December 13th, 2021: Amazon’s profitability, activist investors and Kohl’s, Allbirds Q3 losses, and the state of the supply chain issue
It’s December 13, 2021 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Is Amazon Fooling the Market About Its Profitability?
Kohl’s Is Next Up In a Long Line of Retailers Targeted by Activist Investors
AllBirds Q3 Losses Prompt Debate Over Its Future
Supply Chain Issues Will Take Longer To Sort Out Than Many Expect
- 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….
Is Amazon Fooling the Market About Its Profitability?
A recent report from Stacy Mitchell at the Institute of Local Self Reliance and brought to light by TechCrunch shines a light on the fact that even in 2021, many people simply do not realize how profitable the Amazon Third-Party business is, and how critical it is to Amazon’s retail business.
Now what’s juicy here is that Amazon disputes this report. Well, of course they do because it would ruin the company narrative that they are the friend of small businesses.
Here are a few of the major points.
1 - Seller fees, not AWS are the major profitability source.
2 - You would know that if Amazon hadn't been hiding it from you.
3 - It's being hidden to obscure the monopoly forces at work.
4 - So Amazon needs to be split into smaller companies. Right now.
In my opinion, Amazon really has two businesses.
One dependent on Prime. This includes 1P (#retail), 3P (#marketplace), Advertising, Video, Devices (Alexa, Ring, etc), and Logistics (AMZL in all its forms). Prime stirs the drink. And yes it's a flywheel with a phenomenal moat.
The other is AWS. Not really Prime-dependent, which is why it is vulnerable to Microsoft and Google. Microsoft has the long-term advantage here as Microsoft Office is essentially its "Prime."
My take:
1 - Amazon doesn't really hide its fees. The company is well known to all sellers. And yes, it has been steadily increasing over the last 15 years.
2 - Amazon doesn't really hide its seller business. When the CEO writes in reports that "third parties are kicking our first party butt" and units are greater than first party, how's that hidden?
3 - Amazon does obscure its 3P GMV, and many analysts confuse 3P revenue (which Amazon books) with 3P GMV (which it does not really disclose). I feel like Scot Wingo has been talking about this for 13 years.
4 - Government is not going to attempt any breakup. It takes months of "negotiations" to simply fund commitments everyone agreed on 10 years ago and prevent the entire government from shutting down. This same body is going to pull off something like this? Ah, no.
5 - #Amazon PR train is well-tuned. Years ago Amazon selected a Virginia HQ site for two reasons: 1) it's where AWS is heaviest and 2) lobbying. The two million SMB narrative continues to be driven into the ground.
> Ultimately you can quibble at the edges of the report; every seller’s fees are a little different. It’s true Amazon’s costs have been rising for years.
Is Lina Khan the Chair of the FTC funding this research? Because reading this report right now, it sure seems that way. I have no doubt that Andy Jassy, the new CEO of Amazon, and his fabled “S-Team” are discussing a response to this report right now.
[References:]
Our Second Story
Kohl’s Is Next Up In a Long Line of Retailers Targeted by Activist Investors
Engine Capital - which holds approximately 1% of the firm’s shares - recently sent a note to the Kohl’s Board of Directors highlighting opportunities for value creation.
The money quote from the release is here:
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Assuming online sales revenue of around $6.2 billion and a valuation of 2.0x sales, Kohl’s’ digital business alone would be worth $12.4 billion, around 40% higher than the current enterprise value of the entire business today. This multiple is conservative in light of the rumored 4x sales multiple expectations for the Saks.com initial public offering. We would also note that since the market started to believe Macy’s may consider a separation, its stock is up 23.3% vs. 10.4% for Kohl’s, highlighting investor interest in such a separation as well as its potential value creation.
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So we are developing something of a baseball lineup here.
Saks is advancing with an eCommerce IPO next year – but hasn’t even reached first base yet. That’s the starting point for the consumer, but for many of these investors it’s the finish line.
Macy’s is now in the batter’s box, and now Kohl’s is in the on-deck circle warming up.
What is no one talking about here? What happens next after the eCommerce IPOs, in particular after these new entities start losing real share to Walmart, Target, and Amazon?
No one is solving the root issue here, which is the lack of a defensible consumer value proposition. Who is being brought in to solve this problem?
You almost have to imagine that there is a wink-wink relationship here between the investors and the retail store entities that are being left behind. Imagine if you had two kids on a sinking ship, and to the eCommerce kid you give a life raft, and for the brick and mortar kid, you wrap a rock inside of a raincoat and yell “Catch!”
There’s another elephant in the room here. We used to say it was impossible to deliver an omnichannel experience within a siloed organization where the retail department worked just a few feet or a few floors from the digital team. Now, we can separate into different companies that treat each other as vendors and suddenly we’ve figured it all out? It’s unlikely.
What changed their minds? Now, these same CEOs are practicing their best Scrooge McDuck with new investor money, which of course has eased some of their operational worries in the short-term.
[References:]
Our Third Story
AllBirds Q3 Losses Prompt Debate Over Its Future
The latest AllBirds earnings kicked up a huge firestorm of debate in the eCommerce community about what it means for the company’s future. Let’s start with the reports.
The company’s revenues grew 33% a year, big investments in physical retail, and it reported a strong response to its performance apparel line. At the same time, losses doubled.
The long-term debate is over how successful its retail efforts will be. AllBirds built a growing but not profitable digital business as a native brand. And now it’s asking investors to fund the next phase of its resolution. Is this the definition of a Ponzi scheme or are they the next Lululemon? That is the question.
What’s needed for success in retail?
There are a few things to look at regarding retail:
One, retail is more profitable than eCommerce as anyone can see from looking at Walmart or Target versus Amazon’s eCommerce bottom line. Wholesale is a siren song but AllBirds is wise to slowplay this, as its brand presentation is all it has.
Two, most D2C brands evaluating retail need to determine if they have enough SKUs to support a store. An athletic lifestyle brand can better support a nationwide store footprint than a sustainable shoe brand.
Three, certain categories simply do not have huge eCommerce penetration yet. Eyewear and Beauty are great examples. Warby Parker would barely be a business at all without physical retail, and Glossier, the blog turned beauty brand, is now looking to reopen experiential retail stores. Both categories are hard to grow beyond a certain point in eCommerce.
Fourth, the one variable here is price pressure due to competition as the company expands. If expansion means AllBirds isn’t able to keep its premium pricing, the entire venture could collapse on itself.
AllBirds is not a well-known brand. If it stays up-market, it will struggle against huge players like Lululemon. If it tries the mid-market, it will run into mainstream America just buying workout gear from Target and Walmart, all with less consumer trust than those brands.
Ultimately, I think AllBirds will choose the up-market path which is slightly less crowded, but they need distribution.
What’s being left unsaid here is whether AllBirds should at the same time partner with traditional retailers like Target and give up some control, or continue to go it alone? This key questions will likely center on how much funding the company can get for its store expansion and how quickly it can show that it’s profitable.
My biggest prediction? Don’t be surprised if while trying to make its branded physical stores profitable, AllBirds also starts a number of Target Shop in Shops next year to expand brand awareness, which is still lacking. In fact, it may be an urgent priority for a firm.
[References:]
And Our Last Story
Supply Chain Issues Will Take Longer To Sort Out Than Many Expect
A new report from the Wall Street Journal has an interesting statement from the CEO of Intel that I think many would be wise to pay attention to.
When people talk about the global supply chain crisis, there are really two things going in parallel.
The first is directly COVID-related, in particular country-specific manufacturing shutdowns and delays.
The Intel CEO said that the company had allowed its supply chains to consolidate in Asia, leaving the company without the geographic balance to cope with disruptions.
I thought this was an interesting statement on one side.
On the other side you have the labor market. Even before the pandemic, it was difficult to find digital talent. Now retail and supply chain are having difficulty with talent as well, as COVID has given the entire industry a breather to re-evaluate their lives.
Despite the cry about benefits, gig economy, etc., it really is all about pay. And many companies still haven’t realized this.
I’m reminded of a quote long ago from Winston Churchhill who famously said:
“You can always count on the Americans to do the right thing, after they have tried everything else.”
I feel like many companies around the world are acting this same way, namely trying everything else and not fixing the core issue. There has been a lot of focus on increasing work from home flexibility and adding additional benefits. That’s all well and good, but many are only incrementally increasing worker pay.
Sorry, but that’s not going to cut it anymore. The companies that will succeed are those that pay their workers more, attracting better talent and getting better service as result.
The COVID-induced supply chain bottlenecks in Asia will subside. But what will remain is the shortage of talented workers. If you aren’t solving this problem, then your own personal supply chain crisis will not subside.
> Business leaders need to take note and start asking these questions of their suppliers. Stop asking for the best deal. Start asking your suppliers how they treat their workers. The sooner you admit that your fortunes are linked to the fortunes of your supplies, the faster you will get back to normal.
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Platform provider Marketplacer raised $38 million in order to fund further expansion in the US market. This continues the well-worn path of successful Australian software companies moving into the US market. Sounds like more marketplace businesses coming your way.
Second
Chinese marketplace seller aggregator Nebula brands raised $50 million in a Series B investment funded by L Catterton. Like a truffle hog, private equity will find the money. The key question here is: "If third-party Chinese marketplace sellers are the fastest growing segment on Amazon, why not just fund those?" I’m surprised it took so long for us to get here.
Third
In ultra-fast grocery news, New York-based 1520minute shut down in what is I’m sure the first of many dominoes to fall in the “quickcommerce” space. Most providers - GoPuff being the exception - have not been profitable in the US market and it’s only a matter of time before many of them consolidate, go out of business (as is the case here), or leave the market (as in the case of JOKR).
https://www.businessinsider.com/1520-ultrafast-grocery-delivery-service-shuts-down-2021-12
Fourth
European service provider InterculturalElements was recently acquired by Amazon agency BuyBoxExperts. InterculturalElements fills a key niche – localization across multiple marketplaces. Congrats to my friend Scott Galvao on his long journey towards this exit.
AND FINALLY …
Trading card collectibles marketplace Dibbs secured an investment from Amazon and launched a Sell With Dibbs program that allows users to fractionalize ownership of their collectible trading cards. Once someone owns 100%, they can have it shipped to them. Smart investment for Amazon to get exposure to this market.
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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 show is produced by Citizen Racecar. Alex Brower is the producer and also wrote our theme music. The Executive Producer is David Hoffman.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.