How Amazon Is Advancing Its Moat Against Shopify

EdwardHughes
2022-10-20

Shopify (NYSE:SHOP) has been building out its own Shopify Fulfillment Network [SFN] to challenge Amazon's (NASDAQ:AMZN) fulfillment services, its own marketplace through the Shop app to better compete with the Amazon marketplace, and is striving to enhancepenetration of its payment solutions to drive future revenue growth. Amazon has not taken Shopify's growth efforts lightly. Fulfillment By Amazon (FBA) and the Amazon marketplace are key elements of Amazon's moat, which it is leveraging against Shopify and other ecommerce website developers to defend its dominance and fend off growing competition. We will assess Amazon's advancement strategies, and whether Shopify is well-positioned to defend its position in the ecommerce industry.

Amazon was already leveraging its fulfillment prowess through offering Multi-Channel Fulfillment (MCF), which allows non-Amazon sellers to integrate MCF with their own websites to benefit from FBA delivery speeds. This solution not only augments Amazon's fulfillment revenue, but also offers a passive market penetration strategy through monetizing competitors' merchants, despite these merchants not being direct Amazon sellers. This year, Amazon has extended its efforts to encourage non-Amazon sellers to adopt MCF solutions, and is striving to deepen integration of its third-party solutions into external merchants' core operations, through the introduction of 'Buy with Prime'.

Buy with Prime

Amazon has decided to further leverage both its fulfillment prowess and loyal customer base (Prime subscribers) to monetize digital merchants outside of the Amazon platform, through the introduction of 'Buy with Prime' in April 2022, which extends Prime benefits for its loyal customer base to third-party websites.

Before evaluating its implications, let us first better understand how 'Buy with Prime' offers to enhance merchants' business operations. 'Buy with Prime' is sold to merchants through offering two key benefits: faster delivery and access to millions of prime members. Though merchants were already able to access Amazon's faster fulfillment capabilities through integrating MCF with their own websites. Hence while 'Buy with Prime' may further extend prime-like benefits (like same-day delivery), its main value addition does not lie in fulfillment. However, it does facilitate easier access to Amazon's loyal customer base. Shopify had removed the Amazon sales channel from its platform in September 2021. As a result, Shopify merchants currently access Amazon's marketplace, including its prime subscribers, through third-party app integrations which incur monthly subscription fees. Enter Amazon's 'Buy with Prime', which allows merchants to access Amazon's web visitors/ Prime subscribers more cost-effectively. As per Amazon's press release:

Using Buy with Prime, merchants simply pay for what they use. Pricing is based on a service fee, a payment processing fee, and fulfillment and storage fees that are calculated per unit. With no fixed subscription fee or long-term contract required, merchants can expand selection or cancel at any time.

In September 2022, Amazon advanced its 'Buy with Prime' offering by introducing new marketing solutions for these non-Amazon sellers. According toInternet Retailing, "Sellers who take part can show their products on…an Amazon storefront that they can customise. Sellers can then use 'sponsored brand' ads to direct Amazon shoppers to their own products on their own website". Hence it offers merchants a way to increase web traffic to their own websites through Amazon.com. From Amazon shareholders' perspective, this offers a new avenue to increase advertising revenue, as well as third-party solutions revenues.

Amazon is also offering to fund 'Buy with Prime' ads on social media platforms like Facebook/Instagram featuring sellers' products that use 'Buy with Prime', essentially offering free advertising for these non-Amazon sellers. Amazon is certainly not allowing merchants to direct visitors away from Amazon.com towards their own websites out of generosity. Sales enabled through 'Buy with Prime' require payments to be processed through Amazon Pay. Hence, 'Buy with Prime' paves the way to cross-sell its payment solutions, and consequently further augment fulfillment revenue (which includes payment solutions revenue, as perAmazon's accounting).

Furthermore, Amazon allows external merchants to use the 'Buy with Prime' badge on their websites to let shoppers know which products are fulfilled by Amazon, and merchants agree to do so with the aim of driving higher conversion rates among Prime members that trust Amazon's fulfillment services and speeds. Essentially, this serves as free marketing for the Amazon brand. Website visitors witnessing 'Buy with Prime' badges on non-Amazon websites further augments shoppers' impression of Amazon's fulfillment services, which in turn could lead to more Prime subscribers, thereby creating a self-reinforcing network effect and brand power enhancement.

From Amazon's perspective, the 'Buy with Prime' offering is a wise strategic move to leverage its superior functionalities over website building platforms, creating new sources of advertising and third-party solutions revenues. In essence, Amazon is capitalizing on competitors' comparatively inferior capabilities and resource inadequacy to monetize their own subscriber bases, hence leaving a delta to exploit. Furthermore, its latest move to allow external sellers to create a customizable Amazon storefront unravels Amazon's ploy to directly compete against ecommerce web developers. Essentially, Amazon's 'Buy with Prime' solution is a well-devised merchant acquisition strategy, whereby they gradually work to imbed Amazon's third-party solutions into non-Amazon sellers' core operations, with the aim of eventually inducing these merchants to leave their legacy website development providers for the Amazon platform.

'Buy with Prime' emboldens bearish sentiment towards Shopify

While 'Buy with Prime' will eventually be rolled out to all digital merchants, industry followers believe Amazon's 'Buy with Prime' is specifically targeted towards Shopify merchants. It comes as no surprise then that Shopify is dissuading merchants from enabling 'Buy with Prime' on their websites by warning ofdata security risks. Though it still allows merchants to proceed with enabling 'Buy with Prime' after they have been warned of the risks.

Despite Shopify striving to develop its own fulfillment network, it allows merchants to choose Amazon's fulfillment services over SFN, in order to avoid losing merchants to Amazon (and other website builders offering MCF & 'Buy with Prime' integration) while it works to catch up to Amazon's fulfillment capabilities. However, by doing so it is risking augmenting Amazon's brand power, as it could solidify merchants' (as well as shoppers') perception that Amazon's fulfillment services are superior to Shopify's SFN. This could prove problematic going forward when Shopify's SFN is better established and the firm strives to more fiercely compete for fulfillment business with Amazon.

To encourage merchants to choose SFN over Amazon's fulfillment services going forward, Shopify may have to resort to price competition, which would undermine profitability and could be a difficult war to win given Amazon's superior scaling abilities and financial resources. Alternatively, Shopify will have to work towards ensuring merchants' core operations remain more integrated with Shopify's solutions over Amazon's solutions, which is already a key element ofShopify's strategy. Shopify could also make MCF / 'Buy with Prime' accessibility more difficult through platform/ terms of service changes to fend off Amazon integrations, at the expense of potentially upsetting certain merchants (at least in the short-run).

Shopify also boasts the broadest set of sales channels offerings than any other ecommerce platform. However, Amazon's initiative to extend sponsored brand advertising to non-Amazon sellers, allowing them to direct shoppers to their own websites, poses a threat to Shopify's marketing solutions. Amazon boasts high ad conversion rates as it benefits from web visitors intending to buy something when they visit, contrary to most other major ad platforms. This strength was reflected by Amazon's industry-leading ad revenue growth rate of18%for Q2 2022, while other ad platforms suffered from Apple's iOS privacy changes and deteriorating economic conditions.

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