This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.
Memo: Shopify, Fulfillment, and Disruption
This isn’t as much a story about Shopify as it is one about supply chain disruption and the assessment of the company’s risk tolerance. Logistics and fulfillment is now one of those disciplines that require a company’s full measure of attention and discipline. Amazon could do it, while Shopify cannot.
Shopify’s fulfillment network – and its ambition to compete with Amazon in the fulfillment game – has suffered a setback. Shopify is shrinking its network of warehouse and fulfillment partners by about half. We learned of the plan to scale back the strategy last week after an existing partner notified 2PM of the impending change. He noted: “Any merchants that use custom packaging, do wholesale, or kitting, won’t be serviced by the new offerings.” A recent report by Insider made it official.
The move is telling in terms of where Shopify sees itself in the grander retail landscape. Shopify’s goal has long been to build an “army of rebels” that can compete with Amazon’s larger machine. That’s worked well as a retail movement and Shopify has had a considerable past year. Brands use it to launch and build their businesses and the company has become synonymous with direct to consumer retail. It’s positioned itself as the anti-Amazon, a market position that has served it well. But there are some areas where Amazon’s moat provides undeniable advantage.
Retail logistics is a monstrous undertaking in the best of times. The past year has been one of the worst. Supply chain disruptions have increased by 88% over 2020, with 47% of disruptions impacting the US, Shopify’s chief market. We provided this breakout below:
On December 27, we wrote:
While Shopify has the advantage now, Amazon’s network of fulfillment systems is quickly becoming essential. Shopify’s great rival, may eventually become its most necessary partner.
Shopify cannot absorb the increasing complexity of the shipping industry, not even with world class software. Why? Because it’s a people and vehicle business. Software can optimize manpower; it cannot replace it. There are rules and external forces that dictate the state of shipping, deliveries and returns that even the best software cannot overwrite. When disruption becomes that dictator, the best-equipped machines are needed. Amazon is that machine. It’s built a business, and a moat, designed to maintain optimum performance even in the worst of times. Also from December:
Through years of investments, Amazon has created its own cargo shipping fleet and is leasing planes, along with the opening of an Air Hub in Cincinnati, to avoid out-of-stock problems that have begun plaguing other retailers at this stage in the holiday shopping season. Amazon has stretched its business in myriad ways, but its advantages are no longer just product and digital-driven.
Shopify Fulfillment Network is nowhere near DOA, according to Insider’s report and insider reports. The company is eyeing third-party acquisitions. It will likely retool, with a smaller warehousing footprint and a heightened focus on one of eCommerce’s biggest pain points: returns. Now for Shopify, returns may not be one piece of a massive fulfillment network but rather the selling point of a slimmer, software-driven operation.
Returns is one of retail’s modern problems that could be greatly improved with more capable software. In the post-returns marketplace, we suggest that with enough returns volume, a marketplace or returned goods could thrive. But first, Shopify or a Shopify partner like Loop would need to become the de facto solution for returns administration. The following is a relevant snippet from that report:
After analyzing dozens of warehousing operations and interviewing countless owners, one thing became clear: There is an elegant marketplace opportunity disguised within an unglamorous industry. In a recent discussion with a top independent third-party logistics CEO, he said:
“With the exception of our two largest clients who use Loop, the rest of our clients all use our WMS/OMS to facilitate their returns. We’re a drop in the bucket doing $150M in GMV last year. But right now no one we ship for is using Shopify’s internal system to facilitate the process.”
Shopify’s fulfillment setback is a reminder of why Amazon is the rare, full stack retailer: marketing, search, buy, ship, return. This strategy shift is a chance for Shopify to better navigate its next moves, not as Amazon’s replacement but its potential partner. In December’s Bloomberg feature on Tobi Lutke’s leadership style, a former Amazon executive was the source of the quote: “Shopify made us look like fools.” That response was short-sighted. Retailers are buying containers by the dozen, they are building new 500,000 square foot fulfillment facilities, or outright renting entire container ships. Logistics is now an all or nothing proposition and few have exemplified this new reality than Amazon, who Shopify should just partner with at this point. We ended our memo on this Bloomberg report with a different takeaway:
While Shopify has the advantage now, Amazon’s network of fulfillment systems is quickly becoming essential. Shopify’s great rival, may eventually become its most necessary partner.
Everyone needs a frenemy in their life.
By Web Smith | Editor: Hilary Milnes | Art by Christina Williams
Memo: Frenemies, Part 2
In a new feature detailing the trajectory of Shopify, Bloomberg unpacked CEO Tobi Lütke’s distinct management style, the company’s history, and its pointed differences from Amazon. While Amazon’s obsession with its customer and “everything store” tag define it, Shopify is merchant-obsessed and now striving to be the “everywhere store”, underscored by its early-pandemic move to completely virtual work. After years spent building the backbones of small businesses’ online stores, Shopify went public in 2015 and has catapulted to greater heights since the pandemic’s onset as traditional retailers moved online.
Its trajectory is one that Amazon missed out on. A 2015 headline in Recode stated: “Amazon Will Shut Down Amazon Webstore, Its Competitor to Shopify and Bigcommerce.” The report by Jason Del Rey added:
The eCommerce software business focused on small and midsize businesses has become more competitive in recent years as young companies such as Shopify and Bigcommerce have raised gobs of venture capital to expand their tool sets and attract more customers.
Six years later, we’ve learned via Bloomberg that Amazon sold its merchant platform (Webstore) to Shopify for $1 million. In exchange for the more than 80,000 merchants who switched their business to Shopify, Amazon Pay was enabled on the Shopify platform. From Bloomberg:
Bezos and his colleagues believed that supporting small retailers and their online shops was never going to be a large, profitable business. They were wrong – small online retailers generated about $153 billion in sales in 2020, according to AMI Partners. “Shopify made us look like fools,” says [a] former Amazon executive.
Shopify’s success is not due to Amazon’s Webstore misstep, but it afforded the company an advantage in capitalizing on a piece of eCommerce that Amazon underestimated. Amazon didn’t take direct-to-consumer sales seriously enough to work that into its long-term business plan, and it went so far as to set up a competitor for success in that area of retail. It was focused elsewhere, including on its private-label brands. Amazon communicated to many that entrepreneurs aren’t its bread and butter, rather the end customer is.
By focusing on product retail, Amazon left the field open for Shopify to excel in the art of brand development, something that Amazon has notoriously minimized as it built its own retail empire with the Amazon brand at the forefront. With Shopify putting its merchant brands first, its scope expanded beyond small merchants by earning the trust of leading retailers as well. The validation from Amazon, granted when it turned over its Webstore merchants, also helped.
Now, Shopify is stretching its legs to emerge from behind the scenes, tapping creators and big names to appeal to young customers and brands on the rise. Last fall, it hired former Yeezy GM Jon Wexler to lead its creator and influencer program, a move that has already led to deals like BIGFACE Coffee, created by NBA star Jimmy Butler. In No. 759, we wrote on the Wexler era and Shopify’s foray into persona-led brands:
BIGFACE Coffee is the experiment’s first major output of Shopify’s creator program. It’s a project that combines demand, earned media, and a pulse with the technical prowess and support of Shopify Inc. It uses what Shopify has been known for (physical products) and pairs it with built-in demand (creators) and tests newer forms of commerce and technology (Web3 products / new front end design concepts / etc). Yes, BIGFACE packages a selection of its products with NFTs.
With earned media and more flair, Shopify intends to work on its own brand next. The road ahead will not be easy, however. Shopify is still behind in the critical are of fulfillment management and third-party logistics. While it began investing in fulfillment in 2019, the “last mile” is largely left to merchants whereas Amazon has shouldered one of the heaviest burdens for its sellers.
In this way, Amazon has taken steps to regain its edge on Shopify. Over the summer, it inked a partnership with BigCommerce to provide fulfillment for its merchants, a move that gives a direct Shopify competitor an edge on the leading SaaS provider by extending the power of Amazon’s biggest advantage, full-stack fulfillment. The possibility of it creating a Shopify-killer isn’t ruled out. “Amazon is a worthy rival,” Lütke told Bloomberg. But if the numerous developments covered above are any indication, Shopify’s rival may become a fulfillment partner. In Amazon’s Moat, we explain:
Through years of investments, Amazon has created its own cargo shipping fleet and is leasing planes, along with the opening of an Air Hub in Cincinnati, to avoid out-of-stock problems that have begun plaguing other retailers at this stage in the holiday shopping season. Amazon has stretched its business in myriad ways, but its advantages are no longer just product and digital-driven. On October 5, a container ship ported in Houston, Texas with a ship filled entirely by Amazon.
Shopify’s product pipeline does not include a fleet of shipping vehicles or investments into a midwest air hub, or transnational shipping strategy that consolidates shipments for its vendors. Amazon has passed FedEx in shipping volume and is poised to capture UPS and USPS’s market share as well. Additionally, Amazon will spend $52 billion on warehousing and shipping. Amazon is now in command of nearly 175 million square feet of warehousing with the ability to process, pack, and deliver over 50% of the goods that it sells. [1]
Amazon is approaching a truly vertically integrated logistics network on par with the largest delivery companies in the world. [2]
While Shopify has the advantage now, Amazon’s network of fulfillment systems is quickly becoming essential. Shopify’s great rival, may eventually become its most necessary partner.
Edited by Hilary Milnes with art by Alex Remy and Christina Williams
Frenemies, Part I: Shopify vs. Meta