in prices is more than the rise in wages, inflation would continue to grow.

Declining consumer sentiment

Consumer sentiment index , published by the University of Michigan, takes into account the financial standing of an individual in the past 12 months, their expected financial standing in the upcoming 12 months, their perception on how the economy has fared financially in the past 12 months and how they expect it to be in the upcoming 12 months, and whether they think if it is a good time to buy major household items like refrigerators and televisions.

The consumer sentiment in the US has been declining over the last 12 months. The more recent and major reason for the decline in consumer sentiment is the Ukraine war and the resultant rise in the prices of gasoline. Other factors that contributed to the declining consumer sentiment include high interest rates, depleted personal savings, and low confidence in the economic policies of the government. The recent increase (April 2022) in consumer sentiment is attributed to the decrease in fuel prices from March's peak, strong labor market and rising wages. The May figures just continued to extend the downward trend that was witnessed over the past year.

People are spending less than last year

The Visa Spending Momentum Index (SMI) is based on transaction details of millions of Visa-branded credit and debit cards. The transaction data is aggregated using a diffusion index framework where index values are scored from 0 to 200. When the Visa SMI rises above 100, the consumer spending momentum is strengthening and when it falls below 100, the spending momentum is weakening as fewer consumers are spending more relative to the previous year. The SMI fell sharply at the onset of the pandemic. From thereon, it has gained pace to reach above the 100 mark. It remained above the 100 point mark from March 2021 to February 2022, powered by stimulus spending. In March, it breached the 100 point mark again, and has stayed below 100 ever since. This indicates that more people are spending less than they did last year.

What does it mean for eCommerce?

According to Adobe, 22 billion USD worth of eCommerce revenue was due to higher prices (not more purchases) in 2021. The total eCommerce sales in the US in 2021 was 871 billion USD. In 2020, inflation accounted for only 4.7 billion USD whereas total eCommerce accounted for 760 billion USD. In other words, inflation-contributed sales jumped around four times in one year. During the first two months of 2022, eCommerce sales of 3.8 billion USD was due to higher prices. It should be noted that eCommerce accounted for about 250 billion USD for Q1 of 2022.

Inflation is going to be high throughout 2022 due to both global and domestic reasons. On the global front, higher freight rates and effects of short supply will slowly be shifted down to the consumer. On the domestic front, the Fed is striving to bring inflation down by increasing interest rates. Given the low unemployment rates and rising wages, higher interest rates should only do so much to bring demand down. This decline in demand would not be enough to nullify the rise in prices resulting from the shortage of supply. But, consumer sentiment and consumer spending have been declining despite low unemployment rates and rising wages. People's sentiments and purchases seem to be dictated by fears of recession or the more recent claims of stagflation. Coupled with Fed's efforts, people's revised spending behavior could help ward off any possible recession or stagflation. At the very least, it would not be as worse as it was originally expected.


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