November 20th, 2023: Target Q3 2023 earnings surprise, Shopify’s recent outage, Update on Amazon Fresh, and my 2024 outlook
Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.
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It’s November 20, 2023 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Target Q3 2023 Earnings Surprise
Shopify’s Recent Outage
Update on Amazon Fresh
My 2024 Outlook
- 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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Just a reminder to stay tuned until the end for my Final Word for the week.
BUT FIRST in our shopping cart full of news….
Target Q3 2023 Earnings Surprise
It looks like Target had a good quarter, at least on the profitability front and I thought it might be a good time to unpack it here, since I think there are lessons here for everyone in the industry.
The story of Target the last 3 years is navigating the pandemic bullwhip. John Mulligan, the retiring COO of Target, told the story well:
* 2021: Could not secure enough inventory to meet demand due to digital growth.
* 2022: Growth in discretionary reversed. Way too much inventory. Operating margins at historical lows.
* 2023: Right-sizing inventory, control what we can control.
Target Q3 2023 Earnings quick recap:
* Comparable sales down 4.9%, revenue 4.2% lower
* Gross margin 27.4%, up 11% y/y.
* Operating margins at 5.2%, a full 1.3 points higher than last year.
A few odds and ends:
* Same-day sales up, led by Driveup up 12% y/y.
* Comp sales were expected to be flat y/y in 2023, but are down 5%. More than expected even given Target's huge efforts.
* Beauty an outlier: high single digit growth y/y. Rihanna by Fenty launching soon.
* Discretionary y/y down high single to low double digits. Electronics and apparel the worst. Home high single digit decline.
* Other revenue basically flat, proving Target is still a retail media outlier.
Macro-trends Target is reporting:
* Units and sales down for discretionary items 7 quarters in a row.
* Food & Beverage inflation still up 25% since pre-pandemic
* Consumers still making difficult choices, responding to heavy promotions.
In response to this, Target has identified four key factors that all multi-category retailers should be thinking about in the face of these trends:
1 - Right-size your inventory, particularly in declining discretionary segments. Everything else fails if you get this wrong. Target's inventory is down 14% y/y, and discretionary inventory is down even lower at 19% y/y.
2 - Below $25 is a critical price point across the assortment. This must be highlighted to consumers, especially during shopping seasons.
3 - Invest in newness, on-trend and freshness.
4 - On weeks without shopping, promotions the only thing driving demand. Don't chase unsustainable gains.
Finally, for Q4 2023, Target is forecasting mid-single digit comp declines, which feels about right in a balanced discretionary retailer and is probably about the best you can do with huge efforts in these categories.
These lessons from Target I think all retailers need to hear. We are not all in essentials or replenishable categories. Cautious category-by-category inventory planning is the essential watchword.
[References:]
Our Second Story
Let’s Talk About Shopify’s Recent Outage
Last week one of the biggest stories of the week was Shopify’s 45 minute outage. As a result of the outage, the company has instituted a code freeze for the rest of the holiday period.
"The horse is out of the barn already" is a term that comes to mind when I think about enacting a code freeze the week before Black Friday right after a 45 minute outage. The old eCommerce developer in me is reminded, isn't this Q4? Don't code freezes usually start mid-October timeframe at the earliest and November 1 at the latest?
At the beginning of the outage, I was randomly browsing some Shopify websites with an agency friend and noticed the outage around 3:27PM Eastern time. I have a few questions that I feel need to be asked as a result of this:
* If you don't proactively freeze code heading into the busiest time of year, when will you do it?
* Is it much of a status page if you can't even see the timeframe of the "recent events"? (It looks like the past two weeks)
* Aren't breaking database changes the riskiest type of change to attempt, regardless?
* Can't AI analyze and detect the risk of certain types of developer changes?
* How long until more transparency and trust become part of their Enterprise messaging instead of just innovation?
One of the first SaaS companies in the world, Salesforce, famously and successfully convinced the world that multi-tenant SaaS software was reliable; one way they did that was by having an extensive and detailed (I recall even multi-year) audit log of production issues to keep the company accountable.
Sadly, their vaunted trust (dot) salesforce (dot) com website is just a shell of what it used to be, only showing details for the past few weeks.
This leaves me with my last question for the community: what is Shopify's real uptime?
On a help page, sure, their marketing team says "99.99%", but that is 52 minutes per downtime a year. Considering they used up 45 of those minutes last week, I'm guessing that web page might need to change.
In addition to their QA processes, I would love to see some improvements to the Shopify status pages. It would benefit the entire community.
I'm sympathetic in some respects that there is no such thing as perfection in SaaS. Still... there are ways to get better here, and based on Shopify's desire to go much further up-market, it needs to hold itself to a much higher standard than just releasing more code than anyone else.
After all, it's not just the rebels relying on them anymore. And it's not just the rebels they are pitching anymore.
[References:]
Our Third Story
Could 2024 Be The End of the Line For Amazon Fresh?
Amazon has been in the grocery business since they acquired Whole Foods in 2017. Problem is, they have not improved their situation very much. Amazon Fresh has opened up, but they company tried to add so much technology to the stores that they ended up like sterile wastelands.
It seems like Amazon has a new VP of Retail in the US and is finally focused on getting back to the fundamentals, according to a recent article in RetailDive.
The problems she indicates are as follows:
* Assortment gaps preventing customers building a full basket.
* Basic grocery experience was cold and lifeless
* Not enough convenience with prepared foods.
Sounds bad. Other than that Mrs. Lincoln, how was the play?
Amazon has a long road ahead of it, and is still trying to learn what makes a grocery retailer work. I’m left wondering, even if Amazon happens to figure out what makes a regular retailer, why would people given up the store they already shop at?
Creating a welcoming store could just as easily end up another empty store. Do I trust Amazon with my groceries is one question that comes to my mind. I think the question is still unanswered.
In the article, the Amazon VP of Retail says that if they can figure out the formula, they will expand it. Sounds like they don’t know yet, and this is 6 years in. If Amazon’s grocery expansion was a sports betting line, I know I would be betting the under.
[References:]
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And Our Last Story
My 2024 Outlook
We've had two good recent earnings in Amazon and Shopify recently, and even Target seems to have figured out its profitability issues. This is good for retail overall heading into the holidays. Overall, though, there is no "rising tide" lifting or sinking all boats. Most companies have their own stories. Amazon buoyed by Advertising and Cloud. Shopify's accelerated growth in Europe and POS.
On the downside, UPS was still recovering from both Teamsters contract parcel diversion and weaker y/y shipment numbers from its customers. Target’s digital business is still struggling to be relevant in a world where discretionary income is hard to come by.
The best analogy for 2024 at the moment is the shrug emoji 🤷♀️ We are past the point of profitability and economic trends affecting many company's restructuring decisions. However, that means those who are still out there making adjustments are in more dire circumstances than the "early adopters". In other words, I don't expect better news.
Maersk, Carta, BigCommerce, Faire, Salsify show you even relatively well-funded companies have layoff and profitability issues and as a result there is little margin for error. Shopify cut 20% of its workforce in May, and has signaled that AI will likely flatten out its support hiring going forward.
On the SaaS side, you have some out there predicting a startup extinction event, and in large part I think it's happening. The VCs who took flyers on companies during the pandemic don't have unlimited capital, and many are loath to take chances on companies that can't attract another lead investor.
In this environment, I would encourage all SaaS founders with less than 16 months of runway to be almost continually fundraising. The reason?
Just because many VCs and investors are looking for perfection right now, doesn't mean they all have the same definition. Give yourself time and runway to fight another day.
[References:]
https://www.linkedin.com/posts/ecommercestrategyconsulting_more-consumer-clues-in-target-walmart-earnings-activity-7129814020575891456-oPso?utm_source=share&utm_medium=member_desktop
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Hey, Watsonians, Do you wonder what the FTC thinks about what Amazon did to Zulily or Jet.com? (did Amazon harm or kill Zulily and Jet.com)? If you were in our online community, you would! To stay on top of what’s going on in eCommerce and join the conversation, visit community.rmwcommerce.com today.
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Omnicom Acquires Flywheel Digital for $835M
Omnicom has acquired Flywheel Digital, a marketplace agency, for $835M, a move that continues the trend of incumbent agencies acquiring e-commerce or digital marketplace agencies.
Link: https://www.wsj.com/articles/omnicom-buys-e-commerce-shop-flywheel-digital-for-835-million-a40212d4
Second
Shein Buys UK Fast Fashion Brand Missguided
Shein, a global fashion marketplace, has acquired the intellectual property and trademarks of UK-based Missguided, marking a significant expansion for their business model. After acquiring a stake in Forever 21, Shein wants to be more involved with the manufacturing and selling branded fast fashion.
Link: https://www.reuters.com/markets/deals/shein-buys-missguided-ip-mike-ashleys-frasers-2023-10-30/
Third
FCP Euro Raises $25M Series A
FCP Euro, an automotive parts retailer, has raised $25M in Series A funding. The new capital will be used to grow the company's geographic footprint. The aftermarket auto sector is fascinating, and FCP Euro is growing quickly. Congrats to CEO Scott Drozd and all my friends at FCP Euro on the fundraising. First capital raised in the company’s 20 year history.
Fourth
Tory Burch Hires Morgan Stanley To Explore Options
Tory Burch has enlisted Morgan Stanley to explore strategic opportunities like a potential public listing, sale, or new investors. Tory Burch prides itself on being private; why is the company exploring opportunities?
AND FINALLY …
Davinci Micro Fulfillment Raised a $3 Million Seed Round
Edge Fulfillment and Software Provider Davinci Microfulfillment provider DaVinci microfulillment raised a seed round in order to help accelerate its growth, expand its software offerings and I’m sure continue to open new facilities.
Happy to see this for CEO Corey Apirian, a Watsonian and great friend of the program. Looking forward to bigger and better things from DaVinci in the future.
Today’s final word for the week of November 20th, 2023 is: INVENTORY.
If you are in retail right now, you have had quite a problem the last few years managing inventory. Going from the digital COVID explosion, to the post-pandemic hangover has been rough. 2023 has hopefully given everyone a lot of practice in what consumers are expecting now with tighter wallets, so take those learnings and bring them into 2024.
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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.