February 6th, 2023: Shopify’s engineering shakeup, Foot Locker is sued, the lawsuit against Google, and UPS’s latest earnings
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It’s February 6, 2023, and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Shopify’s Major Engineering Shakeup
Foot Locker Sued For Its Customer Chat Feature
The Department of Justice Lawsuit Against Google
What UPS’s Latest Earnings Report Can Teach Business Owners
- 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….
Shopify’s Major Engineering Shakeup
Recent reporting suggests that Shopify’s Chief Technology Officer Allan Leiwand has left for "personal" reasons after a little over a year of service. Do you think he left for personal reasons? Sure, it's possible, but not likely. That also wouldn't explain why two of the first hires Allan made are also departing around the same time.
I'm sure Tobi personally wanted them all gone! How's that for a personal reason?
Just look at Shopify’s recent moves:
* New COO, Kaz Nejatian, and new CFO, Jeff Hoff Meister, were announced in September 2022.
* There are reports of many internal meetings being canceled as well as Slack channels being shut down.
* And now, Shopify has dismissed its CTO and the top lieutenants of that CTO.
What’s fueling this? I think in no small part this is a result of Shopify’s CEO Tobi Lutke feeling more comfortable in his role today than at this time last year.
In June 2022, Tobi was awarded founder shares controlling 40% of the company, which gives him more latitude to make significant changes to the company without fear of a hostile takeover.
In addition to Tobi having more control, Shopify is also a unique situation for a Chief Technology Officer like Allan Leiwand. Namely, Tobi is not only a first-rate technologist but also the founder of the company. Which means in some respects you are simply implementing Tobi’s vision rather than charting your own course. Many seasoned CTOs would not want to enter into such a situation.
So why did Tobi ever hire a CTO at all? It’s always fun to speculate with insider information, and my guess would be that in the middle of the pandemic in 2021, Tobi was afraid that Shopify could very quickly get to a size where he would not be able to manage the company effectively on his own.
Now in early 2023, with the pandemic hyper-growth receding and Shopify innovation wobbling, Tobi reasserted control over his primary domain: technology and innovation.
What this does is leave the Shopify core team in charge of most things. And I anticipate seeing improvements from this approach for their core offerings.
However, while the Shopify core team can be trusted to execute the current playbook, it's still unclear if that same core can be trusted to execute on two other massive Shopify initiatives:
The first is the Shopify Fulfillment Network.
While I’m sure Shopify will release amazing stats as part of its Q4 earnings call, the reality is Shopify is coming from such a small base that they will need meteoric growth for it to be noteworthy.
Regardless of your feelings, Fulfillment was an expensive bet for Shopify. For listeners who may not be familiar, Shopify acquired Deliverr less than a year ago, and acquired 6 River Systems in 2019.
The next move is surprisingly straightforward but Shopify has not executed on it. It comes back to the original CEO and Founder of Deliverr, Harish Abbott.
Who else could they find to execute the Deliverr vision at Shopify better than the founder of Deliverr? The big problem right now is that he is not the "single-threaded leader" of this group.
Personally, I kept waiting for Harish Abbott to take over fulfillment, but it was somewhat telling that he took the cash in the acquisition instead of the shares from Shopify, so maybe it’s not in the cards.
Shopify Components is another big new bet by Shopify, or at least it could be. This bet is aimed at the enterprise software market, which Shopify could have trouble with.
Shopify Components is essentially renaming components that Shopify has released in the past few years. But beyond the technology, culture is the biggest worry.
The DNA of the Shopify organization is fast, multi-tenant SaaS, product-led growth, offers limited support, and talks about disruption a lot.
Enterprise software is about security controls, legacy, vendor consolidation, marketing and sales-led growth, premium support, and risk avoidance.
This seems like a huge culture gap, which could be a structural blocker to Shopify’s ultimate success at the top end of the market. Much more will need to change to make this successful.
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Our Second Story
Foot Locker Sued For Its Customer Chat Feature
Footwear News recently reported that Foot Locker is the target of a new privacy-related lawsuit related to the company’s chat feature.
Essentially the idea is that recording text conversations on chat, archiving them, and sharing them with analytics partners to analyze them and gather insights means that... must be involved in illegal wiretapping? As crazy as it sounds, that’s what is being alleged.
The lawsuit is a class action lawsuit, which no one ever wants, and could cost Foot Locker up to $25 million if it goes through.
This is, of course, happening because of the rise of digital technology and the fact that many privacy and other consumer protection laws were designed for a different era.
Some might call this technology useful, others might call it mass surveillance. Sure, you initiated a chat, but what precisely did you consent to when you did that? To keep personal details of your conversation forever?
Did you consent to their employees reading it? What about their partners who you have no relationship with?
It's more slippery than you want to admit. Witness a quote from the lawsuit:
QUOTE
“Visitors would be shocked and appalled to know that Defendant secretly records those conversations, and would be even more troubled to learn that Defendant allows a third party to eavesdrop on the conversations in real time to harvest data from the chat transcripts under the guise of ‘data analytics.'"
It sounds scary when put that way.
Regardless of what happens next, it’s helpful for you to know that this is not just an isolated incident against a single retailer. Similar lawsuits were filed against Crocs and Adidas last November. Which means, it's entirely possible more could be coming.
In the end, I'm sure it will be appealed and settled... but if the lawyers succeed, that will just embolden them, won’t it?
As you might expect, if you’re a brand or retailer, it wouldn’t be a terrible idea to mention this to your lawyer and double-check that your chat function reminds shoppers that their conversations could be logged and archived according to your privacy policy. I went to Foot Locker’s website and found that its chat has been updated with just such a privacy message when you begin a chat with their support team.
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Our Third Story
Could the Department of Justice Lawsuit Against Google Benefit Amazon?
This segment comes from my friend and Watsonian Adam Crawshaw who asked me an interesting question last week: "What impact does the latest Department of Justice Google lawsuit have on Amazon?"
The short answer is not much. But we should go over it.
First, The DOJ is suing Google for QUOTE "monopolizing digital advertising." Despite the fact that Google bought one of the best ad servers in the world in Doubleclick, Google still has only a 27% share of advertising revenue, which has been slowly declining primarily due to Amazon's share gains.
This means that instead of suing Google for share of advertising, the DOJ might have been better served by looking at the share of search instead where Google has a 90% share.
At the heart of the suit is monopoly technology raising ad rates and causing harm to small businesses…
However, based on all the brands I speak with, if you wanted to pinpoint a single event raising ad rates,it wouldn’t be Google. Ad rates most definitely went up for many brands due to Apple’s privacy stance and how it affected advertisers like Meta.
This makes me think that the DOJ believes that it needs to prove consumer and business harm, and that a strict monopoly definition is not enough.
Otherwise, why would you attack such a narrow market rather than one in which Google has a greater monopoly?
Ironically, this is one of those questions that kind of answers itself. What consumer is complaining about how free and amazing Google search is? Not many.
Moreover, there are other factors to consider here. Google and others are losing share to Amazon, which has doubled its share of advertising revenue by going from a 7% share of ad revenue in 2019 to an expected 13% in 2022. And it appears to me that if you are going to measure the impact of the market, then revenue would be the appropriate metric here.
Which is another way of saying that it’s Amazon that is growing faster than everyone else. Facts also tell us that advertiser costs-per-click – what the industry calls CPCs – on Amazon are steadily rising, not Google’s. This is an added bonus to Amazon.
Where could this go?
Ultimately, Amazon seems very focused on hurting a wounded Google and is no doubt thrilled by this lawsuit as long as it manages to stay out of the fight. The pace of innovation in Amazon’s advertising data and tools released in the past few years seems to keep increasing with AMS and Amazon Marketing Cloud focused on the big agency ad budgets.
A lawsuit like this might not distract Google fully, but if it’s going to help anyone in the industry it will be Amazon more than anyone.
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And Our Last Story
What UPS’s Latest Earnings Report Can Teach Business Owners
If UPS’s earnings call is any indication, it’s going to be a wild 2023. CEO Carol Tome started off the UPS Q4 2022 earnings call saying that 2023 was going to be the year of resilience. I took this to mean, “hang on tight we don’t know what to expect.”
Strap in, Watsonians, there’s a lot to think about here.
Let’s first jump into Q4 parcel volume, as this information has implications beyond just UPS earnings.
Overall Q4 declined more than expected, but the quarter played out like this:
- September and October hit UPS volume expectations.
- Early November was lighter than expected but there was a surge in Cyber Week volume.
- After Cyber Week, volume completely fell off a cliff and missed the company’s expectations.
Overall, business-to-onsumer average daily parcel volume declined 3% year-over-year, while business-to-business average daily parcel volume declined 5% year-over-year. UPS reported that consumers returned to pre-pandemic shopping behaviors, and holiday retail sales were lower than expected.
For UPS Q4 2022 earnings, revenue was down for the company 2.7 % year-over-year, and overall operating profit declined 3.4%. Overall, average daily volume declined 3.8% year-over-year for the quarter, about half of this is due to Amazon volume declines. Despite the decline in volume, margins improved due to revenue quality and efficiency gains. It’s worth noting that the Small and Medium Business category is now 26.5% of US daily volume, which is up 70 basis points from last year.
UPS’s International Business in Q4 looked worse as exports from Asia declined 10%, leading to an 8.3% decline in international revenue.
For UPS 2022 full year earnings, revenue came in at $103 billion, rising 3.1% over 2021, but missed its forecast by 2% primarily due to a stronger US Dollar. Operating profit came in 5.4% higher year-over-year, and US operating margin expanded to 12.8%, which is the company’s best performance in 10 years.
It’s the 2023 Outlook that has me cautious. Overall, the company has two scenarios it’s using to forecast.
One is the base case, and the other is more conservative.
The base case forecast includes a mild recession in the first half of the year, with a moderate recovery in the second half. Average daily volume is expected to be flat overall with some puts and takes. There are negotiated volume Amazon losses, which the company plans to offset with Small and Medium Business growth.
The conservative forecast is a little more pessimistic. UPS is expecting mid-single digit declines in average daily volume, and weaker demand in Asia in the first half of the year, and a slower European recovery than expected in the second half of the year.
The major initiatives for UPS in 2023 are the continued rollout of its smart package, smart facility initiative, expansion of its Digital Access Program (or DAP) for small businesses into Europe, as well as a 2.3 million square foot expansion of warehouse space specifically for healthcare logistics, which I thought was very interesting as this is one of the company’s most profitable and high-growth segments.
Essentially, the company is leaning more heavily into its big successes and cutting back on other projects. Ironically, this is great advice for any business in 2023.
To close this segment, I want to highlight something interesting I learned from UPS CEO Carol Tomé during the call. The company is using the S&P Global 2023 projections as its core projection for the year. Based on this information, I pulled up a few highlights from the report for all the Watsonians out there with the hope that we can all get smarter about 2023 together.
Understanding what is built into these baseline assumptions is critical for business owners, because any downside surprise to these assumptions could affect investors, the credit market, and consumer demand negatively.
First, the S&P Global 2023 forecast is based on no escalation in the war in Ukraine, and a negotiated peace in the summer timeframe. Obviously, no one knows what is going to happen here, but to me this means that literally any conflict escalation is not built into market expectations.
Second, the forecast predicts that, while inflation will not rise as much as last year, consumer demand will pull back.
Third, the forecast predicts that it could take several years for inflation to reach the Central Bank’s targets, and no Federal Reserve rate cuts are planned in 2023. The US Dollar is expected to retreat slightly from its current levels, but not to a great degree.
Finally, labor shortages will continue to affect the economy but it’s predicted that hiring freezes will be more common in 2023 than layoffs due to the scarcity of labor. The forecast expects job losses to be concentrated in real estate and finance.
To me, all of this just reinforces a “plan for the worst, hope for the best” type of outlook. And the worst thing that could happen this year from a financial perspective would be triggered by an escalation in the war in Ukraine and its ripple effect on the global economy. Something like this could reignite inflation and further dampen consumer confidence.
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Hey, Watsonians, this is Rick. If you’re looking to discuss eCommerce topics with other listeners, you can find it all at the RMW Commerce Community. There, you’ll find a trusted group of listeners just like you who are passionate learners of eCommerce. So don’t delay, just visit community.rmwcommere.com to sign up for free.
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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
eBay invested in UK luxury resale platform Cudoni.
Cudoni is a marketplace that allows buyers and sellers to trade designer fashion. The company has raised about 7.5 million pounds in this fundraising.
Link: https://www.businessoffashion.com/news/retail/ebay-invests-in-luxury-resale-platform-cudoni/
Second
Digital agencies Blue Wheel and Retail Bloom merged to form a larger agency.
In the past, Blue Wheel has focused on digital eCommerce, and Retail Bloom has focused on being an agency for Amazon sellers. The combination of these two agencies is one indication that Amazon is a difficult channel for any brand to ignore.
Third
Cosmetics brand Makeup by Mario raised a $40 million growth round.
Mario Dedivanovic is a celebrity makeup artist who is going to use this investment to expand to additional retailers like Sephora, as well as invest in a direct-to-consumer website.
Link: 40m/641034/
Fourth
Digital freight marketplace Freightos made a public debut via a special purpose acquisition company.
The usage of SPACs has majorly declined in the past six months as they have not returned much to retail investors and the performance of these companies has not been good. Freightos hopes to break this trend by making it easier for shippers to compare and book services from freight forwarders and importers. To this point, the company’s stock opened at $7 and has since dropped to 50 cents a share.
Link: https://www.freightwaves.com/news/freightos-makes-public-debut-on-nasdaq-as-spac-market-tanks
AND FINALLY …
Ariana Grande will buy back her beauty brand for $15 million.
The pop singer is buying back her r.e.m. brand from Forma Brands, which she had previously sold the brand to, because Forma Brands recently entered bankruptcy.
All I can say is, “thank you, next?”
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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.
