31% of shoes were sold online in 2019.
51% of consumers said they bought sneakers regularly online.
23 billion is the size of the US online shoe market.
15% of new parents say they buy diapers mainly online.
20% of all commerce for baby products are online.
30 billion dollars is the US baby product market online.
With e-commerce being such a huge piece of many industries, why did industries like the shoe industry or diaper industry reject e-commerce for so many years?
Two stories
The first is Zappos.
When Tony Hsieh invested in Zappos from his firm Venture Frogs, the company attended its first sneaker trade show, where they pitched 80 companies about selling their shoes via Zappos, with dropshipping as the core model.
Of the 80 pitched, only 3 said yes.
And as they grew to over 10 million in revenue and moved away from dropshipping to buying and having their own warehouse/inventory, most major shoe/sneaker companies still rejected them.
They ended up having to buy a failing shoe shop and ordering massive volumes of shoes through that store, to just get certain companies/distributors to carry with them.
Story two is Diapers .com.
Diapers .com started with Marc Lore pitching every major diapers manufacturer to sell with him and they all turned him down.
They instead would drive to Costco at 5 am, after they’d get a shipment of diapers and buy all the inventory, paying retail prices to lose money selling them online.
They started hitting one million a month in sales and still no major brand would sell to them. They only were able to get Procter and Gamble on after both Costco & BJ’s told them to sell to Diapers .com, due to them having an issue with them buying all the diapers from their customers.
Both Zappos and Diapers grew to over a million a month in revenue and couldn’t get any major brands to carry them, without bending some rules in places.
But why did P&G or Nike care so much, when both Zappos & Diapers were just offering them money.
Several reasons
Retail relationships
During COVID, AMC said they were going to end their relationship with Warner Bros, due to Warner putting all of their movies on HBO Max and AMC for the same day in 2021.
Disney also had a similar issue, where they did duel releases with the Disney Premiere Pass for Disney+ and theaters until mid 2021, when they agreed to a deal to release Shang Chi as theater exclusive for the first 45 days.
The studios paid 100% of all fees to both make and market the movies, with theaters really only having to be open and give studios a cut of ticket sales.
Even though AMC and other theater companies have a fairly easy model, with more pressure on studios, they still leveraged the presence they had a retailer to pressure Disney & Warner to not go online for releases.
AMC has also avoiding distributing most Netflix movies in the limited releases they do, so the movies they produce can qualify for the Oscars and other awards.
This was a process for shoe, diaper and other companies thought process when ignoring e-commerce for years.
Sell online to a small company and potentially have a large retailer get angry and buy from a company sticking to traditional retail.
E-commerce failures
Etoys launched in 1997 and went public, where it peaked at a market cap of 7.7 billion dollars.
Filed for bankruptcy in 2001, reporting 275 million dollars in debt and poor performing sales online.
Garden .com IPO’d and raised millions promising to sell gardening tools to people online.
Within 18 months, the stock price would go from a peak of $20 to just 9 cents and eventually go bankrupt.
Pets .com launched in 1998 and in just two years would hit a market cap of 300 million, being called the future of retail and end up bankrupt in that time.
Those companies were three big examples of times major manufacturers aligned with e-commerce companies and ended up all in failure, suggesting outside of books, e-commerce wasn’t going to be a big thing.
Also, all three of those companies have something in common, which was they promised to destroy retail and ended up with Toys R Us, Home Depot and Petsmart buying most of the remains in bankruptcy auctions.
Even Tony Hsieh starting Zappos didn’t want to invest initially, because he didn’t think anyone would buy shoes without getting to try them on. He only invested, because his partner read a report a year prior saying 10% of shoe sales happened via catalog purchase currently.
E-commerce at the time was heavy risk and even 10 million in sales made Diapers or Zappos just another potential waste of time for a big company.
Return policy
Neither Diapers or Zappos were big enough initially for inventory, so they tried at first to pitch the companies with dropshipping as the goal.
For those who don’t know, most companies selling online will buy the product from the manufacturer and sell it via their site or app. Dropshipping is really when the site or app is just a broker and gets orders for the manufacturer to sell to consumers.
To show the problem, it involves return policy.
8.9% of products bought in physical retail end up getting returned.
E-commerce the numbers are unclear, but the average now is 20-30% from most reports.
E-commerce has such insane return rates, it makes dropshipping an extremely unprofitable model, where Zappos could have just been pitching manufacturers something they saw as a money loser, versus sales.
Even Zappos when in their prime before selling to Amazon struggled to profit, due to their 365 day a year refund policy.
Returns make e-commerce more difficult over what most people think.
Final thoughts
Reason for bringing this up is I was watching an interview with the creator of Diapers .com on telling the story of the company.
Also, my favorite non fiction book is actually Tony Hsieh’s book about the creation of Zappos.
Both present a case where they were the innovators and the giant legacy brands didn’t want to embrace change.
While that is technically true, there was some logic behind that and looking at it with more context, it makes sense why billion dollar companies didn’t want to work with random people who cold emailed them.