Contrarian 1: Shopify, the U.S.'s newest marketplace, decades in the making (Part 1)
Marketplaces aren't created equal, thank God!
Shopify cemented itself as a marketplace on May 21, 2015.
Yet, Harley, it’s COO, insists that “Shopify’s intention is not to make a marketplace, but to allow consumers to find not only new local businesses but also to interact with their favorite brands.”
But, life's never what it’s intended to be, and that's a good thing. That applies to marketplaces too; however, in the U.S., being one comes with negative connotations.
First, everyone thinks of “Amazon”, and its anti-brand and digitally imperialistic bravado. Which is the last thing Shopify wants when pitching brands like Alo Yoga, Gymshark, Skims, and Steven Madden, or inspiring new ones via their Start product lines.
Second, marketplaces in the U.S. aren’t universally brand-centric - yet!
Sure, at the upper end of the market Farfetch, GOAT, and StockX exist; however, they’re niche. Down-market’s similar, but consists of commoditized and lower-priced products listed on Instacart and Walmart. Then there’s Italic, a marketplace selling the quality of premium and luxury products minus the brand.
Simply put, there’s not a marketplace that exists for brands that care about brand; specifically, one that features products spanning a wider spectrum of categories and prices.
While pundits argue that marketplaces cannot compete and are a threat to brand, it’s quite the contrary outside of the United States.
In China, Burberry, Gucci, and Hermes sell on TMall, a marketplace where brands can open a store, manage operations, and control the brand experience from store design, visuals, and everyday marketing and customer support. Brands can also open multiple stores, and sell different products, segments, or lines, and manage their own inventory. Additionally, the marketplace’s selective only allowing trusted and verified brands to list on the platform.
Since launching in 2008, as a subsidiary of Alibaba’s Taobao marketplace, TMall’s diversified its offering to better cater to brands:
Classic: For brands that have acquired a Chinese business license, have inventory in-country, and can meet local consumer demands. Notable brands include Adidas, Nike, Puma, and others spanning all categories and ranges of premium to luxury.
Global: For brands that have not established a formal presence in China, but want to test the market, and ship products across borders. Notable brands include Fenty Beauty, Drunk Elephant, and Deceim.
Pavillion: Invite only and for the upper echelon in luxury, including categories like mansions, private jets, and hyper sports cars. Notable brands include Valentino, Burberry, Versace, Stella McCartney, Maserati, and Givenchy.
Soho: For brands on Classic and Pavillion that want to markdown products; it’s marketed to consumers as a luxury outlet or one’s path to “entering the world of luxury.”
In Europe, there’s Zalando, a fashion and lifestyle marketplace that’s available in 17 countries.
Like TMall, Zalando cares about brand and imposes regulations on sellers to ensure it maintains an elevated shopping experience. Regulations include content standards and media uniformity; for example, product imagery has set aspect ratios and dimensions, placement guidelines, and background color restrictions.
Also, Zalando helps consumers discover new products via Lounge, a curation service that personalizes recommendations based on purchase history and preferences.
While China and Europe are mature markets, brand-first marketplaces are gaining traction in emerging markets too. For example:
Lazada: a crown jewel of Southeast Asia, it features a diversified catalog spanning commoditized through luxury goods. Also, it’s grown to account for categories such as video games and vouchers.
Namshi: a Middle Eastern marketplace that not only curates premium-to-luxury brands, but helps them account for local cultural and socioeconomic factors, and now offers brick-and-mortar.
In Latin America, Mercado Libre reigns supreme; however, its product selection, fulfillment, and payment services resemble Amazon. Additionally, price harmonization and currency volatility have many on edge. In August, Brazil’s Central Bank shut down the use of WhatsApp’s payment service; however, that hasn’t slowed others:
Rappi: a Colombian-based marketplace for same-day delivery with a diverse catalog, has raised over $1.4B and is now available in 9 markets.
LAGO: based in Mexico City, it’s all about Latin American fashion design, showcasing up-and-coming brands from across the region, including Peru, Colombia, Ecuador, and Argentina.
Not Just A Label: globally available, it focuses on emerging talent by providing a platform to connect with other creatives and distribute products.
Moda: through Lab and Operandi, Moda’s properties have grown to be some of the largest in the world by curating products from top Latin designers and offering shipping to 120+ countries.
Third, advertising isn’t created equal and sharing isn’t caring.
For example, ACME Shop, which leverages Shopify Plus, spends $1,000,000, per year in advertising to acquire customers, that may or may not check out using Shop Pay; regardless of how the checkout’s captured, the brand incurs all acquisition costs. But, with Shop App, Shopify freely markets brands and products to those that have checked out using Shop Pay, without paying a referral fee to the brand that originally acquired the customer.
This is in line with their “arm the rebels” mantra; however, it’s at the expense of creating a conflict-of-interest with brands that drive larger percentages of its platform’s Gross Merchandise Volume (GMV).
Note, attributing downstream actions and conversion’s hard, and likely top-of-mind for Shop App. In 2016, I wrote, “Brick & Mortar Retail has a new product and it doesn’t come with an SKU,” which outlined new concepts that better accounted for this struggle:
Storefront as Media Publisher, Attributing Monetary Value to In-Channel Interactions: This concept shifts a brand’s perception of their storefront from being a product distribution channel to a media publishing platform. Creating a new metric of success that place monetary values on influences that affect downstream conversions.
To better understand, consider the following: A shopper enters Bloomingdales with the intent of purchasing a Burberry handbag. Passing a Marine Serre display, she stops and falls in love with its latest collection. A sales associate answers a few questions, walks the shopper through the collection, and pulls out their iPhone, showing Beyonce’s latest Instagram post featuring a product on display. The shopper’s intrigued but continues onto Burberry. While still in-store, the shopper visits Minkoff’s website, opts into its newsletter, follows them on Instagram, and adds several items to their cart. After the shopper purchases her new Burberry bag, she grabs a cupcake, heads home, and later finalizes her order. Clearly, Bloomingdales should be compensated for its influence.
Cost Per Interaction, Calculating Engagement Premiums and the Downstream “Scorecard”: Mirroring existing KPIs, storefronts assign monetary values to visits, customer support and concierge, and other channel-specific interactions.
Referring to the previous scenario, Bloomingdales would designate a price per interaction. Similar to paid search, Bloomingdales also imposes premiums on placement; specifically, in higher trafficked sections of the store. Potentially, it could also gamify bidding and real-timing merchandising.
So how did Shopify become a marketplace (in the making)?
To answer, you have to ask why?
Let’s go back 10 years.
Shopify’s non-existent, and e-commerce technology’s split between those that could afford an enterprise platform or just PayPal buttons on a GoDaddy hosted website.
SaaS was just getting started and the e-commerce market was small, but growing rapidly.
At the time, a leader emerged, Onestop Internet, who provided challenger brands - Lululemon, John Varvatos, and Rag & Bone - an end-to-end solution that outsourced all e-commerce operations, including customer support, content development, fulfillment, marketing, and technology. By 2013, Onestop Internet owned the mid-market and accounted for almost every brand name you’d see in SoHo.
But, what they didn’t foresee was technology shifting to the cloud. This shift created an abundance of specialized services and software that provided better value and more cost-effective solutions in comparison to Onestop Internet’s monolith.
In turn resulting in e-commerce’s first unbundling, the removal of professional services as apart of the core e-commerce platform.
In Boston, Stephan Schambach’s building Demandware, a challenger to Onestop Internet and the culprit of e-commerce’s first unbundling.
Demandware’s model was simple, it was a technology company that partnered with service providers to enrich the overall experience. This allowed agencies and SaaS software companies to partner with, extend core capabilities, and build an ecosystem around Demandware’s platform.
In Canada, Shopify, also backed by Onestop Internet’s lead investor, is taking Demandware’s approach; however, set its eyes down-market, focusing initially on small businesses, and already has 150 employees, 40,000 stores across 90 countries, and $740M in GMV.
Over the next 5 years, Onestop Internet’s churn accelerates. It’s pricing model, based on a percentage of each store’s monthly GMV, fails to scale and match the level-of-effort needed to manage a mid-to-large market business. By 2016, almost every Onestop Internet customer’s migrated to Demandware and Salesforce buys it (Demandware) for $2.8B.
But, Demandware, like Onestop Internet, was monolithic and without an open API. Resulting in longwinded launches, costly integrations, and high maintenance costs. Furthermore, its pricing model segregated the market and prevented challenger and start-up brands from accessing the platform due to its high Total Cost of Ownership (TCO).
By now, Shopify’s grown to 140,000 stores, $3.7 billion in GMV, and files for IPO. Unlike its enterprise competitors, Shopify has an open API, app store, and service - Shopify Plus - aimed at providing a better experience for those growing frustrated with the cost and limitations of Demandware.
Ultimately, Shopify’s strategy leads to e-commerce’s second unbundling, the platform.
Shopify’s API, or microservice architecture, and app store revolutionized e-commerce. For the first time, developers could freely build on top of an e-commerce platform, and they did, fast! Providing Shopify the runway it needed to create and market a more robust platform to brands with higher GMV, and drive its stock price.
Within 3 years of Shopify’s IPO, the mid-market, or what’s now called Direct to Consumer (DTC), migrated from Demandware to Shopify Plus, just as they did Onestop Internet.
Where are they today?
Onestop Internet: Despite raising $22.5M, the company pivoted to a private-equity-like model, working with near bankruptcy brands, but failed to regain momentum. It’s now closed.
Demandware: Less than 2 years post-acquisition, its net income plummeted by 751%, it continues to lose market share to Shopify Plus, and it’s one, of several, blemishes in a series of bad e-commerce acquisitions made by Salesforce.
Shopify: From its IPO to today, its stock has grown from $24.93 to $1,157.85, per share, and it’s extended its offering to email, financial services, fulfillment, subscriptions, and more.
So, when does the 3rd e-commerce unbundling start? It’s happening now!
Unlike those before, this unbundling’s driven by consumers; specifically, their need for better experiences and personalization. As a result, brands are unbundling their technology stack, participating in a concept called Headless Commerce.
Headless Commerce gives brands’ control and flexibility over two things:
Website: The website, or presentation layer, becomes platform-agnostic, freeing brands of platform constraints surrounding personalization, internationalization, security, speed, and performance. Nacelle, Shogun, and Vue Storefront are tools transforming how e-commerce websites are now being built.
Content: E-commerce platforms have subpar Content Management Systems (CMS). Also, a large portion of their functionality is outsourced to 3rd party software, including customer support, email, fulfillment, marketing, product, order and warehouse management, and more. In response, brands have shifted content management to Amplience, Contentful, and GraphCMS, building systems and schemas more relevant to their business.
What does this mean for Shopify’s hold on the e-commerce market? Everything!
Let’s go back to ACME Shop.
Like most brands, ACME Shop has 15+ SaaS subscriptions; furthermore, it uses Contentful to manage its website content, runs a Headless Commerce website on Vercel, but is still paying $20,000, per month in licensing fees to Shopify, which its team rarely uses. Also, the brand’s scaling into international and wholesale, and as a result, it’s building middleware that better connects its channels, teams, and technology stack.
Here’s where Shopify’s problem(s) begin:
Loss of control: With headless commerce, the website moves out of Shopify’s control and allows the brand to dictate alternative fulfillment and payment providers, which for a larger brand will likely not be Shopify.
Perceived Value: As brands scale past DTC, Shopify becomes an expensive roadblock. Teams spend more time in 3rd party customer, order, and product management tools versus doing everything within Shopify.
As Shopify loses control and its perceived value diminishes the probability of churn increases. But, this happens in e-commerce, remember Demandware and Onestop Internet.
But, unlike Demandware and Onestop Internet, Shopify’s a publicly-traded company and the effects of unbundling impact:
GMV: As brands begin to migrate off of Shopify, so does their GMV.
Stock Price: If GMV tappers or starts to plateau, so will their stock.
What does Shopify do to avoid history repeating itself? I’ll answer that in Part 2.
If you have comments or questions, feel free to Tweet them to me, @surgieboi.