November 22nd, 2021: Shopify’s Hydrogen Custom Storefront Framework, Walmart’s Q3 Earnings, Amazon’s New Payment Options, and Target Continues Great Operational Execution

November 22, 2021 Rick Watson

It’s November 22, 2021 and this is the Watson Weekly - your essential eCommerce Digest!

Today on our show:

Shopify Releases its Hydrogen Custom Storefront Framework - But More Is Needed
Walmart’s Q3 Earnings Highlight Its Grocery Gains
Amazon Introduces New Payment Options and Delivers an Ultimatum to Visa in the UK
Target Continues Great Operational Execution Triggered by Growth in Same Day Services

- and finally, The Investor Minute, which contains 5 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….

Shopify Releases its Hydrogen Custom Storefront Framework - But More Is Needed

Shopify recently released a new set of functionality called Hydrogen, which enables developers to build custom user interfaces in Javascript’s React framework.

These new updates allow building completely custom user interfaces, which has been a gap in Shopify’s previous Liquid template strategy, relative to newer competitors in the headless space.

It appears that Shopify is not immune to the headless drumbeat of flexibility and speed.

Let’s talk about headless for a second. It essentially means an eCommerce platform which allows flexibility and composability in various choices of components in the eCommerce platform stack, relative to other platforms, which are labeled “monolithic.” In theory, while headless means the front-end is connected from the operational back-end, in practice it often means flexibility in more than just these two components.

Going back to my old developer days, headless is a poor man’s implementation of what is often called something like a model-view-controller design pattern. Which proves once again that Xerox PARC back in the 1970s really did invent all the things.

The fact that this was the next on Shopify’s roadmap means to me that sales objection handling is a big focus of product prioritization at the moment -- usually when this happens you are not ahead of the curve, and instead are playing defense to keep your top customers.

In addition to what they are calling Hydrogen, there is another new framework coming called Oxygen, which in some ways is kind of Shopify’s own cloud offerings for developers to get the best performance, rather than hosting their own code or own AWS.

But this is still built on a rocky foundation of Shopify’s poor content management system foundation. Seems to me like the company should have built the foundation first before adding the custom front-end portion, but Shopify didn’t see it that way.

In any event, none of my previous comments put any kind of dent in Shopify’s growth strategy because they still have a very affordable, cloud-based platform that has most of what small to mid-market merchants need.

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Our Second Story

Walmart’s Q3 Earnings Highlight Its Grocery Gains

Last week, Walmart reported Q3 earnings with about 9% same store sales growth, which is comparable to Target overall, with Sam’s Club posting double-digit growth.

What’s more interesting about Walmart these days is its penetration in the grocery world, which continues to expand, I think, at the expense of most other players in the space including Instacart. Instacart for one is going to need more than a new brand campaign to match the price drops and fulfillment efficiency of Walmart.

eCommerce sales grew 9% in the quarter, which was a marked difference to Target, which grew over three times that amount at 29%.

Walmart further highlighted its assortment expansion of 21 million more items for its marketplace in the quarter. While that sounds interesting, it doesn’t tell us if it’s unique supply. I bet a lot of it is not unique — anyone who’s been on Amazon in the last 5 years can easily see that they have the same issue as well.

More on the marketplace side, the company also seems excited about its continued investments in Walmart Fulfillment Services, which were mentioned on the call.

I couldn’t help but feel this quarter’s results for Walmart were a little light on details overall, so it will be interesting to see how they are positioned in Q1. Target is still out-executing them in omnichannel experience, and despite their growth in advertising, marketplace and fulfillment, they are still the “me-too” player compared with Amazon.

They are making good investments but the future follow-through is much more important.

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Our Third Story

Amazon’s Introduces New Payment Options and Delivers an Ultimatum to Visa in the UK

In the past few weeks, Amazon has made a flurry of important announcements in the payments space.

First, Amazon recently announced that in January it will stop taking Visa payments in the United Kingdom due to the fees charged by the company.

Second, Amazon introduced and doubled down on its investment in Affirm as well as Venmo. The thing you can’t help but notice about these new payment options is that they are not credit-based. They are alternative payments based on financing or debit.

In order to frame this debate for you, consumers - particularly the younger generations - are not hooked on credit. Debit is much more common, particularly because it’s hard to get credit at the start of your career. What it means is that new payment methods have started to build a playbook to come to market, make it easy to use, and then add additional services to keep those customers long-term.

In the past, as consumers got older they would increase their credit adoption. What’s changed is that adoption has shifted to debit-based options like Venmo because they don’t allow you to accumulate debt — a huge worry for millennials and GenZ in a precarious economy.

The newer Buy Now Pay Later companies like AfterPay, Affirm, Sezzle, and Klarna have attracted millions of customers, particularly younger customers that are more digitally savvy.

As a result, I like this move from Amazon because it taps into these trends that have been building. I also feel it also serves as a warning for the company, which has been able to grow over the past 20 years mostly through credit card payments.

> The US market has been very stable and owned primarily by Visa and Mastercard. Even the mighty Amazon needs to adapt to survive, and if they can do that while at the same time reducing their payment processing fees to Visa, then all the better.

Every retailer and brand needs to sit up and take notice of these growing payment trends.

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And Our Last Story

Target Continues Great Operational Execution Triggered by Growth in Same Day Services

While the stock market didn’t react favorably to near-term cost pressures, last week Target delivered a strong Q3 earnings report. These solid earnings are really the results of over five years of patient, results-oriented investments in its stores and supply chain.

I have a few points to make here.

First, the CEO Brian Cornell led the call with a discussion of priorities and values. The CEO counts a few important enterprise-wide priorities as key to the collaboration and results across multiple teams at Target.

As I talk to companies, I often see different teams that are motivated by different and even competing sets of priorities .

It’s clear to me that Target not only understands how to develop new leaders, it also has a framework in place to make smart decisions and see that investments are followed through on.

If there is a better CEO in retail today than Brian Cornell, someone please give me an introduction.

Second, despite short-term gross margin pressure due to wholesale and landed cost increases, Target will likely end the year with a greater operating profit margin than last year. In 2020, Target had 7% operating profit margin. The company expects that it will end 2021 at around 8%, or with a full point profitability increase.

How does 7 or 8% compare to other retailers? Well, let’s look at Amazon and Walmart. Amazon has flat to slightly negative margins in its overall retail business. Walmart had about 3% operating margin. This gives some perspective on just how profitable Target is relative to its competition.

I’m going to let that sink in for a moment. Target is more than twice as profitable as Walmart and growing faster.

What does this mean and how did it happen?

John Mulligan, the Chief Operating Officer at Target, reported that its same day fulfillment services from stores - which includes curbside, pick-up in store, and same day to the home - are all materially more profitable than shipping from a central fulfillment center, which is the dominant eCommerce shipping model.

I want to end by mentioning Target’s same day services. Here are a few stats for you Watsonian data geeks in the audience:

- Same day services are up 60% on top of 200% a year ago.

- Driveup/curbside leads increased 80%, on top of 500%+ a year ago.

- In-store pickup, plus Target’s Shipt delivery business, are up 30%.

All these numbers show that Target’s customers are responding positively to all of the company’s investments.

> It really makes me wonder why more retailers are not following Target’s lead here. It doesn’t make sense, and I feel like I have been saying this for the past two or three years. Will more retailers get the memo in 2022?

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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.

Multi-channel marketing automation provider Sendlane raised $20 million in Series A funding. It seems to me like the company wants to be something like the next generation of Klaviyo, which offers SMS and email marketing tools to boost customer loyalty and engagement through the use of analytics and data.

https://techcrunch.com/2021/07/22/sendlane-raises-20m-to-convert-shoppers-into-loyal-customers/

Second

In Amazon aggregator news, HeyDay just raised $555 million in order to continue its torrid pace of acquisition of Amazon marketplace sellers. It doesn’t seem like this trend is slowing down anytime soon as HeyDay joins the likes of Perch, Thrasio and Berlin’s Razor Group at the top-end of the funded companies in this market.

https://techcrunch.com/2021/11/16/heyday-raises-555m-to-buy-up-and-scale-more-d2c-brands-on-the-amazon-marketplace-universe/

Third

Popular wholesale marketplace Faire raised$400 million in order to continue its platform investments and growth.

A wholesale marketplace allows brands to be found by retail merchandising teams looking to add new inventory to their store chains. I was struck earlier this year when I learned that the most popular search filter on the Faire platform used by retailer merchandisers looking for new brands was the “Not on Amazon” filter. Very telling, and smart for independent retailers looking for unique inventory.

https://www.wsj.com/articles/wholesale-marketplace-faire-raises-400-million-11637056802

Fourth

Israeli-based brand connectivity software Cymbio raised $20 million in a Series B for its platform. Unlike some other players in the space that started from the side of the retailer, Cymbio generally starts from the brand’s point of view, helping them connect to new channels more efficiently.

https://www.calcalistech.com/ctech/articles/0,7340,L-3922774,00.html

AND FINALLY …

In a shoutout to my friends in South Beach, Keith Rabois’ and Jack Abraham’s startup OpenStore raised an additional $75 million.

One thing I like about this particular aggregator is that it is focused on direct to consumer Shopify brands rather than Amazon sellers….

However, I was struck by a quote from the founder who mentioned that he challenged his team to make one new acquisition a day by the end of the year.

Have we hit peak investor craziness yet?

https://refreshmiami.com/charging-ahead-openstore-raises-75m-series-b-led-by-general-catalyst/

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Next week we will not release on Cyber Monday because that would be insane. Instead we will release next Wednesday.

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.

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