July 24, 2018 by Sujay Seetharaman

Note: A modified version of our report was first published on Techcrunch.

The Amazon squeeze

In May this year, Amazon published its small business impact report in which it disclosed that there are 20,000 SMBs that make a million dollars or more in sales.

Amazon boasts about 5 Million third-party sellers on its marketplace today, with an estimated 100,000 sellers hopping onboard every month.

At 100,000 sellers a month over the next 5 years, there could be an estimated 11 Million sellers on Amazon’s marketplace by 2023.

eCommerce intelligence firm Marketplace Pulse estimates Amazon’s Gross Merchandise Volume or GMV for 2018 at $280B, set to triple over a 5-year period, concluding that the marketplace contribution to Amazon’s GMV would surpass 70% by 2023.

Combined with Prime and FBA, this high-level picturization sounds like Amazon can afford to not worry about its marketplace. But an uneasy trend seems to simmer within its 5 Million cohort.

Currently, there are an estimated 100,000 sellers with at least $100,000 in sales, 20,000 with at least $1 Million but 57% of all GMV comes from just 6,000 sellers. – who make up less than 1% of all marketplace sellers.

Effectively, a majority of the sellers are those selling similar products, have no distinct brand identity and hence no lever to scale. What are their options as Amazon’s marketplace becomes increasingly competitive and top-heavy?

Buy more advertising?

Quite the opposite, actually. We compared Feedvisor’s survey of Amazon marketplace merchants from 2017 and 2018 and found five interesting trends:

  1. A little more than half of those who were surveyed in 2017 were looking to keep advertising costs low. The most preferred option to promote products was through Amazon sponsored products which helps merchants score more traffic to their product pages. This trend continues in 2018.
  2. Topping their list of fears were high fees and competition from Amazon itself. A year on, the latter continues to be their biggest concern.

  3. 60% of all merchants surveyed in 2017 said that they planned to diversify to other channels. Walmart emerged as the most preferred channel, followed very closely by Shopify and eBay.

  4. About 10% of those surveyed in 2017 were making a million dollars or more in annual sales. A year on, this figure is up by 90% to 19%. One can tell where these first-time millionaires are heading when we see that Walmart today supports 9% more Amazon merchants than it did in 2017.

  5. 28% of respondents in 2017 expressed interest to sell on Walmart.com. This has jumped to 36% today. It is no surprise that Walmart seems like an attractive option, given its knack for handpicking merchants that have a good reputation on major marketplaces like Amazon and eBay.

In its pursuit for parity with Amazon, Walmart has clearly overtaken eBay in merchant preference. The latter supports 12% fewer Amazon merchants today than it did in 2017 and is closely trailed by Shopify and Jet.com.


Can Walmart afford to be conservative?

Walmart’s marketplace has 18,000 sellers, 36% of whom make at least $2 Million in sales – all of whom sell on Amazon!

With its eCommerce business struggling to see gains since 2016 when it acquired Jet.com, Walmart has recently been making the waves with its string of partnerships and acquisitions. In May, it announced that it was partnering with Postmates and Doordash for expanding its last mile delivery of online grocery.

In what seemed to be a rebuttal to Amazon’s private label push, Walmart acquired Bonobos, Shoebuy, Modcloth and Moosejaw. It also announced in May that it was adding 4 fashion brands to its kitty.

While it continues to be hard-fisted about who sells on its marketplace, a trend seems to be emerging wherein Walmart is not just competing with Amazon but is also striving to bring reputed retail brands under its banner and attempting to re-shape consumer perception of it being low-price and inexpensive.

Walmart may be second in line to Amazon but it has its cons. Its process to qualify a third-party seller is more stringent. Sellers need to request an invitation to join and must fulfill certain quality requirements pertaining to product mix, price point and fulfillment.

Unable to differentiate among millions of sellers on Amazon and faced with rigorous screening from Walmart, the best bet for Amazon’s third-party sellers to diversify seems to be to set up their own store.

They can either create their own website or set up a store on an eCommerce platform like Magento or Shopify.


Shopify – The network is bigger than the software

Shopify, the eCommerce platform for small and medium-sized businesses isn’t too far behind eBay and Walmart in merchant preference.

A seller can set up her own store on Shopify’s basic version for as little as $29 a month. It also has a premium version for a $2000 monthly fee called Shopify Plus aimed at Enterprise-level sellers and wholesalers. An estimated 3600 merchants have already bought into Shopify Plus and among them are popular logos such as Tesla, Kylie Cosmetics and Budweiser.

Shopify has an estimated 600,000 merchants on its eCommerce platform and has seen its merchant base grow annually in excess of 100% since 2014.

What particularly makes Shopify attractive – and gives it an upper hand over marketplaces like Walmart – is its third-party network of developers, photographers, digital marketers and designers that merchants can leverage for their business. Shopify today is a more turnkey platform than Walmart! Of all digital commerce revenues in 2017 – totaling $2.3 trillion, Shopify sellers’ GMV was 1% worth $26 billion, which shows just how important Shopify is next to Walmart.

Analysts are betting big for the next 10 years despite its recent volatility in stock price.

Around the same time when Amazon published its small business impact report, Shopify announced that it would open a brick-and-mortar store in the US by the end of summer this year to provide in-person advice and consulting services to its customers.

Such a showroom would also provide Shopify the opportunity to cross-sell its hardware products to merchants who are looking to go brick-and-mortar.

For these reasons, Shopify will continue to attract more merchants and will become more important in the days to come and as it does, it will get noticed by the big players – Amazon & Walmart.

Shopify and Amazon share history

  • Shopify partnered with Amazon in 2015 as its preferred migration partner for webstore merchants. Many Shopify merchants already sell on Amazon; they have the option to use Amazon’s FBA and Payment gateway.

  • More than 50% of Shopify’s 3600 odd ‘Plus’ merchants sell on Amazon as opposed to less than 1% who sell on Walmart.

Clearly, the preference for Walmart.com is abysmal among Shopify merchants.

At a market cap of $19.5B, Shopify can be acquired by Amazon without much hassle. While this may not be on Amazon’s cards considering the call it took 4 years ago to shut its webstore business and the ease with which it gets inbound interest from the long tail eCommerce companies (which forms 90% of the independent eCommerce companies base), Walmart should start figuring in Shopify into its strategic plans.

When your competition is Amazon, nothing is enough

In its SEC filings for the fiscal year ended January 2018, Walmart said that it is looking to increase investments in grocery, eCommerce and technology. Much of Walmart’s moves in these spaces continue to come across as reactive responses to Amazon.

  • Recently, in its overseas battle against Amazon, Walmart acquired a 77% stake in India’s ‘Flipkart’ for $16B.

  • In what could be seen as a long overdue answer to AWS, it revealed its own cloud network.

  • It has also kickstarted efforts to take on Amazon Go. With FBA and Prime seeming invincible, Walmart will never be able to catch up to the giant. But, it can prove to be a serious rival if it decides to acquire Shopify.

Why Shopify?

1. The non-Amazon destination

Today, eBay has more Amazon merchants on its platform than Walmart does. However, Walmart is picking up pace and is evidently becoming more attractive.

Between 2017 and 2018, the percentage of Amazon sellers on eBay reduced from 65% to 52%. At the sametime, Walmart and Jet.com combined saw an increase from 17% to 25%.

Given 2018’s stats, if Shopify were to become Walmart-owned, about 42% of Amazon’s sellers today, would be selling via either Walmart, Jet or Shopify. This would bring the difference between eBay and Walmart (Jet & Shopify included) down to 10%, in turn narrowing the competition gap between Walmart and Amazon.

Interestingly, there were rumors in 2017 that eBay was planning to acquire Shopify. The stocks reacted positively but there were no signs that eBay was interested in such an acquisition.

2. The perfect complement

The fundamental difference between Walmart and Shopify is that the former is a marketplace while the latter is an eCommerce platform.

It is hard for a seller with no distinct brand identity to differentiate herself on a marketplace unlike on a platform. As revenue channels, they are both necessary for a merchant’s omnichannel strategy.

While Amazon will rule the roost in the marketplace arena for a long time to come, merchants should start betting on Shopify. This acquisition will be an opportunity for Walmart to write its story in a market that Amazon tried and quit.

Shopify does not get you shoppers and Walmart does not get you the support services. As a combined entity, their value proposition becomes very compelling.

3. The apparent weakness is an actual strength

Shopify is not without lows. As with all eCommerce platforms, the majority of their eCommerce merchants are long-tail with little to no revenue. But critics including Andrew Left of Citron Research fail to understand that long-tail is sort of a deal pipeline to identify sellers who are likely to grow and contribute significantly to the revenue.

A study of Shopify’s marketplace will validate their claim that the merchants are there for the value of a ‘one stop platform and extended services’ and not just for Facebook data of their shoppers.

As Brian Stoffel put it in his article, “The moat is strong and growing, even as recent protests have tested the company”.

Shopify’s long-tail merchant base isn’t a weakness. It’s the pipeline that Walmart should value. It could be Walmart’s answer to Amazon’s merchant acquisition spree.

4. The neighborhood store is actually a Shopify Store

Shopify is an ecommerce platform provider but that’s no reason to dismiss it as a non-competitor to Walmart. Both target merchants and both are focused on making them sell online albeit differently.

Walmart handpicks merchants. Shopify doesn’t.

Walmart is a legacy brand and has a perception problem in the market. Shopify is a born millennial, like Jet.

Walmart is competing with Amazon on multiple fronts. Amazon closed its webstore business and switched to an integration with Shopify!

Walmart has no equivalent to FBA. Shopify’s merchants can opt to have their merchandise fulfilled by Amazon.

Brett Andress of KeyBanc Capital Markets drives home the importance of Shopify – “Emerging brands on Shopify are getting larger, and more established brands are gravitating to Shopify to be more nimble”.

While Walmart continues to shop for private label brands in a bid to throw a new spin on its brand identity, it needs to look a few yards away. There are 600,000 of them. Either Walmart could hope for them to come list on its marketplace someday or make itself the very technology that powers their business.

Shopify is known for its ability to attract eCommerce merchants. Its tools – like the name generator, domain name generator, to name a few – are subtle retention hacks to get intending sellers hooked onto its platform. Should a seller decide to sell her business, Shopify has an exchange on which she can list her store for sale. On the partner front, developers, marketers, designers have helped create many success stories, while writing their own. Overall, it seems like the stickiness is here to stay.

With e-Commerce still 12% of global retail trade and with an expected growth rate of 47% over the next 3 years, Shopify is well positioned to capture a lot of the eCommerce upside. The neighborhood grocer is now more likely to open on Shopify or sell on Amazon than at the neighborhood. This is also why it makes sense for Walmart to acquire one of the two default portals of entry into eCommerce.

To compete with Amazon, it needs to make moves that shift the ground beneath the foot and Shopify acquisition could be one of those bets still open.

Sujay Seetharaman

Market Analyst @ PipeCandy

Currently donning the Researcher's hat. Talks to himself.