Serving the Underserved and Growth M&A

I’m using the Chewy.com filing for IPO news to make a broader point about e-commerce and the niche opportunity in general. Specifically, how it is interesting to think about the success of more niche market e-commerce sites and why those sites may likely be a better commerce experience than Amazon.

There is an interesting observation I’ve been fond of that is specific to when a market gets mature that is worth repeating. When markets mature, it opens the door for niche experiences. Even though e-commerce is still less than 12% of US retail, the majority of US consumers have had an online purchase experience. E-commerce is a mature market and Amazon is one of the sole reasons it has matured. We can understand Amazon as the standard of e-commerce platforms in the US.

Standard platforms help drive markets to maturity. But once it happens once a market matures is where things get interesting. Mature markets, or one common standard platform, set the stage for a diversity of solutions to thrive. This is why after a market matures, we start to see more niche solutions show up in the market.

The behavioral science behind this is driven by the standard platform growing into something that is general purpose in its solution that it does a lot of things but none of them very well. As consumer behavior matures, in this case around online shopping, there needs, wants, and desires become more refined, and as a process, they look for more niche solution.

Chewy.com is an example of this, in that their selection, curation, services, and product portfolio are much more aligned with the interests of pet owners. This isn’t to say people can’t buy the same products on Amazon.com but that if Chewy.com has better reviews, services, product bundles, etc., that are more helpful and relevant as well as similarly priced as Amazon, then it makes it easy for consumers to purchase with Chewy and not with Amazon.

In my own personal life, I have an even better example with a site/app called Reverb. Many of you don’t know this but I’m a hobby guitar player, and I buy quite a bit of musical gear every year. One of my secret addictions is boutique electric guitar pedals to which there is both enormous creativity, diversity, and selection.

Reverb is fascinating to me because they are truly a musical instrument marketplace, in that they hold no inventory and just link you up with sellers, but with a valuable service layer on top. For example, Reverb has brilliantly used YouTube to create content channels to review gear, offer tutorials, cover industry news, and more, in order to spur interest to the items their sellers are offering on their marketplace.

One of my favorite channels is the Reverb Tone Report where new guitar pedals are regularly reviewed. What makes this interesting, is the boutique guitar pedal landscape sees many new product releases making it very hard to follow and discovery tricky. The Reverb Tone Report solves this and frequently causes me to buy a new pedal for my collection.

Video reviews for this landscape are incredibly valuable. Just like they are with beauty and fashion, high-tech, pets, toys, and more. These niche e-commerce sites do a vastly better and more relevant job providing trusted video reviews of the products they carry which makes the decision-making process much more helpful. By offering more relevant services for these niche markets and capturing the customers’ attention via relevant content, it eases the friction for point of sale to happen with them instead of heading to Amazon.

Interestingly, in many cases with my experience with Chewy.com and Reverb, a video review compelled me to buy a product, and when I price compared with Amazon, the product was not even available on Amazon.com. What this example caused me to think about is the way niche market players, in this case, related e-commerce will better serve a target audience than a general purpose player like Amazon. This goes back to an analysis I did on the idea of smaller companies focusing on profitable niches as a sustainable business.

Growth Challenges and Niche Segmentation
In Ben Thompson’s Stratechery daily update last week, he brought out a point that I think is one of the most important observations to understand as it relates to the biggest tech companies in the world. From his daily update:

There is a theme emerging here: there is reasonable doubt about just how much low-hanging fruit is left for the largest tech companies. Apple has sold the world iPhones, Google has stuffed mobile search, and now Amazon has seized the obvious parts of e-commerce; what comes next is much more difficult and expensive.

His point echoes a theme I’ve tackled many times over the years that the easy growth for many of these companies is over. By easy I mean, when a market is growing, and new customers are up for grabs. It seems that Apple, Google, Microsoft, and Amazon have largely reached the point where adding new individual customers is harder, slower, and a bit more difficult and as a result, their growth strategies turn to make the most money off existing customers. Note, this is an end-consumer point I’m making since three of the mentioned companies (Amazon, Microsoft, and Google) still have new customer businesses on the cloud platform side of their business.

With that backdrop of slowing end-user/consumer growth, the idea of niche players stealing a share of wallet from these platforms becomes interesting when you think about acquisition strategies. For example, you could argue Amazon should buy Reverb.com if they felt the music instrument industry was big enough dollar wise to add to their bottom line meaningfully.

This niche player theory is also a key part of the evolved thesis of many venture capitalists I work with. Their eyes are looking to those new investments that don’t necessarily plan to be a new Amazon, Microsoft, Google, or Apple, but to opportunities that look to better serve the customer of those platforms in a way that is intentionally underserved because it isn’t that interesting to the bigger players as of yet.

This is the new playbook to watch in a decade or longer which will be dominated by the big tech companies. By nature of their size and shifted focus, they will leave parts of the market open for niche players to serve. Then, inevitably, as their growth further becomes challenged, their eyes will turn to these niche players as acquisition targets in order to boost their bottom line. This has happened so many times before that it isn’t surprising to anyone who studied business history, but it is the cycle we found ourselves in an opportunity for those with a keen eye.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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