November 8th, 2021: Supply Constraints Slow Down Advertising, Bed Bath & Beyond Signs With Kroger, Amazon’s Challenging Earnings, and Shopify’s Fulfillment Strategy
It’s November 8, 2021 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Advertising Slowing Down With Supply Constraints
Bed Bath & Beyond Signs a Big Partnership with Kroger
Amazon Has a Surprisingly Challenging Earnings
Shopify’s Fulfillment Strategy Remains a Mystery
- and finally, The Investor Minute, which contains five 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….
Advertising May Be Slowing Down with Supply Constraints
The biggest question brands have right now as we head into the peak of the holiday season?
“What are our options if we are short on supply?” A recent report from the Wall Street Journal dives into this very topic and focuses on some major brands like Hershey’s and Kimberly Clark, which are starting to make statements like:
QUOTE: “It’s not wise to drive demand while shelves are bare.” END QUOTE
In other words — If a brand’s supply is limited, what’s the point of advertising?
This may sound counterintuitive if you’ve never run a brand or retailer before, but the logic makes too much sense.
Once you are locked into a season, you have a set of inventory to sell through, and as fast as possible. What happens in a situation where you can predict the number of weeks of sell-through, but the product is going to sell out before the season is over?
Well, at this point you have two primary levers. One is price, and the other is promotion. Let’s explore the effects of changing both on demand and other factors. Starting with price.
The simple laws of supply and demand say that if your price goes up, demand goes down. Demand going down is good, because that stretches out your supply to meet the entire season, but what about other effects?
Not only does demand go down, but your customer’s satisfaction might also decline. If you are perceived as taking advantage of shortages, price gouging, or your prices just look very high compared to your competition, that could tarnish your brand reputation long-term.
But are there other ways to suppress demand in a supply-constrained environment? The simple answer is to reduce your demand-generation efforts, in other words, advertising.
While this could be a worry for the advertising industry in general, I don’t expect it will miss too much. What’s really worrisome is this double whammy of supply-constrained brands combined with Apple’s iOS changes, which reduce visibility and effectiveness. This combination is powerful.
>The best advice I have for supply-constrained brands right now? Reduce your advertising slightly, but keep some cash in reserve to accelerate your business, particularly if you see per-click costs start to drop due to other brands following the same approach. You may be able to grab market share.
[References:]
Our Second Story
Bed Bath & Beyond Signs a Big Partnership with Kroger
Last week, Bed Bath & Beyond got a major stock boost by signing an extensive deal with Kroger. The news was a little complicated, so let’s break down what happened.
First, Bed Bath & Beyond announced its own digital marketplace. Fun fact, I talked with Bed Bath & Beyond about building its own marketplace almost eight years ago when I was CEO of Merchantry. Clearly my salesmanship was unsuccessful.
Anyway — Although it wasn't announced, I have pretty much no doubt it is Mirakl powering this, as this is the same provider used by Kroger's marketplace.
Second, Bed Bath & Beyond announced it will power a number of home and baby categories for Kroger online, with in-store experiments coming later.
There are a few interesting topics to unpack related to this deal. The first one is related to the Bed Bath & Beyond marketplace.
I’ll consider it a given that the site has enough traffic to support a marketplace. Online, there is no cost of extra shelf space so it only makes sense that the company uses this to expand its business.
The big question about the marketplace is — and this was highlighted by one of my LinkedIn followers — how many items on BedBathandBeyond.com will not be on Amazon? Unless it can get unique supply, there will be almost no reason for people to switch their buying behaviors and the impact may not be as great as expected.
Outside of the marketplace, Bed Bath & Beyond also announced that it would supply baby and home products to Kroger stores. This is a lot more interesting to me. There are really only two possibilities here. One is that Kroger is using Bed Bath & Beyond as a kind of “distributor” to curate a selection into these stores.
This approach strains credibility because Kroger has enough buying power to source these products directly. What is really gained by this tie-up?
The other option - which no one is saying out loud - is that this is really about the new Bed Bath & Beyond private label brands — in particular, how the company finds distribution partners to improve their sell-through. That would be an interesting play for Bed Bath.
The magnitude of the stock rise - over 30% in the past week - suggests that there may be something else at play, however.
> What’s being left unsaid here? Investors are looking for a reason to believe that Bed Bath & Beyond is still relevant. What better way to do that than to partner with a company that is 30-times its market cap and, incidentally, a potential future acquirer.
Kroger in particular is under a brutal assault from both Walmart and Amazon and may need to expand its categories and margins in order to stay relevant. I believe that investors are projecting a closer relationship and even a potential merger between these firms at some point in the future.
[References:]
Our Third Story
Amazon Has a Surprisingly Challenging Earnings
Amazon reported Q3 earnings last week and had something of an interesting quarter which the company hasn’t had in some time — namely, both a revenue and a profitability miss.
The short story is that revenue grew at a smaller 15% year-over-year off one of the best years in its history, so some of that is expected. And that continued with advertising growing ONLY 50% year-over-year, as opposed to its previous normal of 70%-80% growth. Most companies would be happy to complain about 50% year-over-year growth.
The bigger shock is on the cost side. In Episode 7, we spoke at length about FedEx and the challenges it is having, namely:
- FedEx can’t hire workers so its hiring costs and wages have increased.
- But still it can’t staff its facilities 100%.
- Which causes “chaos costs” in its network because now FedEx has to route parcels away from its most efficient network nodes to fully staffed facilities farther away from the parcel’s optimal path.
As I listened to Amazon’s earnings call, I felt a sense of déjà vu because this same formula is playing out.
Now in Amazon’s defense, we are dealing with a different proposition here. The company has doubled its logistics capacity in the last 18 months since the start of the pandemic.
Just think about that for a moment. Amazon doubled its facility capacity in the last 18 months. That is breathtaking on its own.
What is really happening here is that Amazon is experiencing what is known as a “whipsaw” effect. After over a year of severe capacity constraints on FBA sellers and itself during the pandemic, Amazon was apparently determined to solve this problem at any cost.
If you’ve ever read Eli Goldratt’s books like Critical Chain, you know the first job when you hit a constraint in a supply chain is to elevate that constraint and crush it. Amazon did that masterfully and the CFO reports that it pulled virtually all of its 2022 network expansion forward into 2021.
What it did not truly plan for was one of the tightest labor markets in a generation, so it lurched from one constraint to the next.
> What does this mean for Amazon next? I expect this to be only a short-term bump on the road for Amazon. Despite the media narrative of how horrible the company treats its workers — it literally gives new drivers a water bottle that they then use to urinate in to save time and improve their metrics — Amazon actually does have higher wages and better benefits than 90% of the logistics market, so this will solve itself as well — just not on a neat quarterly boundary. The bigger question in my mind is, if Amazon is doing this poorly, how can the rest of the logistics industry have any hope? Seems to me that consolidation is coming fast.
[References:]
And Our Last Story
Shopify’s Fulfillment Strategy Remains a Mystery
Shopify reported earnings last week and we’ll get into that, but first I want to talk a bit about what Shopify is doing in fulfillment. On the very first question of Shopify’s earnings call, the CEO was asked the following question.
QUOTE
“What is Shopify doing to combat supply chain issues and logistics costs inflation?”
END QUOTE
What followed was a masterclass in how to fumble a softball question, starring Tobi Lutke. First of all, his answer rambled all over the place and ultimately landed on a strange response indicating that its merchants had margin and were buffering these costs.
To which I have a few responses:
1 - How are you not prepared for such a simple and obvious question?
2 - How can Shopify customers not see this as a big “F YOU” and “you guys need to fend for yourselves” rather than Shopify coming to their rescue and, you know, actually doing something to help.
3 - Let’s back up and talk about Shopify’s message. You are arming the rebels against the evil Empire Amazon. The same company that happens to be one of the best logistics providers in the world.
It sounds to me like Shopify is bringing a knife to a gunfight, doesn’t it? This is simply poor strategic positioning on Shopify’s part and the CEO not understanding the intent behind the question.
This, to me, calls into question the experience of the management team.
>> So what would have been the correct answer to this question? Simply put, Lutke should have said, “We are building out our fulfillment offering. We realize it is still nascent and we can’t help enough people right now, but we are accelerating those investments.”
That’s all the response needed and it’s glaring to me that Shopify may not in fact be accelerating its fulfillment investments. Which means it is still tinkering around the edges in a market that I think the company honestly has no business being in to begin with.
[References:]
https://s27.q4cdn.com/572064924/files/doc_financials/2021/q3/Shopify-Investor-Deck-Q3-2021.pdf
https://news.shopify.com/shopify-announces-third-quarter-2021-financial-results
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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
American Eagle Outfitters offers to buy 3PL firm Quiet Logistics for over $350 million. This continues the trend of large retailers buying logistics companies for expertise, but also for the purpose of diversifying into service-based revenue streams.
Second
eCommerce software provider Avalara recently bought closely-held, automated HS classification software provider 3CE.
What is HS classification? Well, customs brokers all over the world use what are called HS or Harmonised codes to accurately classify and rate the goods being transported internationally. The problem that retailers and marketplaces with wide selection have is that it’s often very complex to understand the right codes to assign to these parcels. And the cost of doing that improperly could result in penalties and fines or worse.
My friends Craig Reed and Meg Higgins at Avalara I’m sure had their hands all over this acquisition.
https://www.linkedin.com/feed/update/urn:li:activity:6841119155899396096/
Third
Louisville-based social commerce provider GoWild raises $2.5 million in order to expand its eCommerce operations. The company is focused specifically on hunting and fishing enthusiasts.
The thing I like about companies like this is that they brought eCommerce to an engaged active community that cares about their gear.
Too many companies are instead doing the opposite - selling gear to an unengaged buyer base.
Fourth
Logistics provider Deliverr is raising a $250 million funding round at a $2 billion valuation. Deliverr is one of the leading providers on the market and since the beginning its rise has been propelled by the ability to quickly fulfill for marketplace sellers that require high reliability.
Deliverr made a name for itself early on with its partnership with Walmart’s Marketplace, powering its Two-Day Delivery program from the early days.
AND FINALLY …
eCommerce checkout provider Bolt raises $777 million at an $11 billion valuation. I feel like we just said this in our last episode, but, yes, the company is raising money again.
How Bolt increased its valuation so quickly is a little beyond my understanding. If we aren’t already in some kind of payments bubble, we are close to it. Raise money now if you can, folks!
https://www.axios.com/bolt-financial-one-click-valuation-b4ad5767-3a0b-486f-8b53-95be29b1a091.html
One more thing. I noticed Pinterest and Walmart are in a new tie-up. The common denominator in the previous PayPal rumor, Etsy’s worries about Pinterest’s power over it, Albertson’s tie-up with Pinterest, and now Walmart integrating Pinterest. Count me among the believers that Pinterest is a great long-term player in this space because the company understands how to deliver to its audience.
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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.
