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Shopify's Game of Thorns - Fulfilment Edition

Ashwin Ramasamy
Ashwin Ramasamy
Mar 29, 2022
4
Min Read

Is the winter here?

I had originally not planned to write about Shopify this week, but the team brought out some really interesting insights about Shopify's fulfillment strategy, comparing it with the data we have. It makes for a great read, if I may say so myself.

Shopify Fulfillment Network chronology

  1. Shopify launched Shopify Fulfillment Network in June 2019
  2. Had planned to invest $1 billion over the following five years to build out the network.
  3. Acquired the fulfillment automation startup 6 River Systems for $450 million in Sep 2019. Built fulfillment management software to complement its robotics, which it has rolled out in a few facilities.
  4. Shopify's warehousing partners endured steep discounts for what they saw as a “rocket-ship opportunity.”
  5. In Aug 2021, leased a 563,000-square-foot warehouse under construction near Atlanta.
  6. In the same year, several original architects of the network left the company.

In Jan 2022 Shopify terminated or reduced the scope of its work with several warehouse and fulfillment partners marking a potential shift in strategy. Partners are not happy.

Find here the top 100,000+ stores that use Shopify in US.

What are Shopify’s plans and expectations from SFN?

  1. Shopify claims it is consolidating its network into larger facilities and shifting to operate more of them directly for better control of quality and cost.
  2. Says this will help direct-to-consumer hyper-growth self-shippers compete with big-box retailers, prioritizing two-day shipping at affordable prices and access to easy returns for U.S. shoppers.
  3. The pilot network covers 90% of the US population with two-day delivery coverage.
  4. Over the next three years through 2024, their planned investment (USD 1B) is expected to expand the merchant value proposition including increasing one-day delivery coverage in the U.S.

So far, it makes for a compelling case. Shopify needs to make money from merchants that are growing. Payments and fulfillment are cash sinks for merchants. It makes sense for Shopify to vertically expand. It makes sense to consolidate its position as the platform for DTC brands and also level up against Amazon. But, how compelling is the SFN offering in reality?

We dug through our data for you.

Shipping Speeds in US and Canadian eCommerce (where SFN currently operates) – PipeCandy Data

  1. About 50% of US and Canadian eCommerce businesses already provide next-day delivery.
  2. 62% of Shopify merchants are offering shipping speeds of two days or less compared to 69% of Non-Shopify merchants.
  3. 42% of Shopify merchants are already providing one-day delivery as the fastest delivery option while SFN is optimized for up to two-day delivery currently.

So the challenge for SFN is not just launching a fulfillment service but one that is compelling enough for its own customers to switch. With nearly 50% of that target set already giving a better shipping experience for shoppers than what Shopify can offer, it's going to be a herculean task for Shopify to close the gap and then offer some more.

But, that's not where this ends. Shopify competes with Amazon and Amazon has MCF.

Amazon benchmarks vs Shopify Fulfillment Network

Amazon, the fulfillment leader that sets benchmarks for the industry, offers Multi-Channel Fulfillment (MCF) with deliveries as quick as next-day for orders outside of Amazon, including eCommerce businesses that run on, say, Shopify.

  1. Both MCF and SFN let the merchant take ownership of the customer data while FBA does not.
  2. While, with MCF, Amazon has plans to start using customizable package designs in lieu of Amazon-branded packaging, Shopify lets the merchants own the customer unpacking experience by allowing the use of merchants’ own branded packaging.
  3. Both SFN and MCF do not charge extra for holidays and peak season. SFN waives off storage costs if the unit is sold within six months.
  4. Shopify fulfillment aims to cover 90% of American consumers with at least two-day delivery while Amazon’s MCF is already offering deliveries as fast as one day through priority shipping.
  5. Currently, MCF only supports international fulfilment for media products (books, music, videos, and DVDs). While SFN provides international shipping, it is not clear if there are any restrictions on the products shipped.
  6. SFN only works with brands that ship between 3 and 200 orders per day (or 84 – 6,200 orders/month) that have under 200 SKUs.
  7. SFN doesn’t work with any regulated or perishable products, those that need lot tracking, products where the total package weight is over 35 pounds or longer than 18 inches in any single dimension, prohibited items including hand sanitizers and CBD products, and some items they consider restricted. Amazon MCF, on the other hand, works with heavy, dimensionally odd products as well.

Fulfillment and Payments ought to be the revenue drivers for Shopify as new merchant signups slow down. Shopify has not been able to scale up on SFN since 2019. It has lost most of its team. It is again planning a large capex for the next two years on a leaner self-operated network and narrower target market (DTC self-shippers) most of whom are already offering one-day delivery and may find Amazon MCF better.

There are almost 200,000 independent eCommerce sellers that also sell on Amazon. For them, Shopify is not a compelling option.

Amazon is already having a mature offering with MCF that Shopify hopes to catch up within the next two years.  The DTC market is experiencing a bad year with the public companies drastically underperforming and having lost billions in market cap in 2022. If rising facebook ad prices, worsening admeasurement, soaring shipping costs, and smaller-than-anticipated customer bases aren't enough to eat into revenue, and margins, we have not yet seen a fall in discretionary spending in top categories It's only a matter of time. Will the customer base wait for Shopify to get SFN right or not risk customer churn and stick to safer options like MCF or whomever they do same-day and next-day shipping already with?

Did Shopify miss a trick by bringing fulfillment in-house too soon?

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Slips poor jokes & gets away with a poker face. Carries a no BS attitude at getting things done. First to arrive at the office, Ashwin’s energy does not ebb through the day. Ashwin is one of the co-founders and he sets the tone for marketing, sales, design & culture.
Slips poor jokes & gets away with a poker face. Carries a no BS attitude at getting things done. First to arrive at the office, Ashwin’s energy does not ebb through the day. Ashwin is one of the co-founders and he sets the tone for marketing, sales, design & culture.
hm.com
HQ Location: Beaverton, Oregon, United States Of America, 97005
hm.com, operated by H & M Hennes & Mauritz AB, is an internationally-focused online store that generates eCommerce net sales primarily in Germany as well as in the United States and the United Kingdom. With regards to the product range, hm.com achieves the greatest part of its eCommerce net sales in the “Fashion” category.
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Slips poor jokes & gets away with a poker face. Carries a no BS attitude at getting things done. First to arrive at the office, Ashwin’s energy does not ebb through the day. Ashwin is one of the co-founders and he sets the tone for marketing, sales, design & culture.
Slips poor jokes & gets away with a poker face. Carries a no BS attitude at getting things done. First to arrive at the office, Ashwin’s energy does not ebb through the day. Ashwin is one of the co-founders and he sets the tone for marketing, sales, design & culture.
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