March 18th, 2024: End of free shipping era is exaggerated, SAAS keeps getting harder, American Eagle’s logistics capitulation ends pandemic logistics dream, Shopify at Morgan Stanley tech conference
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s March 18, 2024 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
The End of the Free Shipping Era is Greatly Exaggerated
Software As a Service Keeps Getting Harder
American Eagle’s Logistics Capitulation Ends the Pandemic Logistics Fever Dream
Shopify at Morgan Stanley Tech Conference 2024 Takeaways
- 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….
The End of The Free Shipping Era Greatly Exaggerated
With margins getting tighter across retailer, you sometimes see reports about the end of the free shipping. While that may be true for merchants who are struggling to afford subsidizing shipping, that doesn’t mean that consumers don’t want it.
A recent survey from PYMNTS and Adobe highlights a simple truth.
* 66% of consumers consider free shipping key to customer loyalty
In short, larger retailers still must figure out a way to subsidize free shipping if they want to grow. The changes to Walmart+ in the last couple of years and the recent revamp of Target's loyalty program point to one thing: consumers are still willing to pay for shipping loyalty, at least when there is a wide assortment and fast delivery involved.
With the decline of retailer-based private label credit cards, other sources of revenue like loyalty membership, retail media programs and - for the big players - fulfillment services are the most logical way to subsidize this. Extended warranties factor in too, providing some retailers critical margin dollars.
Can anyone else buy an airline ticket without being forced to un-select third-party purchase protection? Do Boeing’s plane doors keep falling off because I decline this coverage? Inquiring minds want to know.
Another interesting point about the difference between brand and retailer shopping behaviors was also mentioned. The youngest generation surveyed, GenZ, expressed a 43% preference for a brand than a retailer, whereas the average of other generations was at 28%. Still, the majority of 57% prefer marketplaces and retailers.
Why?
The answer is competitive prices and wide selection. Again, that pesky Amazon formula which keeps showing up. Walmart does a good job here also. It's almost like we keep trying to reinvent a new way to attract consumers to shop, but keep ending up at the starting point we found 20 years ago.
What's that?
Back in the stone age of eCommerce, eBay ruled the roost. One analyst even called it "indestructible," thinking auctions were the future of all online purchases because of its efficient price discovery.
Amazon, and even eBay's own internal teams, discovered a new generation of buyers coming onto the internet. eBay even had a fancy MBA-style name for it: "COBs" - convenience-oriented buyers. The problem eBay had, they could not figure out what the heck to do about them.
Amazon had no such problem. Jeff Bezos bet that low prices and unlimited selection was the key to the whole equation, which propelled the growth. Prime in 2005 gave him a consumer subsidy for shipping but more importantly - loyalty.
The market still has not caught up with Amazon's execution of this formula. And in some ways, this report just confirms what you already think about why everyone shops at Amazon.
The report also highlights that if you prefer shopping at brands, TRUST is the primary reason. Which, has always been the issue with wide selection and marketplaces. This contains a lesson for brands in the audience. If you can tell in reviews that marketplace customers are having a tough time in Amazon’s reviews, I would use that information on your product detail pages!
[References:]
Our Second Story
Software as a Service Keeps Getting Harder
Tidal Wave Research published a report recently that I thought would have some relevant for the Software as a Service founders in the eCommerce industry. The broad theme is that the last 15 years have been great for SaaS, but in the next 10 years the gains could be harder to come by.
The gains in the last decade have attracted more competition and new entrants. There will be an inevitable shakeout in the next 5 years, and the failure rate of startups could even be higher than the historical average due to that increased competition.
The report has a few pieces of advice for founders on their journey:
First, building a software startup is not just about technology. If you don’t have an interesting and sticky go-to-market strategy, you will struggle. Technology in the age of AI is easily replicated and those hard-won customers could easily choose a competitor. Which means moats are getting thinner.
Second, speaking of moats. The report indicates that most companies don’t have a real moat. Just because you have good retention does not mean you have a moat. It just means that you have not yet been disrupted, and all that takes is a new well-financed entrant to the market. You see it all the time in the Shopify ecosystem which has been one of the more competitive eCommerce software environments I’ve seen in a while.
Third, there has been a significant decline in returns from what the authors call “vanilla SaaS”. Meaning just subscription-oriented software that does a job with no other angles. This is particularly true because these vanilla platforms are not mission-critical systems of record for their customers. Instead, they are the icing on the cake and offer features like better intelligence.
Better intelligence on top of someone else’s system of record sounds like a house of cards, and more like a feature waiting to be copied or acquired than a real business. Sadly, the eCommerce world contains so many products like this that was just waiting to be disrupted by the prime mover in their ecosystem — usually that is the main platform provider that they depend on. If this sounds like you, I would encourage you to diversify into other providers and find new problems you can solve for your customers.
[References:]
Our Third Story
American Eagle’s Logistics Capitulation Ends the Pandemic Logistics Fever Dream
American Eagle Outfitters Got Caught Up: when everything is going up and to the right faster than it ever has before, everyone thinks it's going to continue going up and to the right.
In 2021, the company bought Quiet Logistics, a venerable automated 3PL network for apparel merchants, started by Bruce Welty. This same year, the company acquired a 10 month old startup AirTerra, when it was convinced this startup could help democratize shipping rates and capabilities for small to medium shippers.
In 2022, the company launched a nationwide shipping network.
In 2023, just one year later, AEO had second thoughts about its logistics ambitions and forced out the head of its logistics unit due to profitability concerns. Sound like another well-known logistics company Flexport whose founder gave a new executive even less runway than a year?
Now news reports have American Eagle "refocusing" away from being a general purpose carrier, and instead focusing more on its own brands and a few key customers. It's tough to fight the king.
Apparently logistics is more difficult and lower margin than people thought? 🤣
The list of retailers who should be logistics companies is very small, and dwindling. The list in the United States may be down to two: Walmart and Amazon.
Either way, the trends are clear in North America. Space is abundant, and consolidation is on the horizon as 3PL providers can't fill their spaces with declining volumes. Mostly because those bigger, bulky items were moving quickly during the pandemic. Now, smaller items are moving and most of the growth is due to parcels being injected into the US network from overseas like Temu and Shein.
Hard lines and big purchases are down, general merchandise is barely predicted to recover year over year.
It's not that supply chain is becoming less interesting or sexy, it's more than supply chain is becoming less interesting or sexy to those who shouldn't be attempting to be suppy chain players. Which leaves more innovation and interesting work for the dedicated folks who understood from the beginning --
No matter how sexy it might sound, logistics is low margin and efficiency gains are hard won. Invest accordingly.
[References:]
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And Our Last Story
Shopify at Morgan Stanley Tech Conference 2024 Takeaways
Harley and Jeff spoke with Keith Weiss at Morgan Stanley's Tech Conference last week
A few things stood out to me:
* Headcount. Last year, Shopify was at 14,000 people. Now they are at 8,000. That is a very different number, and they are committed to staying at or around that number, even in the face of Enterprise sales team growth.
So if you are a Shopify VP, all those open recs -- canceled! So sayeth Jeff.
* The reason that Shopify can do well in this current climate is they have the brands people love/want. The company thinks that consumer spending is pretty decent from their point of view, which matches their recent Q4 performance.
* It was just a year ago that they were being asked about Shopify Fulfillment Network. How happy are they that this is in the rear view mirror?
At least they only have to throw a few hundred million at Flexport every year until they get to "default alive." 😀 That's very different than trying to build it themselves.
* They are also pointing to the fact that Shopify is the "second biggest checkout in the United States", and how that gives them advantages of scale.
It's an impressive stat, I would shout about it too.
* Gross Margin pressure?
The CFO revealed the Stripe, Adyen, and Paypal contracts will renew in the next few years. Sounds like the costs of accessing those payment processors/networks could increase and put more downward pressure on gross margins.
* What about a Shopify Marketplace?
I think Harley's answer was too cute by half. Listen to this:
" But right now, we're still sort of in the model of teaching our merchants how to fish and getting them -- helping them find better customers in terms of giving them the fish and giving them customers that may be something we do in the future. We're not doing that just yet."
Teaching to fish = helping people with advertising. Giving them fish = marketplace. Sounds like they may not do it "YET", but not never. Of course, Tobi a few years ago said "they will not do this obvious thing."
What Harley really means here from my point of view is that they do it today but there is not much scale there. When there is scale there, we will talk about it.
Second, I also feel that he is saying they are not explicitly trying to build something like an Amazon. They want it to end up in a different place.
All told -- Shopify is in a place where most of its cash generation will come from keeping its expenses (mainly headcount low) and driving top-line growth rather than acceleration of known margin-expanding products. Their advertising and other products are just so sub-scale relative to the payments business, don't expect meaningful contribution for a number of years.
Personally, I counted more margin headwinds than tailwinds. And if I didn’t know any better I would say that famous 3% attach rate is under attack by the upcoming payment renewals.
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Threecolts Acquires Marketplace Pulse
Amazon software aggregator Threecolts has acquired industry publication Marketplace Pulse for an undisclosed amount. Was Marketplace Pulse for sale the worst-kept secret in e-commerce media, and what will happen with it next? Best of luck to Joe on the sale, but my guess is the property may never be the same again.
Link: https://www.marketplacepulse.com/articles/threecolts-acquires-marketplace-pulse
Second
CARiD.com Raises $35 Million in Funding Post Restructuring
Car parts and accessories platform CARiD has raised $35M in funding post Chapter 11 restructuring. The funding will be used to invest in technology, marketing, and widening of product selection. This looks like another SPAC casualty looking to bounce back.
Link: https://www.citybiz.co/article/529523/carid-com-closes-35-million-in-funding/
Third
The Body Shop Shuts Down US Operations Closes Dozens of Stores in Canada
The Body Shop has filed for Chapter 7 bankruptcy in the US after its UK parent filed for administration in February. In November 2023, it was acquired by the Private Equity fund Aurelius for $257M. Remember when we all used to go to the mall?
Link: https://www.cnn.com/2024/03/10/business/the-body-shop-shuts-down
Fourth
Cap Hill Brands Merges With Juvo+
Brand aggregator Cap Hill Brands has merged with product developer Juvo+ in an undisclosed all-stock deal to create Infinite Commerce. The brand roll-up/aggregator sector is in the middle of consolidation. Consolidation is coming to the brand holding companies.
AND FINALLY …
Treet Raises $10M Series A in Funding
Resale platform Treet has raised $10M in Series A funding. The company uses a peer-to-peer approach that matches brands with people buying and selling its styles. How many resale platforms are there that are profitable and at scale? I think not many.
Today’s final word for the week of March 18, 2024 is KATE. As in Kate Middleton that is. If you didn’t know, Catherine, Princess of Wales is a renowned Photoshop expert. Be careful what you post out there folks, the Internet is watching and apparently who knew it was filled with conspiracy theorists
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That’s all for this week! Till next time Watsonians.....
Hey, did you know that RMW Commerce has a brand new podcast? Check out The Watson Weekend for an unfiltered and lively eCommerce chat each week with me, Rick Watson, my co-host Jess Lesesky, and an array of interesting guests and topics. All focused on eCommerce.
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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.