The ice and fire of cross-border e-commerce: Shopify winters, SHEIN attacks

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

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

The first quarter of fiscal 2022 financial report released before the U.S. stock market on Thursday showed that Shopify's core financial data performance was not ideal: revenue growth fell significantly, and losses continued to amplify.

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

In addition to the slowdown in revenue growth, the increase in costs and the transformation of the revenue structure are also important reasons. More importantly, the gross profit margin of the subscription solution business, which accounts for a low proportion of revenue, is much higher than that of merchant subscription services.

In the research reports of Wall Street investment banks, 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 are directly directed at emerging external competitors.

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

Revenue fell short of expectations, net loss was amplified, and the epidemic dividends were not enough to feed Shopify

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

This kind of 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 dividends have continued to fade

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

According to the data, Shopify's total revenue in the first quarter was $1.204 billion, falling short of market expectations of $1.24 billion, a year-on-year increase of 22%. In the four quarters of the last fiscal year, Shopify's revenue was $988 million, $1.119 billion, $1.223 billion and $1.338 billion respectively, with 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 Research 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 Shopify's merchant scale growth rate and GMV growth rate.

Due to the severe impact of the epidemic on the global offline retail industry, e-commerce has become a direct beneficiary. For the whole year of 2020, Shopify added a net increase of 700,000 merchants, which is a terrifying performance that has caught the attention of the industry. However, this hot market disappeared in the second half of last year. Shopify executives also admitted in their financial report for the fourth quarter of last year that 'the epidemic-induced outbreak in the e-commerce industry will only continue into the first half of 2021', and the number of new merchants in the last fiscal year has shrunk sharply to 300,000.

In fact, since the second half of last year, Shopify has been launching various promotions and new recruitment activities, including cooperation with Tik Tok and JD.com in an attempt to promote the continuous growth of the number of merchants, but unfortunately the effect is not satisfactory.

In terms of GMV, the first quarter recorded $43.2 billion, also lower than market expectations of $46.5 billion, and the year-on-year growth rate of 16% is very different from the 114% in the same period last year. You know, Shopify's GMV still maintained a year-on-year increase of more than 50% in the second half of last year, and the big regression in the first quarter disappointed the market.

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

Secondly, while revenue growth has stagnated, Shopify's losses are not optimistic.

In the first quarter, Shopify's net loss was $1.474 billion, a further magnification from $12.6 in the same period last year. Diluted earnings per share were $1.17 billion, a significant drop from $9.94 per diluted earnings per share in the first quarter of last year.

In addition to the slowdown in revenue growth, the increase in costs and the transformation of the revenue structure are also important reasons.

At present, Shopify's revenue mainly relies on two segments: subscription solutions business and merchant solution business, which account for the majority of revenue. In the first quarter, the merchant solution business revenue was US$859 million, a year-on-year increase of 29%; Subscription solutions revenue was $345 million, up only 8% year-over-year.

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 had revenue of $321 million, a year-on-year increase of 77%; the revenue and year-on-year growth rate of the merchant solutions business were as high as US$668 million and 136%, respectively.

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

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

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

It can be seen that the merchant solution business will still be Shopify's main direction in the future. However, the relatively higher operating costs, especially the high cost of technical facilities required for logistics and warehousing, seriously restrict 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 when the epidemic dividend fades and revenue growth declines.

(Image from Shopify's earnings report)

Of course, Shopify isn't the only one worried about profits.

In the first quarter of this year, Amazon released its worst financial report in recent years. Among them, the revenue, profit margin and other indicators of e-commerce-related businesses declined across the board, and recorded the first loss since 2015, directly causing Amazon's stock price to plummet, and its market value evaporated by $200 billion overnight.

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

In fact, after the release of the earnings report, Amazon and Shopify have been lowered by a number of major Wall Street banks, and the capital market is full of concerns about the prospects of these two high-quality stocks. The latter, in particular, has been bearish by Citigroup, National Bank of Canada, Stifel, 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 troubles are naturally the decline in revenue growth and the amplification of losses, while external troubles directly point to emerging external competitors.

Several of the strongest opponents happen to be from China.

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

Unlike Shopify, which has entered the harsh 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, with the overall market size reaching 6.05 trillion yuan as of the first half of last year. According to the data, the growth rate of transaction scale in China's cross-border e-commerce industry 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 dynamics of the domestic cross-border e-commerce market, we can find that capital has been looking for the next Shopify.

According to data from Zhitong Finance statistics, dozens of cross-border e-commerce SaaS companies such as Aike Technology, Leyan Technology, Lingxing ERP, and Dian Xiaomi have received a new round of financing in the past year, 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 making efforts in cross-border SaaS business.

Among them, MyyShop, a subsidiary of Dunhuang.com, and Shopexpress, a subsidiary of Weimob, have the most obvious upward momentum.

Compared with Shopify, although the scale of MyyShop and Shopexpress is far apart, the advantage is that it is backed by 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 most active cross-border e-commerce seller team in the world and play an important role in the industrial chain.

However, as Shopify bids farewell to the high-growth era and falls from the altar, followers such as MyyShop and Shopexpress may need to rethink: Is the e-commerce SaaS model a profit? Is Shopify's growth myth really replicated?

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

As the most popular cross-border e-commerce platform in recent years, SHEIN's legend is not inferior to Shopify. The two have completely different revenue structures and business performance, which perfectly interprets the similarities and differences between the two business models of SaaS and DTC in the cross-border e-commerce industry, as well as their respective advantages and disadvantages.

According to Apptopia, SHEIN's total downloads in 2021 were 190 million, a 70% increase from 2020, and it has surpassed Amazon to become 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 that of a year ago; Revenue is expected to be $15.7 billion in the previous year, a year-on-year increase of nearly 60% - and in the previous eight years, SHEIN has created the myth of 100% revenue growth for eight consecutive years.

Up to now, SHEIN's current market share in the North American fast fashion market is close to 30%, which is 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 somewhat equivalent to a barometer of the cross-border e-commerce market.

Of course, it is not only foreign giants who are jealous of SHEIN. In China, established e-commerce overlords such as Alibaba 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 rival.

At the end of last year, Alibaba launched the fashion shopping app 'AllyLikes' focusing on the women's market overseas, betting heavily on the North American market. It should be noted that Alibaba'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 a manifestation of Alibaba's initiative to change.

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

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

According to statistics from Grand View Research, a research agency, it is expected that by 2025, 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 encounters of Shopify and Amazon also have important warning significance for the popular SHEIN and its imitators Alibaba and Byte.

Whether it is Shopify and Amazon, Alibaba, SHEIN, or Byte, they must all deal with the contradiction between cost and profit margin. Behind this is not only the dispute between the advantages and disadvantages of SaaS and DTC, but also 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: pay attention to 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 players in the market.

The outbreak of SaaS e-commerce platforms led by Shopify and DTC cross-border e-commerce represented by SHEIN is somewhat 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 - the B2C model is starting 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's 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 Canada's proportion is 33%, and the C-end consumption firepower is close to the B-end. It is precisely because of the high enthusiasm of local consumers in North America for cross-border consumption, the repurchase rate and single consumption are at the world's leading level, so cross-border independent stations are becoming more and more 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 a 52% share of revenue, and then the gap between the two became wider. During this period, Shopify relied on building independent websites to help merchants connect to C-end resources, which not only rapidly improved brand image and awareness, but also significantly broadened revenue channels, providing small and medium-sized merchants in North America with the opportunity to get rid of Amazon's monopoly.

Now that Alibaba and SHEIN want to burn the war to North America, they naturally need 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 localized operations.

Many people attribute SHEIN's success to the rapid drop of the product and its ultra-high cost performance, but ignore its user operation capabilities.

Tracking user preferences through big data and technical means is the most important operating principle of SHEIN. According to official data, SHEIN is a major customer of Google Trend Finder, and the two parties have been working closely together on customer data management. In addition, SHEIN has a buyer team of 800 people to 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 localized operation among China's cross-border e-commerce platforms.

However, as mentioned above, whether it is Shopify's SaaS model or SHEIN's self-operated model, there is an obvious flaw in sticking to the B2C route: high operating costs, and the industrial chain links connected upstream and downstream 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 and distribution and payment finance because it connects C-end consumers, and it is almost inevitable that cost pressure will rise.

In other words, strengthening supply chain management is an inevitable choice to reduce costs and the key to breaking through profit bottlenecks in the future.

As for the specific approach, Shopify, which is positioned as a SaaS service platform, and SHEIN, which is self-employed, naturally have their own focuses. But they have one thing in common: strengthening control over all aspects of the supply chain and keeping the core links with higher profit margins firmly in their own hands.

The acquisition of Deliverr is a manifestation of Shopify's strengthening of control over downstream logistics and warehousing. At a time when competition is gradually entering a white heat, whoever can solve the supply chain problem faster will be able to take the initiative.

Written 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 consumption, and gathered a large number of elite employees in Amazon's retail consumption department, with the goal of strangling Shopify, which is rising rapidly.

At that time, Shopify was in its heyday, with a market share close to eBay, and then officially sat in the second place in the North American cross-border e-commerce market. Shopify, which made 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 hegemon Amazon at different times.

Looking back now, Amazon may have overestimated the power of Shopify, but it didn't expect the sudden rise of SHEIN to become a new henchman.

From Amazon, eBay, Alibaba, to today's Shopify, SHEIN and Shopee, cross-border e-commerce has ebbed and flowed for more than a decade, and no one can tell 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.

One thing is certain: the popularity of cross-border e-commerce remains high, and players from all walks of life will not give up this treasure easily. This also means that more intense fighting is yet to come.

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