Retail Holiday Newsletter
Despite the considerable challenges US retailers faced this holiday season—including overstocked inventory, persistently high inflation, rising input costs, and concerns of an impending recession—Bain-defined nominal holiday sales grew 4.9% year over year on a seasonally unadjusted basis. While these results are lower than most forecasts, including ours, growth stayed in line with the 10-year historical average of 5%. And as anticipated, at 8.7% year over year, nonstore sales growth—including e-commerce; buy online, pick up in store; and mail order—outpaced in-store sales growth, which was 3.6% year over year.
This year, inflation boosted sales more than volume growth. On an inflation-adjusted basis, we estimate the year-over-year change in holiday sales was between –1% to +2%. We haven’t seen negative holiday sales growth since 2008.
Nevertheless, some retailers were able to deliver a bit of holiday cheer. While Amazon doesn’t publicly disclose its gross merchandise value (GMV), our analysis of proprietary data and analyst estimates reveals that once again, Amazon outperformed the market, likely faring better than expected. While its declining stock price—which reflects many factors beyond its core e-commerce business—belies this success, Amazon was still a go-to stop on shoppers’ holiday lists (see Figure 1). Based on the latest data from Pyxis, we estimate Amazon’s US e-commerce GMV grew by 15% to 20% year over year in the fourth quarter, significantly surpassing overall US retail sales.
Amazon has consistently outperformed the market
A major contributor to Amazon’s consistent success is the ever-increasing power of its ecosystem—an extensive system of integrated offerings that creates value for all stakeholders (including customers, suppliers, employees, communities, and shareholders) while also strengthening and expanding the traditional business. These offerings stretch beyond traditional trade, which we define as the reselling of owned goods.
While the rise of large ecosystems is a global phenomenon, Amazon is a leading example as we explore the evolution of retail ecosystems in the US. Its Prime membership, extensive third-party (3P) marketplace, and Prime Video offerings are the most visible parts of its ecosystem, but several other offerings enable its broad approach, including its logistics services like Amazon Relay and Amazon Warehousing & Distribution, and other services like Amazon Pay and Amazon Ads.
As Amazon knows, ecosystems are especially advantageous during the holidays, providing more unique opportunities to attract and wow new customers. This can generate loyalty that lasts into the new year and beyond.
More than 75% of Amazon’s revenue from the first quarter of 2022 to the third quarter, excluding Amazon Web Services, came from activities “beyond trade.” The online behemoth and players like it are blurring industry boundaries, and traditional retailers are finding it increasingly hard to compete. In fact, we believe retailers that embrace “beyond trade” offerings will outperform over the next decade. Bain research shows that by 2030, 35% of retail revenues and 50% of retail profits will come from “beyond trade” activities.
Forays into ecosystem offerings are becoming more prevalent as retailers look to new profit pools for a competitive edge. For instance, according to Bain analysis, the number of top 100 US retailers that offer a bolt-on marketplace has increased 25% from last year. Retail Media Networks (RMNs) can pave another path to growth “beyond trade,” with digital RMN growth expected to outpace e-commerce growth by 1.8 times from 2022 to 2024.
Still, retailers should be cautious. Most don’t need to (and shouldn’t) build their own Amazon-like ecosystems in search of scale. The increased popularity of marketplaces and RMNs also doesn’t (and shouldn’t) imply guaranteed success: These aren’t the right ecosystem offerings for all retailers. Articulating the right ecosystem strategy requires a thoughtful assessment of competitive edge, and reaping the value requires precise execution.
Well-executed ecosystem strategies significantly reinforce a retailer’s traditional business by increasing the customer lifetime value and loyalty of existing customers, while providing access to new customers. Amazon’s symbiotic set of business-to-consumer (B2C) and business-to-business (B2B) ecosystem offerings exemplifies this ideal. Take Amazon Prime, which offers shoppers additional services such as audio and video streaming, audiobooks, payments, and video game streaming. The e-commerce giant’s more than 160 million US Prime members have been a boon to its traditional retail business, spending 2.3 times as much as non-members do annually. In September, during its inaugural season of exclusively streaming “Thursday Night Football” on Prime Video, Amazon saw a record number of Prime sign-ups in a three-hour period. This climbing Prime membership further reinforces the business case for advertisers to buy into Amazon’s RMN.
Even beyond Prime, Amazon’s ecosystem offerings bolster one another. For example, it also offers Fulfillment by Amazon to 3P sellers on Amazon’s marketplace, enhancing its value proposition to suppliers by signing up more sellers and, in turn, enhancing its value proposition to consumers as a retailer with seemingly endless aisles.
However, not every move on Amazon’s ecosystem-building journey has been a home run—and that’s part of the test-and-learn philosophy that Amazon has championed. For instance, Amazon recently closed its Books, 4-Star, and Pop Up brick-and-mortar shops and refocused its physical retail strategy on other ventures, such as grocery. In 2015, the retailer launched Amazon Restaurants, a free food delivery service for its Prime members, but it failed to create synergies between its e-commerce last-mile and restaurant deliveries, eventually discontinuing the service four years later.
Leading retailers will not only learn from these success stories but also heed these cautionary tales. However, those that abstain from crafting a deliberate ecosystem strategy risk being left behind.
How can different retailers play in the evolving ecosystem landscape?
Not every retailer has the right to play or the resources to win in as many arenas as Amazon—no matter how attractive an emerging profit pool may be. Leading retailers will consider where to play and how to win along the spectrum of ecosystem development, from building a full-fledged ecosystem to strategically participating in others’ ecosystems.
Make an honest assessment
Two dimensions will help retailers identify the right approach.
1. Advantageous assets
A retailer’s advantageous assets—those proprietary, owned assets that provide a meaningful competitive advantage—determine its right to play in various ecosystem offerings. These include a retailer’s brand strength, breadth and uniqueness of assortment, extensive customer data, store footprint and reach, distribution network, logistics capabilities, and more.
Of these, we believe that a retailer’s brand and assortment are the most important factors. The exclusivity, breadth, and depth of a retailer’s offerings influence which needs it fulfills for shoppers. For example, Amazon’s wide-ranging assortment, enhanced by its 3P marketplace, makes it a true one-stop shop for customers. Others can rely on their sector-focused assortments—such as Adidas, which has created an ecosystem of its sports assortment and related services, including its running app.
A retailer’s scale is also critical in determining its ecosystem strategy, particularly its number of offerings. Large-scale retailers typically have the means to invest and develop more offerings for broad ecosystems—such as streaming services, marketplaces, logistics capabilities, and B2B technology services. They also have the financial resources to support multiple rounds of testing, learning, and pivoting along the way. Meanwhile, smaller retailers need to be more focused about where they invest.
Choose the right strategy
Given the variance among retailers’ advantageous assets and scale, each will need a tailored ecosystem strategy. But, in general, retailers can pursue one of three primary strategies.
1. Build a broad, owned ecosystem.
Large, national mass-merchandisers—such as Amazon, Walmart, Target, and Costco—have the full scope of advantageous assets that enables the broadest, most advanced ecosystems. And their absolute scale provides the financial means to invest in multiple offerings. Thus, these retailers can offer an array of products and services to their extensive pool of customers and suppliers. When done right, these offerings reinforce the strength of their core retail business.
Due to the extensive advantageous assets and scale required, relatively few will win using this strategy. And those that do will carefully decide which offerings to pursue and whether they buy, build, or partner to develop those offerings.
Like Amazon, Walmart is an excellent case study in how retailers can build their own broad ecosystems that create value across stakeholders. Walmart has added a 3P marketplace to complement its already extensive assortment. It has also launched its own ad network, Walmart Connect, which has grown 30% year over year into a multibillion-dollar business, as of the second quarter of 2022.
Beyond these larger initiatives, Walmart also offers financial services, pharmacy, and auto care, among other services. It recently announced partnerships with Salesforce to provide fulfillment technology and local delivery services to other retailers, as well as Paramount+ to offer video streaming services to Walmart+ members. Walmart has also continued to expand its end-to-end logistics offerings by providing Walmart Fulfillment Services for marketplace sellers and Walmart GoLocal white-label delivery service. The retailer even recently expanded its same-day drone delivery capabilities in select markets to deliver packages in time for the holidays.
2. Build a narrower ecosystem with a focused selection of offerings.
This strategy is suited to retailers that focus on carrying a best-in-class assortment in a narrower set of categories than large, national general-merchandise retailers. These retailers—such as Ulta in health & beauty, Best Buy in electronics, and Publix in grocery—have deep expertise and scale in their sector. Despite their high relative market share, their relatively lower absolute scale and specific sector focus mean that these players should be more strategic and selective about their offerings, thinking carefully about which complement their category.
Take Best Buy’s Totaltech program, a narrower ecosystem centered around consumer electronics. Members have access to exclusive deals, free delivery, installation, and haul-away, as well as savings on repairs, extended return windows, product protection, and priority tech support services—bolstering Best Buy’s value proposition along every step of the pre- and post-purchase journey.
Category specialists are also well positioned to pursue RMN offerings, where their narrower category focus can be an asset. Consider Ulta’s RMN, UB Media, which it launched in 2022. Ulta’s customer base is a better audience for beauty advertisements than a general retailer’s customer base. Its coverage of multiple brands and suppliers also gives it access to a wide advertiser base, while its closed-loop capabilities and strong attribution data make it a more appealing partner than big tech companies.
These retailers can also utilize nontraditional partnerships to expand their ecosystem’s customer base. This past holiday season, brands such as Ulta Beauty, TULA Skincare, and POPFLEX partnered for YouTube’s nine-day live shopping festival. The platform brought together multiple brands and some of YouTube’s biggest creators to cater to a younger demographic.
3. Play selectively in other ecosystems and continue to build advantageous assets.
This strategy works best for retailers that deliver an ultra-low-price positioning, such as Aldi in US grocery, or Dollar Tree in discount stores, as well as those that focus on a proprietary brand, such as Carter’s in apparel, or Saint Laurent in luxury fashion. While these retailers’ price positioning or proprietary brands allow them to differentiate themselves from multi-brand players, their relatively lower absolute scale in the US and focused assortment limit their ability to win in a broad range of ecosystem offerings.
These players can selectively participate in ecosystem offerings that help them fortify their niche or reach new customers. For example, in partnering with Instacart, Aldi demonstrates how low-price retailers can partner to meet customers’ delivery expectations while still focusing investments on a unique, low-priced assortment. Meanwhile, retailers with a proprietary brand can become valuable spokes in other broad ecosystems. For instance, Carter’s has its own stores and website but also has an exclusive line, Simple Joys by Carters, which is sold on Amazon to target savings-oriented customers. Saint Laurent has plugged into NET-A-PORTER, a high-end marketplace, allowing the retailer to access a new set of customers.
Besides participating in other ecosystems, these retailers can focus on further developing their advantageous assets. Many have best-in-class customer rewards programs or store credit cards to access additional proprietary customer data. Several apparel retailers, such as Express and Neiman Marcus, offer store credit cards with rewards. Ultra-low-priced retailers are also using this approach to strengthen their cost positioning. For example, Dollar Tree’s Value Seekers Blog provides exclusive access to additional deals and specials. Off-price retailers HomeGoods and T.J. Maxx offer a store credit card to earn money back, helping customers find additional savings while capturing useful data.
Retail ecosystems will continue evolving at a rapid pace, so winning retailers will frequently revisit their strategy and execution tactics to remain competitive. Although each retailer has its own way to win, leading retailers will have a strong sense of urgency—they will start today, if they haven’t already.
Questions for the new year
As this holiday season winds down, industry leaders are already laying the foundation for success in the 2023 holiday season and beyond. Retailers can ask themselves the following questions to determine where and how to compete in an ever-changing landscape:
- What advantageous assets do we already have? And how advantageous are they?
- Given our scale and assets, which offerings can strengthen our value proposition and reinforce our traditional retail business? Which offerings will create value for our stakeholders? How will we measure that value?
- Which ecosystem offerings will give us the best return on our investment? Do these offerings tell a compelling equity story to our shareholders?
- How do we execute our ecosystem offerings? Should we buy, build, rent, partner, or participate in other retailers’ ecosystems? How does this decision impact our returns?
- How will we test and learn fast, pivot our resources, and scale successful offerings to create value? How do we get the organization ready to support diversification, from incubation to scaling? Do we have enough resources to change the business while running the business?
Best wishes for 2023
This is the last issue of this season’s holiday newsletter. Thank you for tracking the holiday season with us. We hope you’ve enjoyed our views on the holiday forecast, Singles Day, planning pricing and promotions in the face of inflation, future-proofing supply chains, and winning in a world with ecosystems. The full series can be found here.
We look forward to keeping in touch with you throughout the year, and we will be back later this year to share our 2023 holiday outlook. As always, we welcome your thoughts and questions.
The authors would like to acknowledge Anirudha Sharma, Adam Kowalski, Quinn Creamer, Daniella Valverde, and Darsh Jalan for their contributions to this newsletter.