Amazon (AMZN) decided a while ago it will be rolling out features that allow its users to use its platform for both payment and delivery; this has led to analysts forecasting a significant threat for Shopify (NYSE:SHOP). The rollout is set for the end of January. But despite this entrance, Shopify may not be instantly under threat, and pricing will remain a key feature. Shopify not only provides infrastructure, but also end-to-end service, and while some users may migrate to Amazon, most businesses who rely on Shopify’s ‘white glove service’ may be reluctant to head to Amazon. A number of analysts have come out with the thesis that Shopify is likely to face significant competition, but this is unlikely, and Shopify is likely to continue to consolidate its position.
Will Users Migrate Straight Away?
Shopify’s key feature over the current competitors such as WooCommerce and BigCommerce is the fact that it caters to different market segments, and provides a range of after-sales services, and infrastructure, at a slightly higher cost, which users are willing to pay for. Firstly Amazon prime will only be available to U.S. merchants initially, which itself is a slightly more saturated and sophisticated market, and merchants may be less willing to migrate. Shopify’s global reach combined with its end-to-end service plays a major role, in keeping users, and even the smaller players, have preferred to pay a marginally higher price, for its services.
Another factor that is playing into Shopify’s hand is the fact that major retailers are increasingly integrating Shopify’s infrastructure into their platforms. The larger players provide significant revenue, and margin opportunities to Shopify, compared to the small and medium-sized businesses, which have been less profitable and are the primary users being targeted by Amazon. Currently, Shopify has a number of key features, especially on the front-end to help integrate their infrastructure for larger players this should help the company with future projects, where it can, and it has introduced a number of ‘a-la-carte’ features that should help the company ensure, that the rest of their ‘commerce stack’ continues to be well synergized with the platform. Compared to Amazon, which is currently only offering minimum support to its merchants as it rolls out its initial features.
“Enterprise retailers bring a unique set of technical needs that require multiple products and platforms to work together,” “They want optionality, and the technical freedom, and to compose their own technology stacks.”-VP of Product, Shopify (Source).
Furthermore, Shopify provides a range of services, including a multi-channel frontend service, which allows its users, to access a range of services, both at the frontend and at the backend, which then allows for a simple and smooth transition from offline to online sales. The ease of use has been specifically cited as a key feature by Shopify users, but beyond ease of use, the multi-channels, including, retail, pop-up, social media storefronts, mobile apps, and marketplace, all work in tandem to provide a lot more than simply a storefront, and online infrastructure. Amazon prime is currently rolling out very basic services, and considering that most small and medium businesses usually need multiple channels, and many different types of services, including an integrated backend, which Shopify currently has globally and in multiple languages.
Shopify plus remains the main source of bringing on growing SMEs and large business enterprises, it has a range of integrated features including customer optimization through data analytics, allowing users to manage customer information, monitor and track sales, manage product information, and finally manage payments. These might seem like obvious features, but Amazon may not be as well integrated to provide these services.
Furthermore, Shopify’s early user advantage when it comes to its global presence will come in handy, as once users are set up on a service, and the service is doing its job, users are usually quite unlikely to switch, both due to the cost of switching infrastructure, and the cost of
What Is The Potential Market Size?
To add to Shopify’s already advantageous position, is the potential market size; SMEs are expected to grow anywhere from 2-3% until the end of the decade, currently, around 3%, of the total SMEs have an online presence, and many continue to come online, and presently there are close to over 300 million SME’s globally. Shopify’s market share remains around 2% (Source: 10K), of the total market size, and this would mean that even if Amazon comes onto the market, Shopify could still see a significant upside, just considering the market size. This means that Shopify has a long way to go before it faces market-risks, stemming from saturation. Shopify’s current market share positioning is a strong one, with very marginal global users increasingly preferring the platform, over its competitors.
Where is Amazon a threat?
Amazon’s biggest threat comes from its significant backend infrastructure, ability to bring down costs, and use its massive set of data and information to compete with e-commerce merchant platforms such as Shopify.
Amazon’s infrastructure, also known as Amazon Merchant Fulfillment Network, or (MFN) including its global freight service, its warehousing, and the integration of warehouse management, means that online shoppers have an all-in-one backend, to get their products shipped globally. This would mean that small businesses that do come onto the network, especially if don’t require a lot of individual business services, could potentially get their products to their customers at very low prices, making it enticing for them to migrate over to Prime Merchant Services. Furthermore, Amazon Web Services will provide a behemoth of a backend, which will allow companies the necessary architecture to set up their business’s needs. This combined with their expertise and data, allows them to ensure that they have the necessary tools to develop and engage their potential customers, in a manner that best suits them.
But, overall, it will still take time to ensure that Amazon’s Merchant Services can compete with Shopify. Currently, Shopify has an advantage over its competitors, and the stock is trading at a relatively moderate valuation, with a forward P/E (price-to-earnings), likely to be around 70-80x earnings, and could be as low as 40x earnings, if the company is able to get operations streamlined. Currently, there is a focus on reinvesting cash back into the business, rather than making a profit. This means the stock is likely to remain rangebound despite the current headwinds, but will likely head back up as economies even-out.
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