February 7th, 2022: The Washington State Attorney General investigation and Amazon, UPS 2021 Q4 earnings, Glossier’s recent layoffs, and declines at Bed, Bath, and Beyond
It’s February 7th, 2022 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Confirmed Stories:
Washington State Attorney General Investigation Shuts Down Amazon Price Fixing Program
UPS 2021 Q4 Earnings Highlights Their Focus on Revenue Quality
Glossier’s CEO Learned a Hard Lesson in Technology Decision-making as it Lays Off 80 Employees
Recent Declines at Bed, Bath and Beyond Make You Wonder If It Can Make It?
- 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….
Washington State Attorney General Investigation Shuts Down Amazon Price Fixing Program
Amazon will end its "Sold by Amazon" program, following antitrust enforcement action by Washington State, Attorney General Bob Ferguson’s office announced on Wednesday. The SBA program amounted to unlawful price-fixing, according to a press release from Ferguson’s office.
Here are a few points about the program:
The program ran between 2018 and 2020.
Amazon must pay about $2.25 million dollars in settlements related to this program. Wait. That’s it? Does this seem to anyone else like so much pocket change?
Ostensibly, according to Amazon, this allowed Amazon to set the seller’s prices properly on the platform, which you know is kind of a conflict of interest, right? Amazon is also competing with you.
Let this be a lesson to sellers.
If you want another retailer to set your prices for you, at least get the cash up front for it. That’s what first-party sales is all about.
In third-party selling, that risk is all yours and you should never want anyone else setting prices for you that you can’t control. (Note that I’m not talking about automated repricers here; those act like an extension of your own staff.)
Speaking of staff, I know many sellers who instead of using their own staff or a third-party agency to manage their advertising, outsource their entire advertising budgets and strategy to Amazon.
Not good.
I mean, you are literally handing over the keys to one of your largest channels to a company that does not have your best business interests at heart? What could possibly go wrong?
Sellers looking to grow long-term with the platform need to spend the time and effort to learn how to do things on their own, rather than assume a third-party, namely Amazon, will come up with a program to solve their problems for them.
The fact that there wasn’t a huge uproar from consumers and sellers from the beginning on this program continues to demonstrate just how much trust Amazon still has in the market.
This is a small example of a much larger problem of doing business on Amazon that generally most of the world has become numb to because of how large and influential the company is. In what other situations would you put the majority of your business and dollars into run by those actively competing with you? It’s nonsense, right?
Sometimes you have to step back from closely following the space, investments and growth to realize what is really happening.
[References:]
Our Second Story
UPS Q4 2021 Earnings Highlights The Focus on Revenue Quality
UPS just reported earnings for Q4 2021, and I thought I would give you a few callouts.
First, the company’s overall profit grew 37% year over year, an extremely impressive achievement.
Overall, UPS predicts 4.5% growth from the economy this year, which is positive except when you realize that we are in an increased inflationary period. UPS expects inflation to be higher in the first half of 2022 than in the second half. Ssellers and shippers should translate this as higher labor and materials costs.
Second, there was an interesting quote from CEO Carol Tomé in the Q and A period when commenting on December 2021 retail shopping:
"Where are all the customers???”
She noted that they were all home due to Omicron and that volume had surged earlier in Q4 this year than in previous years.
As far as the company’s focus areas, UPS is continuing to hone in on three major segments: SMB, Healthcare and B2B. SMB is now up to 26% of overall volume.
This highlights a key issue for UPS at the corporate level — the company is not trying to be the biggest shipper; instead, it is focused on high-quality, profitable and growing segments of revenue. This reduces yearly capital expenditures and improves UPS’s return on invested capital, which incidentally the CEO noted is up 910 basis points in the quarter.
Third, of course everyone wants to know about Amazon – which is the largest UPS customer, likely by a wide margin. UPS’s Amazon revenue as a percentage of their total is now at 11.7% compared to 11.6% in 2019 after surging in 2020.
When asked about future Amazon trends, Tomé responded: "UPS's Amazon 2021 revenue grew," but she then quickly highlighted that the companies mutually agree on where each company is best suited to grow volume between them (network planning).
She highlighted UPS’s focus on healthcare, B2B and SMB, which means that the company’s revenue is diversifying long-term away from Amazon.
My take is to expect increased revenue growth for UPS due to Amazon, but the share of revenue to tick down going forward. The only way for this to work is to find segments growing faster than Amazon, which ironically is easier than it used to be five years ago.
Fourth, 60% of UPS’s capital expenditures in 2022 are going into expansion of facilities and network, which I thought was a positive interesting number particularly since capex is growing to $5.5 billion in 2022 from $4.2 billion in 2021.
Not to be lost in this is a transformation of how UPS does business as well with what the company calls its "Smart Parcel Smart Facility" initiative, which plans on eliminating 20 million parcel barcode scans and replace them with RFID tags across their entire network.
You can just imagine how much this will save on labor, particularly at induction and at all points throughout the parcel journey on the way to the consumer.
Overall, UPS continues to invest in profitable growth segments and quality service – all good signs for the company.
[References:]
Our Third Story
Glossier’s CEO Learned a Hard Lesson in Technology Decision-making As it Lays Off 80 Employees
Many technology organizations like to say, "We are different and special".
It's a source of pride for businesses because it means they "aren't limited" by the software and solutions the industry is producing. You know, that same industry that is investing billions in each little corner of eCommerce, but a $1 million tech budget will somehow make up for that.
Anyway!
The cause for this belief is most certainly a combination of ignorance and hubris.
To be clear, once a company reaches a certain size and revenue, it can become necessary to build your own software. There are no companies building "off the shelf" eCommerce platforms for Walmart-sized companies because there are no other companies Walmart's size. But even if there were companies this big, they still couldn’t afford to build the entire stack themselves.
Almost certainly this does not apply to your startup. It's with this lens that I analyze Glossier, whichrecently laid off 80+ members of its technology team because it built a lot of its platform in-house rather than using off-the-shelf components.
It’s something that certain Chief Technology Officers take pride in, I realize. But here’s where I come down on this.
If you are just a retailer or a brand, chances are someone is building something close to what you need. If your business model is so complex that it demands custom software, think carefully, and then evaluate even more carefully.
Choosing the wrong vendor can set you back several years.
Which brings me to one rule I always try to follow – for your mainstream use case, you obviously want to see how your vendor is motivated to improve it continually.
That means you need to get outside of your own needs for a moment and think like your vendor. What have they historically prioritized , and what are they likely to prioritize in the future?
One proxy for this is your vendor’s top customer list. If you as a retailer don’t “look like” the other customers on the platform now, chances are you won't look like them later on either.
Which, ironically, might make you think you need to build your own software again.... when really, you just didn't find the right partners to be honest with you during the sales process.
[References:]
And Our Last Story
Recent Declines at Bed, Bath and Beyond Make Me Wonder – Can the Company Make It?
A recent story in the Wall Street Journal about Bed, Bath and Beyond highlighted a few frustrating facts.
Picture this scenario:
The number of shoppers in stores is declining.
There is too much fixed overhead.
Employee retention is a challenge.
Too many SKUs in stores are confusing buyers.
There is no private label strategy.
Everyone "knows" what to do next. Isn’t it obvious that the company should just follow what top retailers like Walmart, Target and Kroger are doing?
The big challenge with turnarounds is that it's always going to get worse, sometimes much worse, before it has any chance of getting better.
Sometimes a new management team can apply lessons from their previous lives (Target, for example) and "shock the patient" so much that the remaining fans of the old chain just flee, wondering what happened to it.
This certainly happened to retail legend Ron Johnson when he tried to take the lesson from Apple Stores over to JC Penney. It was all reversed a few years later. Not that that worked either.
Sometimes consumers have just given up on a chain.
The big challenge is, customers that might appreciate the tactics being brought in are already gone. And so are you going to switch Target and Amazon customers from their current loyalty even though they used to shop at Bed, Bath and Beyond? That is not clear at all.
What Bed, Bath and Beyond needs is not just transformation, it's a plan to get modern shoppers back into the stores. And for that it needs a reason to exist. Which, from my point of view, is where the whole plan falls down.
You need a consumer value proposition that resonates.
In an era when the biggest of the big box retailers like Walmart, Target and Costco are crushing it with consumer satisfaction overall, there is much less space for a "medium box" retailer that implies "endless selection" in its name, but, now, due to its private label and SKU rationalization approach, doesn't have endless selection anymore.
Will the company make it? All signs point to no. Still, the most likely outcome is that it sheds enough to become profitable, and then the chain is later sold to new buyers.
Which in itself could be a win over the previous trajectory.
I was chatting with some industry veterans I trust who say to give CEO Mark Tritton more time, and I think that’s fair.
The biggest challenge is it will take a little more time to hit bottom before the company starts ascending again and it still have so much work to do to get to level ground.
And this is in an environment when competition is executing at a very high level and gaining share every day.
In my final analysis, I am forced to ask a few simple questions:
1 - Does the world need a category killer in this segment that is full-priced (as opposed to HomeGoods, BigLots, etc.)?
2 - Do I think Mark and his team will out-execute Target and Walmart?
3 - Do I think that the average consumer will soon understand when to visit Bed Bath and Beyond versus some of these other players?
I cannot confidently answer "yes" to any of them. And that should worry thosehoping for a comeback here.
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
BJ's Wholesale Club strengthens supply chain with acquisition of Burris Logistics
This one is interesting because it is another in the trend of a retailer acquiring specialty logistics capabilities - this time in cold chain storage facilities.
Second
Crazily named startup, and I am not kidding you, “The.com” just launched a low-code website builder and snagged $4 million in venture funding.
The unique feature is the ability to create customizable blocks that you can collaborate on and share with other website owners.
Are they kidding me with this name, though?
Third
As she sings in Pour It Up, all Rihanna sees is dollar signs, this time from her lingerie venture, Savage X Fenty, which just raised $125 million in Series C Funding.
Seriously, is there a retail fashion concept that Rihanna has been associated with that has not been wildly successful?
Fourth
International marketplace Farfetch is planning a big launch into the beauty category later this year with an acquisition of Los Angeles-based retailer Violet Grey.
It will be super interesting to watch the company’s expansion into a new category.
https://www.voguebusiness.com/beauty/farfetch-plans-beauty-launch-with-violet-grey-acquisition
AND FINALLY …
Kim Kardashian’s Skims Doubles Valuation to $3.2 billion with a new $240 million funding round
The reality star’s underwear label raised another $240 million from Lone Pine Capital after sales surged 90% last year.
The Kardashian Sisters previously owned a boutique-type store simply named "Dash" in three locations including New York City, but they were shut down in 2018. It makes me wonder if Kim would ever consider opening up a physical location of her new brand.
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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.