From the entry of agile, cloud-born platforms to the recalibration spurred by the pandemic, there’s no shortage of disruption in commerce these days. In fact, Alex Graf, our guest for this particular session from Monetize Forum 2021 says that it’s by far the most exciting moment e-commerce has witnessed in the last decade. Alex is Co-Founder and Co-CEO of e-commerce software platform Spryker and a recognized expert in his field. In this discussion with MGI Research analyst Igor Stenmark, he offers his perspective on strategies that businesses are adopting to increase verticalization and secure more direct access to their customers. He also discusses if and how brick-and-mortar businesses will have a place in the post-pandemic world and how Spryker is enabling organizations to rethink their business models and adapt to markets that are constantly changing.
Key Issues
How are businesses looking to adopt and use marketplace models?
How can brick-and-mortar businesses evaluate their sustainability?
What are the major vectors of disruption in e-commerce today?
Guest Profile
Alex is Co-Founder and Co-CEO of Spryker. Prior to Spryker, he co-founded numerous companies including Etribes, factor-a (Europe’s leading Amazon agency), and Hamburg-based unicorn About You. Alex has more than 20 years of experience analyzing business trends and providing valuable insights to business leaders. He is a frequent speaker at commerce and technology events and runs his own very successful blog and podcast Kassenzone.
Igor Stenmark
Hello, this is Igor Stenmark of MGI Research. We’re at the 2021 Monetize Forum conference, and this next session is titled “The Death of E-commerce.” During the last 12 to 18 months, we’ve seen a very significant level of disruption in the world of e-commerce. First, there was the early stage of a generational transition in e-commerce. The installed base of the first generation of cloud-based e-commerce solutions collided with the new, born-in-the-cloud, second generation of e-commerce platforms. These newer products were much more lightweight, often headless, not bound to a user interface channel, and supportive of a much more agile model of development and deployment.
Then, the pandemic hit, and suddenly no one was meeting in person for B2B transactions or going to stores and malls. As a result, all commerce became either e-commerce or dead commerce. Very early in the pandemic cycle, we began highlighting in our research recommendations that the importance of e-commerce is likely to skyrocket over the next 24 months and beyond. We see this as applying especially to the B2B end of the market. You’ve seen some of the research we published on this topic regarding headless commerce, conversational commerce, and the impact on B2B. We see evidence of this trend in demand for advice in this area, in demand for products, in improving fortunes of e-commerce software vendors, in rising valuations, and in the increased number of transactions and performance of many e-commerce tools in public equity markets.
So, this session focuses on disruption in e-commerce, and we’re very fortunate to have Alex Graf as our guest speaker. Alex is Co-Founder and Co-CEO of e-commerce software platform Spryker. Prior to founding Spryker, Alex co-founded several successful companies, including Etribes; factor-a, which is Europe’s leading Amazon agency; and Hamburg-based online fashion company About You. Alex has authored numerous articles and books, including the industry benchmark: The E-Commerce Book. He’s a frequent speaker at commerce and technology events and also runs his own highly successful blog and podcast, Kassenzone. Alex is based in Kiel, Germany. Alex, welcome to Monetize Forum 2021.
Alexander Graf
Igor, thank you for the very warm welcome and introduction. I’m happy to be here.
Igor Stenmark
We’re really excited to have you join us here at the conference. To start, tell us a bit about Spryker. What sets you apart from other e-commerce players? Give us a sense of your company.
Alexander Graf
Some of the audience may have seen our press release at the end of 2020 where we announced a financing round of €130 million. We are now the best-financed e-commerce software vendor in the world. In a nutshell, we enable companies to build transactional business models because, as you said, everything is commerce. Everything has become transactional. Every company wants to sell, and the problems have actually changed. It’s not just about building another online shop. The challenges are now emerging around B2B business models and marketplace business models—so way beyond desktop and the standard brick-and-mortar retail. The B2B and marketplace business models need new software vendors, and we think we should be on the shortlist when people are thinking about new transactional business models.
Igor Stenmark
From your exposure to a lot of companies that are now trying to modernize their e-commerce efforts, where do you see real disruptive growth? Are there specific sectors or geographies? Are there companies that really say, “Look, we can no longer just be incremental about this. We have to make a non-linear change, a fundamental leap forward.” What’s your view?
Alexander Graf
I think the fundamental change for all niches came with COVID because COVID accelerated the whole growth process three to five years into the future. We’re increasingly seeing models that had been smaller, niche, and more long-tail now with online transactions huge enough to claim a market share of way beyond 20% or 30%. They’re now beginning to build e-commerce businesses and marketplace models. For example, in the audio niche, there is a European company called Thomann which already controls 25% of the whole professional audio market—headphones like you’re wearing, my microphone, e-pianos, et cetera. It feels like every week, there’s a new major company popping up with a revenue in the hundreds of millions or sometimes even the billions.
Interestingly, I think the leapfrog idea you’re referring to is especially observable in the B2B area because, all of a sudden, B2B field force agents weren’t allowed to visit their clients anymore, so they had to invest in much more than the tablet solution that had been the e-commerce practice in the B2B industries for years. They had to think about how to address challenges in the B2B market. Everything is booming, and the businesses that are more verticalized and can offer services independent of carriers like UPS or DHL are much better off because they can grow now in triple-digit numbers. Usually, vendors that do rely on service infrastructure that was built for, let’s say, 20% to 30% e-commerce growth per year can’t grow with this new demand because third-party providers, especially logistics, are not able to transport more boxes to the customers.
Igor Stenmark
That’s interesting, and it makes sense when you look at how much money Amazon is pouring into building their own cargo airline and fleet of delivery trucks.
Alexander Graf
Yes, and Amazon’s airline is like the delivery fleet from AO.com in the UK or the e-mobile fleet from Picnic, one of the major disruptors in the grocery business here. You see it with Instacart and goPuff in the US as well. Those are logistics platforms that are enabling new business models. This was not possible two or three years ago because the demand in a given area was never big enough to justify investment in such a fleet, but right now, everything is booming. The people we know who are active in commerce just don’t know where to get more manpower for their warehouses, and they’re having to get more resources from DHL or Hermes.
This is accelerating new initiatives and innovation. For example, a service I always previously wished for from Amazon was the option to receive all my boxes on a Friday because I was getting 10 to 20 deliveries a week. A year ago, this kind of service would cost extra money, but right now, because resources are so stretched, they offer it for free. In this way, they can manage deliveries much better and have better capacity management. These kinds of changes that I had waited so long for are now appearing in a matter of weeks. So, it’s by far the most exciting time for commerce in the last 10 years. I started in this field about 15 years ago, and during that time, all these new business models were emerging, like woot.com in the US (selling one product a day), which was acquired by Amazon. We also saw shopping club models like Brands4Friends and Limango. This was about 10 or 12 years ago, and those business models were emerging about once a week, but then the financial resources dried up for e-commerce B2C models. Now, though, it’s all beginning again. It’s a great time to be active in e-commerce.
Igor Stenmark
It’s certainly pretty exciting, and a lot of it is going to be for integration. For example, the transportation scheduling you mentioned—the technology to do that exists. It has always existed. There’s a sector called TMS (transportation management systems) that allows you to go in and say, “I want all of my stuff to be in a certain place, at a certain time, on a certain day.”
Let’s just extend that conversation. What do you see in terms of different commerce strategies that are likely to get more adoption? I’m specifically interested in what you think about marketplaces. We certainly see a lot of demand for marketplaces. Companies are setting those up for selling and for their supply chain as well.
Alexander Graf
Until about two years ago, marketplace thinking was focused around how to connect one’s service to eBay, Amazon, Rakuten, or Tmall in Asia. However, since then, companies have been looking into how they themselves can become marketplaces, for several reasons. Obviously, there is the financial reason: You want to get rid of the inventory risk in your warehouse. You want to add new inventory which you don’t have on your balance sheet anymore. You want to expand your product offering to increase customer loyalty and buying frequency.
We are one of the only vendors in the market that provides an enterprise marketplace offering. Our customers can become or create marketplaces based on Spryker. Three years ago, I would say only 5% of all the conversations we had with clients or potential clients were around marketplaces. Today, more than 50% of all new customers or customers in the pipeline have marketplace functionality in their requirements sheets or on their roadmaps. It may not necessarily be the first milestone or an initial launch, but it’s definitely on their roadmaps. Long-tail is now becoming fatter and fatter and fatter; there’s enormous potential, especially in B2B, to create niche marketplaces around certain services and products. That’s a major trend.
A second trend is verticalizing businesses because people now know that they shouldn’t rely on Amazon services in their wholesale strategy. Amazon can just rearrange priorities and unlist your products if something else becomes more important. As a result, the direct-to-consumer idea is really emerging again. We saw this five to seven years ago when brands, even B2B brands, started to think about their direct-to-consumer approach. Sometimes, it was B2B2C, and other times, it was B2C directly. At that time, though, this idea got crushed by Amazon, eBay, Rakuten, and Tmall. Companies started to think, “Okay, I can’t compete with them because they’re too strong. They’re already inside customers’ mobile phones.”
However, people are now realizing that the only thing that matters is direct access to customers. If you’re not accessing your customers directly, you eventually become a logistics company for one of the big platforms (that could be Amazon, Alibaba, Rakuten, or another marketplace depending on your niche). For logistics platforms, only the biggest ones can earn money in the long run. It’s an economy of scale there, rather than an economy of innovation. Most businesses, by definition, can’t become the biggest in their niche; only one or two can really play that part.
Igor Stenmark
Yes, we definitely see more emphasis on direct-to-consumer, firstly because people feel that, with big marketplaces like Amazon, the delivery side of the model was somewhat broken by the pandemic. They couldn’t fulfill the same-day commitments in many cases and had to re-prioritize based on emergencies. Additionally, there’s this whole value of metadata which you can collect and bring back into your business. That’s very, very significant, and it almost adds to your valuation as a company if you’re able to collect that directly. So, that’s a premium right there.
Could you share an example of how some of your clients are using marketplaces? When they set up a marketplace, are they saying, “We’re going to sell our goods there, but we’re also going to bring in our partners. We’re going to open it up to our sellers.” What is a typical use case for something like that?
Alexander Graf
Most of the companies we’re working with are in what we call the enterprise marketplace space. There are also pure marketplaces where the operator is not selling itself, and that’s usually something you set up on a greenfield. Most companies we’re working with are retailers already, so the logical next step is to create an enterprise marketplace. We’re currently working with a DIY company that isn’t necessarily thinking about expanding their product range—they’re not selling more drills, chainsaws, et cetera—but they want to expand into a service marketplace. This totally makes sense because, when you’re buying wood or products for your floor, you’re often in need of services, and service is very fragmented, especially in the carpenters market. To add a platform where those services can be booked and orchestrated, potentially with some quality guidelines built in, that really helps the customer. It adds 100% value to the platform.
A lot of customers we’re working with are driven by that. When you’re starting to build marketplaces where external sellers compete with products similar to what you have in your warehouse, that creates huge channel conflict and a huge conflict of interest with your buying departments who were previously very proud about securing, for example, a big delivery of drills for a very good price. Now, there’s another company selling similar drills. So, this kind of transformation within your own org charts is often harder to manage than the technical transformation of becoming a marketplace. Therefore, companies are instead focusing on expanding their product portfolios or moving into a service aspect.
That said, companies with very strong brands in certain niches may have a different strategy. For example, say we have a company selling wooden products from Austria, operating as a person-to-person business over the last 200 years. Now, though, we can set up a marketplace platform where we can train our customers to get used to an online portal. In this case, it’s still a desktop-oriented portal. Then, we can invite our partners to add their products into our portal because, usually, the status quo of their e-commerce activities is zero. When you start a marketplace and invest half a year or so into marketplace infrastructure in those niches where most of the companies haven’t invested anything in e-commerce, you become the Amazon of your niche after that half a year. So, it’s easy to achieve, and it totally makes sense. You typically also create a lot of extra business for that industry. However, in other niches, especially in B2C where Amazon is already active, it’s a much harder sell. That’s why we at Spryker are focusing on B2B and marketplace projects right now.
Igor Stenmark
There’s a lot of opportunity there. Let’s talk about the physical brick-and-mortar situation for a couple minutes. One school of thought says that when the pandemic goes away, people will flock to physical stores, to malls, et cetera. I can see that, but the other position believes our behavior has been changed permanently, that people who did not use e-commerce much before are going to continue to use a lot of e-commerce and frequent stores less. After all, if they can get a delivery of all their groceries, why go to a store? What’s your view? Are we going back to normal, or will we emerge into a world that’s going to be very different on the other side of the pandemic?
Alexander Graf
I think it depends on the specific business model itself. If it’s verticalized and selling exclusive products versus just acting as retailer for a product you can buy through Amazon, Walmart, or anywhere else, it may survive. That’s what we see in the market and what the data is definitely supporting. However, if your business model is based on your neighbors buying at your store out of pity, that is not sustainable at all. They won’t come back just to support you. That might work for a COVID campaign or once a week, but it won’t support a real business model long-term.
When it comes to the brick-and-mortar model itself, these companies need to answer the question: Why should people come? Service-wise and logistics-wise, it will be much cheaper, better, and more convenient to get something ordered from home in the future. It will even be more expensive for you to touch a product before buying it at home because orchestrating brick-and-mortar infrastructure is way more expensive and inefficient than orchestrating warehouse and remote delivery infrastructure.
Strangely, we now have some business models that are a kind of hybrid, these “click-and-collect” businesses, for example. Some of them may make sense now, but in the long run they won’t work. There’s a funny saying in our community here that with click-and-collect, we’re bringing together the worst of all worlds. You can’t touch the product before you buy it, and you have to drive. That’s combining the disadvantages of both the online channel and the brick-and-mortar channel. Again, it might make sense today if you have a very distributed setup of stores and some number of people employed at those stores. It may be useful in a transition period, but it really reminds me of sailing boats 200 years ago that had installed steam engines. Yes, it made sense there because steam engines weren’t so sustainable 200 years ago, but, as we all know, the sailing boat was basically just a steam engine. It wasn’t a success case in the long run.
Igor Stenmark
It’s the hybrid car of e-commerce.
Alexander Graf
Yes, it’s like a hybrid car. There’s a market, and it makes sense now, but I highly doubt that these business models will prove sustainable in the long run. They rely on customers coming back to a brick-and-mortar store and doing all the logistics themselves. They have to drive to the store to pack and pick up the product themselves, and they have to service themselves because usually they research the product on the internet before purchasing. So, if this store is selling products that are sold elsewhere (at another store or online), I wouldn’t count on people coming back. People will come back to stores because they like that experience, but click-and-collect is not a sustainable business model, and I wouldn’t invest in it today.
Igor Stenmark
Yes, the retailers we think are going to survive are the ones who firstly already have a very strong e-commerce presence. Additionally, when it comes to their physical stores, they have unique franchise products that no one or almost no one else has, and they can deliver a unique, entertaining, and fantastic customer experience in the store. People should go in and say, “It’s like therapy going into that store because it’s so fantastic as an experience,” rather than feeling like they’re just going to a warehouse and picking something up.
Alexander Graf
Yes. As you said, there are some interesting success cases where we’ve seen e-commerce work for brick-and-mortar-DNA business models. The hurdle seems to be whether or not they had 20% to 30% of their business online before COVID. If they did, infrastructure-wise, process-wise, and org chart-wise, everything was in place to cover the brick-and-mortar loss with the e-commerce revenue. This is true for bigger companies as well. For example, I know a very big fashion retailer in Europe that was able to save his revenue with his online channel, but he already had 20%-plus online before COVID. The companies I know with e-commerce revenue of 5% or lower, where e-commerce was just a playing ground, weren’t able to use that to cover their losses.
Companies with a decent target group were also more successful. They were able to create a lot of new event-driven commerce formats, bringing customers together at places which may not be necessary to lure customers into the store but are needed to connect customers with local salespeople. So, there’s definitely a lot of opportunity, but most of the opportunities are driven by digital interfaces—that could be a WhatsApp group, a Telegram group, or your own CRM. Do you know of one customer that has a proper CRM? Most of them, especially the brick-and-mortar ones, don’t know your name, your email address, or your Telegram alias. They don’t know anything. You’re just a random number coming to the store on a weekly or monthly basis. I think this is the big mistake that many brick-and-mortar businesses have made for years. The ones who invested in their loyalty programs or other methods of getting to know their customers have every chance now.
Igor Stenmark
When we look at e-commerce, what are the vectors of disruption? Is it going to come from technology, from a methodology approach, or from new kinds of products? Is it going to come from business model changes—from the way we finance, transport, store, distribute, or fulfill? There are obviously many, but what would you consider the top one or two?
Alexander Graf
I think the main factor that really changes everything is the speed of development in our area. For example, new business models come out of China within months. Vova, for example, is a shopping app that’s popular even in the US. I didn’t know about it two months ago, yet it’s already in the top 10. Additionally, there’s this kind of mobile revolution already happening which is destroying the desktop generation. We’re both representative of the desktop generation, and when we think about a new business model, we’re optimizing for a desktop screen that we have in mind. Even if you look deeper into the org charts of Amazon, Walmart, et cetera, when it comes to e-commerce, 80% of the organizations are thinking in desktop terms about optimizing websites.
They have a hard time transferring this kind of thinking into the mobile world, and now there are more new devices coming. Those can include everything from voice-driven and smart watches to smart interfaces in cars because every device is getting access to WiFi now and can therefore be used for other purposes and services. The disruption is happening so fast that it creates new entry opportunities for business models, maybe from China or Europe. Sometimes they’re coming with a verticalized infrastructure approach which is all logistics. These business models are getting enough funding. There’s no funding issue anymore. I’m very humble when it comes to evaluating what we have achieved and seen so far because we know it only takes a year or two to disrupt even the major business models. That’s why Amazon still has to develop so many new offerings; The business model is getting disrupted anyway.
Igor Stenmark
We’re coming to the end of our timeslot here. As a final question, what is one thing that every C-level decision maker should know about Spryker but doesn’t?
Alexander Graf
C-level decision makers often look at software from a cost center perspective. They’ll say, “Okay, I’ve invested in an IBM setup, an Oracle setup, or an SAP setup.” That software alone won’t change too much. It’s more about the approach of bringing software into a business center perspective and seeing that it can be important leverage in a good organization or idea developing and adapting faster. Faster adaption is really the main trick.
Digital business models that were successful in the last five to ten years were only faster in adapting to customer needs and faster in exploring and adapting to market opportunities. They didn’t have smarter people, more money, or more resources of any other dimension. They just adapted faster. Spryker is actually a way to adapt much, much, much faster if you put it in the right pocket of your company. It’s not a cost center infrastructure. The value is in the new business model thinking which comes with it, and we think that should be adopted by every company.
Igor Stenmark
With that, I’d like to thank Alex for joining us here today, and we hope to have you back again. Enjoy the rest of Monetize Forum 2021.
Alexander Graf
Thank you, Igor. Thanks for the invitation.
