Transcript: Shopify vs Amazon

This is an audio transcript of the Unhedged podcast episode: ‘Shopify vs Amazon’

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Ethan Wu
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 Unhedged, 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 Mutoh.

Anna Mutoh
Hi.

Ethan Wu
Making her podcast debut. And live from the carpet, it’s Robert Armstrong.

Robert Armstrong
It’s true. I hurt my back the other day doing some really strenuous journalism, and as a result, I am supine on my bedroom floor while we’re recording this because I can neither stand nor sit.

Ethan Wu
Rob tried to write about private credit, which you talked about on the show with Katie on Tuesday, and it just injured him permanently. He’s never gonna recover.

Robert Armstrong
Yes. I saw the fee structure and it threw out my back.

Ethan Wu
Yeah. Makes two and 20 look like light work. I mean, Rob, I gotta 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.

Robert Armstrong
Show must go on.

Ethan Wu
But Anna has written, in publication soon in the Financial Times, an excellent piece about the story of Shopify. It gets at both some interesting trends with ecommerce 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 as unbeatable — you know, increasing returns to scale, like 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?

Anna Mutoh
Sure. So if you’re the average consumer, you may not have heard of Shopify before, but they’re actually the second-largest ecommerce company outside of China. They 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 per cent of market share within the ecommerce space, and that’s compared to Amazon’s 40 per cent. And they’ve had tremendous growth over the years. They IPO’d in 2015 and the stock price is up 25 times since then.

Robert Armstrong
OK, I have a question.

Anna Mutoh
Sure.

Robert Armstrong
Their revenue is just like they take a percentage of all your sales. And is it a totally digital business?

Anna Mutoh
It’s a totally digital business. It’s subscription-based. So that’s part of their revenue stream. But the other larger part of their revenue stream is through their payments business. So they have a button called Shop Pay and they take a cut of that transaction.

Ethan Wu
So it’s running the whole kind of digital architecture for . . . I mean, my understanding, Anna, is primarily small companies, right? So it’s some mom and pop store and they have auto repair, blah, blah, blah. It’s just two or three employees. They don’t have any computer scientists on staff. They don’t wanna pay some horrible, exorbitant fee to get, you know, a website up and running. So they pay Shopify.

Anna Mutoh
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. So that’s kind of the direction that they’re trying to go into. But bread and butter . . . 

Robert Armstrong
Are a lot of people shopping online at Heinz?

Anna Mutoh
(Laughter) That’s a very good question.

Ethan Wu
I mean, I think that stuff sells itself, right?

Robert Armstrong
I wanna get my ketchup from the source, you know.

Ethan Wu
(Laughter) It is, like, the undisputed best ketchup. Like, I fully buy into the Heinz branding.

Robert Armstrong
Oh, 100 per cent. Wall Street must love this business. What does Wall Street like? They like recurring revenue, so 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 a, like an eye-watering valuation? Yeah.

Anna Mutoh
Yes. So most of the analysts have a buy rating. There are few holds and sells. But one analyst has 130 times p/e.

Robert Armstrong
Oh. For their target.

Anna Mutoh
So expectations are very high. Target, yeah.

Ethan Wu
Yeah. That’s nuts. So Amazon is the dominant ecommerce player. That much is very clear. Shopify starts with these small 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?

Anna Mutoh
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 co-ordinate with Shopify. It’s turned into this symbiotic relationship in a way that Apple has with their apps or Google has with their apps.

Robert Armstrong
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?

Ethan Wu
Or Etsy or eBay or whatever.

Anna Mutoh
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’s side, the merchant’s side and they make it much easier for merchants to do business. So Amazon has one platform and the goal is to get customers to come directly to your site because you wanna have that relationship directly with the customer.

Robert Armstrong
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.

Ethan Wu
Shopify. (Anna laughs)

Robert Armstrong
It’s almost like . . . I’m sorry. We’re going to talk about Spotify later. Shopify. You know what I mean. This space was intentionally created by Amazon, in a way.

Anna Mutoh
In a way, yeah.

Robert Armstrong
Because of their choices, you know.

Anna Mutoh
Yeah. I think it started off with just not having a lot of options to build a website. But 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.

Robert Armstrong
Against the Empire.

Anna Mutoh
Oh, sorry. Against the Empire.

Ethan Wu
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. 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?

Anna Mutoh
It’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 on logistics, delivery, warehousing, but realised that it’s going to be really hard to go against Amazon two-day Prime. So they quickly exited that after a year, which was a good move. It did result in back-to-back lay-offs, but they learned from that lesson.

Robert Armstrong
I think that really tells you something about what really works about Amazon’s strategy.

Ethan Wu
Totally.

Robert Armstrong
Amazon’s strategy is like we, although we’re an ecommerce company, we are all about meat world, right? Like physical infrastructure, expensive stuff, carrying stuff around. And why do they emphasise that stuff so much? Because once that stuff is in place, it is very hard to replicate, compete against, overcome, etc etc. So it does speak to Jeff Bezos’s vision that Shopify has to compete where it does — more in the purely digital realm.

Ethan Wu
Anna, why did Shopify even attempt to compete in this logistics business with Amazon anyway? You’d think it would be like really, really hard to do that, right?

Anna Mutoh
Yeah, that’s a good point. I think they were listening to their customers, their merchants that this shipping and delivery is a huge pain point. In fact, I was speaking with, the founder of Callie’s Hot Little Biscuits. They 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.

Ethan Wu
What does Callie’s Hot Little Biscuits sell?

Anna Mutoh
They sell hot little biscuits in Charleston, South Carolina.

Ethan Wu
Sounds amazing.

Robert Armstrong
Right on. I love biscuits.

Ethan Wu
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 ecommerce market, especially starting from humble beginnings. And I wonder if there are lessons for, you know, outside of just the ecommerce world. I mean, you know, I think we’ve talked about, Rob, other challengers, to the Mag Seven. I mean, what comes to mind for you?

Robert Armstrong
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 the massively dominant Mag Seven is Meta vs TikTok. TikTok came into the space, short-form video, that they haven’t even thought about 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 the big challenge.

So who is, you know, you might say that at one point Salesforce was that for CRM. You know, that was customer relationship management. Microsoft didn’t want that bit. And they got in there and they turned it into a huge business.

Ethan Wu
And I think that’s why Alphabet panicked so much when ChatGPT came out, right? This is a totally new niche that’s been invented. Maybe it, you know, cannibalises our business, maybe it doesn’t, but it certainly could.

Robert Armstrong
In search, as currently conceived, Google will win forever, 100 per cent. 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.

Ethan Wu
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. It starts with, you know, chiselling away in some little niche area that the incumbent doesn’t really care about, right? Amazon probably doesn’t wanna 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 . . . 

Robert Armstrong
This was for toys was the attitude of the rest of the industry.

Ethan Wu
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. It’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, 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.

Robert Armstrong
That’s the approach we’re taking to unseating Joe Rogan. (Anna laughs) That’s the biggest podcast. Finance geeks, who cares about them?

Ethan Wu
The Unhedged lifestyle spin-off is coming very soon, ladies and gentlemen. (Anna and Rob laugh)

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Anna Mutoh
From the carpet.

Ethan Wu
Live from the carpet. Exactly right. That’s where Joe Rogan does all his podcasts. All right, Anna and Rob, we’ll be back in just a moment with Long/Short.

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Ethan Wu
Welcome 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?

Anna Mutoh
I have a pair trade.

Ethan Wu
A pair trade.

Anna Mutoh
It’s highly technical.

Ethan Wu
Strong debut.

Anna Mutoh
All right. 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. In 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.

Ethan Wu
The fish lick that will live in infamy, 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. He’s recording this all for YouTube. It’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?

Robert Armstrong
I’m gonna 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.

Anna Mutoh
Also DC.

Robert Armstrong
DC. No, DC is overrated. I’m saying Brooklyn. (Anna laughs) I’m gonna sell Washington’s cherry blossoms and buy Brooklyn’s cherry blossoms.

Robert Armstrong
Yes. They are really awesome. Listeners, if you’re interested, if you’re in New York and you wanna 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.

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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 Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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