8/04/14

Growth challenges

While many small retailers struggle to acquire new customers, innovative startups grow by outmaneuvering their competitors in myriad ways.

Stefany Zaroban , Associate Director of Research

There are a slew of retailers that sell custom invitations online—about a dozen ranked in the Internet Retailer Top 500 Guide and Second 500 Guide, in fact. But PaperStyle.com Inc. says it differentiates itself in two ways: It ships orders the same day they are placed, and expert stylists are available to help consumers make buying decisions via live chat—two features that many merchants in the same category don’t offer.

However, despite consistent rave reviews from customers of a “terrific buying experience,” “quality invitations,” or “the VERY BEST customer service I’ve EVER encountered,” sales on PaperStyle.com declined 1.5% in 2013 to $4.40 million from $4.47 million in 2012.

This decline was due largely to PaperStyle, No. 911 in Internet Retailer’s 2014 Second 500 Guide, having a hard time bringing in new customers in 2013, says president David Grocer. On some of its most profitable products, the retailer suffered from changes in Google Inc.’s search results following the rollout of the Panda and Penguin updates in late 2012 and 2013. The retailer had previously used repetitive wording like “invitations” or “bridal shower” in its product descriptions to appeal to search engine crawlers. As part of its Panda update, Google began penalizing sites with too much repetition, or so-called keyword spam. This change affected sales on PaperStyle.com in a big way, as the merchant relies heavily on organic traffic from search engines to bring in traffic.

“There’s a lot more noise out there, so it’s harder to break through,” Grocer says. “It’s not harder to differentiate ourselves because we have several legs up on the competition. It’s just that the ability to let everyone know the difference is getting harder. We’ve found that once consumers discover us, they’re thrilled and they come back,” he says. “The challenge is getting the word out.”

PaperStyle.com’s story will sound familiar to quite a few other small to mid-sized merchants ranked in the 2014 Second 500 Guide. Like PaperStyle.com, many of them have loyal followings of repeat customers but say increasing competition online is making it harder or more expensive to acquire new customers.

“In general customer acquisition is hard because so many people use Google or Amazon, and it’s hard to stand out,” says Sucharita Mulpuru, principal e-commerce analyst at Forrester Research Inc. “Small retailers say they spend nearly 20% of web revenue on marketing—that’s nearly twice what large retailers spend.”

The challenges small retailers faced in 2013 are evident in the numbers. Collectively, Second 500 merchants brought in $4.741 billion in online sales in 2013, up 14.1% from $4.155 billion in 2012. That growth rate is down slightly from 15.6% for Second 500 merchants in 2012, and further behind the 17.1% growth of the largest merchants in North America in 2013, those ranked in the Top 500 Guide. The Second 500 growth rate is also below the 16.9% rate of online retail sales in 2013, according to the U.S. Department of Commerce. As a result, the Second 500’s share of U.S. online retail sales slipped slightly to 1.80% in 2013 from 1.84% a year earlier.

However, that 14.1% growth for the Second 500 is still around four times the 3.7% growth in total retail in 2013, and many small e-retailers posted major growth numbers online in 2013. Newcomers to the Second 500 Guide did particularly well—the 64 merchants new to Internet Retailer Top 1000 rankings grew web sales 40.9% in 2013 to $530.1 million from $376.3 million. And startup web-only merchants also shined—of the 25 fastest-growing retailers in the Second 500 Guide, 80% sell only online and were founded in 2009 or later.

What’s the secret of the fastest-growing Second 500 merchants? There’s no one answer, but each of them is outmaneuvering competitors in some way. Many are growing by investing in their web sites, making them eye-catching and easy and convenient to shop. Others are tapping into unmet demand with a niche product, selling in a new way or aggressively marketing to attract new customers.

Take Chalkfly.com, for example, a web-only retailer of office and school supplies. When the merchant launched in mid-2012, it faced an uphill climb, because of all retail categories, office supplies was already the one in which the largest percentage of total sales had moved online.

Competition in the sector is fierce, as around 48% of the $39.5 billion in office supply sales in the United States were transacted online by merchants ranked in the Top 500 Guide. Plus, the largest three merchants in the category—Staples Inc. (No. 3), Office Depot Inc. (No. 9) and OfficeMax Inc. (No. 12)—have sold online for nearly 20 years, and their e-commerce revenue makes up around 94% of all online office supply sales in the United States, according to an analysis of U.S. Commerce Department data.

What sets Chalkfly apart is a distinctive brand message: Chalkfly donates 5% of each sale to individual teachers. A shopper can choose which teacher to donate to when checking out, or she can opt to give her 5% to any teacher in a nearby school.

This business model gets people talking about Chalkfly. The teachers registered to receive donations are naturally inclined to tell friends, colleagues and parents about Chalkfly, and encourage them to order there instead of from Staples, Amazon.com Inc. or Office Depot, which merged with OfficeMax last year.

Chalkfly also invests in Facebook ads targeting small businesses. The message appeals to owners of independent businesses, many of whom like to give back to their communities, and understand that it can generate goodwill. What’s more, since Chalkfly operates online only, it doesn’t have the overhead costs of the physical stores its much larger competitors operate. That means it can pass on some of those savings to consumers and offer competitive prices on par with its larger competitors.

“We have thousands of brand advocates throughout the country that are telling their friends, parents and business to use Chalkfly,” says co-founder Andrew Landau. “We’ve succeeded because of the teachers who are advocates and independent tech companies deciding to go with us over the other office supply guys because we give them an opportunity to make a difference. It’s businesses making a social decision.”

Enabling businesses to give back is an intriguing concept, but Chalkfly has to also make its site easy for businesses to use. More than 60% of Chalkfly’s customers are businesses, Landau says, and it says its clients include Quicken Loans, Northwestern Mutual Bank and the Detroit Opera House.

The needs of a business customer are often more complicated than those of the individual consumer. And from the get-go Chalkfly’s in-house developers built out advanced business-to-business shopping functionality that rivals large B2B players. Its site, for example, which is based on the Magento Enterprise e-commerce platform, features custom pricing arrangements for businesses, automatic reordering and an order-approval process that allows managers to authorize purchases from many office locations.

The merchant also seeks to provide a fresh look to its site with large imagery and simple search tools, unlike some other office supply sites that are cluttered or overwhelming, Landau says.

The multipronged strategy is working for Chalkfly. In 2013—its first full year in business—the merchant grew online sales to $2.0 million, earning it a No. 962 spot in the Second 500 Guide. With 2,566.7% growth from $75,000 in sales in 2012, Chalkfly is the fastest-growing retailer in the guide.

Another fast-growing retailer that is overcoming the challenges of acquiring new customers and successfully tapping into unmet demand is Plated.com, which sells fresh food ingredients that shoppers can whip into gourmet meals. A recent menu item was the honey mustard drumsticks with jicama salsa, for example. A shopper pays $15 (or $12 if they are monthly members) per serving, or “plate,” as the retailer calls it. They will receive a box of fresh, portioned-out ingredients, such as chicken drumsticks, red onion, shredded jicama, red bell pepper, rosemary and other ingredients required to cook the meal.

Since its 2012 launch, fast growth has come relatively naturally to Plated.com, says founder Nick Taranto, since there’s pent-up demand from online shoppers for home food delivery. At least, he says, for the kind of food Plated.com offers.

In general, U.S. consumers have not moved to the web to buy much of the $650 billion they spent in 2013 at food and beverage stores last year. That’s the third-largest category for U.S. retail spending after automotive sales and sales at general merchandise stores. However, the North American e-retailers ranked in the Top 500 that predominantly sell food products, such as Peapod (No. 61) and FreshDirect (No. 80), capture the equivalent of only 0.5% of that total, about $3.67 billion.

From Taranto’s perspective, this leaves plenty of room for a small web retailer to capture a niche within this market. “There’s plenty of competition out there on a local and national level, but we’re providing a product that people love and need every day,” he says. “Only 1% to 1.5% of food is purchased online in this country, so there’s not going to be a winner-take-all-type scenario. When it comes to food, there’s plenty of room for multiple players.”

To get the word out to consumers, Plated.com puts a large emphasis on social media marketing. The merchant invests hundreds of thousands of dollars each month on targeted Facebook ads that appear in consumers’ news feeds. Many of the ads offer two free plates (a $30 value) for first-time customers. Plated.com also rewards customers with two free plates when they refer two friends who complete a purchase.

Buzz about the retailer also spreads in an organic way on social networks, as existing customers are often excited to share pictures of the meals they cook with the ingredients they order from Plated.com. “Next to kittens and puppies, food is the most shared thing on the Internet,” Taranto says. “It’s a word-of-mouth product. With Plated, you get this box and you cook up your meal and you want to share that experience because you’re proud of what you made.”

The retailer has more than 107,000 Likes on Facebook, 47,000 followers on Instagram and 7,500 Twitter followers.

Plated.com brought in an Internet Retailer-estimated $10.0 million in sales in 2013, up 900% from $1.0 million for the few months it was up and running in 2012. Ranked No. 713, it’s the fourth-fastest-growing retailer in the Second 500 Guide.

However, the 900% growth and 2,566% growth Plated.com and Chalkfly.com experienced in 2013 are the exception and not the norm, and those large growth numbers are inflated because those retailers only got started in 2012. A more common Second 500 story is that of U.S. Patriot Tactical, a store-based retailer of boots, apparel and gear for members of the military. The retailer’s online sales have grown steadily over the last few years, but it has to fight hard for every dollar it earns and chooses carefully where it invests its limited time and money.

That was especially the case in 2013, as the retailer struggled to maintain fast speeds on its site and respond to changes at Google. “A company of our size, we don’t have as many resources available to us, so it’s hard for us to keep up with the updates from Google or it takes longer for us to respond,” says U.S Patriot Tactical president Paul Yoo.

The merchant also has to adapt to Amazon’s growth, as the leading online retailer’s expansion into new categories and product lines is a threat to Patriot’s business. “Sometimes we’ll buy up the inventory from the manufacturer before Amazon will even get their hands on it,” he says. “For us, being nimble is survival. For now, I have more inventory on many items than Amazon does, since this is my specialty. But the minute they decide to go into my niche, I’m not sure I’ll have very much to say about it. That’s something a lot of small retailers are faced with.”

U.S. Patriot Tactical opts to sell a few items on Amazon’s marketplace, but only products like boots where it stocks 60,000 pairs, as it feels it has a real advantage over Amazon and other sellers on Amazon.com. The retailer doesn’t profit much from those sales, as Amazon charges a pretty hefty commission—around 15%, Yoo says.

“I sell a few items on Amazon but that’s a defensive strategy, not an offensive one,” Yoo says. “Even if I’m not making as much money on those sales, I want to be the person people buy from. If someone orders from me, I ship it that same day. Hopefully they’re pleased and come back to my site later to buy some more.”

U.S. Patriot Tactical, ranked No. 667 in the Second 500 Guide, experienced modest growth in 2013—it brought in $11.6 million in web sales, up 12.8% from $10.3 million in 2012.

But not every small retailer has a lot of cash to spend on Facebook ads, respond quickly to changes in the way Google ranks web sites on search results pages, or to play Amazon’s game. Lack of money to invest is a major impediment to growth for small online retailers, retailers and analysts say.

Many of the fastest-growing retailers in the Second 500 Guide, by contrast, had the luxury of a lot of investor cash in the bank. In fact, six of the top 10 fastest-growing merchants have secured venture capital funding in the last year or two. That includes eyeglass maker Rivet & Sway (No. 996), indie fashion marketplace UsTrendy (No. 888), punk clothing retailer Dolls Kill (No. 513), and web-only colorful office supplies maker Poppin.com (No. 806).

Indeed, many of the technology and marketing initiatives Chalkfly and Plated.com implemented in 2013 were made possible by investor funding, both retailers say. Chalkfly has raised $750,000, and Plated.com secured $8 million since its founding in 2012.

To those merchants without venture backing, Chalkfly’s Landau suggests picking a market carefully—discover a target demographic and learn everything there is to know about those shoppers. “Take a market that you can serve really well and focus everything you have on winning over their customers,” Landau says. “Do whatever you can to make sure their shopping experience with you is better than anyone else’s. If you can do that, you’ll do fine.”

As with so much in retail, that’s easy to say and hard to do. Many of the smaller and mid-sized retailers in the Second 500, once they get past the startup phase, are struggling to grow as fast as online retailing as a whole.

stefany@verticalwebmedia.com

@stefanymooreir

Topics:

August 2014 magazine, Chalkfly, David Grocer, PaperStyle.com, Plated.com, Second 500 Guide, small business and e-commerce, Top 500 Guide, Venture capital

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