October 18th, 2021: Macy’s eCommerce business, Michael’s eCommerce marketplace, Thrasio delays SPAC deal, and the port delays prompt big-company workarounds.
It’s October 18, 2021 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Will Macy’s Be Forced to Spin Off Its eCommerce Business?
Arts and Crafts Chain Store Michael’s Looks to Launch Its Own eCommerce Marketplace
Amazon Aggregator Thrasio Delays SPAC Deal as Executives Exit
Port Delays Prompt Big-Company Workarounds and Government Action
- 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….
Will Macy’s Be Forced to Spin Off Its eCommerce Business?
Activist investor Jana Partners recently announced that Macy’s could make $14 billion dollars if it split off its eCommerce business, and is starting to demand that the company do so. Macy’s eCommerce business unit is projected to reach approximately $8.3 billion in 2021, which would give it about a 2x revenue valuation, using comparables to what Saks.com did when it was spun out of Saks Fifth Avenue earlier this year.
What’s an activist investor? The playbook usually goes like this. An existing investor in a company sees a big financial opportunity that perhaps other Board members see but the management is for some reason opposed to. Often these players buy up a larger share of the company and acquire more Board seats to get their way.
What follows is very often a very public back and forth battle between the CEO and the activist investor. Having watched for years similar types of disputes between Elliott Management and companies like eBay, I anticipate some kind of resolution, meaning the investors get some or all of what they are asking for.
Why do they do this? To make money. The thinking is that if the company takes advantage of whatever opportunity the investor sees, then all shareholders benefit, not just the activist investors.
What does it mean for an eCommerce business unit to split from its parent company? Essentially what happens in its place is some kind of affiliate or franchise-like arrangement between the entities.
On one level this makes sense. Macy’s valuation is approximately $7 billion total. Using Saks comparables, the eCommerce business on its own could easily be worth twice that amount. What’s not to like about creating $21 billion in value where there is only $7 billion today?
But does this make any actual sense? Of course not. This is about the dumbest form of financial engineering I can imagine.
There’s only one Macy’s brand. There’s only one customer. So for investor reasons, you should split apart an entire company?
Seems like a big shell game to me.
What you have to believe is that investors really have no faith in Macy’s stores business. Meanwhile, they have this internet business that, if it were not attached to this historic department store chain, would be worth a lot more.
The problem? This is a nonsense premise. The eCommerce business didn’t evolve on its own like Amazon did. The only reason people are visiting the website is to make it easier to transact with a store chain they are familiar with, powered by an inventory assortment that only a large stores business could possibly support.
The classic confrontation.
In one corner, we have investors who just invented a $14 billion payout out of thin air.
In the other corner, we have common sense.
My advice to anyone looking to handicap this race?
Follow the money.
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Our Second Story
Arts and Crafts Chain Store Michael’s Looks to Launch Its Own eCommerce Marketplace
The Dallas Morning News brought a new specialty marketplace to my attention being built by Michael’s.
Here’s what we know from the published reports:
Rather than using an off-the-shelf marketplace platform, the company acquired technology from Zibbet.
Michael’s eCommerce business grew triple digits over the past two years with people spending more time on creative projects during the pandemic.
The marketplace is headed up by a pair of Jet.com veterans, so you know they have had both good and bad experiences to learn from in the past and are going into this with eyes wide open.
The target launch date is early next year and the company is starting with expanding the supply of craft raw materials to existing buyers. I like this move because it matches their buyer’s existing behavior.
Where could they go from here? The most exciting possibility I see is what they might do in Phase 2. Michael’s has the ability to create new entrepreneurs because of how creative their buyers are.
The question I ask myself is what percentage of Michael’s customers are digitally savvy? I’m sure many, but not all are. This could create an entirely new consumer-to-consumer marketplace if the tools are simple enough for the average consumer. Imagine if you bought your craft supplies on Michael’s website, and then you were able to add your own creativity and value, and sell your creation back to other Michael’s customers and other channels like Etsy? And instead of having to navigate the digital world yourself, Michael’s helps you?
The key to that proposition would be Michael’s viewing this as not simply building a marketplace, but helping its shoppers build digital businesses.
The biggest worry in my mind with Michael’s strategy is technology. The company is building a marketplace on its own, rather than leveraging a third-party. While this gives them a lot of flexibility, it also brings risk. The key determining factor in this case is not strategy, but the execution of their technical teams — something many retailers are not known for.
Stepping back from Michael’s and thinking more broadly for a moment. Retailers that are building a new marketplace have only two problems to solve:
One, are enough of our buyers looking for additional selection that can be filled by third-party supply?
Two, can we drive traffic and conversion of those new items?
Let’s take the questions one at a time.
Are enough buyers looking for additional selection that can be filled by third-party supply?
The primary mistake that can happen here is misjudging the traffic you have and what your buyers are looking for. If you aren’t careful, you will add sellers whose products don’t match your buyer’s demographic… or you will not have enough scale to drive meaningful traffic to any one seller.
If you just need a few more suppliers to test demand, dropshipping may be a better short-term option to expand your supply until your traffic scales.
The second question is can we drive traffic and conversion of these new items?
In my career, I see too many retailers with less than 1 million visitors per month in traffic trying to start a marketplace and assuming it will ignite their flywheel. It will not because you have not attracted enough critical mass of shoppers who trust your brand enough to notice your new selection. Assuming you will later figure out how to acquire shoppers from your competition is an extremely expensive and often wrong assumption.
Even Amazon tried and failed twice to launch a marketplace when it didn’t understand how to drive traffic and conversion to its items, wasting millions of dollars in the process. Only when it decided to allow third parties to compete on its own product pages was it able to be successful. Grocery retailer Albertson’s launched its own marketplace a few years back, only to learn the same lesson 15 years later.
The cost of not answering these simple questions properly is extremely serious. More funding will not help solve these problems, it will just create a bigger hole for you to throw money down. The good news for Michael’s is that it appears to have answers to these critical questions at the start of its journey.
[References:]
Our Third Story
Amazon Aggregator Thrasio Delays SPAC Deal as Executives Exit
This one is a doozy in the Amazon aggregator market with one of the larger players in the Amazon rollup business. What’s happening here?
First is executive exits. Co-founder Josh Silberstein recently left the business, along with the CFO, who was only part of the company for a total of three months.
Second, there are reports of issues with financial audits ahead of an exit that the company was seeking by the end of the year.
Here’s my take:
First, even though Thrasio’s current president says the company was never considering a SPAC, it does not mean they were not seeking some kind of exit. It’s silly for him to say otherwise.
The fact that they were considering a SPAC at all tells you everything you need to know. I was talking with a good friend in the financial industry and there is a reason for a company to consider a SPAC , rather than an IPO, to exit and that’s because the scrutiny and due diligence requirements are much less.
Furthermore, unlike earlier this year, the SPAC loophole, if you want to call it that, is closing fast and there are very few companies considering this going forward.
Second, corporate governance is a serious thing — issues with financial audits likely mean that there is no way this company would pass financial muster to go public in the traditional sense. Investors should always insist on certified audits before putting money in anything. Don’t just let the fact that someone has raised a lot of money in the past convince you that someone else must have checked this out. Hasn’t anyone been listening to the Theranos trial?
Finally, the fact that a co-founder left before an IPO means one of two things: are there some serious company issues we don’t know about, or did this person get paid a lot of money to leave. Likely the former.
In terms of things we may not know, can we just stop for a second and take a look at Thrasio? Over a billion dollar valuation. Three executives were running the ship, none of whom have ever run an eCommerce business in their entire lives.
Raising several hundred million dollars and acquiring hundreds of million-dollar brands is truly a recipe for a management disaster. Even just the financials could take dozens of people to sort through and fix.
Whether this story serves as the canary in the coal mine for the entire sector or is more of a one-off is the real question.
My prediction? Likely 10-20% of the sector is extremely healthy with experienced operators running the ship, 25% are in WAY over their heads, and the rest are somewhere in between. This isn’t exactly a ringing endorsement of the sector.
If the model is to be something like the Proctor and Gamble of Amazon, are there even ten companies that survive out of this current surge of over 100 roll-up companies?
Sadly, the long-term answer is likely no.
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And Our Last Story
Port Delays Prompt Big-Company Workarounds and Government Action
A new Wall Street Journal report notes that large retailers like Walmart, Home Depot and Target are flexing their muscles in a battle to stay ahead of all the port delays in the United States.
Here’s the latest:
First, unlike traditional sea freight in which each ship carries over 20,000 containers and can go into only a few ports, these retailer workarounds are trying to use lower capacity ships and route into lesser-used ports like Portland, Oakland, and the East Coast.
The motivation for these moves is that it is taking about 80 days to transport goods across the Pacific, which is about double pre-pandemic levels.
This solution won’t help most retailers, however, as these smaller charter ships are twice as expensive as larger container ships and hold fewer than 1,000 containers.
The funniest quote from this whole experience comes from the VP of Transportation at Home Depot who said,
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This whole idea of chartering our own ships started as a joke.
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If that’s true, the question is, who is the joke on?
Maybe the consumers who are going to be the ones footing the bill for these more expensive and still-delayed shipments.
In order to streamline this situation, the government is stepping in too. The White House is meeting with commerce industry leaders like Walmart and Home Depot, in addition to the Los Angeles ports and unions, in order to break the logjam. The idea seems to be some kind of government authorization to force the ports to work off-hours - effectively 24/7. There is some mention here that smaller retailers will also get to take advantage of this.
The big problem in this situation is that this will only be so helpful. The US government can’t help COVID shutdowns at Chinese and Vietnamese manufacturers, or delays at foreign ports. Not to mention, where will the extra truckers come from to ship to already overstuffed warehouses across America?
While this backlog is a nice reminder of what the government can offer if it’s paying attention, does it feel to anyone else that this solution is about three months too late?
[References:]
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It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
UK-based fulfillment solution Huboo raised $81 million in Series B financing. Huboo appears to be similar to folks like ShipHero, Shipmonk and others in the United States combining both software and services into one solution.
Second
Mexico-based eCommerce platform PideDirecto raised $5 million in seed money in order to build its eCommerce platform. The company acts like Shopify might if 30-minute deliveries were built into the platform natively, which is an interesting concept.
Third
Poshmark acquired authentication platform SuedeOne in order to boost its automation for items less than $500. If Poshmark has a clear idea of what is fake vs what is real, this seems like something that could be automated better than human eyes and checks. On the other hand, if it doesn’t, this could be a loophole for seller scams. While this alone won’t help Poshmark’s flagging stock price, if the promise holds, it’s definitely a limiting factor in the value chain so continued experimentation makes sense.
Fourth
Softbank invests $400 million in direct-to-consumer sports athleisure company Vuori. This company became very popular during the pandemic which likely helped fuel their meteoric rise. All investors are trying to create the next Lululemon. The real test will be when they open their first dozen stores.
https://www.reuters.com/technology/softbank-invests-400-million-activewear-maker-vuori-2021-10-13/
AND FINALLY …
eCommerce Checkout Provider Bolt raised $393 million at a $6 billion valuation to help streamline buyer experiences. Sometimes I get asked, “why is this kind of stuff needed?” Providers like Bolt, Fast and Checkout.com – all of which have raised hundreds of millions at this point – provide essentially one-click checkout solutions to Magento, Salesforce and other custom headless platforms. The amount of the VC funding chasing this space ultimately tells you how bad the checkout solutions are on most of these platforms out of the box.
https://www.bolt.com/blog/bolt-series-d/
https://dealbreaker.com/2021/01/tdu-fast-fundraise
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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.
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