How Online Retailers Are Preparing for the Future After a Record Holiday Season

In short:

• Online retailers capped a year of impressive gains with 45% higher sales YOY in November and December, and demand increased earlier than usual.
• Sellers we spoke to continued to face supply chain challenges through the fall but made adjustments on the fly and created sustainable solutions to mitigate issues in the future.
• Ecommerce-driven brands are exploring new ways to sell their products and encourage repeat business from their larger customer bases while also looking for back-end systems that can support their growth.

In November 2005, the term “Cyber Monday” first appeared in a press release from the National Retail Federation (NRF). NRF reported that most online retailers had seen a spike in sales on the Monday after Thanksgiving, when shoppers returned to the office and took advantage of faster internet speeds and the absence of their children’s prying eyes.

Since then, online sellers have come to rely on Cyber Monday to provide a top-line boost every year. And 2020 was perhaps the most highly-anticipated Cyber Monday and holiday shopping season ever for online retailers. Beginning in March, many businesses that have ecommerce channels saw tremendous growth there, as more shoppers avoided stores and stayed home. Expectations were high for the holidays.

Then came a sluggish start. During the all-important stretch from Thanksgiving through Cyber Monday (known as the “Cyber 5”) when most retailers run major promotions, online sales climbed 21% compared to 2019, according to Digital Commerce 360. That fell well short of the 35-40% Cyber 5 growth many experts projected.

Those results, however, were more the product of a shift in shopping patterns and an extended shopping season than an overall lack of consumer spend. In November and December, ecommerce sales jumped 45% and comprised a striking 26% of all retail sales, per Digital Commerce 360. Consider that online retail represented just 19% of holiday sales in 2019, and that this number usually increases about one to two percentage points annually.

Last year saw the realization of the long-predicted promise of online retail that fast-forwarded consumer adoption by several years.

In the wake of a landmark year — and holiday season — for ecommerce, we wanted to learn not only how online sellers fared but also what they learned, how they’re responding to elevated demand and how the past year has affected their outlook. Their insights can help other forward-thinking merchants as they move forward in this new landscape.

New Buying Patterns — and Record Sales

As retail experts predicted in September, consumers started working through their holiday shopping lists earlier than ever. They were already spending more time online, and many sites offered their best deals early, so why wait?

LovelySkin has been selling skincare and haircare products, cosmeceuticals and the like online since 1999, but 2020 bucked long-standing trends. The ecommerce company’s typical holiday sales spike came at the beginning of November, about two weeks earlier than usual. Many other retailers noticed the same trend: Apparel brand Pact, for example, saw 30% year-over-year growth in early November but sales were flat during the Cyber 5.

Pact CFO and Director of Operations Drew Cook believes the holiday shopping season really kicked off with Amazon’s “Prime Day” in mid-October. The shopping event is usually held in July and may return to its usual date in 2021, but its 2020 date likely contributed to the earlier-than-usual increase in sales.

And within the Cyber 5, there were notable shifts. Sales on Thanksgiving Day itself were “much bigger” compared to past years for direct-to-consumer (D2C) office chair manufacturer X-Chair. CEO Tony Mazlish said he thinks that’s because fewer people were with their extended families or at big gatherings, giving them more time to shop.

Pact, which specializes in basics like T-shirts, leggings and sweatshirts, spotted another interesting trend: more people buying comfortable clothing for themselves. The retailer added a gift-wrap option at checkout, and from Black Friday to Cyber Monday, only 2-3% of people used it, much less than the 5-10% Cook expected. He said he believes fewer get-togethers reduced gift-giving.

“The holiday and Black Friday-Cyber Monday is not just about buying gifts,” he said. “There’s an engrained mentality for consumers that it’s the best time of year to get deals, so that just drives consumption overall.”

All four online-focused retailers that we spoke with reported impressive results in the lead-up to the holidays:

• Online sales were up 30% for Pact compared to 2019 during a fourth quarter that usually accounts for about 40% of annual revenue.
• LovelySkin’s business increased 40% year-over-year in November and December, a period that usually makes up a quarter of annual sales.
• At X-Chair, a younger brand that launched in 2016, sales spiked 300% in 2020, with a similar increase in the fourth quarter. The final two months of the year are the equivalent of three normal months of sales for the company, and Mazlish noted it’s a “high-profile time” for X-Chair, as more people visit its site.
• For DIY home decor brand Chalk Couture, online sales increased 80% in 2020 as a whole vs. 2019.

Online Demand Strains Supply Chains

The supply chain problems that first surfaced in the early days of the pandemic persisted through the final months of 2020 as purchases piled up.

Smaller discounts due to limited stock

Pact didn’t receive several large orders it planned to have for the peak season until a few days after Christmas. The Colorado-based business faced shortages for months after sales spiked more than 100% in the spring and summer.

Pact manufactures its apparel in India, and shutdowns there created delays of two to three months. As production got back on schedule, fewer container ships traveled between India and the U.S. At the same time, American ports became increasingly backed up, especially in Los Angeles and neighboring Long Beach, the country’s two busiest ports and a critical point of entry for goods made in Asia. To offset the impact of limited stock on-hand, the D2C retailer offered smaller discounts during the holidays than usual.

Creative shipping solutions

X-Chair faced similar logistical challenges getting products to its Maryland warehouse. Ports were not only extremely busy but also short-staffed due to coronavirus outbreaks. The furniture brand found creative solutions: Instead of sending shipments to Baltimore as usual, the business had them sent to West-Coast ports and trucked the goods to the opposite coast. It also used air freight and faster cargo ships and split up orders when there was limited capacity available.

As more consumers worked from home and decided to upgrade their home offices, demand for the manufacturer’s chairs took off. Mazlish said he felt it was worth the extra costs of these alternative shipping methods to keep the company’s promise of being in stock with fast delivery.

“We just made the decision … to do whatever we have to to get it here,” Mazlish said. “It’s a very supply-and-demand-driven world in transportation, and our attitude is, if the demand is there, we want to build that loyalty now, be there for our customer, and that timing and cost structure will settle back down.”

Honesty about stockouts

Chalk Couture also encountered issues with its suppliers. The brand sells everything art enthusiasts need to create designs on different surfaces, like framed chalkboards and wood products, using chalk “paste” or ink and stencils (called transfers). Overall sales were steady year-over-year for Chalk Couture, even as online sales took off. The company sells through both its own site and a direct peer-to peer sales model.

The manufacturer that produced the plastic jars that hold Chalk Couture’s paste and ink suddenly switched to making hand sanitizer bottles because it was more lucrative. Orders from other overseas suppliers were late and the business ran out of certain items, with little idea of when replenishment shipments would actually show up. It also ran into problems with its third-party logistics (3PL) provider. At one point last year, orders were taking 12 to 16 business days to ship, instead of the usual two or three days.

The company was honest about these issues with the individual wholesale buyers who sell the product, and most were understanding, said Director of Finance Ansen Hatch.

Paying top-dollar for last-mile

Even for companies that had plenty of inventory on-hand, last-mile delivery was challenging. It’s no secret that major parcel carriers, particularly the U.S. Postal Service, struggled to support a sudden increase in home deliveries. Beginning in mid-December, LovelySkin’s shipping system showed expected delivery dates much further out than usual, said Dr. Joel Schlessinger, a board-certified dermatologist who’s the company’s founder and CEO.

Although the health and beauty retailer usually sends orders through the Postal Service, it transferred all orders with a value of $50 or more to UPS to ensure customers didn’t receive their orders late.

“We clearly were affected initially, before we knew the extent of the issue,” Schlessinger said. “But after the issue was identified, we were able to pivot very quickly and retain customer loyalty and happiness.”

New Retail Environment Inspires Improvements

Those difficult moments convinced some retailers to reevaluate their supply chain and even their broader business strategy.

Customer value takes priority

Pact’s gross margin more than doubled in the fourth quarter thanks to savings from lighter promotions. The retailer was not profitable for much of its 11-year history while it focused on growth and building a customer base, Cook said. Since September 2020, though, Pact has turned a profit. It plans to keep that streak alive in 2021 and will not rely on big discounts. So far, it’s working — January sales are on a record-setting pace after Pact finally built stock levels back up.

While the brand likely would have seen more dramatic growth during the holiday season if it had more inventory available and ran more aggressive promotions, that’s no longer the top priority.

“We’re a business now that is really focused on acquiring high-value customers and retaining them by providing great products and experience,” Cook said. “I think, and we’ve heard this from investors too, there’s less of a single-minded focus on how big can you get versus can you be a self-sustaining, profitable business that has high-value customers? That really creates more value than proving you can grow the top line really fast.”

Manufacturing and fulfillment go in-house

After overseas manufacturers fell short, Chalk Couture decided to take much of the manufacturing process in-house. The company’s Salt Lake City warehouse, which already manufactures paint and ink, will soon have the machinery to cut and paint wood surfaces.

Although domestic manufacturing will increase costs, it gives Chalk Couture much greater flexibility. The brand will be able to produce goods on much shorter notice and in the quantities it needs instead of being forced to buy in bulk, which should reduce holding costs.

“In the end, the cost is going to go up some, but I think overall it’s going to improve our cash flow tremendously,” Hatch said.

In addition, the brand will fulfill more orders from its own warehouse instead of relying on the 3PL. It added a packaging system and will hire at least 18 more employees to pack and ship orders. That move comes as Chalk Couture adopts something closer to a D2C model, shipping more items straight to customers from its warehouse instead of to representatives who store their own inventory and then sell it to consumers.

Warehouses expand

In the wake of record sales, LovelySkin will expand its warehouse for the third time since 2010. It also plans to add more automation equipment to increase throughput.

X-Chair was able to add warehouse space within its existing building because other tenants didn’t renew their leases. The company also hired about 50 people in 2020 to help in the warehouse and other areas.

Uncovering New Opportunities Online

Now that online-focused companies have a larger customer base and considerable momentum, they’re exploring new ways to sell their products and retain customers.

Video becomes another sales channel

Chalk Couture’s 16,000 “designers”s previously resold products at face-to-face events like classes and craft fairs, as well as through their own, personalized online stores. Ecommerce has of course become a much more important channel, and many designers quickly realized they could attract a sizable audience by hosting virtual classes through livestreaming or video-conference platforms.

“In my mind, in the end … I think it gives our business greater opportunity for expansion and certainly greater opportunity for the products being out there,” Hatch said. “We don’t just have to rely on one [channel] and then a little bit of another.”

As ecommerce became more important for Chalk Couture, the company found new ways to package items. The business has had a lot of success selling kits with everything a new customer needs to get started: a painting surface, a couple colors of chalk paste, a few transfers and a squeegee. Now, a DIY maven can order that kit from a designer’s site, then watch a quick video or attend a class to learn how to use it.

Subscription models

Seeking a new way to engage with customers, LovelySkin launched a subscription service that gives clients a discount on many products and delivers as frequently as they desire.

“It was incredibly opportune, timing-wise,” Schlessinger said. “I think there were many people that wanted to have some dependable option for reshipment of products, and that seemed to go well with the new trend toward online purchasing.”

Pact is also exploring the potential for subscriptions with certain products shoppers might buy regularly, like underwear, socks and undershirts. As part of the company’s focus on increasing customer lifetime value, it may launch a loyalty program, as well.

How Online Retailers Are Preparing for the Future

In light of a seminal year for ecommerce, many companies are taking a closer look at their processes and the technology that supports them. Consider, for example, whether current systems can handle double or triple the number of orders without killing the efficiency of your operations.

Sticking with business technology

X-Chair struggled with the manual processes its old system required as order volume intensified. By the time the holiday rush neared, the business was nearing a breaking point, Mazlish said. But right before it, X-Chair moved to a new ERP system that automated many steps in the fulfillment process and helped keep everything running smoothly.

Schlessinger also noted the importance of LovelySkin’s ERP and complementary systems in helping the company keep up with a level of demand it had never seen before. While these systems were “overkill” in the past, this year they were invaluable in providing additional capacity.

“I think we not only learned that we had a tremendous opportunity to stretch when necessary, but that nearly every system that we put in place to predictively anticipate volume, shipping and inventory needs was worth its weight in gold,” he said. “There are very few times that you are challenged in the way that we were this year, and it’s like a crucible.”

Holdouts head online

It’s not as if the growth these and other online retailers experienced will suddenly grind to a halt. Although the 25% market share ecommerce had during the holidays may fall slightly as more stores reopen, there is no doubt that retail has changed for good.

Those that formerly held out on online shopping finally tried it, in some cases because there was no other safe, practical option. And after purchasing groceries or medication or kitchenware online, they changed their tune.

“There are consumers that for whatever reason were previously hesitant to do ecommerce,” Cook said. “Maybe they liked to try on their apparel or they didn’t want to wait four or five days for shipping or they hated the returns process. … A lot of those barriers were forced to come down, in a consumer’s mind. … Our hope is that a lot of the growth that we’ve seen is here to stick.”

Mazlish, for his part, feels like X-Chair has just started to tap into a market that has expanded in a big way over the past year as office chairs become more of a consumer product.

“The vast majority of people have not taken the plunge [into buying a high-quality home-office chair],” he said. “They’re still trying to either live on their kitchen chair or they bought something for $200 and they’re just trying to get by. I don’t want to say I like to see people not sitting in good chairs, but it’s nice to see that the marketplace is still enormous. There are just a lot of people who haven’t cried ‘uncle’ yet.”

The Bottom Line

As these and other retailers continue to flourish, the online retail marketplace will only become more crowded and competitive, so now is the time to lock down customers. Leaders should embrace creativity — in a way that intentionally builds a better customer experience.

Improving the customer experience goes beyond having what shoppers want and delivering orders on time in the face of operational challenges. It also means understanding and adapting to critical changes in shopper behavior. That may mean offering additional products or services, selling them through a different channel or trying new marketing techniques to drive engagement and loyalty. And in most cases, there’s only one chance to get it right.