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.
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