August 14th, 2023: TikTok launches Fulfillment by TikTok in the United Kingdom, WalMart expands its in-store advertising network, UPS Q2 2023 earnings disappoint, BigCommerce reports Q2 2023 earnings
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s August 14, 2023, and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
TikTok Launches Fulfillment by TikTok in the United Kingdom
WalMart Expands Its In-store Advertising Network
UPS Q2 2023 Earnings Disappoint
BigCommerce Reports Q2 2023 Earnings
- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
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BUT FIRST in our shopping cart full of news….
TikTok Launches Fulfillment by TikTok in the United Kingdom
Well, it's here, folks. Fulfillment by TikTok (or FBT) has arrived in the UK, and it seems more targeted right now at brands and creators that need help keeping up with their logistics. In some ways, the same way that Shopify talks about the ability for its platform to handle viral drops, TikTok is talking about giving that same capability to influencers so that they can grow without worry.
Here is how it is being positioned:
* TikTok manages the entire fulfillment process: storage, pick, pack, and ship.
* It's not all or nothing - meaning sellers can ship from multiple warehouses.
* No marketing benefits are mentioned; which in my mind means that Fulfillment by TikTok is not advantaged in the overall algorithm.
* Same-day fulfillment for orders placed by 7 PM, with next-working day premium delivery.
* Merchants must be UK-based and there is a public rate card.
* The focus for FBT is on streamlining operations for creators and brands. A feedback/rating system is included in the program, which gives the entire system a marketplace quality.
* I researched TikTok Shop UK fees which I hadn’t done before — they are 1.8% for the first 90 days and 5% after that. The United States site still says TBD on fees, but this will give you some idea of where I think the puck is headed for you brandowners in the audience. 5% is not nothing, but it’s cheaper than Amazon and your customer and content dollars are already there.
As far as some of my commentary on this deal:
* While it's easier to launch a fulfillment network in the UK than in the US, the US version of FBT does appear to be around the corner; this late timing for the UK may indicate that it could be a post-holiday launch for the US if I had to guess.
* By naming it "FBT" it immediately sets off Amazon comparisons, which may not necessarily be the best thing out of the gate. We see how such comparisons worked out for the Shopify Fulfillment Network - I’m pouring out some liquor now for SFN to mourn my lost homie.
* The Tiktok Fulfillment Service itself has started off quite sophisticated, which to me is a signal that this service is not just a trial and plans to be around for the long term. Day 1 with multi-warehouse capabilities and the ability to ship different items from different warehouses? This is not normal for a social media network outside of China.
* The example merchants are influencers and beauty brands to start with. Every single one of the brands included in the case studies (BeautyCrop, Sumaya, Nature Spell) is a Shopify store.
I'm struck by the fact that any order on TikTok Shop is an order that cannot take place on Shopify / Shop Pay. While outwardly, Shopify encourages this -- inwardly, I suspect this could affect Shopify by slightly diminishing the value of a checkout that can handle the volume of "viral drops." Where do you think those viral drops initiate? This will be an interesting space to watch.
If I’m an entrepreneur, what does this mean to me? If I want to start an eCommerce business why don’t I just start it on TikTok first, and add Shopify later as I grow, rather than starting on Shopify first? As an entrepreneur, the biggest risk isn’t operations it’s actually the idea risk which TikTok is where you would go to test this.
I’m not saying that either Shopify or TikTok view each other as direct threats, but for an entrepreneur or influencer there is some element of replacement theory here.
So what’s the bottom line?
At some point if you have captured all the consumer attention like TikTok has, you are now just coming up with new ways to monetize it.
Fulfillment by TikTok is an accelerator for TikTok Shop. If TikTok Shops aren't having at least some success, this is nonsensical.
I have heard at least some anecdotes of success, and we all understand the power of TIkTok for brand awareness, product introduction, and driving sales to a website. Particularly for influencers who care less about their website than social, it could make some sense.
For the average brand? I expect adoption only if there are specialized marketing benefits to justify the additional operational overhead.
[References:]
Our Second Story
WalMart Expands Its In-Store Advertising Network
CNBC has an interesting story that mentions Walmart is looking to ramp-up its use of ads in its physical store locations. Where will the ads appear?
* TV and digital display screens in the electronics department and elsewhere.
* Self-Checkout screens
* Store radio (Blue light special anyone?)
* Product samples at store demo stations
Walmart claims that it can deliver a Super-bowl sized audience each week to its advertisers in a targeted manner. While not targeted on the consumer level like digital, at least by location and area of the store. we don't have Minority Report-like targeting yet, but we will eventually!
Digital ads still deliver less than 1% overall Walmart revenue, but it's high margin, and there is significant room for growth as Walmart ramps up the amount of ad inventory in stores, as well
This has several benefits for Walmart:
* It’s difficult for competitors (including Amazon) to address because Walmart has a much broader reach.
* It Improves the profitability of its stores, relative to other grocers like Kroger.
* The continued growth of Walmart online will continue to give this a nice tailwind.
* Demo sample stations could even serve as a testing ground or kind of marketplace in stores for new product introductions. (Though this part is much less scalable)
The only real downside risk is if ads start to interfere too much with their stores experience.
It's a well-worn playbook to use another more profitable line of business to reinforce the growth of your primary, lower-margin, more mature business. Walmart is starting to lean into this playbook, and it's a good move for them.
The results will play out in earnings, but given it's all upside for Walmart, this is a fantastic bet for them. You could easily see Walmart as one of the largest digital and physical integrated media platforms in the entire United States in the future.
That prospect should worry the rest of the grocery industry, including Amazon.
[References:]
Our Third Story
UPS Q2 2023 Earnings Disappoint
Fresh off the heels of closing its negotiations with the Teamsters, UPS reported Q2 2023 earnings. First the bad news:
* At the end of 2022, UPS predicted average daily volume to be between flat (bull base) and down 5% (bear case). In Q1, UPS affirmed the bear case of 5% decline.
Well, this quarter, the bear got eaten by a larger bear, as US volumes declined almost 10%. By any measure, that is not good. UPS CEO Carol Tome’ reports its “all hands on deck” and have stood up a war room/control tower environment to monitor their progress on recovering volumes.
The numbers of last parcels work out to about a 1 million diverted packages per day, and $200M in sales that diverted due to labor negotiation risks.
UPS remains bullish on eCommerce trends in the back-half of the year: reversion to pre-COVID volumes, at least in the US.
As far as US Domestic Q2 2023 Highlights:
* Revenues Declined 6.9% y/y to $14.4 billion (accelerated decline from 0.9% Q1)
* Operating profits declined, about half due to volume and half due to wages.
* Operating margin stands at 11.1% which is more in line with the 11% achieved in Q1 2022.
* 9.9% decrease in average daily volume, although SMB declined less than Enterprise. UPS reports that cCustomers shifting volume from air to ground.
* There was a 3.3% increase in revenue per piece which slightly offset the average daily volume declines, but obviously this can’t last forever. At some point the volume must return.
As far as Guidance for the Rest of 2023:
* UPS updated their guidance based on results of the recent labor negotiations. Revenue now expected to be $93 billion with an adjusted operating margin of 11.8%.
* May not recover diverted volume until towards the end of the year.
Other commentary I have:
* UPS says they lost volume due to Teamsters negotiations, but clearly they lost more than they expected (perhaps both in volume and in salary/benefits). They flew a little close to the sun that it affected their shipper’s plans.
* Work cut out for them to regain it given the competitive market and the continued growth of regional and super-regional carriers. ⅓ volume lost to UPS, ⅓ to FedEx, and ⅓ to regional carriers. I do expect them to recover this volume but a friend of mine Nate Skiver points out how do you recover FedEx volume by December if it’s locked up in a year-long contract?
* UPS CEO Carol Tome’ indicated they will keep their pricing discipline which might indicate that regaining share might take longer than investors expect. Still, even though investors may not want to hear it, but disciplined leadership is hard to find these days.
* Just going back in the time machine for a moment. At the end of 2022, the company had guided between $97 billion and $99.4 billion. The lowered guidance of $93 billion reset clearly indicates that downward average daily volume trends got ahead of UPS expectations.
* Company is leveraging artificial intelligence technology they call NPT to make changes to their network, planning, and scheduling. This contributed to a 10% decline in hours to offset the volume declines - helped hold margins high. This is typical of efficiency advances. They will flow to everyone, and people begin to take them for granted. Vendors who don’t adopt are often left behind.
* 50% of facilities were now operating with their RFID initiative. Deployment will be completed by end October.
* Management headcount was reduced by 2,500 continuing a widespread initiative across companies to reduce middle management.
* Just to give you some comparisons relative to Amazon vs UPS: Amazon spends about 4x UPS’ worth of fulfillment each year. I continue to think the fulfillment industry should be worried about a business-to-consumer oriented independent Amazon transportation and last-mile network that exists outside of FBA, MCF, and their existing offerings.
Overall, the Teamsters had them over a barrel this cycle and UPS was in a "damned if you do, damned if you don't" situation. Too little negotiation and you give up too much -- too much and you risk a strike which UPS as you can see they DEFINITELY could not afford. All other carriers would have pounced on all UPS customers even more had that happened.
In 3 years time, this may look cheap for UPS, however and this raises the bar for all shippers in America.
Ultimately though, UPS may have the last laugh in their cost improvements.
[References:]
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And Our Last Story
BigCommerce Reports Q2 2023 Earnings
Over a week ago now, BigCommerce reported their quarterly earnings.
I’ve said this for a long time. In a world where Shopify does not exist, BigCommerce would be a fine offering. Unfortunately for BigCommerce, we do not live in that world.
Despite its Enterprise messaging… in previous years, it has not been Enterprise enough to take share from bigger players. Instead, the company has focused on scooping up Magento refugees, which in retrospect feels like a miss.
And despite the company’s SMB roots, it has not captured entrepreneur’s imagination like Shopify, and has focused all its attention up-market.
The one area where BigCommerce has solid (and growing) market presence is in small to mid-sized B2B manufacturers and distributors who are not really interested in B2C. This is an area which has been totally inaccessible to Shopify, and likely will be for at least a little bit, given their focus. Even here, however, there is a fragmented set of up-market competitors which puts pressure on them, and the company truly needs to be purchased by someone like a Hubspot (in a similar manner to Salesforce purchased Demandware and CloudCraze) in order to have a more complete B2B offering. That or go in the other direction of an ERP, which would point to an Oracle Netsuite acquisition.
In this environment, however, Private Equity is the most likely outcome.
As far as the company’s 2023 Q1 Results:
* Annual Recurring Revenue grew 12% (Enteprrise: 14%) y/y to $331M (compared to 13% Q1), flat/slight deceleration quarter over quarter [Shopify is growing 3x faster]
* Enterprise is 71% of Annual Recurring Revenue, off slightly from previous 72%. Enterprise ARPA up 5% to ~$40k, again declerating from its previous 11% growth, another worrying sign.
* Revenue grew 11% y/y to $75M, compared to a Q1 growth rate of 9%.
* The company operating at a -25% net loss. The culprit is 28% of revenue spent on R&D (Shopify at 38%) and 47% of revenue spent on Sales & Marketing (Shopify at 19%). This is BigCommerce’s core dilemma: Shopify can afford to innovate more, and spend less to acquire customers than BigCommerce.
This is a somewhat worrisome trend for the company long-term. Sales must get much more efficient without sacrificing growth.
As far as some of my commentary…
* I would like to see Bigcommerce Enterprise annual recurring growing at least in the 15-20% range to keep up with other platforms. They are losing ground in the replatform wave. Enterprise ARR deceleration feels like attrition up-market - not a great sign for the company.
And when I say attrition up-market what I really mean is that there are players in the B2B market that I feel are winning business that if they did not exist would go to BigCommerce. Those players include players like Optimizely, Salesforce, Commercetools, Shopware, and VTEX. And more entering the market each day. It feels to this observer that while there is room for multiple players in B2B eCommerce, more consolidation will happen in this market as the opportunity continues to expand.
* I’m very positive on the company’s recent hiring of Stephen Chung as President. Is Mr. Chung the next CEO of BigCommerce, even if BigCommerce stays independent? If I’m Brent Bellm, I may not have been satisfied with my succession plan and recent deceleration.
* While certainly Shopify’s recent acquisition of Codisto is a feather in BigCommerce’s cap regarding its previous purchase of Feedonomics. Feedonomics is a great solution for brands. That said, feed management tends to be a commodity relative to financial and payment-oriented offerings -- meaning it's hard to get EBIT leverage from it due to downward pricing pressure from brands.
Look, when I analyze earnings, I want to be clear that I’m analyzing earnings here. I’m not evaluating fitness of the platform for a particular customer’s use case. As I mentioned, in the small to mid-market B2B, BigCommerce has broad awareness and applicability and should continue to grow in this segment in particular. It’s a solid solution here that should be in your consideration set and I will continue to recommend it to customers who are the right fit for the solution.
That said, I do think they need to continue to invest in their ERP and CRM integrations to gain competitiveness in larger B2B deals.
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Supply Chain Risk Intelligence Solution PreWave Raises $20 million
The PreWave solution crawls data sources like global and local news, social media, and other proprietary data sources to find evidence of supplier issues and violations in a company’s supply chain. These data sources are then aggregated into global scores that allows a brand or retailer to track their global supply chain risks and compliance over time.
Second
Customer Loyalty Platform Stay AI Raises $15 million Series A to Help Shopify Brands
Stay AI is in a crowded subscription provider space with providers like Recharge and OrderGroove having been in the market for a while, Yotpo having launched a solution, and even Shopify has announced it’s launching a native subscription product in the platform itself recently.
https://www.finsmes.com/2023/08/stay-ai-raises-15-1m-in-series-a-funding.html
Third
Source to pay software provider Tradeshift raises $70 million from HSBC
Tradeshift takes a network-based approach to procurement and source-to-pay software and was founded in 2010 by Christian Lanng. This is all just a fancy way to say that they help companies manage their supplier relationships better than alternative providers like SAP Ariba.
For the Watsonians out there, you may now know that I actually helped sell a company to Tradeshift back in 2015, a company few probably remember at this point called Merchantry. If you’re listening to this, now you know.
Fourth
Retail technology theft prevention tool Everseen Raises $70 million
Everseen looks at the persistent retail problem of shrinkage with an AI and technology lens. The company essentially uses AI analysis of video to spot criminals in retail settings. Given how prevalent this trend is recently, I do believe this is going to be a popular solution to an unfortunately all too common problem.
AND FINALLY …
Supplements retailer Vitamin Shoppe taken private in $2.6 Billion takeover deal
The company - which has over 3,000 locations in the US - has been troubled recently as they have reported a series of unprofitable quarters. If the deal goes through, it could close in the second half of the year.
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That’s all for this week! Till next time Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our production partner for the series is CitizenRacecar. The show is produced by Jose Baez; Production Manager, Gabriela Montequin.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
