The consolidation of Czech e-commerce has been talked about for a long time. However, only now, at a time when the number of online stores is booming (also because of a pandemic), has this topic been as important and relevant. This situation also brings about changes in the e-commerce agency market
Consolidation on the Czech e-commerce market is in full swing
Every year thousands of new online stores are opened in the Czech Republic. According to the portal ceska-ecommerce.cz, there should be perhaps 45,000 of them by the end of this year.
However, according to a study by Reshoper, only 35,440 online stores were active at the beginning of the year, and over 4,000 e-shops in 2019 actually disappeared. The coronavirus pandemic has given rise to a number of new online stores, but it can also be a problem for lesser-known plays as consumers turn to established brands that they trust in times of crisis and uncertainty.
And it’s not just about the number of online stores, it’s mainly about the fact that market leaders are growing faster than the market average.
“Already today, the 100 largest online stores account for about 80 to 90 percent of the turnover of Czech e-commerce, and it will go even further. A small group of leaders will stand out to dictate the pace. These leaders will be recruited not only from e-commerce, but also from retail,” according to Ondřej Klega, from eRockets for the 11th edition of EXEC, which was devoted to research on the future of e-commerce.
Despite the great online boom due to the COVID-19 crisis, consolidation will continue, perhaps rather intensively. Why?
- Advent of marketplaces.
- Entry of large retail players into e-commerce.
- Entry of foreign online stores
- Decreasing margins.
- Technological debt.
- Higher pressure on customer loyalty and repeat purchases.
Consolidation as a self-accelerating phenomenon
All these factors are interconnected. Big players have the capital they can invest in their development and marketing, so smaller online stores often have no choice but to compete solely according to their prices. This puts them in a vicious circle. In a world of low margins, they do not earn enough to invest in technology and therefore find it difficult to offer competitive prices, and therefore have low margins.
In order for online stores to profit in the long run, they must build loyal customers. As the number of customers shopping online will not increase significantly, if loyalty is to increase the number of online stores must necessarily decrease.
And it is large retail players who enter e-commerce with their strong brands, a big chain of branches, hundreds of thousands or even millions of customers in their loyalty programs and, of course, higher budgets.
In addition, consolidation is a self-accelerating phenomenon – as larger players grow faster than the market and at the cost of small ones, they become stronger and even easier to grow.
What will happen in the market of e-commerce agencies?
Market changes on the part of online stores must necessarily be reflected in the market of suppliers of e-commerce solutions.
How e-shops are built in the Czech Republic
There are simply 4 ways to develop an e-shop:
- leased solution,
- customized box solution (often mistaken by the market as a tailor-made solution)
- tailor-made solutions,
- in-house development.
Renting a solution typically costs in the range of 10 – 100 euro a month. E-shoppers can choose from predefined templates and have a number of functions and plugins to third parties. A major disadvantage is the lack of customization. For this reason, template solutions are especially suitable for starting an e-commerce business or smaller online stores.
Various box solutions can already be partially adapted to the individual needs of the client. Agencies offering this way of online store development often refer to it as a tailor-made e-shop, but in reality it is based on an existing “box” with a number of functions, some of which can be easily modified, removed, or added. These are often individually linked to information or other systems. However, the customer must adapt to the online store, not the other way around. The cost of such a solution is the amount of this initial customization in the range of several hundred to several thousand euros and a fixed subscription fee, as in the leased solution.
In the third method of development, a tailor-made solution, the online store is already fully adapted to the needs of the customer and the needs of his customers. All functionalities are really tailored to fully meet individual needs. This is logically reflected in the price, which starts with a hundreds thousands of euros for these solutions. Three groups of resellers typically go down this path:
- larger and fast-growing ambitious online stores
- retail players entering online
- wholesalers and manufacturers.
In-house development, i.e. the development of an online store through own programmers, is typically the domain of the largest players in the market, who need the maximum possible degree of flexibility in adjustments. It is redeemed by high costs and the need to acquire, maintain, and develop your own IT team.
To put it simply, the above-mentioned 4 ways of online store development gradually correspond to the growing turnover of them – rental of a template solution for start-up, box solution for the need of the first individual modifications, tailor-made solutions for those with sales in the range of millions euro, and house development for market leaders. The following figure illustrates this:
Of course, this is not always the case. There are online stores whose founders are programmers, and they have in-house development often from the beginning. There are also examples that demonstrate template solutions can result in hundreds thousands euro of turnover (typically in the case of a narrow portfolio of products and when sold through only one channel).
242 agencies offering tailor-made online stores
According to a survey we conducted in 2019 as part of the 8th issue of EXEC magazine, there are 242 agencies operating on the Czech and Slovak markets that offer tailor-made online stores. Rather, they claim to offer tailor-made online stores, so from the perspective of the previous part of the article, they offer a boxed solution or tailor-made solution.
In the survey, we examined the size of these agencies, the size of their typical contracts, and other factors. You can find the whole research here or in the video:
6 trends that fundamentally affect the market environment of e-commerce agencies
As the market of online stores in the Czech Republic develops dynamically, the market environment of e-commerce agencies is also changing.
- Growing number of template solutions
Template solutions have more and more functions and online stores are learning to adapt their needs and internal processes more to the market standard. Template solutions will thus be able to cover an ever larger part of the market.
- Emphasis on in-house development
More and more online stores (even with smaller turnovers than before) are turning to in-house development. E-commerce companies are realizing the benefits of transformation in a technology company. The number of online stores that develop their solution through so-called co-development is also growing, i.e. they will build an online store in cooperation with the vendor, but continue to operate it themselves (and still have the opportunity to contact the vendor if necessary).
- Consolidation in the online stores market
Consolidation, as described earlier, means that small and medium-sized online stores will have an increasingly difficult time. They will disappear from the market at the expense of big players. This must logically be reflected in reduced demand for customized box and tailor-made solutions.
- Technological fragmentation
A survey of agencies offering tailor-made solutions found, among other things, that almost 80% of agencies use their own solutions for e-commerce development. The use of your own solution limits online stores because of the so-called vendor lock-in, where e-shoppers are dependent on only one specific vendor who can develop it. At the same time, the solution itself requires constant investment in its development and modification, which is becoming more and more difficult for the agencies as they usually do not charge customers any license fees for using their software.
- The growing importance of omnichannel sales
The trend of connecting offline and online is getting from the biggest players to the smaller ones, which affects the market with tailor made online stores. There is a growing demand for full-service agencies that have experience with omnichannel. However, it is difficult for many small agencies to acquire these competencies. And that’s why it will be difficult for them to stay in the market.
- New players and the expansion of existing leaders
Shoptet, a Czech leader in leased solutions, recently announced an expansion into the tailor-made online stores segment. At the same time, the Brazilian VTEX is rushing into the Czech market, which is preparing to dominate the market, supported by several hundred million investments. We at Shopsys also recently introduced a new product that expands our presence in the market from the largest custom projects to a product with a faster time-to-market. Shopsys Commerce Cloud enables the launch of online sales in a matter of days and the subsequent gradual transformation into a full-fledged ecommerce solution for the biggest players.
We are awaiting consolidation in the market of e-commerce agencies offering tailor-made online stores
All six trends inevitably lead to a reduction in the number of agencies offering tailor-made projects (either in the form of customized box solutions or truly tailor-made). The current number of more than two hundred agencies is not sustainable. Therefore, the consolidation of agencies will be driven mainly by the consolidation of online stores, but the above-mentioned factors will also make a significant contribution.
So far, big questions are hanging over the Shoptet Premium service and VTEX plans. Shoptet will benefit from its dominance in the template solutions segment, it is logical to offer other solutions to clients who “grow” in Shoptet. However, even with the new product, it will probably not be able to serve market leaders who need to implement omnichannel scenarios, work with B2B or marketplace sales, or want to be able to co-develop or fully transition to in-house development. VTEX, although very strong globally, has chosen the agency In creative as its exclusive partner for its entry into the Czech market, which is not yet very well known in the segment of online stores creation.
Even so, consolidation in the market of e-commerce agencies offering tailor-made e-shops is more or less clear.
What does this mean for sellers requesting tailor-made online stores and the agencies themselves?
Companies looking for a tailor-made online store must be careful
The current e-commerce boom is forcing many retailers to improve their e-commerce solutions. But companies looking for a tailor-made online store must be careful. They should keep in mind what is happening in the market for e-commerce agencies – that is, they operate in a shrinking market. And because “a drowning man catches at a straw”, the market situation can tempt some agencies to try to get a client at any cost, just to survive. The need for increased attention when choosing a vendor is exacerbated by the fact of technological underinvestment.
Agencies have to be different, otherwise they have no chance
E-commerce agencies threatened by consolidation have several ways to differentiate themselves to survive.
- Ride the wave of growing solutions and focus on developing online stores on their technologies.
- Transform into a full-stack agency by expanding into the omnichannel, conducting their own research, or other complementary avenues.
- Expand the range of services to include so-called co-development, which is increasingly in demand by large players (this requires cutting-edge and open technology with the existing ecosystem).
Although online sales have a bright future ahead, it doesn’t mean e-commerce agencies automatically have a bright tomorrow. In the market of online retailers, the strongest are strengthening at the expense of smaller and uninteresting ones, and so will the market of e-commerce agencies.