Pictured: Jonathan Deptula and Thomas Pabst, HYPERAMS

E-commerce is defined as the buying and selling of goods or services using the Internet, and the transfer of data and money to execute these transactions. Essential is defined as something which is extremely important or necessary. E-commerce has always been viewed as a disrupter in the retail industry because of its convenience, growing ease of use for the customer and consumer-centric policies. The dent e-commerce has made into the retail landscape has been obvious for all to see over the past decade, and there is no doubt that its influence will continue to grow. But to term it as “essential” would have been a stretch some 16 short months ago. That all changed with the rapid spread of the COVID-19 pandemic and the physical shutdown of our economy. Suddenly, these two words became synonymous, as e-commerce became the safest way for consumers to shop for virtually all of their most basic needs. As a result, the distribution center workers, truck drivers, and others who kept the industry humming were all deemed essential as well.

Now that we are reaching critical mass in the vaccination effort and consumers have been returning to stores and other activities, it made me wonder whether the pandemic floated the boats of all e-commerce retailers, and to what extent. We all have seen that Amazon the industry giant, posted sales increases of 40% or more, and record profits during the last couple of quarters. But what about the smaller, less-established players in the industry? Did they benefit as well?

The answer is absolutely, and not in just a couple of categories. We have completed the appraisal of twenty plus e-commerce retailers since the beginning of 2021, and all but two of those companies posted sales increases of 20% or more. The two that did not fit this positive criteria operate in industries where sales declines during the pandemic would be expected, including one that caters almost exclusively to support the in-classroom educational sector. Most of these winners also took advantage of less discounting to achieve these sales increases, with gross margins escalating in the majority of those companies for which we completed collateral monitoring assignments. Inventory levels, by and large, have remained in a range close to the prior year or have increased, as these companies have proven their ability to procure stock to help support the significant rise in sales. Furthermore, an increase in customer traffic to their websites, as well as third-party shopping sites as a result of the pandemic, enabled some of these companies to clean up excess inventory. That said, not all e-commerce companies took advantage of this opportunity, and some may still need a push to markdown that slow-moving inventory to provide increased liquidity for new inventory.

The real question now is: What happens to those sales volumes as the pandemic eases and physical retail stores reopen? Our initial read is that sales volumes have held during the first four months of 2021 and, while we cannot predict the future, it seems unlikely that e-commerce will yield ground to brick and mortar going forward. This indicates to us that borrowers will need to continue the maintenance of higher inventory levels in order to support their sales volumes. If the need for increased borrowing by your customers has not already taken place in order to build or rebuild inventory, it may be forthcoming in the very near future. This need can potentially create more opportunities to those lenders that already have e-commerce-based customers and those that are trying to enter the space.

Recent and continuing supply chain issues are forcing all retailers — and not just e-commerce businesses — to reassess their purchasing habits. The delay in the receipt of inventory from overseas, the lack of shipping containers, the shortage of chips required to make smart products, and a general increase in the need to replenish consumer goods has to be accounted for in your borrower’s purchasing habits. The need to purchase earlier, and potentially in higher quantities to offset future supply-chain delays, has to be considered by all e-commerce retailers. Of course, this always represents a fine line between building inventory in the wrong places and being in stock all the time on those products the customers need. However, if you haven’t asked the question of your borrowers, you should proactively gain a better understanding of what their plans are heading into any upcoming high seasons. Most e-commerce businesses are all about growth and, in order to sustain that growth, increased inventory levels will need to be supported by their lenders. Additionally, the risk of increased pricing for the purchase of consumer goods is real, and it begs the question as to whether or not the increased cost of inventory can be passed along to the consumer. If the inflationary trends continue, and consumers ultimately pull back on purchasing because of price increases, pressures on gross margin could become a factor in the back half of this year.

The other big question is: what does this all mean for collateral values in relation to your customer’s current borrowing base? Increasing sales, higher gross margins, and reduced weeks of supply and excess inventory levels are all positive indicators when it comes to recovery values. Sales increases during the pandemic were driven by many types of customers, including an influx of buyers who were either new or infrequent users of the e-commerce channel. Gaining new customers, and new customer email addresses, is an incredibly valuable thing during an e-commerce liquidation. In the event of a meltdown, the ability to solicit established customers to purchase products they are already familiar with, through a website they are comfortable with, is critical. Liquidations on the Internet are not like retail store liquidations, where the physical placement of a going-outof- business banner on the building can generate an increase to store traffic on its own. Every customer gained during the pandemic is a potential customer if a liquidation were to take place. Additionally, the increase in gross margins witnessed during the pandemic means that such customers have grown more accustomed to purchasing at those higher price points, even if on the surface they seem insignificant. The perceived value of a ten or twenty percent discount off of a slightly higher original selling price could mean an overall improvement to recovery values. And, if your borrower is one of those that took advantage of increased e-commerce traffic during the pandemic and reduced its excess inventory and weeks of supply, they should be sitting on fresher, more desirable inventory in the event of a liquidation.

A few other things to consider, that are not necessarily pandemic-driven, but always at the forefront of an e-commerce liquidation. For those companies whose inventory is solely sold through Amazon or through another third-party channel, the ability to create a true sell-to-the-walls mentality does not exist. There can be no going-out-of-business theme, no selling to the bare walls mantra to drive sales – but only changes in price. A sale through Amazon will benefit through the tremendous amount of traffic that its website alone drives, but it will likely be more of an orderly event that will take more patience. To ensure an extensive inventory sell-through, a more methodical approach to discounting may be required. Company support, particularly from those businesses whose prices are driven based on algorithms and other computer-generated methods, is even more essential to properly manage a sale. A lender will need to be patient in terms of expense rationalization to ensure the proper support is in place to achieve the sale’s goals. There will also need to be more patience as the accounts receivable from the third-party sites turn into cash. Additionally, in a retail store liquidation, you can reduce prices to get to a total sell through of almost any category of inventory. It is less than certain, however, in a sale solely driven through e-commerce if inventory can ever be discounted far enough to sell-through to the last piece. Companies with very high weeks of supply, and significant amounts of excess inventory, will struggle even further to achieve an extensive sell-through. Do not be surprised if the bottom third of the inventory must be sold through a wholesale channel at significantly reduced recoveries if a total liquidation were to take place.

E-commerce, as an “essential” element of the retail landscape, is truly here to stay. Based on early data, it appears that e-commerce businesses will continue to thrive post-pandemic, and at least a portion of those sales gains derived in the last year or so will become permanent. It is also our belief that e-commerce liquidations, if there are to be any, would only perform better in this environment; lenders might just have to be a bit more patient to get to the end result. Although nothing changes faster than inventory as a collateral base, especially in a direct-to-consumer setting, the need to monitor never changes, even if current indicators are trending positive. So, remember, collateral monitoring is an essential business too.