Can Shopify save retail?

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When did shopping become so beige” asked an eBay ad targeting – not so subtly – their Seattle-based competitor. Try as they may, ecommerce retail did become synonymous with shopping on Amazon. Is this a bad thing? And can it be changed? I would argue, yes and yes.

It’s becoming increasingly clear however, that if someone is to beat Amazon in their game it’s not going to be eBay but a humble company from Toronto whose market value has recently exceeded that of many Sillicon Valley darlings.

How much does it really cost to sell on Amazon?

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Amazon’s market share is projected to reach 50% of the US ecommerce market by as soon as 2021. As its clout grows, so does its pressure on the retailers using the platform for their online business.

While the battle to get into the Buy Box has always been tough, it can’t go unnoticed that Amazon sellers increasingly see their profits diminishing since the advent of Amazon ads.

The Buy Box is a functionality of the Amazon marketplace which allows an Amazon algorithm to select the best seller offering a given product. Although buyers also get to choose and a sale can happen even if the seller hasn’t been pre-selected by Amazon, in reality more than 80% of products sold on Amazon come from the sellers who made it to the Buy Box.

In order to get into the Buy Box and increase the odds of her product being purchased an Amazon seller needs to do a few things:

  • have the most competitive price
  • have a high percentage of positive feedbacks
  • have competitive delivery times and rates (so ideally use Amazon fulfillment, which allows same day delivery)

It goes without saying that all of this comes at a cost: the marketplace commission itself is on average around 13% but can go as high as 25%. The price wars on the Amazon marketplace are a real race to the bottom as sellers compete on price with each other AND with Amazon, who incidentally is one of the world’s biggest retailers. Also, in order to win the Buy Box sellers may see themselves forced into offering same day delivery and using Amazon FBA which is an additional expense.

If the Amazon marketplaces continues to gain market share at the expense of its competitors it’s because sellers have always seen the value for their money from using it – it does drive sales. Many ecommerce businesses I speak with admit that 80% of their sales volume comes from Amazon with roughly 10% generated by their own website and 10% from other marketplaces.

This added value has become less obvious since the introduction of Amazon ads. To be found in the crowded marketplace, a seller not only needs to have a high quality product with a good title, description, keywords and pictures – she also needs to pay for advertising on the platform. Since 2018 Amazon has been increasingly aggressive in promoting their advertising platform, which allows the Seattle-based company to generate profits at a very low cost compared to a typical retail business.

It’s quite obvious that having one platform with so much power doesn’t benefit ecommerce retailers and many are quite desperate to differentiate their sources of income and sway away from Amazon. But can anyone, apart from regulators, stop Amazon’s ascension?

How is Shopify different from Amazon?

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Tobi Lütke, the Shopify CEO. Source : Toronto Star

On the opposite site of the North American continent, in Toronto, a new rival is gearing up in the battle for the future of ecommerce.

From a seller’s point of view the Shopify value proposition is quite the opposite of Amazon’s. Where Amazon requires uniform experience, Shopify offers hundreds of themes. Where Amazon controls the purchasing process from the discovery to the delivery, Shopify only takes over the checkout and lefts the rest to the retailer’s discretion. Finally, and most importantly, the Shopify commission can go down to as little as 2.4% of sales which is quite unlike the 25% (+ FBA, + ad spend) merchants may need to pay to Amazon.

The Shopify platform makes it incredibly simple to set up an online business. So simple, that overtime it has drawn a lot of criticism pointing out that many of its users can barely be called professional sellers. Stories abound about teenagers setting up stores in no time to sell low quality goods imported from China. On the other hand, the platform’s marketplace of apps and third parties makes it equally easy for these businesses to scale. That’s why the company can boast having Kylie Cosmetics and Allbirds among its customers.

Being on Shopify allows sellers to build their brand and re-engage their customers with emails, retargeting and social media. Therefore, even if the cost of customer acquisition is higher (as sellers have to buy media themselves, rather than rely on a marketplace to do it for them), so is the customer lifetime value. Retailers who were suffocating under all the constraints imposed on them by the marketplaces find themselves empowered to run their businesses as they deem wise.

What comes next?

Shopify can save ecommerce retail. But is it going to? There are signs that the Toronto-based company may have different plans.

Shopify has recently changed their Terms of Service for independent apps to have more control over their sellers’ data and very publicly parted ways with MailChimp who didn’t wish to comply. They are also investing in their own fulfillment solutions. Are they quietly building their own marketplace, unifying all the beautiful independent direct-to-consumer brands they helped create?

As a Canadian proverb says “Patience is a tree whose root is bitter, but its fruit is very sweet.”

US Sales tax – what do you need to know when exporting to the US?

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Anyone who has read Brad Stone’s fascinating The Everything Store will be familiar with this story – Amazon has decided to build their first HQ in Seattle, Washington in order to avoid paying high sales tax. Back in time, in order to pay sales tax in a given state, a retailer would need to have physical presence in this state. As a consequence,  ecommerce retailers established their businesses in states with low sales tax rates and low population, avoiding states such as California or Texas.

South Dakota v. Wayfair shakes things up

About everything has changed with the recent Supreme Court decision in South Dakota v. Wayfair. The court decided that “the physical presence rule for state tax jurisdiction is incorrect and not a requirement under the Commerce Clause of the U.S. Constitution.” Thus, in order to be eligible for paying the Sales Tax, the merchant does no longer need to have physical presence in a state – it’s enough if she has what’s called an economic nexus.

What’s an economic nexus?

The economic nexus means that a business has economic activities in a given state. Each state defines the nexus individually and the thresholds that make a business eligible for paying the sales tax vary from state to state.

Thus, an ecommerce business selling to buyers from California needs to make 200 transactions to California or exceed $ 100K of sales volume to this state in order to be eligible for the California sales tax of 7.25%.

The same business would need to exceed $ 500 K of sales volume to Texas in order to have to pay its 8.25% sales tax.

A very handy map showing all the thresholds per state can be found here.

What does it mean for non-US sellers?

Whereas the Supreme Court ruling does not explicitly mention businesses exporting to the US, there is no reason to believe that non-US sellers would be exempt from collecting and paying the Sales Tax if they have an economic nexus in a given state. The linked article from TaxJar cheerfully explains that the only way not to be eligible for the US Sales Tax is not to make any sales to the US. The other solution is to make so low volumes as to not be eligible for the Sales Tax. Any exporter who exceeds the per-state thresholds will need to face the reality of having to establish a tax presence in various US states and collect and pay the Sales Tax per state.

As a result, the ruling which was initially aimed against Amazon, ends up by hurting SMB’s for whom the need to figure out the new taxation rules may be daunting to say the least.