Why Is The Commerce Department Underreporting E-Commerce Sales?

Consensus or census? The e-commerce landscape as we know it.

If you don’t have a favorite podcast and you’re reading the E-Commerce Observer, let me direct you to my favorite, The Jason and Scot Show. In a recent episode (#117), one of the hosts, Scot Wingo, made the argument that it is virtually impossible that US e-commerce is only growing at the 16 percent year over year rate that the US Commerce department reports.

The US Commerce Department uses a quarterly survey of a random sample of retail businesses to estimate the size and growth of e-commerce. Without going into too much detail, Scot’s argument is that, knowing what we know about Amazon’s size and growth in the US, the only way that overall e-commerce could have grown by only 16 percent during 2017 is if all retailers other than Amazon are growing by just 4 percent.

This seems extremely unlikely given the numbers that bigger retailers have published about their e-commerce growth. Walmart’s online business was growing by 50+ percent before a disappointing fourth quarter where growth slowed to 24 percent. Even Macy’s grew its online business by double digits during Q4. In fact, I am not aware of a single retailer that has reported that it grew its online business by less than 10 percent in 2017. 

Why is the Commerce Department under-reporting e-commerce sales? After looking through the methodology details, it seems likely that the biggest factor is the sampling of businesses included in the survey. The Census Department takes a random sample of 10,000 businesses to project to 2 million retail businesses in the US.

The challenge here is that there is one business, Amazon, which accounts for more than 40 percent of all online sales, and it is unclear whether it is one of the 10,000 businesses surveyed. A random sampling methodology amongst consumers makes a ton of sense, as a single consumer can only have so much impact [despite my household’s collective effort to disprove that]. Amongst businesses, though, those that fall in and out of that sampling can have an enormous impact on the results.

The other issue is of a definitional nature [if definitional is actually a word]. The Commerce Department does not consider an online purchase that is picked up in a store to be an online purchase. These click & carry transactions have been the biggest catalyst of growth for the e-commerce sector over the past few years. Target fulfilled 70 percent of holiday season orders from the store during the 2017 holiday season.

Slice estimates that half of Walmart’s online business [the part of the business that is growing like a weed] is click & carry. Slice also uses a sampling methodology, but we sample consumers, not businesses. Our data is telling us that e-commerce grew by 23 percent in 2017, a growth rate that is much more plausible [in my completely unbiased view].

So, if we accept that the Commerce Department is understating the size and growth of the e-commerce in the US, let’s think through the consequences. First, the US Commerce Department’s estimate of the size and growth of e-commerce isn’t just a number that is published and widely cited, it is also used as a calibration point for many other firms [I’ll not name names] that size and forecast different aspects of the US e-commerce economy.

At one point in its early history we at Slice actually tried to use these numbers as a calibration point, but it was simply impossible to reconcile what we were seeing in our data, in the financial results reported by publicly traded companies, and the Commerce Department’s numbers.

If you’re a consumer of data, two things happen if you think that the overall market is actually smaller and growing slower than you believe. First, you’re likely to underinvest in the e-commerce opportunity. Second, you’re more likely to believe that you’re winning, when you might in fact be losing. 

If your e-commerce business is growing by 18 percent and you believe that the overall market is growing by 16 percent, you might think that you had a successful year and that you should continue to do what you’re doing. However, if you’re growing by 18 percent and that is 5 points behind overall market growth, you’re actually losing and you don’t know it. This is a recipe for strategic disaster. 

Benchmarks matter, a lot. Be sure that you’re benchmarking yourself against the right numbers.

Membership-only clubs embrace e-commerce (kind of) 

While the e-commerce threat has been pretty clear to most retail sectors for at least 5 [although I’d argue 20] years, Club stores such as Costco, Sam’s and BJ’s have been much slower to embrace it. This is largely because the Club channel has experienced explosive growth at the same time that the e-commerce channel has experienced explosive growth.

Since e-commerce hit the mainstream in, let’s call it January 2000, Costco’s stock price has run up more than 300 percent while Walmart’s has only increased by 130 percent. Club stores used to argue that its model was uniquely equipped to deliver low prices to consumers and that its shoppers were heavily skewed toward small business owners, rather than the consumers that were gravitating toward e-commerce.

Over time, of course, we’ve found that online has been able to deliver low prices (albeit at margins well below Costco’s), that small business owners appreciate the same conveniences as consumers, and that the demographics of the club shopper are very similar to the affluent online shopper.

Perhaps the final straw for Club retailers was the growth of Amazon’s Prime membership program, which could potentially threaten Club’s own profit engine, membership fees. A recent study by MoffettNathanson found that 57 percent of Costco members are also Amazon Prime members, up from just 13 percent in 2013.

Over the past few months Costco has announced a partnership with Instacart for same-day delivery and free two-day shipping of non-perishable groceries. Sam’s Club has closed stores to better resource its e-commerce efforts. It now offers free two-day shipping to Sam’s Club Plus members and announced its own partnership with Instacart just this week. And rumors have been bouncing around the tech trade press for months about whether Boxed might be acquired by Kroger, Amazon or someone else.

Costco actually admits that it has only grudgingly pursued e-commerce in an extraordinarily refreshing bit of candor and will not look to clone Amazon’s ‘everything store’ model.  

In short, Sam’s recent moves seem to suggest that it is more ‘in’ on e-commerce than Costco, which can best be characterized as ‘half in’. The question is who is making the right move, amongst these two.

My instincts tell me that Costco’s ‘half in’ model is the right one. The Club model is defined by limited assortment of highly negotiated items, packed efficiently into a no-frills retail environment, where pallets go straight from the truck to the selling floor.

Significant expansion of items fundamentally undermines the negotiating power of the buyer. Addition of significant costs to either pick orders for consumers or to deliver to consumers threatens Clubs’ very thin profit margins. Costco is a wildly successful operation by any standard, but saw margins below 2 percent in the most recent quarter. There simply isn’t extra money to go around to fund an aggressive shift in the business to e-commerce without compromising the model.

The Clubs can’t ignore e-commerce, but a model where a third party service handles the picking and delivery, largely funded by the shopper, seems to address consumers’ desire to buy online without inordinate cost. Fortunately for the Clubs, their affluent customers can afford memberships to a warehouse club and to Amazon Prime.

About Ken

Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data.

Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.