Ice and fire of cross-border e-commerce: Shopify winter, SHEIN attack

Image source @ Visual China

Text | Value Institute

Officially launched in 2006, positioned as a one-stop e-commerce service platform, providing a variety of online services for retail commercial customers, from a small company with a start-up team of only 5 people in 16 years to grow into the second largest cross-border e-commerce giant in North America with a peak market value of more than $160 billion, Shopify's history is legendary enough.

But shopify, which has eaten all the dividends of the times along the way, is now the time to slam on the brakes.

The first quarter of fiscal 2022 released before the U.S. stock market on Thursday showed that Shopify's core financial data did not perform well: revenue growth fell significantly, and losses continued to widen.

After the earnings report, Shopify has fallen for two consecutive days, and on Thursday it closed down nearly 15%, falling to its lowest point since April last year. In addition, many large banks such as the National Bank of Canada and Citi have also all lowered the target price of Shopify, and the capital market's evaluation of this financial report is self-evident.

In addition to the slowdown in revenue growth, the decline in profits and the amplification of losses are also important reasons for the increase in costs and the transformation of the revenue structure that is less than expected. More importantly, the gross profit margin of the subscription solution business, which accounts for a lower proportion of revenue, is much higher than that of the merchant subscription service.

In the research report of the Wall Street investment bank, Shopify's "internal and external troubles" are mentioned: internal troubles are naturally the decline in revenue growth and the amplification of losses, while external troubles refer to external competitors that are rising.

Under the internal and external troubles, can Shopify still ride the wind and waves?

Revenue fell short of expectations, net losses widened, and the epidemic dividend was not fed to Shopify

Before the U.S. stock market on Thursday, cross-border e-commerce giant Shopify announced its first quarter of fiscal 2022, and the performance of various core financial data was not satisfactory.

This unsatisfactory is mainly manifested in two aspects: one is the decline in revenue growth, and the other is the amplification of losses.

Revenue growth has declined significantly, and the epidemic dividend has continued to fade

First, let's look at the overall revenue situation. From the perspective of revenue growth curve, although Shopify's actual revenue scale has not regressed much, it is an indisputable fact that revenue growth rate continues to decline.

According to the data, Shopify's total revenue in the first quarter was $1.204 billion, which was less than the market's expectation of $1.24 billion, an increase of 22% year-on-year. In the four quarters of the previous fiscal year, Shopify's revenue was 988 million, 1.119 billion, 1.223 billion and 1.338 billion, corresponding year-on-year growth rates of 110%, 57%, 46% and 41%, respectively, all 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 fading of cross-border e-commerce dividends brought about by the epidemic. The most direct evidence is the decline in the growth rate of Shopify's merchant scale and GMV growth.

As the epidemic has had a serious impact on the global offline retail industry, e-commerce has become a direct beneficiary. For the whole of 2020, Shopify net increased by 700,000 merchants, a horror performance that is eye-catching in the industry. However, this hot market disappeared in the second half of last year. Shopify executives also admitted in the fourth quarter of last year's earnings report that "the epidemic-induced e-commerce industry outbreak only lasted until the first half of 2021", and the number of new merchants in the previous fiscal year shrank sharply to 300,000.

In fact, since the second half of last year, Shopify has continuously launched various preferential activities and new activities, including cooperation with Tik Tok and JD.com, trying to promote the continuous growth of the number of merchants, but unfortunately the effect is not satisfactory.

In terms of GMV, it recorded $43.2 billion in the first quarter, which was also less than the market expectation of $46.5 billion, and the year-on-year growth rate of 16% was even more different from the 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 increase of more than 50%, and the decline in the first quarter disappointed the market.

Behind the amplification of losses, cost pressure is becoming increasingly prominent

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, further amplified from $12.6 in the same period last year. Diluted loss per share recorded $1.17 billion, a significant decline from diluted earnings per share of $9.94 in the first quarter of last year.

In addition to the slowdown in revenue growth, the decline in profits and the amplification of losses are also important reasons for the increase in costs and the transformation of the revenue structure that is less than expected.

At present, Shopify's revenue mainly relies on two segments: subscription solution business and merchant solution business, the latter accounting for the majority of revenue. In the first quarter, merchant solutions revenue increased 29% year-over-year to $859 million, while subscription solutions revenue increased by only 8% year-over-year to $345 million.

Compared with historical data, the revenue growth rate of the two major business segments in the first quarter is not high. In the same period last year, the subscription solutions business revenue was $321 million, an increase of 77% year-on-year, and the merchant solutions business revenue and year-on-year growth rate were as high as $668 million and 136%, respectively.

What's more, the gross margin of the subscription solutions business is much higher than that of the merchant subscription service.

The revenue of the subscription solution business mainly comes from the provision of e-commerce SaaS services such as subscription function packages, plug-ins, and customer management. The merchant solution business relies on the payment, logistics, warehousing and other fee-based services provided to the settled merchants to make a profit.

In its first-quarter earnings report, Shopify highlighted the acquisition of Deliveror, indicating that it will expand the scope of fulfillment services. Shopify's CFO, Amy Shapero, said he believes Deliverrr can streamline the process, guarantee delivery promises, and provide merchants with more advantages.

It can be seen that the merchant solution business will remain the main direction of Shopify in the future. However, relatively higher operating costs, especially the construction of technical facilities required for logistics and warehousing, have seriously restricted the gross profit level of the business.

In other words, with the current revenue structure, it is difficult for Shopify to push up profit margins in the case of the epidemic dividend fading and the revenue growth rate declining.

(Image from Shopify earnings)

Of course, it's not just Shopify that's fretting about profits.

In the first quarter of this year, Amazon released one of its worst earnings reports in recent years. Among them, the revenue, profit margin and other indicators of e-commerce-related businesses have declined across the board, and they have recorded their first losses since 2015, which directly caused Amazon's stock price to plummet, and the market value evaporated by $200 billion overnight.

Shopify's share price performance is also not optimistic. After the earnings report, Shopify has fallen for two consecutive days, and on Thursday it closed down nearly 15%, falling to its lowest point since April last year.

In fact, after the earnings report, Amazon and Shopify have been lowered by a number of 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 Citi, National Bank of Canada, Steiffel, etc., and Citi has sharply lowered its target price from $534 to $432.

In the research reports of these investment banks, Shopify's "internal and external troubles" are mentioned: internal worries are naturally the decline in revenue growth and the amplification of losses, while external troubles point directly to external competitors that are rising.

Several of the strongest opponents happen to be from China.

In addition to e-commerce SaaS, SHEIN offers another attempt

Unlike Shopify, which has entered the winter, the domestic cross-border e-commerce industry is still in a thriving trend.

According to the report of the Prospective Industry Research Institute, after 2019, the domestic cross-border e-commerce industry entered a period of rapid development, and the overall market size reached 6.05 trillion yuan as of the first half of last year. The data shows that the growth rate of China's cross-border e-commerce industry transaction scale has remained above 16% in the past three years, and the penetration rate has risen from 22% five years ago to 38.86%.

Looking back at the development of the domestic cross-border e-commerce market, it can be found that capital has been looking for the next Shopify.

According to the statistics of Zhitong Finance, in the past year, dozens of cross-border e-commerce SaaS companies such as Aike Technology, Leyan Technology, Lingxing ERP, and Dian Xiaobi have received a new round of financing, with a total financing scale of more than 2.5 billion. In addition, Youzan, Weimob and the veteran cross-border e-commerce giant Weimob are all working on cross-border SaaS business.

Among them, MyyShop under DHgate.com and Shopexpress under Weimob have the most obvious upward momentum.

Compared with Shopify, although the scale of MyyShop and Shopexpress is far from each other, the advantage lies in the huge market of China and the complete e-commerce industry chain behind it. When Shopify announced its strategic cooperation with JD.com, it publicly admitted that Chinese sellers are the world's most active cross-border e-commerce seller team and occupy an important role in the industrial chain.

However, as Shopify bids farewell to the era of high growth and falls to the altar, followers such as MyyShop and Shopexpress may need to rethink: Is the e-commerce SaaS model a million profits? Is shopify's growth myth really possible to replicate?

The Value Institute believes that SHEIN, which lives around MyyShop and Shopexpress, may be able to solve some of its doubts.

As the most popular cross-border e-commerce platform in recent years, SHEIN is not inferior to Shopify. The completely different revenue structure and business performance of the two perfectly explain the similarities and differences and their respective advantages and disadvantages of the two business models of SaaS and DTC in the cross-border e-commerce industry.

According to Apptopia, SHEIN's total downloads in 2021 will be 190 million, up 70% from 2020, and has surpassed Amazon as the world's most downloaded shopping app. According to foreign media reports, SHEIN's current valuation is as high as 100 billion US dollars, three times higher than a year ago; the previous year's revenue is expected to be 15.7 billion US dollars, an increase of nearly 60% year-on-year - in the previous 8 years, SHEIN has created a myth of 100% revenue growth for 8 consecutive years.

As of now, SHEIN's current share of the North American fast fashion market is close to 30%, equivalent to zara and H&M combined. In the eyes of the latter, SHEIN has long become the number one rival. For SHEIN's followers and the capital behind them, SHEIN's performance is, to some extent, equivalent to a barometer of the cross-border e-commerce market.

Of course, it's not just foreign giants who are red-eyed. In China, veteran e-commerce overlords such as Ali and JD.com, as well as ByteDance, which also wants to have a place in overseas markets, have long regarded SHEIN as their number one enemy.

At the end of last year, Alibaba launched allyLikes, a fashion shopping app focused on the women's market, overseas, and bet heavily on the North American market. It should be noted that Ali's cross-border business has been taking the comprehensive e-commerce route before, and AllyLikes is the first attempt at the vertical e-commerce model, which is the performance of Ali's initiative to change.

The North American market that Ali has bet heavily on is not only the home base of Amazon and Shopify, but also an important granary of SHEIN - no matter from which point of view, Ali's northward march will inevitably further intensify market competition.

Objectively speaking, what leads the domestic cross-border e-commerce boom is not the e-commerce SaaS model led by Shopify, but the DTC model led by Alibaba International And SHEIN.

Statistics from the survey firm Grand View Research show that it is expected that by 2025, the size of the global decentralized e-commerce market dominated by independent stations will rise sharply to more than $550 billion. 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 encounter between Shopify and Amazon also has important warning significance for the popular SHEIN and the imitators behind it, Ali and Byte.

Shopify and Amazon, Ali, SHEIN, and Byte must deal with the contradiction between cost and profit margin. Behind this is not only the dispute between the advantages and disadvantages of the two major cross-border e-commerce tracks of SaaS and DTC, but also implies the supply chain management problems that cannot be avoided by various business models such as B2B and B2C.

The future of cross-border e-commerce: focus on customer operations & strengthen supply chain management

There is no doubt that the epidemic has indeed brought a series of uncertainties to the cross-border e-commerce industry, and has also put forward new requirements for various players in the market.

The SaaS e-commerce platform led by Shopify and the DTC cross-border e-commerce represented by SHEIN have achieved an outbreak, which is more or less related to the blockage of offline business channels after the outbreak of the epidemic, and the tightening of offline supply chains has also brought rare e-commerce dividends.

In addition, there is another thing in common between the two - B2C mode is beginning to play an increasingly important role.

In north America, the current core battlefield, B2C is a more popular model than B2B. The reason for this situation is related to the consumption habits of North American consumers and the popularity of cross-border e-commerce business.

According to iResearch statistics, 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%, and the C-end consumption is close to the B-end. It is precisely because the local consumers in North America are enthusiastic about cross-border consumption, and the repurchase rate and single consumption are at the global leading level, so the cross-border independent stations are becoming 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 the gap between the two has become wider and wider. During this period, Shopify relied on creating independent sites to help merchants connect C-end resources, which not only quickly improved its brand image and popularity, but also significantly broadened its revenue path, providing opportunities for small and medium-sized merchants in North America to get rid of Amazon's monopoly.

Now that Ali and SHEIN want to burn the flames of 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, to do a good job in localization operations.

Many people attribute the success of SHEIN to the rapid decline of the product and the ultra-high cost performance, but ignore its user operation ability.

Tracking user preferences through big data and technical means is one of the most important operating principles of SHEIN. According to official data, SHEIN is a big customer of Google Trend Finder, and the two sides have been working closely together on customer data management. In addition, SHEIN has a team of 800 buyers who track user spending 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 localization operation among the many cross-border e-commerce platforms in China.

However, as mentioned earlier, Shopify's SaaS model or SHEIN's self-operated model, insisting on taking the B2C route has an obvious flaw: high operating costs, and the upstream and downstream connection of the industrial chain links are more complex, facing severe tests in management.

Compared with the B2B model, the B2C model involves cumbersome distribution and retail, after-sales service, terminal warehousing logistics distribution and payment finance because it wants to connect C-end consumers, and the cost pressure is almost inevitable.

From another point of view, strengthening supply chain management is the inevitable choice for cost compression, and it is also the key to breaking through the profit bottleneck in the future.

As for the specific approach, Shopify, which is positioned as a SaaS service platform, and SHEIN, which is positioned as a self-operated business, naturally have their own emphases. But they are similar in one thing – by strengthening control over all parts of the supply chain and keeping the core of higher profit margins firmly in their own hands.

The acquisition of Deliver is a manifestation of Shopify's increased control over downstream logistics warehousing. At a time when competition is gradually entering a white-hot situation, who can solve the supply chain problem faster can grasp the initiative.

Write at the end

According to foreign media reports, Amazon launched the "Santos Plan" internally at the beginning of last year, led by Peter Larsen, vice president of Amazon's consumption, and gathered a large number of elite employees in Amazon's retail consumption department, with the goal of frontal strangling the rapidly rising Shopify.

At that time, Shopify was in its heyday, with market share approaching eBay, and then officially sat in the second place in the North American cross-border e-commerce market. Shopify, which makes its fortune from small and medium-sized business customers, has many similarities with Alibaba to some extent, and the two giants have also posed a huge threat to the e-commerce overlord Amazon at different times.

Looking back now, Amazon may have overestimated the power of Shopify, and did not expect that the sudden rise of SHEIN has become a new problem.

From Amazon, eBay, Alibaba, to today's Shopify, SHEIN and Shopee, the cross-border e-commerce boom has been on and off for more than a decade, and no one can say 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.

There is only one thing that is certain: the popularity of cross-border e-commerce remains high, and all kinds of players will not easily give up this treasure. This means that more intense fighting is yet to come.