Wen | Value Institute
It was officially launched in 2006, positioning itself as a one-stop e-commerce service platform and providing various online services for retail business customers. It took 16 years for a small company with only a five-person start-up team to grow into the second largest cross-border e-commerce giant in North America with a peak market value of over 160 billion US dollars. Shopify’s family history is legendary enough.
But Shopify, who has eaten all the dividends of the times along the way, is now on the brakes.
The financial report for the first quarter of fiscal year 2022 released before the US stock market closed on Thursday showed that the performance of Shopify’s core financial data was not satisfactory: the revenue growth rate dropped significantly, while the loss continued to increase.
After the financial report was released, Shopify has fallen for two consecutive days, and closed down nearly 15% on Thursday, falling to the lowest point since April last year. In addition, National Bank of Canada, Citigroup and many other big banks have all lowered their Shopify target prices, and the capital market’s evaluation of this financial report is self-evident.
The decline in profits and the increase in losses are not only related to the slowdown in revenue growth, but also the increase in costs and the unexpected transformation of revenue structure. More importantly, the gross profit margin of subscription solution business with relatively low revenue is much higher than that of merchant subscription service.
In the research reports of Wall Street investment banks, Shopify’s "internal troubles and external troubles" are all mentioned: internal troubles are naturally the decline in revenue growth and the amplification of losses, while external troubles are directed at rising external competitors.
Under the internal and external troubles, can Shopify ride the wind and waves?
Before the US stock market opened on Thursday, cross-border e-commerce giant Shopify announced its financial report for the first quarter of fiscal year 2022, and the performance of various core financial data was not satisfactory.
This is not ideal, mainly in two aspects: one is the decline in revenue growth, and the other is the amplification of losses.
First look at the overall revenue situation.From the revenue growth curve, although the actual revenue scale of Shopify has not greatly regressed, it is an indisputable fact that the revenue growth rate continues to decline.
The data shows that Shopify’s total revenue in the first quarter was $1.204 billion, which was less than the market expectation of $1.24 billion, up 22% year-on-year. In the four quarters of the last fiscal year, Shopify’s revenue was 988 million, 1.119 billion, 1.223 billion and 1.338 billion US dollars respectively, and the corresponding year-on-year growth rates were 110%, 57%, 46% and 41% respectively, which were much higher than the first quarter of this year.
In the view of the Value Institute, Shopify’s revenue bid farewell to the era of high growth, largely due to the gradual decline of cross-border e-commerce dividends brought about by the epidemic. The most direct evidence is the decline in the growth rate of Shopify merchants and GMV.
As the epidemic has had a serious impact on the global offline retail industry, e-commerce has become a direct beneficiary. In the whole year of 2020, Shopify has a net increase of 700,000 merchants, which makes the industry look askance. However, this hot market disappeared in the second half of last year. Shopify executives also admitted in the fourth quarter of last year’s financial report that "the outbreak of e-commerce industry induced by the epidemic only lasted until the first half of 2021", and the number of new businesses in the last fiscal year shrank sharply to 300,000.
In fact, since the second half of last year, Shopify has continuously launched various preferential activities and innovative activities, including cooperation with Tik Tok and JD.COM, trying to promote the continuous growth of the number of merchants, but the effect is not satisfactory.
GMV recorded $43.2 billion in the first quarter, which was also less than the market expectation of $46.5 billion. The year-on-year growth rate of 16% was far from that of 114% in the same period last year. You know, in the second half of last year, Shopify’s GMV still maintained a year-on-year growth of more than 50%, and the great decline in the first quarter disappointed the market.
Secondly, while revenue growth is stagnant, Shopify’s loss situation is not optimistic.
In the first quarter, Shopify’s net loss was $1.474 billion, which was further enlarged compared with $12.6 in the same period last year. The diluted loss per share was $1.17 billion, which was significantly lower than the diluted earnings per share of $9.94 in the first quarter of last year.
The decline in profits and the increase in losses are not only related to the slowdown in revenue growth, but also the increase in costs and the unexpected transformation of revenue structure.
At present, Shopify’s revenue mainly depends on subscription solution business and merchant solution business, and the latter accounts for the bulk of revenue. In the first quarter, the revenue of merchant solution business was US$ 859 million, a year-on-year increase of 29%; Subscription solution business revenue was $345 million, up only 8% year-on-year.
Compared with historical data, the revenue growth rate of the two business segments in the first quarter is not high. In the same period last year, the subscription solution business revenue was $321 million, a year-on-year increase of 77%; The revenue and year-on-year growth rate of merchant solution business were as high as 668 million US dollars and 136% respectively.
More importantly, the gross profit margin of subscription solution business is much higher than that of merchant subscription service.
The revenue of subscription solution business mainly comes from e-commerce SaaS services such as subscription function packages, plug-ins and customer management. The merchant solution business relies on payment, logistics, warehousing and other charging services provided for settled merchants to make profits.
In the first quarter financial report, Shopify highlighted the acquisition of Deliverr, indicating that it will expand the scope of performance services. Amy Shapero, CFO of Shopify, expressed her belief that Deliverer can simplify the process, guarantee the delivery promise and provide more advantages for merchants.
It can be seen that the merchant solution business is still the main direction of Shopify in the future. However, the relatively high operating costs, especially the high cost of technical facilities for logistics and warehousing, seriously restrict the gross profit level of this business.
In other words, with the current revenue structure, it is difficult for Shopify to push up the profit margin when the epidemic dividend fades and the revenue growth rate declines.
Of course, Shopify is not the only one who is worried about profits.
In the first quarter of this year, Amazon released the worst financial report in recent years. Among them, the revenue, profit rate and other indicators of e-commerce related businesses declined in an all-round way, and even recorded the first loss since 2015, which directly caused Amazon’s share price to plummet and its market value evaporated by 200 billion US dollars overnight.
Shopify’s share price performance is also not optimistic. After the financial report was released, Shopify has fallen for two consecutive days, and closed down nearly 15% on Thursday, falling to the lowest point since April last year.
In fact, after the financial report, Amazon and Shopify have been lowered by many Wall Street banks, and the capital market is full of worries about the prospects of these two high-quality stocks. The latter, in particular, has been looked down upon by Citigroup, National Bank of Canada, Steffel, etc., and Citigroup drastically lowered its target price from $534 to $432.
In the research reports of these investment banks, Shopify’s "internal troubles and external troubles" are mentioned: internal troubles are naturally the decline in revenue growth and the amplification of losses, while external troubles are directed at emerging external competitors.
Some of our strongest rivals happen to be from China.
Unlike Shopify, which entered the winter, the domestic cross-border e-commerce industry is still in a thriving trend.
According to the report of Forward-looking Industry Research Institute, after 2019, the domestic cross-border e-commerce industry entered a period of rapid development, and the overall market scale reached 6.05 trillion by the first half of last year. The data shows that in the past three years, the growth rate of cross-border e-commerce transactions in China has remained above 16%, and the penetration rate has increased from 22% five years ago to 38.86%.
Looking back at the development of domestic cross-border e-commerce market, we can find that capital has been looking for the next Shopify.
According to Zhitong’s financial statistics, dozens of cross-border e-commerce SaaS companies, such as Aike Technology, Le Yan Technology, Lingxing ERP and Dianxiaomi, have gained a new round of financing in the past year, with a total financing scale of over 2.5 billion. In addition, Zan, Weimeng and veteran cross-border e-commerce giant Weimeng are all making efforts in cross-border SaaS business.
Among them, MyyShop under Dunhuang Network and Shopexpress under Weimeng have the most obvious upward trend.
Compared with Shopify, MyyShop and Shopexpress are far apart in scale, but their advantage lies in the huge market of China and the complete e-commerce industry chain behind them. When Shopify announced its strategic cooperation with JD.COM, it publicly acknowledged that China sellers are the most active cross-border e-commerce sellers in the world and play an important role in the industrial chain.
However, as Shopify bid farewell to the era of high growth and fell into the altar, followers such as MyyShop and Shopexpress may need to rethink:Is the e-commerce SaaS model profitable? Is it really possible to copy Shopify’s growth myth?
The value research institute believes that SHEIN, who lives next to MyyShop and Shopexpress, may be able to solve some doubts.
As the hottest cross-border e-commerce platform in recent years, SHEIN’s legendary color is not inferior to Shopify.The completely different revenue structure and business performance of the two perfectly explain the similarities and differences, advantages and disadvantages of SaaS and DTC business models in cross-border e-commerce industry.
According to Apptopia’s data, the total download volume of SHEIN in 2021 was 190 million, which was 70% higher than that in 2020, and it has surpassed Amazon to become the most downloaded shopping APP in the world. According to foreign media reports, SHEIN’s current valuation is as high as 100 billion US dollars, three times that of a year ago; Last year’s revenue was expected to be $15.7 billion, up nearly 60% year-on-year & mdash; — In the previous eight years, SHEIN had created the myth of 100% revenue growth for eight consecutive years.
Up to now, SHEIN’s share in the North American fast fashion market is close to 30%, which is equivalent to the sum of ZARA and H&M. In the eyes of the latter, SHEIN has already become the number one enemy. For the followers of SHEIN and the capital behind them, SHEIN’s performance is equivalent to a barometer of the cross-border e-commerce market to some extent.
Of course, it’s not just foreign giants who are jealous of SHEIN. At home, Ali, JD.COM and other established e-commerce overlords, as well as ByteDance, who also want to have a place in overseas markets, have long regarded SHEIN as their number one rival.
At the end of last year, Alibaba launched the fashion shopping app "Allly Likes" focusing on the women’s market overseas, betting heavily on the North American market. It should be noted that Ali’s cross-border business has always taken the comprehensive e-commerce route. AllyLikes is the first time to try the vertical e-commerce model, which is the performance of Ali’s initiative to change.
The North American market that Ali bet heavily on is not only the base camp of Amazon and Shopify, but also an important granary of SHEIN — — No matter from which angle, Ali’s marching north will inevitably further intensify market competition.
Objectively speaking, it is not the SaaS mode of e-commerce led by Shopify that leads the domestic cross-border e-commerce boom, but the DTC mode led by Alibaba International Station and SHEIN.
According to the statistics of the survey agency Grand View Research, it is estimated that by 2025, the scale of the global decentralized e-commerce market dominated by independent stations will rise sharply to more than 550 billion US dollars. Cross-border e-commerce platforms from China have stepped into the North American battlefield, which will undoubtedly pose a great threat to local e-commerce platforms in the United States and Canada.
However, the recent experience of Shopify and Amazon also has important warning significance for the famous SHEIN and its imitators Ali and Byte.
ShopifyAnd Amazon, Ali, SHEIN, Byte, all must deal with the contradiction between cost and profit rate.Behind this is not only the dispute between SaaS and DTC, but also the supply chain management problems that B2B, B2C and other business models can’t avoid.
Undoubtedly, the epidemic has indeed brought a series of uncertainties to the cross-border e-commerce industry, and also put forward new requirements for players in the market.
The SaaS e-commerce platform headed by Shopify and the DTC cross-border e-commerce represented by SHEIN broke out, which was related to the blocking of offline business channels after the outbreak. The tightening of offline supply chain also brought rare e-commerce dividends.
In addition, there is another thing in common between them — — B2C model is playing an increasingly important role.
In the current core battlefield of North America, B2C is more popular than B2B.The reason why this happens is related to the consumption habits of North American consumers and the popularity of cross-border e-commerce business.
According to statistics from iResearch, 61% of consumers in the United States are willing to shop on international websites, accounting for 32% of cross-border online shopping consumption, while the proportion in Canada is 33%. The C-end consumption firepower is almost equal to the B-end. It is precisely because local consumers in North America are enthusiastic about cross-border consumption, and the repurchase rate and single-time consumption are at the leading level in the world, so cross-border independent stations are increasingly prosperous, and the increase in supply promotes consumption growth, forming a virtuous circle.
Historical data shows that after 2016, Shopify’s merchant solution business surpassed the subscription solution business with 52% of revenue, and then the gap between the two became wider and wider. During this period, Shopify relied on building an independent station to help merchants connect with C-end resources, which not only rapidly improved the brand image and popularity, but also significantly broadened the revenue channels, providing opportunities for small and medium-sized businesses in North America to get rid of Amazon monopoly.
Now that Ali and SHEIN want to spread the war to North America, it is natural to learn from the successful experience of their predecessors and identify the pain points of local customers — — That is, do a good job of localized operation.
Many people attribute the success of SHEIN to the rapid decline of products and high cost performance, but ignore its user operation ability.
Tracking user preferences through big data and technical means is one of SHEIN’s most important operating principles. According to official data, SHEIN is a big customer of Google Trend Finder, and the two sides have been working closely together in customer data management. In addition, SHEIN has a team of 800 buyers who track users’ consumption habits through offline channels.
The two-pronged SHEIN can even be said to be the one with the strongest user thinking and the most successful localized operation among a number of cross-border e-commerce platforms in China.
However, as mentioned above, Shopify’s SaaS model or SHEIN’s self-operated model has an obvious defect in sticking to the B2C route:Operating costs are high, and the industrial chain links connecting upstream and downstream are more complicated, which is facing a severe test in management.
Compared with B2B model, B2C model involves complicated links such as distribution, retail, after-sales service, terminal warehousing, logistics and payment finance because it wants to connect C-end consumers, and the rising cost pressure is almost inevitable.
To put it another way, strengthening supply chain management is the inevitable choice to reduce costs and the key to break through the profit bottleneck in the future.
As for the specific practices, Shopify, which is positioned as a SaaS service platform, and SHEIN, which is a self-operated business, naturally have their own emphasis. But they are similar in one thing — —Strengthen the control of all links in the supply chain and firmly grasp the core links with higher profit margins in your own hands.
The acquisition of Deliverr is Shopify’s performance in strengthening the control of downstream logistics and warehousing. At the moment when the competition is gradually becoming fierce, whoever can solve the supply chain problem faster will be able to take the initiative.
According to foreign media reports, Amazon launched the "Santos Plan" internally at the beginning of last year, headed by Peter Larsen, vice president of Amazon consumption, and assembled a large number of elite employees in Amazon’s retail consumption department, with the goal of positively strangling Shopify, which is rapidly emerging.
At that time, Shopify was in its heyday, and its market share was almost equal to eBay, and then it officially took the second place in the cross-border e-commerce market in North America. Shopify, which made its fortune by small and medium-sized business customers, has many similarities with Alibaba to some extent. These two giants also pose a great threat to Amazon, the e-commerce overlord, at different times.
Looking back now, Amazon may have overestimated the power of Shopify, but I didn’t expect the sudden emergence of SHEIN to become a new menace.
From Amazon, eBay, Alibaba, and now Shopify, SHEIN and Shopee, cross-border e-commerce has been on the rise and fall for more than a decade, and no one can tell what new stories will happen in the next stage. From SaaS to DTC, from B2B to B2C, no one can predict which model will continue to shine in the future.
Only one thing is certain: the popularity of cross-border e-commerce remains high, and players from all walks of life will not give up this treasure easily. This means that more intense fighting is yet to come.
