A Tipping Point For E-Commerce

​Malcolm Gladwell’s Tipping Point is one of my favorite books.  The book talks about how little things can make a big difference, but what happens when big things tip the scales in your favor.   Let us explore why changing behaviors in a Post Covid-19 world can tip Ecommerce towards sustained profitability. 
 
An internet retail business has two significant but distinct investments:  1) a fixed cost investment in logistics and 2) a variable cost investment to acquire customers.  While most e-commerce businesses have grown sales at a blistering pace over the past decade, the unit economics are attractive for only a small subset.  Simply put, logistics are expensive to build, and customers are expensive to acquire.  But the latter is also fickle.  In other words, repeat transactions are hard to come by, and companies must keep spending on marketing and discounts to bring customers back.  Therefore, despite the rapid sales growth and share gain from traditional retail, profits are hard to come by. 
 
The other obvious reason is the dominant position of Amazon.  It comes as a shock to no one that most shopping intent starts on Amazon.  However, the positive demand shock from social distancing is even too much for Amazon to handle.  The company is only delivering essential items as even the Amazon machine cannot handle this influx of orders.  Suddenly, customers are forced to look elsewhere.
 
Physical retail was already weak and now could be permanently impaired even after reopening.  The silver lining in a sea of high unemployment is that the majority of the population is still employed.  While this employed group might look to cut down on their spending, they have a few places to spend.  Without Amazon or traditional retail in the way, this influx of new business is served on a platter to E-commerce companies.   
 
This acceleration is moving internet retail towards a tipping point.  A profitability tipping point.  The flood of order volume is doing wonders to leverage the high fixed costs.  But to put the icing on the cake, customers are flocking to these businesses on their own.  No advertising needed.  The longer the threat of COVID lasts in our society, the more repeatable and entrenched will customer actions and preferences become.  How could this not be a significant boon to E-commerce businesses?
 
This surplus cash flow will be reinvested in faster logistics and to lower the cost of operations.  The compounding effects will strengthen these companies in the long run.  Business moats will be entrenched.  We may be in the very first inning of this acceleration.  Most businesses are moving in reverse in a COVID world, but E-commerce is tipping towards sustained profitability.

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This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund.  These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described.  These forward-looking statements will not be updated in future.