August 8th, 2022: Amazon Q2 earnings, PayPal targeted by Elliot Management, Shopify invests in Klaviyo, and Amazon Today offers same-day shipping
It’s August 8, 2022, and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Amazon Q2 Earnings Beat Revenue and Reaffirms Full-Year Guidance
PayPal Being Targeted By Activist Investor Elliott Management
Shopify Invests $100 Million in Email Marketing Provider Klaviyo
Amazon Today Offers Same-Day Shipping From Retailers, Boosting Prime
- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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FIRST in our shopping cart full of news….
Amazon Q2 Earnings Beat Revenue and Reaffirms Full-Year Guidance, Great to Have a Cloud Division
In the last two weeks, Amazon released its Q2 2022 earnings, and let me tell you financial analysts loved it.
Most of this is that their AWS Cloud division seems to have re-accelerated, as well as the fact that they seem to be on a good path for cost reduction by making their logistics network more efficient, and more slowly ramping up their real estate and other commitment.
Here are a few things I noticed on the call:
* Amazon’s net sales improved 10% year over year to $121 billion. Its AWS division alone has a $79 billion annual run rate in sales now with $5.7 billion operating income in Q2.
* While the company’s net loss was $2 billion in Q2, this was primarily due to a $3.9 billion Rivian pre-tax valuation loss. Amazon would have been massively profitable this quarter if not for Rivian. That is why everyone is so excited about Amazon. That plus they are still growing. To the winner go the spoils.
It’s very clear that Amazon’s customers do not view their Amazon purchases as discretionary. Amazon owns the convenience-oriented consumer and this is to their benefit.
* 3P Marketplace Sellers units were at 57% – highest ever.
Management was asked about how it is trying to improve 3P mix and responded that, "We don't try to improve it. We don't care if 1P or 3P wins, it's just happening."
* To make sure people understand this point, management reiterated that:
3P is for selection
1P is for price-competitiveness
Prime is for convenience
Put them all together and you have a flywheel, folks.
Get it out of your head that 3P is to make Amazon price-competitive.
3P is about wide selection and availability of uneven inventory in categories with supply that is not concentrated (i.e. 50% of toy category is 3P, last I checked).
* The company showed strong advertising growth with growth of 22% year over year. The Amazon advertising network is highly efficient and Amazon customers have their credit cards out ready to make purchases.
You might compare this with someone like Pinterest who is in the opposite situation and has a problem monetizing their traffic.
* Amazon has made quarter over quarter delivery speed improvements and in-stock at an all-time high this year.
Speaking personally, this matches my experience 100%. Amazon delivery to Manhattan is on fire right now.
* Amazon’s 2022 capital investments include 50% on AWS, up from 40% the previous year, and lower fulfillment and logistics investments than last year.
* Buy With Prime is now invite-only and FBA only. It will expand throughout the year. Amazon management said that, "We have a history of empowering and helping merchants."
<cough, cough>
Sorry, I had to laugh at this comment. Of course it’s true, but they also have a history of competing with their sellers.
I left this earnings call feeling like this is the kind of quarter that Andy Jassy needed after the disappointing previous quarter, slowing economy, and overly optimistic projections which led to fulfillment expansion.
Mid-quarter, Amazon made it clear they had a read on how to defer or delay costs, and they were just fine. Looks like they were right to me.
[References:]
https://s2.q4cdn.com/299287126/files/doc_financials/2022/q2/Q2-2022-Amazon-Earnings-Release.pdf
https://ir.aboutamazon.com/files/doc_financials/2022/q2/Webslides_Q222_Final.pdf
Our Second Story
PayPal Being Targeted By Activist Investor Elliott Management
If you’re wondering what an activist investor is, it’s just like a regular investor except the goal is to generally make major shifts at a company by acquiring a significant stake in it and advocating for board seats.
If there’s one thing I’ve noticed over the past few years, it’s that if Elliott Management targets you, something big is going to happen. For example, the existing management makes changes and sometimes replaces Board members in response to the activity.
It’s with this lens that I analyze PayPal being accumulated by Elliott Management.
* The Wall Street Journal has reported that Elliott now has a sizable stake in PayPal, which was recently valued at approximately $89 billion, down from its previous pandemic peak of $350 billion.
* In addition to being off its stock highs, the company lowered its 2022 growth targets in a similar manner to a lot of tech companies this year.
* The rumors reported by Bloomberg indicate that Elliott Management is trying to get the company to accelerate its cost cutting, which has included both layoffs and offices closing.
The bigger issue of course is not cost-cutting, but growth. PayPal’s CEO Dan Schulman has recently reported that 30% of its customers make up 80% of its revenue. Those highly active customers seem like the quickest way to accelerate the company’s revenue growth.
In other somewhat related news, it is interesting that Elliott Management is acquiring shares in PayPal when it also has another interesting holding that has been rumored to be a PayPal acquisition target in the past — Pinterest.
[References:]
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Our Third Story
Shopify Invests $100 Million in Klaviyo, Continues Investing in Ecosystem
Shopify continues to show that it does not care about cries of "fair play" in its ecosystem by taking a $100 million investment in email and marketing automation provider Klaviyo.
Overall, that sentiment seems to be right. Investment attracts VCs, VCs fund new apps on top of Shopify, which are adopted by merchants, and the cycle continues.
Getting a Shopify investment also clearly offsets the large percentage fees that Shopify collects from its ecosystem partners. You might even consider these investments a credit against those fees, rather than a true investment. I think this point is important because as your revenue gets into the tens of millions, that Shopify cut gets larger and larger.
The big question I have with this partnership is why now? Really, why now? I think likely Klaviyo wanted this implicit Shopify endorsement ahead of a potential IPO in the future with the hopes that it would further turbocharge its growth.
The second thing I would love to know is what these apps need to give up in exchange for such an investment and endorsement. I’m sure it is designed to create some degree of dependence for - and even lock-in - some of Shopify’s important partners. Shopify is then likely able to ensure that these ecosystem players don’t send their best customers to other platforms without knowing that Luca Brasi from the Godfather is waiting to whack them.
Of course, apps like Klaviyo are often not successful because of a Shopify investment. Instead it’s the opposite — Shopify finds growing apps on its ecosystem to bring into the fold.
Klaviyo has been doing great for a while. It also keeps getting a lot more expensive for merchants too!
One thing surprised me a little about the Klaviyo release, which is repeated throughout the Klaviyo website. It defines itself as the "recommended email provider for Shopify Plus."
It most surprised me because if you scour the Shopify website, and the statements from Shopify execs, you do not see this language anywhere. Certainly not in terms of what Klaviyo means for it to say -- in other words "the official email partner of Shopify Plus."
Now, of course any investment is an endorsement, that is easy to admit. I was at ChannelAdvisor back in 2002 when eBay invested in ChannelAdvisor. Regardless of whether eBay told everyone that it recommended ChannelAdvisor, we used that endorsement in investor and customer presentations to benefit from the eBay halo effect, given that ChannelAdvisor was one of the most popular providers in the eBay software market at the time. Having eBay’s investment simply made sales conversations that much easier.
That said, for Klaviyo to say it’s "THE recommended partner" - versus just "A" recommended partner feels like a bit of sales puffery happening here.
When Shopify invested in Sanity, did they become "the recommended content management system for Shopify?" It did not.
We’ll have to watch to see if other vendors that have received Shopify investments start doing this and if Shopify pleases it.
The bigger worry for Shopify is the effect that these investments have on its balance sheet. Shopify showed about a $1 billion loss in Q2 from its investments and over $2 billion on the entire year. It’s entirely possible this could turn around, but investors might also appreciate Shopify spinning out its investment arm into a more independent entity as well to keep its balance sheet clean.
[References:]
https://techcrunch.com/2022/08/02/shopify-makes-100m-strategic-investment-in-marketing-automation-startup-klaviyo/
And Our Last Story
Amazon Today Offers Same-Day Shipping From Retailers, Boosting Prime
Amazon surprised us by announcing a new offering last week with brands like PacSun and SuperDry which allows Amazon to pick up items from brands, retailers and malls to deliver same-day to a buyer's home.
Here are some facts about the offering:
* There is a $25 minimum for free delivery from Prime and it can be found in the Amazon app in an area called “Amazon Today.” If the purchase is less than $25, then the charge is $2.99 for the consumer.
* The launch supports 10 cities and zip codes, although this will be expanding throughout the year.
* The delivery is done by Amazon Flex gig workers rather than its Amazon Delivery Service Partners, which are franchisees. This makes sense because they aren’t delivering entire routes; it’s more of a “one parcel at a time” operation.
* In order to participate, the retailer must have an inventory management system, and the business must be in a mall or shopping center or other commercial complex in one of the qualifying geographies. This is in contrast to the typical gig-worker model pioneered by companies like Instacart which use AI and other methods to predict what is in stock. I think that method would likely be much less efficient and accurate for Amazon — particularly for long-tail categories like apparel. How would they ever know what was on the rack?
Here are a few of my comments on the program:
First, I would love to see a deeper dive on the economics of this program. It costs quite a bit of money for gig workers to deliver in the last-mile, much more than $2.99. I would love to see the retailer’s economics on these transactions.
I am expecting Amazon to treat these orders something like third-party sellers transactions, which would be subject to Amazon’s traditional fee structure.
As a result, the retailer is basically subsidizing this free shipping to some extent, but unless the price point is very high, it will still not cover the cost of this last-mile delivery which could be over $20 in some cases. This can change based on volume.
Second, I think the fact that items in this program are included in Prime is interesting and unexpected. Amazon is taking a page from the playbook of Zalando in Europe and JD in China. Zalando has a program called “Connected Retail” which essentially allows pick-up in stores or delivery from stores for purchases made through the Zalando app. So Amazon is copying a known playbook here, this is not an Amazon invention.
Of course you’ve heard me talk on this program about Amazon’s new Buy With Prime program, which allows online store merchants to offer the Prime promise on their product pages. This new Amazon Today program shows us that Amazon is really thinking hard about how to accelerate and leverage its crown jewel into other arenas like retail.
But finally, some might interpret this as Amazon coming to the rescue of US shopping malls, which have struggled in the past few years. I think nothing could be further from the truth. In fact, what Amazon is effectively doing is trying to gain a foothold into struggling malls with the eventual aim to turn them into subsidized fulfillment centers.
[References:]
https://www.retaildive.com/news/amazon-launches-same-day-delivery-retailers/628533/
https://corporate.zalando.com/en/about-us/what-connected-retail
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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
Supply chain software SupplyPike raised $25 million in Series B funding so it can target CPG brands
SupplyPike is one of a number of firms in the supply chain visibility space that is working to codify the tremendous number of rules that retailers place on their suppliers.
Link: https://techcrunch.com/2022/07/18/supplypike-series-b-supply-chains-software-cpg-brands/
Second
Social commerce marketplace platform Flip raised $60 million.
The company claims to be the first social commerce marketplace platform that allows consumers to introduce a brand through a 60-minute video and then allow a purchase.
Link: https://www.businesswire.com/news/home/20220719005030/en/Flip-Closes-60-Million-Series-B-Round-to-Reimagine-the-Next-Era-of-E-Commerce
Third
Retail eCommerce management platform CommerceIQ acquired digital shelf analytics company e.fundamentals.
E.fundamentals is based in the UK and was designed to answer one question above all else - if you’re a CPG brand, how are you showing up in online retail versus your competition?
Link: https://www.efundamentals.com/efundamentals-becomes-a-commerceiq-company/
Fourth
Marketplace Ghost raised money to match brands that have excess inventory with opportunity buyers that are likely to send this inventory other marketplaces
While I’m sure some brands that don’t care about their channel might love this idea, most brands do not want their product to show up on off-price marketplaces without any quality control.
Link: https://techcrunch.com/2022/07/19/ghost-marketplace-buyers-unsold-products/
AND FINALLY …
Software provider Carbon6 acquired Amazon inventory management system SoStocked.
The SoStocked tool is designed to improve in-stock rates for Amazon sellers, which is one of the most important factors for succeeding on Amazon.
Link: https://www.yahoo.com/now/carbon6-acquires-sostocked-leading-inventory-120000660.html
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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 Alex Brouwer; 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.
