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Sent Items #98: Saturday, Aug 1, 2020

HI EVERYONE!

Wow, what a week!  Baseball is officially back (though unlikely for long…) and the Yankees appear to be on the road to another AL East Championship.

Gosh, where do we start. Maybe we talk about the least surprising news of the week. Corporate earnings from some of the largest tech and logistics companies validated what most readers of this newsletter have been enduring for months: ecommerce is on fire!

We got earnings from ecommerce bellwethers Amazon, Shopify, eBay, UPS, to name just a few, and my gosh were they extraordinary (see below for more in depth coverage). 

The underlying headline is the following: US ecommerce penetration went from 16% of retail spending in the first quarter of 2020 to 40% in the month of May. US ecommerce should grow ~30% in 2020, and should settle well ahead of where it was, 20% to 25% of all retail, representing a pull-forward by at least a couple years. Just this morning I came across this fascinating data point that Prof Galloway shared on Twitter:

Think about that for a moment. More US households have Prime memberships than decorate a Christmas tree!

But with this growing ecommerce penetration I tweeted a couple days back about my concern with peak volumes this year. I am writing a longer piece to elaborate on my concerns and provide a few actionable tips on how brands may be able to circumvent some of the inevitable challenges.

Finally, if you missed the discussion I had with leaders from Flexe, Anvyl, and Convey, you can find the recording here.

Lots of news to cover so bear with me. As always, please forward and share here.

- Matt


THE NEWS

Shopify Saved Main Street. Next Stop: Taking On Amazon - Marker

  • Great overview of the origins and now dominance of Shopify. A few highlights on current events:

  • Only Amazon takes in more money online than Shopify’s merchants, which in aggregate brought in more than $60 billion in 2019, $20 billion more than the year before. The company’s prospects have seemed limitless, with its own revenue increasing nearly 50% last year to $1.6 billion.

  • The pandemic has accelerated that already rocket-ship growth, with analysts predicting an average 75% annual rise in the next five years. In early July, Shopify’s stock price surpassed $1,000 per share, more than triple its mid-March price. Aside from Zoom, arguably no other tech company in the pandemic has had such a massive groundswell — or an ideal marketing moment — than Shopify.

  • Shopify doesn’t push merchants to mention its name anywhere on the site; the branding is all the customer’s, at a cost of as little as $29 a month for the most basic Shopify plans, plus a 2.9% cut of sales. It’s why the company has managed to power retailers that account for about 6% of all online sales in the U.S. — ahead of all other e-commerce channels, like eBay and Etsy, though trailing behind Amazon’s staggering two-thirds share.

  • Shopify has become the de facto ecommerce platform for small businesses, but with massive corporate retail customers including Nestle, Unilever, and Pepsi, it’s also now in the crosshairs of the ecommerce marketplace giants, from Amazon to Facebook.

Coronavirus Shifts Pricing Power to UPS and FedEx, and They Are Using It - WSJ

  • The pandemic has created a moment of reckoning for e-commerce, as carriers like FedEx and UPS grapple with a surge in online shopping that has pushed their networks to capacity. Increased demand has also given the delivery firms a window to charge higher rates as retailers need their services more than ever.
  • They are starting to exercise that pricing power, with UPS hitting some large shippers with price increases in the double-digit percent range in recent weeks and FedEx following suit, according to logistics executives including shippers, consultants and carriers. Some of the increases have come mid-contract, these people said, while other increases have been made during renewals.

  • The increases are creating a quandary for retailers who have relied on online shopping to salvage business as stores temporarily closed and many shoppers became reluctant to venture out. Merchants that don’t want to absorb the added cost can raise shipping prices, eliminate free shipping or raise prices of goods sold online.

  • The shift has disrupted some longstanding practices in rate negotiations. With capacity at a premium, shippers have little room to play the carriers off each other to win discounts and other concessions.

                       

UPS: Current capacity can handle peak, 'we'll be selective' on volume - Supply Chain Dive

  • UPS CEO said the company is largely ready for peak season with its current capacity. CEO laid out an operating philosophy centered on network efficiency over size —"better, not bigger".

  • UPS' U.S. daily parcel volume increased nearly 23% YOY in the quarter, heavily weighted toward volume from consumer deliveries (B2C volume was up 65% YOY). U.S. parcel carriers have been facing peak-level volumes since March, and UPS has hired an additional 40,000 employees to handle the parcel growth. UPS will expand the reach of its existing Saturday service to cover 75% of the U.S. by this year's peak season.

  • At the beginning of the quarter, UPS executives expected Q2 would see less parcel volume than Q1. After breaking company records for volume, the carrier predicts Q2 was the height of U.S. daily parcel volume for the year, but strong demand will continue (I generally disagree).

Shopify Overtakes eBay - Marketplace Pulse

  • Shopify’s Gross Merchandise Volume (GMV) for the second quarter was $30.1 billion compared to eBay’s $27.1 billion. For the first time, Shopify processed more transaction volume than eBay. Shopify is not a marketplace directly comparable to eBay; however, like all ecommerce companies, they compete for the same customers.

  • eBay reported a 26% GMV growth for the second quarter - the highest quarterly growth rate in 15 years - and 35% GMV growth in the US. Meanwhile, Shopify said its GMV grew 119% in the second quarter; it doesn’t break out GMV by region. Additionally, Shopify added that it saw “growth accelerating in April and May and decelerating in June and thus far in July.” Shopify’s growth in the second quarter was its highest quarterly growth rate since it went public in 2015.

Shopify Blasts Q2 Earnings Forecast Amid COVID-19 Spending Shift: Shares Hit Record High - TheStreet.com

  • Shopify said gross volumes on its platform more than doubled to $30.1 billion over the second quarter (+119%), thanks to what could be the start of a permanent shift in retail spending to online platforms.

  • Second-Quarter Revenue Grows 97% on GMV Growth of 119% Year on Year. New stores created on the Shopify platform grew 71% in Q2 2020.

  • Certain categories of GMV grew faster in Q2 2020, including Food, Beverages, and Tobacco, which doubled during this period relative to Q1 2020. 

  • Shopify Shipping adoption continued to rise, with 49% of eligible merchants in the United States and Canada utilizing Shopify Shipping in the second quarter of 2020, versus more than 42% in the second quarter of 2019.

UPS's stock soars toward record after big profit and revenue beats, as residential demand surged - MarketWatch

  • COVID has enabled ecommerce growth, which created a peak-like environment in May and June for UPS. Volume surged a combined 20.9% YOY in the quarter, largely driven by US domestic B2C. Domestic SurePost and Ground (ex SurePost) volumes grew 96.6% (53% of total US Domestic volume growth) and 63.8%, respectively. Second quarter mix shifted heavily in favor of B2C, with B2B representing just 27% of total volume in May, before recovering marginally to 37% (vs 46% normal) by the end of June. Average daily volume increased 22.8%, reaching 21.1 million packages per day.

  • Management noted the aforementioned peak-like volume surge created some network issues and dips in service levels in select regions. The big question is how well can the network handle the upcoming seasonal peak on top of an already peak-like base. Management believes they already have the necessary capacity levers required to meet the needs of their forecast holiday peak, and will be able to utilize their 15,000 access points as needed. Continued capacity constraints in the US should give UPS pricing power, which could be leveraged during the peak to keep balance operations. 

  • UPS is better prepared to handle the volume spike now, compared to six months ago, given the company's reached 85% automation in the US and is accelerating time in transit improvements by investing $750 MM in an effort to complete the project by October 2020. UPS expects Saturday ground residential service will be available to ~75% of the US population before the peak in addition to SurePost Sunday deliveries, which should help alleviate some pressure.

  • One of the biggest issues UPS has is that the current pandemic created a significant number of new customers. In the second quarter, smaller retail and mall stores were closed so people ordered more goods on line. Management noted that ground and SurePost volumes grew faster than any other volume and 19 of their top 20 customers saw significant volume increases. 

  • Residential volume is expensive to deliver because the package per stop ratio is generally low. As a result, the cost to deliver grows, and the delivery companies have a hard time gaining economies of scale. A lot of UPS's future investments will be in technology to improve and automate delivery.

  • The biggest gating factor is driver availability and cost. Everyone is hiring drivers, and the cost to do so is increasing. The company said they hired 40K new workers in the last six months, and those workers will start receiving benefits over the next six months. As a result, without prices going up, margins will be squeezed.

USPS Agrees to Treasury Loans with Stunning Strings Attached - EcommerceBytes

  • Congress authorized the USPS to borrow $10 billion from the US Treasury Department as part of the CARES Act.But in negotiating the terms, the Treasury Department attached some significant strings, including the following:

  • “Subject to confidentiality protections, USPS shall provide to Treasury copies of USPS’s top 10 market dominant Negotiated Service Agreements (NSAs) and top 10 competitive products NSAs.” Another provision: the USPS would have to disclose to the Treasury any new or amended NSAs that would constitute USPS’s top 10 market dominant NSAs and top 10 competitive product NSAs.

  • The questions some are asking is why the Treasury wants the information, since Congress already authorized the loans, and what the Treasury will do with the information.

Amazon reports record quarterly profit and 40% sales growth backed by strong COVID-related demand - Business Insider

  • The lockdown drove a clear surge in Q2 demand, leading to +57% YOY growth led by consumables & grocery, which was up 3x YOY. The surge in demand created logistical challenges for Amazon’s fulfillment network particularly in the first half of the quarter, which led to essential items being prioritized, driving increased utilization of Merchant Fulfilled orders. The growth in MFN use fell as AMZN progressed through Q2.

  • Amazon spent $9.4 Billion in Capex and Capital Leases in 2Q20 and noted that it expects to grow square footage by ~50% in 2020 to meet its demand needs, compared to only 15% square footage growth in 2019. This implies an increase of 130MM sqft over the course of the year! The majority of this capacity will come online in late Q3 and into Q4.

  • What's remarkable is that Amazon spent $11 billion on 3rd party transportation in Q1, and it was and on track for $45 billion to $50 billion for the year. Think about UPS or FDX annual revenues in the $70 billion - $80 billion range, and AMZN spending $50 billion. They are swamping USPS and UPS (Sure Post up 96%!) and this is why I believe service levels for everyone are being impacted.

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© 2020 Second Marathon Consulting, LLC
Matthew Hertz is the founder of Second Marathon.
www.secondmarathon.com

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