February 21st, 2022: Amazon and diversifying sellers, Shopify’s Q4 earnings, Hasbro and Mattel, and the 2021 PitchBook venture capital report.
It’s February 21, 2022, and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
What if Amazon Is The Best-Positioned Company to Diversify Sellers Off Amazon?
Shopify Q4 2021 Earnings Shows Growth But There are Still Strategy Concerns
Hasbro and Mattel’s Opposite Economic Views of Toys Industry Future May Have Implications for Other Brands
2021 Pitchbook Venture Capital Report Raises Both Optimism and Concern
- 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….
What if Amazon Is The Best-Positioned Company to Diversify Sellers Off Amazon?
The Amazon rumor mill has been going into overdrive recently with regards to whether or not Amazon will launch is own eCommere platform. You can find evidence hidden in the past couple of years that Amazon indeed regrets ceding the eCommerce platform market to Shopify, even though its own eCommerce platform wasn’t that successful to begin with and now Shoipfy has its own growing flywheel of support behind it.
There is evidence that Amazon could make a dent in this market, however. Here are a few points:
1 - Who knows Amazon sellers better than Amazon itself? It has more data about its own sellers than anyone.
Amazon has over 9 million sellers globally on its platform, whereas estimates put the number of Shopify websites in the 3 million range. This means there is a big enough pie for both companies.
You can also pretty much guess it has an internal index of the top 1000 brands globally and pricing up to the minute.
Given these numbers, I would expect Amazon to go after the lowest part of the market, even below the typical Shopify seller.
There are just so many marketplace sellers that even today don’t want to be bothered with typical multichannel digital marketing, even though marketing is increasingly crucial on Amazon.
2 - Amazon’s display advertising business has been moving in the direction of allowing sellers to advertise not only on non-Amazon websites, but also on non-Amazon properties.
3 - Amazon Multi-Channel Fulfillment (MCF) has been quietly signing up partnerships with eCommerce platforms, such as BigCommerce. But likely those partnerships are not enough to drive the necessary volume on their own through their facilities.
Amazon tends to like to control its own volume fueled by its flywheel, rather than rely on things like sales teams and extensive marketing.
4 - Amazon recently doubled its fulfillment capacity in the last 2 years. However, Amazon's own business did not double in the past two years.
It's clear to me the purpose of this capacity is for third-parties, not Amazon itself. And since DTC is growing faster than Amazon, it would make sense this is where the capacity is aimed.
Most businesses need to be on Amazon, and it's a significant channel. Which means imagery, video, and content need to be optimized. All things that need to also be on a brand’s website. Imagine all your A+ content was also on your own store site?
And Amazon had the lowest fulfillment prices in the industry to fulfill multiple channels without Amazon branding?
Amazon seems to have abandoned its "One Vendor" initiative from years ago to combine 1P and 3P tools, but what if Amazon resurrected that and the hub is instead not Amazon, but a true multi-channel store that supports both retail (1P) and D2C?
What do you need to succeed in eCommerce?
Advertising
Payments
Supply Chain
Who has the largest of all of these in one place?
Amazon.
Its biggest gap is somewhat simple - tools to help you present your brand. But then again, Amazon acquired Perpule and Selz in the last 2 years.
Sounds like something to keep an eye on.
[References:]
Our Second Story
Shopify Q4 2021 Earnings Shows Growth But Still Strategy Concerns
Shopify Reported Q4 Earnings Today And Here's a Few Things I Noticed
Don't get me wrong, Shopify is an amazing company and solution, but strategically it needs some help.
First
The company has some revenue headwinds in 2022 related to COVID annualizing, and developer revenue changes ($1 million credit) annualizing.
Second
It could just be more, but I seriously have trouble consistently following Tobi's train of thought sometimes. My friend had a great analogy - he is like this uber-architect refactoring Shopify as if it were a giant codebase.
Unfortunately, that does not necessarily lead to the world's best operator.
Third
In Q4, Shopify lost $500 million on its investments (likely Global-E and Affirm), as those stocks declined in the last year. Perhaps the company should stop playing the stock market and spin out its investments into a separate fund or something? Seems like it would make sense.
Now to one of my favorite topics - Shopify Fulfillment Network
There was a lot of awkward conversation here, particularly for someone like me who spends a lot of time watching supply chain.
I heard the word “prototype” about 10 times in this earnings call, after not hearing it at all in the last few years. Apparently the Shopify sales team has been selling prototypes to its merchants the past few years? Perhaps it would have been nice to know this.
I also think it’s notable that CEO Tobi Lutke stays away from Fulfillment Network questions, and company president Harley answers them, although not well at all in my point of view, except to repeat the mission. The challenge here is the mission is not the problem; the problem is the strategy and execution.
The only details we got about Shopify’s Fulfillment plans actually came from the CFO, and it’s notable that it took her about five seconds to make the statement that Shopify would operate fewer and bigger facilities as the backbone of its network, and partner for the middle and last miles of the network. Would that have been so difficult for Tobi or Harley to say?
Is the Shopify CFO Amy Shapero also the company’s Chief Supply Chain Officer?
I did notice that each quarter that passes, it becomes more and more obvious that Shop Pay is the real growth engine of the company, although this revenue is lower margin than its subscription revenue.
All in all, I don’t see any material weaknesses in Shopify’s approach in the eCommerce platform market in the short-term, despite wanting to see the company take a different approach to fulfillment.
If there are risks, they are only long-term ones that Shopify’s product becomes too complex and cumbersome for entrepreneurs starting out.
[References:]
https://s27.q4cdn.com/572064924/files/doc_financials/2021/q4/Shopify-Investor-Deck-Q4-2021.pdf
https://s27.q4cdn.com/572064924/files/doc_financials/2021/q4/Exhibit-99-1-Press-Release-Q4-2021.pdf
Our Third Story
Hasbro and Mattel’s Opposite Economic Views of Toys Industry Future May Have Implications for Other Brands
A recent CNBC report calls out differences between two major toy industry players, but one of the reasons I wanted to talk about it is also reflective of the two major viewpoints I am hearing from brands that I’m in discussion with.
To be clear, the backdrop of the entire conversation is about economic uncertainty and the effects of inflation on consumer spending.
One one side, you have Mattel with a very positive view. The company feels that consumers will continue to accept price increases and will buy at a similar rate as during the pandemic.
On the other hand you have Hasbro, which has taken a slightly more negative outlook. As travel and other expenses increase, Hasbro is forecasting consumer spending on toys to decline. In particular, Hasbro believes that we are entering a period of uncertainty due to bumpiness in return from COVID, potential looming war with Russia, and the impact of inflation.
What happens next is obviously the biggest question on investor and CEO minds this year. Here are a couple of things I would be thinking about:
1 - Is there still supply chain exposure?
While it looks like COVID is going away, there will most certainly be new variants that affect different parts of the world in different ways.
2 - Consumers spent a lot in 2021, and may not have the reserves to continue spending the same way into 2022, and in particular,
3 - Material costs keep rising higher than expected.
Whether or not your consumers will be able to absorb higher prices will largely depend on how much their lifestyles require your products. Different categories have more elastic demand in the face of rising consumer prices.
[References:]
https://www.cnbc.com/2022/02/15/hasbro-and-mattel-have-very-different-visions-of-the-future.html?utm_source=pocket_mylist
And Our Last Story
2021 Pitchbook Venture Capital Report Raises Both Optimism and Concern
I recently saw that Pitchbook released its excellent recap of venture capital activity in 2021.
In summary, the good news is that 2021 was the largest venture capital-based IPO market on record. The bad news is that the aftermarket performance of these IPOs was worse than the performance of the S&P 500.
To me this means trouble ahead for valuations, although with the number of funds that still have capital to deploy, I don’t expect that startups will notice anything different until they approach a liquidity event.
Let’s get into it.
First
The average venture-backed IPO valuation was approximately $2.2 billion, but as I mentioned earlier these listings underperformed the market after IPO. The reason is that many of these listings were all overvalued to begin with.
GMV is not a valuation metric, people.
Second
On the other hand, venture capital-backed mergers and acquisitions remained high. The average venture-backed exit was $278 million, which is driven only by the top quartile of deals — like any VC business, if you miss the grand slam home runs, your investment returns are terrible.
Third
In addition to tracking the end of the line – meaning acquisitions and IPOs – I also like tracking the beginning, seed-stage valuations.
Average enterprise seed-stage valuations were in the $14 million range, about 10% higher than the previous year.
Customer technology seed valuations were in the $12.4 million dollar range, about a third higher than 2020.
To bring this discussion home, a few quick points:
What do startups and CEOs care about most? Two things.
1 - Can I somewhat easily raise my next round?
The answer is probably yes, because there are a lot of funds raised that need to be deployed.
2 - What value can I expect on my startup when I plan to exit?
It seems like these are all over the map, and right now acquisition valuations are looking better than IPO valuations, primarily because we are still in a supply-constrained talent market out there.
[References:]
https://files.pitchbook.com/website/files/pdf/2021_Annual_US_VC_Valuations_Report.pdf
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Channable which is an eCommerce feed management provider, has secured over $62 Million in Series B Funding
Feed management is not just a big topic for VC, but also for private equity. You would think this trend would slow down at some point but it is not.
Second
Premium Beauty Brand Underlining Raises $6 Million Seed Round Led By Nordic Eye Venture Capital
Obviously new DTC brands are still being minted everyday. Underlining’s website approach is interesting; it doesn't have a primary brand site really, but instead micro-Shopify stores for each product line. I wonder if that itself will become a bigger trend?
Third
Fast-growing Livestream Shopping Platform Whatnot Acquires Pastel Labs and Hires a VP of Engineering
In the livestream arena, Whatnot has found a nice and differentiated space in the sector, primarily with a focus on collectibles with proven audiences. My friend Victor said they sounded like the Etsy of Livestream Commerce and I agree.
Fourth
Austin-based eCommerce Company Cart.com Inc. Raised $240 Million in Equity and Debt Funding for its End-to-End Platform for Online Retailers.
The company is interesting because it’s partnered with at least one aggregator called ECommerce Brands as a go-to-market strategy.
AND FINALLY …
Freight Forwarding Firm Flexport Raises Nearly $1 Billion in Funding, Adds Shopify, Michael Dell as Investors
Flexport is a monster in the space. The interesting piece here is that Shopify is now on the cap table. Yet another way they are trying to stay ahead what Amazon is doing in this space with its own Global Logistics offering.
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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.
