November 11th, 2024: Amazon reports Q3 2024 earnings, Children's Place partnership with Shein is genius, state of SaaS venture capital valuations, AI platforms to challenge every software category
It’s November 11, 2024 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Amazon Reports Great Q3 2024 Earnings
Children's Place Partnership with Shein Could Be Genius
The State of SaaS Venture Capital Valuations
AI Platforms Looking to Challenge Every Software Category
- and finally, The Investor Minute which contains 3 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….
Amazon Reports Great Q3 2024 Earnings
Profit Growing Faster than Revenue, Units Growing Faster Than Sales, AWS on Fire
A few tidbits:
* Unit volume growing 12% y/y
* Revenue grew 11% y/y
* Online store sales grew 8% y/y - one of the higher numbers in the last two years.
* NA operating margin up 100bps y/y
From the beginning of 2024, Walmart actually called it first. Their plan was to grow profits faster than sales. In an economy you aren't quite sure of, it's a formula where "you control what you can control", and no one was sure they would be able to control the consumer. So where is the consumer now
Amazon says the consumer is still looking for deals and is very price-conscious.
Beyond this, there were themes coming out of Amazon earnings:
> Amazon Dismantling the Convenience Store / Pharmacy
Amazon's largest growth drivers are everyday essentials: health, beauty, personal care, and non-persishable grocery. In short, Amazon is not only eating the convenience store (have you seen the chaos at Walgreens/CVS? yes self-inflicted, but also, hello 'Zon), it's also eating the middle of the grocery store.
And these items tend to be more first-party items. Not coincidentally, 1P units gained against 3P unit share for the first time in recent memory. These are replenishables. This is also the same thing driving frequency / unit volume higher than sales volume.
Expect this trend to continue, because Amazon's logistics performance is only getting faster. In one sense, Amazon is delivering what Quick Commerce promised.
> "Once in a Lifetime" Amazon Web Services (AWS) On Fire
Some tidbits to prove the point:
* Jassy called this a once in a lifetime opportunity - think Amazon will underinvest in AI? Investors look out -- CapEx ahead.
* AWS is now a $110B run-rate business.
* AWS margins are up to 38% (just think about that).
* AI business is growing triple-digit percentages and is already a multi-billion dollar business, with demand growing faster than supply.
* They have gone back to Amazon's custom silicon manufacturer 4x already to make more. AI inference in particular is expensive and they can save people a lot vs NVIDIA.
* $75B in CAPEX this year, more next year, most of which is AWS.
Things I Think I Think:
* Is advertising getting slower because 3P unit growth is slightly decelerating (compared to 1P) at the moment? Amazon advertising business is decelerating slightly to 19% y/y growth, it's slowest growth in the last two years. Last time this happened they blamed inventory levels. No mention on the call.
* Low Cost Store still a hobby. It's unclear how they will surface this, and I wonder if it will be more of a distraction than anything. No Low Cost Store mention on the call, except: "We've always said it's easier to offer lower priced selection than to be able to afford to do so." You can say that again.
* Amazon may not be able to solve fresh grocery.
[References:]
Our Second Story
Children's Place Partnership with Shein Could Be Genius
If there's one category where everyone understands merchandise that may last less than a week, it's kids. It's through this lens that I analyze The Children's Place partnership with Shein US.
The proposition is this: would you accept 1-week shipping from Shein, compared to 3 days from Amazon to save 20%? That's what I found browsing the Children's Place on Shein.
I found an identical Shein item from Children's place on Amazon and Shein. On Amazon, the price was $49.95. On Shein, the Amazon price was the "strikethrough" price on Shein, with the promotional price being $39.96.
Before you jump all over me, consider this:
* The Children's Place Now Has 5 Pages Of Items on Shein - Hundreds and Hundreds
* The items are sold and shipped from the Children's Place.
* The products are shipped from the US.
* Shein's European Entity just reported 68% sales growth in full year 2023, and it's hard to believe that number is slowing down in this consumer environment -- especially with how committed Amazon is to responding.
Although what's not clear to me is why the ship promise is so slow, especially since these are marketed as "Quick Ship". Clearly these are going USPS but they have to be beating that promise correct?
How did Children's Place Circumvent Amazon Price-Matching Rules?
- Likely because the Shein item was > $45, and so the item was discounted 20% by Shein's rules -- so technically they are "on sale". And this was before other Shein discounts are available, including 25% off for buying 3.
The consumer is struggling. Shein is adding assortment available on Amazon, beating them on price, and shipping from the US, albeit slower. That's the value proposition. To the extent this becomes the expectation, it could become a hard proposition to ignore.
If you're a brand giving up 50% of your revenue to Amazon fees, shipping yourself a bit slower, having Shein (I'm sure) subsidize some of these promotions and paying less in advertising looks attractive and bears testing.
In an era of realignment when consumers are adjusting their expectations, it pays to experiment in places of high volume. Jamie Salter and Forever21 raised the white flag to Shein and declared a new era.
How long will it take everyone else?
[References:]
Our Third Story
The State of SaaS Venture Capital Valuations
One of my favorite sources of data this year has been Clouded Judgment, published by Jamin Ball Partner at Altimeter Capital. It's no secret that post-COVID valuations of SaaS in 2023 had come down to 3-4x revenue multiples due to a decline in growth numbers. This caused a lot of SaaS companies seeking acquisitions to delay their plans.
This has stabilized however.
The synposis is this:
* Top: If you're growing faster than 25%, you are worth 11x+ revenue (data seems sparse to me).
* Middle: If you're growing 15-25%, you are worth 10x revenue.
* Bottom: If you're growing below 15%, you are worth 4x revenue.
The data calls out a few things:
* Very few companies growing faster than 25%, which bears out my own experience. When churn is up, the headwinds are greater.
* The spread between the middle and the bottom is the entire story.
The difference between the middle and bottom growers is DOUBLE your valuation. If you are looking for an exit, or to raise money this is a critical difference.
For me that number is 20%. Mainstream Series A-C SaaS companies should calibrate their growth goals at 20%. It is simple math as to why due to the huge valuation difference in being above 15% growth.
For many, in their mid-market and Enterprise segments, net revenue retention rates are north of 90%. However SMB is flagging and retention is the issue. If your NRR is below 80%, it is difficult to grow, period. There are only a few solves for this.
First - evaluate if your pricing has gotten ahead of the market. If you are in the Shopify ecosystem and have raised prices 2-3 times more than Shopify itself has raised its pricing, than my feeling is you are in trouble.
Shopify is a value ecosystem, especially in the lower (historically strong for Shopify) segments. So pricing increases will exacerbate the challenge.
Second, consider your innovation. Many companies have forgotten their historical customers in favor of more lucrative up-market customers. This is logical, however it's also a big mistake. Every category has more competition and your customers have options.
Many are voting with their feet.
[References:]
https://www.linkedin.com/feed/update/urn:li:activity:7259908634959036416/
https://cloudedjudgement.substack.com/p/clouded-judgement-102524-misaligned
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And Our Last Story
AI Platforms Looking to Challenge Every Software Category
Similar to the rise of mobile computing, the tech world is using the latest AI innovations as a moment to reshape the landscape, or at least take aim at it. 15 years ago the theme was "what if this was mobile first?" hit the zeitgeist.
The same question is being asked of artificial intelligence. The results will be mixed, but still the shots will be taken.
OpenAI for its part is directly taking aim at Google with ChatGPT Search. Can this generational shift add value to consumers? Google itself has partially concluded that it must respond - adding Gemini to many (most?) searches, so OpenAI is making the elephant dance.
Perplexity is joining the party reportedly releasing a "Pro Shop" store which AdWeek is saying is aimed at Amazon. While it is notable that Jeff Bezos is an investor in Perplexity, it's unlikely this is directly aimed at the heart of Amazon -- especially since Amazon is essentially a very large logistics company.
There is no category of software immune from this trend, as it is in the nature of venture capitalists to seek power-law outcomes. These sorts of asymmegtric outcomes are only possible if this batch of AI startups can disrupt multi-billion dollar, sometimes multi-trillion dollar industries. And that means the incumbents.
The FAANG + Microsoft gang will attempt to defend its turf at all costs and of course are investing billions of their own dollars to be a part of the revolution, which they cannot miss. The battle continues to play out across martech, payments, supply chain, and even eCommerce platforms.
Tobi Lutke of Shopify said on a podcast recently - the future was clear for a while and it has now become cloudy what the outcome will be. Billions of dollars of "mistakes" will be made in an attempt to fix real problems. Equal amounts will be spent fixing things that are not broken. In these moments, innovation and motion is critical.
Adoption and flywheels are paramount. Meaning, simply having AI in a product is already about as useless as having a website. The solution must produce breakthrough value in order to achieve breakthrough outcomes.
Founders, business leaders, and even product managers must see past their own smoke and mirrors to the real value driven. Too skeptical of AI? You've got your head in the sand. Too optimistic? It could be a blind alley.
Your guide needs to be invention on behalf of the customer's priorities, wherever they may lead you.
[References:]
It’s That Time Friends, for our Investor Minute. We have 3 items on the menu today.
First
SpeedX Founder Acquires Accelerated Global Solutions
SpeedX founder Chris Zheng has announced the acquisition of Accelerated Global Solutions (AGS), a customs brokerage and freight forwarder. Both companies will continue to operate independently.Think about it? Now you have two businesses that can together generate revenue as AGS can help brands move inventory across borders and SpeedX can do the final mile.
Second
Vitamin Shoppe owner files for bankruptcy
Franchise Group, the owner of Pet Supplies Plus, The Vitamin Shoppe, and Buddy’s Home Furnishings, has filed for Chapter 11 bankruptcy. The company went private about 18 months ago in a $2.6 billion deal. Still, it has over $2 billion in debt as its American Freight business has continued to be impacted by rising interest rates. Franchise Group will convert 80% of its first lien debt into 100% equity in the reorganized business.
Link: https://www.retaildive.com/news/vitamin-shoppe-owner-files-bankruptcy-franchise-group/731857/
AND FINALLY
Nexxus Capital Acquires Assets of Intrinsic Brands
Amazon brand acquirer Nexxus Capital has acquired the assets of another Amazon aggregator, Intrinsic Brands, which includes five brands. Consumer preferences have changed due to the economy, as has the ability of these aggregators to sell products and be able to recoup the investment made in them has led to the brand aggregator sector consolidating.
Today’s final word for the week of November 11th is “Affordability”. I don’t care if you are Republican or Democrat in this last election, if you have been paying attention to the rise of Temu and Shein in the past three years, it is not an accident. And what happened in our election is not unrelated to the trend. Despite economists saying things are going great, when the incumbents get thrown out it generally means the economy is worse than we think and not getting better.
Brands in the audience need to consider this carefully. To me, the message is clear. Show consumers you are helping them stretch their dollar, and they will reward you with loyalty. Brand is not loyalty right now. Consumers at the moment are asking for loyalty to their pocketbooks and rewarding those brands and destinations that respect that wish.
Ignore this advice at your own peril.
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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. You can find the Watson Weekend by searching for it on iTunes, Spotify, or Youtube.
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.