Today's episode of the Watson Weekly podcast is sponsored by commerce tools. Make sure your brand and your business is ready for the trillion dollar e commerce market. Commerce tools, the global leader in commerce and creator of the powerfully composable mock architecture, can help you achieve bite sized wins or upsized achievements faster than ever. Whether you are looking to reduce maintenance costs for legacy systems or put the power of AI to work for you quickly, commerce Tools
is your partner for commerce success. Go to commercetools.com to learn how to get started. It's March 18, 2024, and this is the Watson Weekly your essential ecommerce digest today on our show, the end of the free shipping era is greatly exaggerated. Software as a service
keeps getting harder. American Eagles Logistics Capitulation ends the pandemic's logistics fever dream Shopify at Morgan Stanley Tech Conference 2024 takeaways and finally, the investor minute, which contains five items this week from the world of venture capital, acquisitions and IPOs. Look out for our brand new podcast this week from RMW Commerce the Watson weekend just in time for shop Talk 2024.
First, in our shopping cart full of news, the end of the free shipping area is greatly exaggerated. With margins getting tighter across retailers, you sometimes see reports about the end of free shipping. While that may be true for merchants who are struggling to afford subsidizing shipping, that doesn't mean the consumers don't want it. A recent survey from payments and Adobe highlights a simple truth. 66% of consumers consider free shipping
key to customer loyalty. In short, larger retailers still must figure out a way to subsidize free shipping if they want to grow. The changes to Walmart plus in the last couple of years and the recent revamp of Target's loyalty program points to one thing. Consumers are still willing to pay for shipping loyalty, at least when there is a wide assortment and
fast delivery involved. With the decline of retailer based private label credit cards, other sources of revenue like loyalty membership, retail media programs and for the big players, fulfillment services are the most logical way to subsidize this. Extended warranties factor in, too, providing some retailers critical margin dollars. Can anyone else buy an airline ticket without being forced to unselect third party purchase protection? Do Boeing's plane doors keep falling
off because they keep declining this coverage? Inquiring minds want to know. Another interesting point about the difference between brand and retailer shopping behaviors was also mentioned. The youngest generation survey, Gen Z, expressed a 43% preference for a brand than a retailer, whereas the average of other generations was at 28%. Still, the majority of even that generation, 57% prefer marketplaces and retailers. Why? Well, uh, the answer is simple. Competitive prices and wide
selection. Again, that pesky Amazon formula which keeps showing up, Walmart does a good job here too. It's almost like we keep trying to reinvent a new way to attract consumers to shop, but keep ending up at the starting point we found 20 years ago. What was that starting point? Well, back in the stone age of ecommerce, when dinosaurs roamed the earth, ebay ruled the roost. One analyst even called it indestructible thinking. Auctions were the future
of all online purchases. Because of efficient price discovery, Amazon and even eBay's own internal teams discovered a new generation of buyers coming onto the Internet. Ebay even had a fancy MBA style name for it, cobs or convenience oriented buyers. The problem ebay had? They could not figure out what the heck to do about them. Amazon, of course, had no such problem. Jeff Bezos bet that low prices and unlimited selection was the key to the whole equation, which repelled the
growth. Prime in 2005 gave him a consumer subsidy for shipping, but more importantly, loyalty. The market still has not caught up with Amazon's execution of this formula, and in some ways, this report just confirms what you already think about why everyone shops at Amazon. The report also highlights that if you prefer shopping at brands, trust is the primary reason, which has always been the issue with wide selection and marketplace. This
contains a lesson for brands in the audience. If you can tell in reviews that marketplace customers are having a tough time in Amazon, I would use that information on your product detail pages. Our second story software as a service keeps getting harder. Firm Tidal Wave Research published a report recently that I thought might have some
relevance for software as a service. Founders and the ecommerce industry the broad theme is that the last 15 years have been great for SaaS, but the next ten years gains could be harder to come by. The gains in the last decade have attracted more competition and new entrants. There will be an inevitable shakeout in the next five years, and the failure rate of startups could be even higher than the historical average due to that increased competition.
The report has a few pieces of advice for founders on their journey from my point of view. First, building a software startup is not just about technology. If you don't have an interesting and sticky go to market strategy, you will struggle. Technology in the age of AI is easily replicated and those hard won customers could easily choose a competitor, which means moats are getting thinner. Second, speaking of moats, the report indicates that most
companies don't have one. Just because you have a good retention doesn't mean you actually have a moat. It just means that you have not yet been disrupted, and all it takes is, uh, a well financed entrant to the market. You see it all the time in the Shopify ecosystem in particular, which has been one of the more competitive e commerce software environments I've seen in a while.
Third, there has been a significant decline in investment returns from what the authors call vanilla SaaS, meaning just subscription oriented software that does a job with no other angles. This is particularly true because these vanilla platforms are not mission critical systems of record for their customers. Instead, they are simply the icing on the cake and offer features like better intelligence, better intelligence
on top of someone else's system of record. Sounds like a house of cards and more like a feature waiting to be copied or acquired from a real business. Sadly, the ecommerce world contains so many products like this that are just waiting to be disrupted by the prime mover in their ecosystem, and usually that's the main platform provider they depend on. If this sounds like you, I would encourage you to diversify into other providers and find new problems you can solve for your customers.
American Eagle's logistics capitulation ends the pandemic logistics fever dream American Eagle Outfitter got caught up when everything is going up and to the right faster than it ever has before, everyone, of course, thinks it's going to continue going up and to the right. In 2021, the company bought Quiet Logistics, a, uh, venerable automated three PL network for apparel merchants started by
Bruce Welty. This same year, the company acquired a ten month old startup, Air Terra, when it was convinced the startup could democratize shipping rates and capabilities for small to medium shippers in 2022. The company launched a nationwide shipping network in 2023, just one year later, AEO had second thoughts about its logistics ambitions and forced out the head of its logistics unit due to profitability
concerns. Sounds like another well known logistics company, Flexport, whose founder gave a new executive even less Runway than a year. Now, news reports have american eagle refocusing away from being a general purpose carrier and instead focusing more on its own brands and a few key customers. It's tough to fight the king, apparently. Logistics even more difficult and even lower margin than people thought. Let me break it down
for everyone. The list of retailers who should be logistics company is varying, small and getting smaller. The list in the United States may be down to two, Walmart and Amazon. Either way, these trends are clear. In North America, space is abundant and consolidation is on the horizon as three PL providers can't fill their spaces with declining volumes, mostly because those bigger, bulky items were moving quickly during the pandemic.
Now smaller items are moving and most of the growth is due to parcels being injected into the US network from overseas like timu and xien hardlines and big purchases are down. General merchandise is barely predicted to recover year over year. It's not that supply chain is becoming less interesting or sexy. It's more that supply chain is becoming less interesting or sexy to those who shouldn't be attempting to be supply chain
players at all. Which leaves more innovation and interesting work for the dedicated folks who understood from the beginning, no matter how sexy it might sound, logistics is low margin and efficiency gains are hard won. Invest accordingly and our last story Shopify at Morgan Stanley Tech conference 2024 takeaways Harley and Jeff spoke with Keith Weiss at the Morgan Stanley Tech conference last week. A few things stood out to me. First is headcount. Last year Shopify was at 14,000 people.
Now that they're at 8000, that's a hugely different number. And they are committed to staying at or around that number, even the face of enterprise sales team growth. So if you're a Shopify VP, all those open wrecks canceled. That's what Jeff says. The reason that Shopify can do well in this current climate is that they have the brands that people love
and want. That's what they say. The company thinks that consumer spending is pretty decent from their point of view, which matches their recent Q four performance. Also, the two noted it was just a year ago that they were being asked about Shopify fulfillment network. How happy are they that this is in the rear view mirror? At least now they only have to throw a few hundred million at Flexport every year
till they get to actually default alive. And that's very different than trying to build it themselves, which would have cost them many more billions. The two Shopify leaders were also pointing out that Shopify is the second biggest checkout in the United States and how that gives them the advantages of scale. Who's the first biggest checkout? Well, Amazon, of course. It's an impressive stat, and I would shout about that too.
There is some question about gross margin pressures. The CFO revealed that stripe Adyen and PayPal contracts will renew in the next few years. It sounds like the cost of accessing those payment processors and networks could increase and put more downward pressure on gross margins. What about a Shopify marketplace? I think Harley's answer was actually kind of too cute by half. Listen to this
quote. But right now we're still sort of in the model of teaching our merchants how to fish and helping them find better customers in terms of giving them the fish and giving them the customers. That may be something we do in the future. We're not doing that just yet. Emphasis mine. Teaching to fish, from my point of view is helping people with advertising. Giving them fish is a marketplace. It sounds like they may not do it yet, but of course yet is not never. Toby a few years ago said they
will not do the obvious thing which most people believe. He was talking about a marketplace. With regard to shop app, I think what Harley really means here, from my point of view, is that the Shop app is a thing today, but there's not much scale there. When there is scale, we'll talk about it. Second, I also feel he's saying that they aren't explicitly trying to build something like an Amazon, they want it to end up
in a different place. All told, Shopify is in a place where most of its cash generation will come from keeping its expenses mainly headcount low and driving top line growth rather than acceleration of known margin expanding products. Their advertising and other products are just so subscale relative to the payments business. Don't expect meaningful contribution for a number of years. Personally, I counted more margin
headwinds than tailwinds in the call. If I didn't know any better, I would say that famous 3% attach rate is actually under attack by upcoming payment renewals. Now a word from our sponsor, commerce tools. When a multibillion dollar beauty brand's ecommerce platform neared the end of its life, the entire business was at risk, including the ability to serve customers by switching to commerce
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It's that time, friends, for our Investor Minute We have five items on the menu today. First, three Colts acquires marketplace Pulse Amazon software aggregator Three Colts has acquired industry publication Marketplace Pulse for undisclosed amount was marketplace Pulse for sale the worst kept secret in ecommerce media? And what will happen with it next? Best of luck to Joe on the sale, but my guess is the property may never be the same again.
Second, carid.com raises 35 million in funding post restructuring car parts and accessories. Platform Car ID has raised 35 million in funding post chapter eleven restructuring. The funding will be used to invest in technology, marketing and widening of, uh, product selection. This looks like another SPAC casualty going to bounce back. Third, the body Shop shuts down US operations and closes dozens of stores in
Canada. The body shop is filed for chapter seven bankruptcy in the US after its UK parent filed for administration in February. In November 2023, it was acquired by the private equity fund Aurelius for $257,000,000. Remember when we all used to go to the mall? Fourth, Cap Hill Brands merges with Juvo plus brand aggregator Cap Hill Brands has merged with product developer Juvo plus in an undisclosed all stock deal to create infinite
commerce. The brand roll up aggregator sector is in the middle of consolidation, and consolidation is coming to a lot of these brand holding companies. And finally, software platform treat raises 10 million in Series A funding resell platform treat has raised 10 million in series A. The company uses a peertopeer approach that matches brands with people buying and selling its styles. How many resale platforms are there that are profitable in that scale? I think not many.
And today's word of the week for March 18, 2024 is Kate, as in Kate Middleton, that is. But if you don't know, Catherine, Princess of Wales, is a renowned Photoshop expert. Be careful what you post out there, folks. The Internet is watching. And apparently, who knew it was filled with conspiracy theorists. Did you know that
RMW Commerce has a brand new podcast? Check out the Watson weekend for an unfiltered and lively e commerce chat each week with me, Rick Watson, my co host Jess Le Seski, and an array of interesting guests and topics all focused on e commerce. That's all for this week. Till next time, Watsonians. 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 Gabrielle Montequin. To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce m.com / watsonweekly and wherever you get your podcasts