Online-to-offline commerce, commonly referred to as O2O, is making an explosive comeback in the pandemic economy, and it’s taking omni-channel along for the ride.
I have fond memories of the O2O business model. For me, the business model “mainstreamed” back in 2011 when Groupon went public. The basic concept of leveraging increased consumer hours spent online to drive sales in the “real-world” seemed logical and innovative. The online couponing platforms were the “OG’s” of the O2O model, though for some, viability has diminished over the years – see $GRPN’s 5-year chart now….yikes! But the O2O concept has evolved. It’s found new life and success with platforms in online restaurant reservations, online prepared food ordering and delivery ($GRUB), online grocery shopping and pick-up (Instacart), and ride hailing services like $ UBER, $LYFT. O2O has been, and continues to be, a viable model, and given the current economic environment, all signs point to a major surge.
Signs of O2O’s imminent rise are already in the data. Specifically, I refer to the earnings releases of $SHOP, $SQ, $PYPL, $V, and $MA. The Q1 2020 earnings reports of all five fintech companies provided meaningful data that cross-validated the new trend ushering the O2O model to new prominence. The pandemic crisis, the nature of the COVID-19 virus itself, and the subsequent governmental policy implementations have combined to create a potent dynamic which has cast a spell on the American consumer. The five aforementioned fintechs captured this dynamic in their respective reporting by virtue of their unique visibility into consumer spending preferences. The trend and driver that really stands out – and but for the realization of a working vaccine, stands to last – is this: short of required face-to-face consumer experiences, consumers will purchase goods online.
Here’s the high level:
Shopify’s Q1 earnings reflected mass adoption by traditional retail, brick-and-mortar SMBs of ecommerce storefronts. Square’s earnings report confirmed this adoption with an extraordinary drop-off in brick-and-mortar payments volume. PayPal’s data showed a massive, and I mean MASSIVE, surge in online payments volume (same period). And Visa and Mastercard both showed consistent outperformance of online payments volume over brick-and-mortar. The upshot is that consumer purchasing behavior has changed; if there’s no compelling reason to purchase goods in person, consumers won’t.
So where does this leave brick-and-mortar, retail SMBs? Wherever it is, it will be in an environment conducive to the greatest set-up for the O2O business model in history. Simply put, for retail SMBs to be economically viable going forward, they MUST embrace omni-channel commerce to capture the consumer demand online, or else route online demand to a physical purchase, such as curb-side pick-up, delivery, or limited, on-site shopping. All modes of purchasing must be available: website, mobile, no-contact physical, and physical.
As a rule, fintechs, payments processors, and integrated SaaS players who service SMB retail must always embrace and accommodate consumer spending preferences. Those preferences have markedly changed. As a direct result, O2O and omni-channel are off to the races.
Adam T. Hark is Managing Director of Wellesley Hills Financial. With 15+ years of consulting in payments technology, SaaS, and fintech, Adam advises clients on growth, exits, and market positioning strategies. Adam can be reached at ath@wellesleyhillsfinancial.com.
