The Amazonification of Shopify

The Amazonification of Shopify

How come we all like to buy stuff online so much? And when we do, we want it fast and we don’t want to pay a lot for it.

What’s worst, our standards are getting higher. Every day that passes, we want online shopping to be faster, cheaper, easier than the day before.

I don’t know you, but I blame Amazon for that.

And it all started when Amazon launched its fulfillment service. Prior to that Amazon was a good service for buying stuff online. It was pretty good. It wasn’t great.

Then came 2006. Bezos unveiled Fulfillment by Amazon and changed the game forever.

For the price of a small fee, sellers could not only store their goods inside Amazon warehouses, but their products would now qualify for Prime two-day delivery AND Bezos’ company would take care of the shipping and handling.

It made the merchant’s life easier. It reduced costs. But more importantly, it allowed Amazon to take over the e-commerce market.

So far, Amazon’s Fulfilment Network has proved to be one of the key reasons for its unprecedented growth. In 2005 when Prime debuted the stock was worth $41.88 a share. By 2007, it had jumped to $79.18.

Today, each share is worth $1,912.61. Come the Holiday rush hours, some Amazon warehouses ship more than 1 million items a day.

Until recently, the fulfillment space had been quiet. But last week something happened.

During a talk at Unite, Shopify announced the launch of the Shopify Fulfillment Network, a dedicated network of fulfillment centers for Shopify merchants.

"Qualifying merchants in the U.S. can now apply for early access to Shopify Fulfillment Network with a dedicated network of fulfillment centers that will ensure timely deliveries, and lower shipping costs, for a superb customer experience."

For Shopify merchants, this is a game changer. No more logistics, dealing with late shipments or returns. Just let Shopify handle everything.

For customers, it makes the Shopify experience even better. After your customer completes checkout, Shopify Fulfillment Network takes care of everything else. Shipping times will go down, and everything will start becoming cheaper and cheaper.

It’s still early to know for sure but I think this might be the biggest non-Amazon e-commerce announcement in the past 5 years.

Today we are going to understand why that is, how Amazon could be affected, and why Europe needs something like this to compete.

Is it even possible to threaten Amazon?

Fulfillment Centers have been the obvious move for a long time, but the technical and logistical challenges of executing this at scale are enormous. An absolute game-changer for business, particularly at Shopify’s scale.

And they are sure trying. Shopify plans to spend $1 billion to facilitate:

  • one day fulfillment with 2-day shipping
  • warehouses under Shopify control
  • custom packaging
  • support for 10-10,000 packages per day
  • 99% of their US shipments in two days by the end of 2019,That looks oddly similar to Amazon Prime.

The Shopify announcement is without a doubt a major breakthrough for merchants. It makes fulfillment (probably e-commerce's biggest pain in the ass) an order of magnitude easier.

This will, most likely, increase the number of stores that get started on or migrate to Shopify, thus increasing the company’s ARR. It will allow stores themselves to focus on growing their company without having to worry about shipping and storing.

But to buyers, the experience will remain unchanged. For now. There are no network effects, no significant improvements during the purchase process UX other than delivery.

You won’t gravitate towards Shopify stores simply because they have Shopify Fulfillment. You probably won’t even notice if a merchant you work with moved to Fulfillment until your products start arriving earlier than expected.

A fulfillment center network is not enough to take down Amazon. I don’t think they are trying, but still.

That said, the probable next step can definitely make a dent in Amazon’s business.

Unified carts and checkout between merchants.

The amazing thing about Amazon is convenience. When it comes to online shopping, that’s the name of the game. Amazon is so stupidly good at it that it ruined the internet for all of us. We now expect 1-click shopping and free 2-day shipping everywhere. Even our groceries.

Buying for stuff on Do I need to create ANOTHER account? Oh, fuck me. I’m not doing that. Jeff, how can I give you more money?

Well, that might change.

Shopify has over 500,000 merchants distributed across the US, and 150 countries around the world. Right now, all those people run their businesses on Shopify, each one having an individual store in the platform. This created payment fragmentation.

If Store A and Store B run on Shopify, you need to create an account and add a payment method on both. Oh, the madness!

That’s cumbersome. And since we’ve grown quite lazy, we just don’t do it.

Well, Shopify is setting themselves up to change this. With a critical mass of stores running on their platform (growing because it’s now easier than ever to ship stuff), Shopify’s biggest probable move would be to launch unified carts and checkout between merchants.

Instead of creating an account for every single Shopify store, you have one Shopify account, and use that to check out everywhere. Then, Shopify runs the logistics and delivers that product to your doorstep asap.

One Shopify account, millions of merchants.

The power of one-click shopping

One of Amazon’s biggest winners has been their one-click button. This guy:

1-Click technology allows an online shopper using an Internet marketplace to purchase an item without having to use shopping cart software. Instead, she can use a predefined address and credit card number to make the process immediate.

Amazon was smart enough to patent it. In September 1999, The United States Patent and Trademark Office (USPTO) issued US 5960411 for this technique to

Removing this friction in the checkout process is often highlighted by experts as one of Amazon's biggest advantages in the online retail space. It makes sense, doesn’t it? So simple, so elegant.

But in late 2017, the IP expired. This means everyone, including Shopify, can now deploy something alike across their platforms. Essentially, a little button like this one could change how people buy online.

One Shopify account, millions of merchants, one-click shopping. Now we have ourselves a full-blown Amazon competitor.

Growth loops

I keep coming back to the same mental model: growth isn’t about funnels, is about loops. That’s because it holds true for most products.

What I'm trying to say is that there's a (longer cycle) loop in here as well. And this loop, if reinforced well enough, can launch Shopify (to everyone’s surprise) as a worthy opponent for Amazon.

  • Shopify Fulfillment Network makes it a no-brainer to signup to Shopify as a merchant, thus increasing the supply of stores (and products) available on the platform.
  • Introducing a unified checkout, à la Amazon, and a seamless buying and shipping experience will, indisputably, attract new customers to Shopify merchants, and increase the order frequency.
  • As the flow of money towards the Shopify platform increases, more and more merchants will begin to migrate, or more new businesses will get started, attracted to the pre-existing mass of buyers. With unified checkout, it’s now easier than ever to tap into the Shopify ecosystem.
  • By having a bigger supply of merchants (and products), more buyers will gravitate towards Shopify. And so on, so forth.Many are crying foul, accusing Amazon of being a monopoly whose share of the e-commerce space will slowly approach to 100%.

After this launch, I seriously think those people will have to find something else to worry about.

The key to Europe: Continent-wide distribution

When we think about innovation, our heads turn to America. Almost all global companies start over the, and Shopify isn't the exception. The Shopify Fulfillment Network will understandably start in the US because of:

  • The proximity to Canada,
  • The fact that it’s the West’s biggest unified market,
  • There's an existing blueprint one can follow – someone (em, Amazon) did it before.But people often forget that the European internet market is 2x as big as the US market. This means that the potential opportunity is even bigger than in the US. The unsurmountable problem (so far) is fragmentation.

A few months ago, while covering DNVBs, I wrote:

“Second, being in Europe means fragmentation when it comes to international expansion. The US is one single market that shares a common language, as opposed to Europe, where different country languages, culture and regulations make scaling more challenging, all the way from product development to marketing and shipping.”

And that's the key.

Right now, the biggest hurdle merchants who rely on shipping to deliver products to customers face is cross-country logistics.

If figuring this out in the US is hard and requires +$1 billion, doing it in Europe, across country borders and across governments, is an order of magnitude more complex. (And I’m not even considering Brexit here.)

This means that whoever figures that out has, as a consequence, an insanely deep moat around them. If Shopify plays its cards right, their fulfillment could turn out to be bigger than their core online store business.