Shopify vs Amazon

0:06Pushkin. We talk on the show nonstop about the dominant Magnificent seven tech companies. But what about the companies that compete with them? Today on the show, we're going to talk about the rebel alliance of runners-up competing with the big techs through the case of Shopify. Today on the show, what it takes to compete with Amazon. This is Unhedge, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined today in the New York studio by FT reporter Anna Muto. Hi. Making her podcast debut. and live from the carpet, it's Robert Armstrong. It's true. I hurt my back the other day doing some really strenuous journalism.

0:50And as a result, I am supine on my bedroom floor while we're recording this because I can neither stand nor sit. Rob tried to write about private credit, which we talked about in the show with Katie on Tuesday, and it just injured him permanently. He's never going to recover. Yes, I saw the fee structure and it threw out my back. Yeah, makes two and 20 look like light work. I mean, Rob, I got to give you credit. You know, Katie and I, we pushed through our colds on Tuesday, but you're really pushing through a whole lot more. So props to you, props to you. Show must go on. But Anna has written in publication soon in the Financial Times an excellent piece about the story of Shopify.

1:30It gets at both interesting trends with e-commerce and the pandemic, but also, and I think where we want to bring it ultimately, is how you compete with big tech companies that Rob and I are constantly shilling for on the show. It's unbeatable, increasing returns to scale. They have all these huge competitive moats. Let's see the other side of the story, right? What does it take? So maybe where we start, Anna, is just with basic description. What is Shopify? What do they do? Sure. So if you're the average consumer, you may not have heard of Shopify before, but they're actually the second largest e-commerce company outside of China.

2:06They provide a very simple way of creating an online store for merchants with all the bells and whistles that come with it. And so that's how they started off their business. They represent about 10 % of market share within the e-commerce space, and that's compared to Amazon's 40%. And they've had tremendous growth over the years. They IPO'd in 2015, and the stock price is up 25 times since then. Okay, I have a question. Sure. Their revenue is just like they take a percentage of all your sales. And is it a totally digital business? It's a totally digital business. It's subscription based. So that's part of their revenue stream.

2:44But the other larger part of their revenue stream is through their payments business. So they have a button called ShopPay and they take a cut of that transaction. So it's running the whole kind of digital architecture for, I mean, my understanding, is primarily small companies, right? So it's some mom and pop store, they auto repair, blah, blah, blah. It's just two or three employees. They don't have any computer scientists on staff. They don't want to pay some horrible exorbitant fee to get a website up and running. So they pay Shopify. That's how they started off. But over the years, they have started to get on board larger companies like Mattel, for example, Lord & Taylor, even Heinz.

3:23So that's kind of the direction that they're trying to go into. But are a lot of people shopping online at Heinz? That's a very good question. I mean, I think that stuff sells itself, right? I want to get my ketchup from the source. Yeah. You know? It is like the undisputed best ketchup. Like, I fully buy into the Heinz brand name. Oh, 100%. Wall Street must love this business. What is Wall Street like? They like recurring revenues. They got a subscription business. And they love payments business, where you're just taking a scrape as the money goes whizzing by. I assume this thing has like an eye-watering valuation.

3:56Yes. Yeah. So most of the analysts have a buy rating. There are a few holds and sells, but one analyst has 130 times PE. So expectations are very high. Target, yeah. Yeah, that's nuts. So Amazon is the dominant e-commerce player. That much is very clear. Shopify starts with these smaller businesses providing a back end for them. How does it go from that, which would seem, you'd have to imagine, kind of like a backwater to some extent, to something more resembling like a real challenger to Amazon? What is that story? Sure. So they've kind of grown in a niche area where there was a need. Over time, they've grown this ecosystem, whether it's the vendors that are on the platform or whether it's the third party apps that coordinate with Shopify.

4:45It's it's turned into the symbiotic relationship in a way that Apple has with their apps or Google has with their apps. Here's something I wonder. If you're a small business, you sell whatever it is, like the caps that you knit in your spare time or whatever. When you have the option of choosing being a third-party vendor on Amazon, why do you choose to go with Shopify? Sure. Or Etsy or eBay or whatever. Yeah, yeah, yeah. So Amazon tends to focus on the customer, us, right? It's very customer friendly at the detriment of the seller. Oftentimes Shopify is on the seller side, the merchant side, and they make it much easier for merchants to do business.

5:30So Amazon is one platform. And the goal is to get customers to come directly to your site because you want to have that relationship directly with the customer. So it's interesting that Amazon has almost chosen a path intentionally, which is like, we are going to be wildly customer focused. That opened a niche for Spotify. It's like they, it almost like, we're going to talk about Spotify later. Shopify, you know what I mean? This space was intentionally created by Amazon in a way. In a way. Because of their choices, you know? Yeah. I think it started off with just not having a lot of options to build a website.

6:12But then over time, Shopify has really dug into that empty space where no one was really looking out for the merchants. So as the founders said in 2019, gathering the rebels against the alliance was to go against Amazon. Against the empire. Sorry, against the empire. Yeah. I think that's very well put. And, you know, it's sort of like Shopify is not trying to be Amazon. Is it? It's not playing Amazon's game. No. It's kind of invented its own sort of partially parallel game that can sort of create a different ecosystem to Amazon and maybe draw market share. But it's not going head to head, is it?

6:51It's not going head to head. At one point, they were almost trying to go head to head within the delivery space. They spent a lot of money in logistics, delivery, warehousing, but realized that it's going to be really hard to go against Amazon two day prime. Yeah. So they quickly exited that after a year, which was a good move. It did result in back-to-back layoffs, but they learned from that lesson. I think that really tells you something about what really works about Amazon. Totally. Amazon strategy is like we, although we're an e-commerce company, we are all about meat world, right? Like physical infrastructure, expensive stuff, carrying stuff around.

7:30And why do they emphasize that stuff so much? because once that stuff is in place, it is very hard to replicate, compete against, overcome, et cetera, et cetera. So it does speak to Jeff Bezos's vision that Shopify has to compete where it does more in the purely digital realm. Anna, why did Shopify even attempt to compete in this logistics business with Amazon anyway? You think it would be like really hard to do that, right? Yeah, that's a good point. I think they were listening to their customers, their merchants. So this shipping and delivery is a huge pain point. In fact, I was speaking with the founder of Callie's Hot Little Biscuits.

8:07They were one of the first 100 customers with Shopify back in the day. And she was telling me that when you get so many orders, it's hard to figure out the cheapest delivery method each day. And that gets really expensive over time. So Shopify, I think that instigated Shopify to look into this in the first place. What does Callie's Hot Little Biscuits sell? They sell Hot Little Biscuits in Charleston, South Carolina. Sounds amazing. Right on. I love biscuits. I guess it's worth asking if we can learn lessons from this, right? So it's an interesting story. They've taken a significant chunk of the e-commerce market, especially starting from humble beginnings.

8:42And I wonder if there are lessons for, you know, outside of just the e-commerce world. I mean, you know, I think we've talked about, Rob, other challengers to the Mag7. I mean, what comes to mind for you? I think the general, I'll start with the general rule and we can see if it works for specific examples. I would say the general rule is under no conditions, compete head to head. Go where the dominant player isn't. So in this case, it was be a totally merchant centric business where Amazon has decided to be completely customer centric. And then the classic insurgent against a massively dominant Mag seven is meta versus TikTok.

9:23Yeah. And TikTok came into the space short form video that they haven't even thought about. Yeah. The same way Instagram came for images, image sharing. But of course, back then, Meta could just buy Instagram and solve that problem. That's harder now. So it's like zero in on something not only that the big guy doesn't do, but something they've almost chosen not to do. I think that's a big challenge. So who is, you know, you might say that at one point, Salesforce was that for CRM. That was a customer relationship management. Microsoft didn't want that bit and they got in there and they turned it into a huge business.

10:06And I think that's why Alphabet panicked so much when ChatGPT came out, right? This is a totally niche that's been invented. Maybe it cannibalizes our business, maybe it doesn't, but it certainly could. In search, as currently conceived, Google will win forever. 100%. No one will ever defeat them, it is hopeless. The point of entry is if the business is completely changed into something that it wasn't before. And I think where we land ultimately is that, you know, rivals often don't start by just punching the incumbent in the face and saying, we're taking your market share now, right? It doesn't usually work like that.

10:42It starts with, you know, chiseling away in some little niche area that the incumbent doesn't really care about, right? Amazon probably doesn't want to have to deal with all these small businesses that have a bunch of bespoke issues. They're happy to leave it to some other player. NVIDIA, when they started out in the chips game, it was PC chips is what you wanted to make, or maybe, you know, cloud server chips. NVIDIA is making - Just for toys was the attitude of the rest of the industry. Yeah. NVIDIA is making chips for gamers. Who gives a crap, right? Tesla, you know, I mean, think about how expensive their cars were when they started out.

11:12It's this kind of ridiculous, absurd luxury product from this, you know, maniac South African guy. And then you can grow from there. Tesla is talking about selling a$25 ,000 car next year, completely different part of the market, right? Obviously, that takes time. It takes scale. It takes innovation. But it's never going to start kind of just by challenging the incumbent head on. That's certainly the case with Shopify. That's the approach we're taking to unseating Joe Rogan. That's the biggest podcast. Yeah, yeah, yeah. Finance geeks, who cares about them? The unhedged lifestyle spinoff is coming very soon, ladies and gentlemen.

11:46from the carpet live from the carpet live from the carpet exactly right that's where Joe Rogan does all his podcasts yeah alright Anna and Rob we'll be back in just a moment with Long Short

12:01welcome back this is Long Short that part of the show where we go long a thing we love short a thing we hate Anna are you long or short something? I have a pear trade a pear trade and it's highly technical okay strong debut alright so So it's long Japan tourism and short, annoying tourists. Japan has been seeing a huge influx of tourism over the last year because it opened up after the COVID shutdown. The yen is hitting an all-time weak level since the bubble burst. So there's been a huge influx. But then that comes with tourist pollution. And a ton of people have been inundating cities, littering.

12:36In fact, there's 30 times more visitors to Kyoto, for example, than the city's population. and 20 years ago there was a drunken British tourist who licked a frozen tuna that cost 100 grand so don't do that when you go to Japan the fish lick that will live in infamy right yeah I saw a video recently of a guy I think he was like Swedish or whatever and he was trying to ride the high speed trains without paying the ticket fare so he would just hide in the bathroom when the conductor comes along to take the ticket and eventually the police caught him and start chasing him and he's recording this all for YouTube.

13:10It's all like a YouTube style vlog. So he's like sprinting through the train station. The cops are coming after him. What are you doing? What are you doing? And he's like laughing the whole way. He's like, guys, isn't this crazy? Like talking into the camera. Don't do that. Very annoying. Rob, short or long. I'm going to continue the theme that Anna brought up. I'm long Brooklyn's cherry blossoms. It's almost that time of year. You don't have to go to Japan to sit under the cherry blossom trees. You can go to the park. You can go to the botanical garden. We have beautiful cherry trees here. Also D.C.

13:38D.C. No, we're DC is overrated. I'm saying Brooklyn underrated. I'm going to sell Washington's cherry blossoms and buy Brooklyn's cherry blossoms. They are really awesome. Listeners, if you're interested, if you're in New York and you want to go to the Brooklyn Botanical Garden, they have an excellent cherry tracker that lets you know just how in bloom the cherry blossoms are. I would check that out. All right, Rob and Anna, thank you for being here. We'll have you both back soon. Listeners, we're back in your feed on Tuesday with another episode of Unhedged. And we'll catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad.

14:10Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of body. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.

14:43We'll be right back.