December 27th, 2021: A New Consumer Probe, Nordstrom's Off-Price Rack Business, McDonald's Sells Software to Mastercard, and Shopify's New Board Member
It’s December 27, 2021 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Could a New Consumer Probe Blunt Rise of Buy Now Pay Later?
Nordstrom is looking to split its off-price Rack business
McDonald’s Sells Software Provider Dynamic Yield to Mastercard in Warning to both Retailers and Technology Companies
Shopify Board adds Instacart’s CEO Fidji Simo - What’s the Plan here?
- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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BUT FIRST in our shopping cart full of news….
Could Consumer Probe Blunt Rise of Buy Now Pay Later?
We have (rightly) covered the rise of Buy Now Pay Later on this podcast. It’s one of the hottest trends in Direct to Consumer eCommerce because it is increasingly being used by younger generations and those who are not able to readily get credit.
So the world took notice recently when the Consumer Financial Protection Board announced an inquiry in order to gather information and facts about the industry from Affirm, Afterpay, Paypal, Zip and Klarna.
First, in the short-term this is not a factor for merchants, and the average brand should not do anything differently if consumers are responding to it.
Second, because this is only an inquiry, even if there are findings, the government would then need to legislate to make something happen, or some lawsuit would need to indicate that these industries are subject to similar laws as credit card companies.
My take?
It seems to me that half of the products in eCommerce are some form of credit or loan product. It’s hard not to imagine that one segment of the industry would escape the same regulations as the credit card industry which has had consumer regulations for some time.
I still predict that the industry will continue to grow through next year as many new consumers try out the format for the first time, which is likely what prompted this inquiry in the first place.
[References:]
Our Second Story
Nordstrom is looking to split its off-price Rack business
As we struggle to exit the pandemic, one thing has seemed true of Nordstrom’s — the main retail business has rebounded but the off-price business Nordstrom Rack has struggled and now the retailer is starting to wonder: do we even need to operate our own off-price business anymore?
In what is now a veritable trend of retail breakups, the company has hired consulting firm Alix Partners to study its supply chain, profitability, as well as the fit of the off-price business overall.
Nordstrom Rack, while beloved by some consumers, always seemed something like a double-edged sword for a company that always prided itself on great service. The typical Nordstrom Rack customer is more mainstream American than the average Nordstrom shopper. On the other hand, the primary Nordstrom shopper might get tempted by the Rack offering in order to get a higher discount on some items that were in the main department store just 6 months earlier.
For years, Nordstrom has said that the Rack’s customers trade up to full-price and so the play seemed to be customer acquisition. The big challenge is, can Nordstrom’s come up with another acquisition strategy which doesn’t rely on cheapening its brand?
The next question is who is the acquirer for Nordstroms Rack, and the obvious owner is someone who can operate off-price already — more than likely someone like TJ Maxx or Macy’s. Despite the fact that Macy’s doesn’t call itself off-price, they routinely operate at 40% off retail, and on top of that have the Macy’s Backstage business which was recently presented as critical in Macy’s often-changing Polaris strategy.
Of course TJ Maxx is the king of off-price, buying from most retailers on the planet which means they have more leverage to offer a better experience.
So what will happen next?
I do think this Nordstrom Rack sale is likely to happen. The brand dilution by having the Nordstrom brand associated with off-price never made a ton of sense to me, and I expect that the company will fill the gap in customer exposure with the addition of new smaller-format stores.
[References:]
Our Third Story
McDonald’s Sells Software Provider Dynamic Yield to Mastercard in Warning to both Retailers and Technology Companies
In an interesting admission that it probably should never have acquired a technology company, McDonald’s sold its Dynamic Yield personalization technology solution to Mastercard.
At one point, Dynamic Yield was known as one of the top personalization solutions on the market. Since the acquisition by McDonald’s, however, it never seemed like the same company.
This has lessons on both sides. Let’s talk about retailers for a moment.
Retailers sometimes get this disease where they see an important technology, and executives feel they need to own it because it provides some kind of competitive advantage.
The problem is, many of these solutions are just looking for a liquidity event. Let’s be honest, there’s a reason between 70 and 90 percent of acquisitions fail. It’s because of a lack of alignment between the employees being acquired and the acquirer.
On the other side you have Mastercard which contains about 25% of credit card marketshare, in a credit card industry which could be under pressure in the next decade due to the rise of debit as well as cryptocurrency. That means the company could be looking to expand its service offerings in the retail sector.
The other major trend you see with payment solutions is that many brands view them as ways to drive free eyeballs to their website. Mastercard and American Express routinely work with brands on guaranteed marketing promotions in exchange for placement or commitments.
Personalization of price and offer is at the heart of a great marketing promotion, so it’s not hard to see how Mastercard might benefit from the technology. And they are likely getting a good price for it to boot.
So to Mastercard, I hope you are not making the same mistake McDonald’s just did - why not just select a best in breed vendor?
And finally to McDonald’s and other retailers who acquire technology companies, please think twice before doing this and understand what you are buying. Ultimately, it’s highly entrepreneurial talent which is likely not a fit for the culture of most retailers.
Any retailer looking at its corporate development roadmap would be wise to think about two factors: first, the fit with its existing customer base, and second, the fit with the newly acquired employees. Asking the wrong questions during M&A activity will often land you in hot water.
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And Our Last Story
Shopify Board of Directors Adds Instacart’s CEO Fidji Simo, What’s the Plan Here?
In the last week, Shopify added Instacart CEO Fidji Simo to their Board of Directors. The timing here is very strange, and there has been a lot of speculation about what this means. Let’s review the various options.
First, this move could mean Shopify is going to partner with Instacart and tie it into its eCommerce platform.
This is where most people jump to, but I don’t buy it. Why wouldn’t Shopify add all the platforms like Uber Eats or Doordash? Doordash in particular seems like it is in a much better position than Instacart right now.
Strategically, it would be a mistake for Shopify as it would be a distraction. On the other hand, I do think that Shopify needs to partner rather than build for its supply chain solution, which is one possibility here.
Second, this move could simply be a soft landing pad for Fidji Simo.
This theory states that this partnership is more about Fidji Simo setting up a soft landing spot for herself after Instacart explodes than it is about helping either of the two companies.
In all fairness to Fidji Simo, she inherited a troubled company and always seemed like an odd pick for Instacart, which already had a significant amount of advertising and app talent.
Right now, Doordash is eating their strategic lunch and Instacart is not showing any signs of righting the ship.
I would call this a strong possibility and the most likely of the options.
Third, this could be about using Fidji Simo’s expertise in advertising and app engagement to help Shopify.
I think the idea might be that Fidji Simo is there to spur innovative thinking with regards to what could be possible to improve Shop App engagement short of building a marketplace.
The timing of this is also suspicious given the recent departure of Carolyn Everson, the President of Instacart. I suspect that likely both of them are not happy with what they had gotten themselves into, and while Carolyn chose to leave… Fidji Simo is expanding her scope and using her current CEO role as a way to set the stage for her next act.
I would simply be shocked if Fidji Simo is the CEO of Instacart in two years time at this rate.
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
Operations software company Cogsy announced a $6 million seed round led by Accel Partners. The company claims to be a solution for all those brands who use Google Sheets to do things like measure their operational metrics, including purchase order forecasting and inventory sell-through.
https://cogsy.com/announcing-cogsy-seed-funding/
Second
DTC Baby food startup Yumi raised $67 million in venture capital in order to provide healthier meal options for infants and toddlers. It’s a big market dominated by even bigger incumbents so getting distribution will likely be their biggest challenge.
Third
Brightpearl an ERP provider for SMB and mid-market brands, was recently acquired by UK financial software provider Sage. This tie-up makes a lot of sense given the roots of both companies and there are a lot of synergies here. Will it work long-term is the question. In the US, Quickbooks acquired other eCommerce backoffice software and has since shut it down.
Fourth
Post-sale purchase software provider Narvar acquired Lumi which is a kind of packaging provider for brands. I can understand the idea of wanting to offer solutions for the entire post-sale experience, but the fit it still a little questionable in my mind.
AND FINALLY …
Quick delivery provider goPuff just raised $1.5 billion in a funding round that raises them to a $40 billion valuation.
Interesting, this is the same number that Instacart obtained earlier this year, but unlike Instacart, goPuff seems to know who they are. Their big challenge is no one else knows who they are, so personally I expect them to acquire a nationwide retailer in 2022.
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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.
