Abandoned cart: Is shopping online going offline?

Sascha: [00:00:02] From Equity Mates Media. Welcome to The Dive. With the arrival of the pandemic and the implementation of lockdowns all around the world. Investors and founders seised on the idea that this would permanently transform our lives, most notably how we shop and pay. And the e-commerce giants certainly thought as much. Amazon's famous forecasting tool told them to build, build, build. And Shopify told investors they believed pandemic e-commerce gains will stick because, quote, convenience is habit forming. Venture capitalists followed injecting $78 billion into e-commerce companies in 2021. And the hottest stocks of the COVID period were all e-commerce, Afterpay, peloton, Etsy. Three very different companies, but all pandemic powerhouses. But fast forward to 2022, and all of this has changed. The money dried up. Venture capital funding for e-commerce is down 42% from the same period last year. Share prices fell. Staff are being laid off and some companies are declaring bankruptcy. The best performers of 2020 and 2021 have now become the worst performance of 2022 investors and founders. A sobering up from the excesses of the past two years and examining what was hype and what was real. It's Wednesday, the 6th of July, and today I want an hour a week entering an e-commerce winter. And how will that change the industry? To do this, I'm joined today by reporter at the information Mark DiStefano. Marc recently published a piece called Welcome to the E-commerce Winter. Mark, welcome to the Dive. We've heard the term crypto winter before, but you've introduced us to this term e-commerce winter. What does this mean? [00:01:49][107.4]

Mark Di Stefano: [00:01:50] And e-commerce winter is suggests that there was an e-commerce summer and we had that summer in early 2020 when, you know, ironically, most of the world's economies had shuttered. We were all locked inside and every e-commerce company. So that is every company that sells goods and services over the Internet had a moment in the sun, and it felt as though that that sun drenched right where the times is going to last forever. And there were all of these predictions from analysts, from business owners, the CFO of Shopify, a huge Canadian e-commerce company that equips businesses with the tools they need to sell products online, even said, you know, these shopping trends are going to stick. [00:02:35][44.8]

Speaker 3: [00:02:35] So we think actually in many ways that consumer preferences that have shifted through COVID will remain long after COVID. But that shift that that centre of gravity and retail moving from brick and mortar to online, that will be permanent long after the pandemic is over. [00:02:49][14.3]

Mark Di Stefano: [00:02:50] And they haven't. And that's the craziest thing is if you look at 2020 and 2021, companies like Peloton, the Treadmill and and bike maker Netflix, which was a bit of a pandemic era stock which sells, obviously services online. Amazon and Shopify had these huge, amazing booms. And in 2022, what we're seeing is a macro economic situation where, you know, it's a bit of a witch's brew of terrible things that are happening all at once, which is now war in Ukraine, the inflation going crazy, you know, central banks around the world hiking interest rates. And it's basically put a chill through all of that energy. And probably to me, the most interesting part of the winter is this idea that actually and this was introduced by someone we spoke to for the story is that people's natural inclination for shopping is not online. [00:03:45][55.3]

Speaker 4: [00:03:45] The presence of cues like this show that despite the boom in online shopping for the most committed, there is simply no substitute for the physical experience of simply going to the shops. [00:03:55][9.4]

Mark Di Stefano: [00:03:55] That actually what people like to do is go to stores and malls and get in the car and take the kids down and pick up the groceries. And I think that that is where we're at now. Is the e-commerce landscape starting to reassess what is actually permanent trends versus what was just a leg up during the pandemic? [00:04:11][16.2]

Sascha: [00:04:12] Absolutely. Because I think you had that as the takeaway from the pace that investors and founders seised. On the idea that the pandemic would permanently transform how people shop and pay, and the expectations aren't living up to the reality of the situation. [00:04:26][13.8]

Mark Di Stefano: [00:04:27] That that's the problem with investors and founders of start ups is that they sell a vision of the future, that that's that's the point. That's the reason why we love start up community. That's the reason why we love investors, you know, pummelling tens of millions of dollars into into unproven technologies and stuff. But the reality is, when the cold, hard of tougher economic conditions come, you sort of I mean, Warren Buffett's got a great quote, which is, you know, when the tide goes out, you start saying he's swimming naked. And I think that what we're starting. See now is that when people's discretionary spending so that spending is the stuff that they don't have to buy each week, will they need that Netflix subscription? Will they need do they need to have the Peloton subscription? Do they need to have an Amazon Prime subscription? And I think that discretionary was the was the big section of people's pay packet that was going to e-commerce companies. DTC companies, I mean, they're the big ones, the direct to consumer companies, the the Allbirds Shoes and the Warby Parker glasses. [00:05:32][64.9]

Sascha: [00:05:32] These are allbirds. The unassuming wool sneakers have taken the world by storm. [00:05:36][4.3]

Mark Di Stefano: [00:05:37] These companies were selling a vision to Wall Street and to the wider economy that, no, you don't need to go to stores. You can just buy all your shoes online and you can buy your glasses online and you'll never have to go to a store. But actually when they IPO'd recently, their stock has traded because what they've realised is actually PayPal shopping habits are not permanently online. The analyst was right. You know, the the take away of it is Peloton wasn't going to replace the gym. Netflix won't permanently replace the cinema. Lockdowns was sort of an aberration. They weren't a sticking point to so many of these technologies. [00:06:12][34.3]

Sascha: [00:06:13] Look, you've named quite a few different brands there, and I want to kind of dig into that more specifically. So let's go through the story in three sections. We've got the e-commerce giant, the e-commerce enablers, and then the e-commerce payments. Let's start with the giant first, which is Amazon Twitter. [00:06:29][16.5]

Speaker 3: [00:06:30] Right now you're seeing Amazon shares being obliterated down. [00:06:33][3.5]

Sascha: [00:06:34] They're down 40%. And it's been widely reported that they overbuilt and overheated during the pandemic. Just how bad is it at Amazon? What are your thoughts on this? [00:06:43][9.4]

Mark Di Stefano: [00:06:43] It's so bad. I thought of Amazon as a huge part of my bay as a technology reporter. So every sort of cough and sneeze from Amazon, I'm like paying attention to it. But when the quarterly recent quarterly results came out and I was on the call with a colleague of mine and the CFO of Amazon admitted to overbuilding and overspending, combining. [00:07:05][22.0]

Speaker 3: [00:07:06] Impacts to the externally driven cost and internally controllable costs. You get approximately $6 billion in real costs for the quarter. Our guidance includes an expectation that we will incur approximately $4 billion of these incremental costs in Q2. [00:07:19][13.5]

Mark Di Stefano: [00:07:20] We kind of looked at each other. We're on a zoom together, we look at each other, relate how Amazon is meeting it, and then when he admitted that it was going to cost them $10 billion in one quarter, I mean, the air went out of the room on the earnings call. And the reason why is Amazon is not this type of company. They are so clever in how they plot a course for expansion. But what they did in 2020, 2021, they ran up expansion to such a high degree. They were hiring tens of thousands of people a week. They were, you know, opening new warehouses and fulfilment centres and they were employing new delivery van drivers. It's crazy. Right at the moment, Amazon is now the biggest hire of delivery van drivers in America. They currently have 1.6 million employees around the world. It's a staggering amount of people. I think it's before the pandemic, they had as few as 400,000. So they wanted to expand to meet demand. They did the job. But in the current environment, they're now sort of looking around and realising they've got excess capacity for that excess capacity to cost a company like Amazon a $10 billion in overspend. It's just a staggering number. And if you look at their results and drill down, you know, retail Amazon's retail business, which is what they're known for, is losing money last quarter. The only thing that's keeping them afloat in the black is the fact that they've got an advertising business that's just spinning off money and the IWC cloud business. So Amazon is an e-commerce behemoth, of which it still is. It's still the number one company in the space. It's kind of like if the smartest guys in the room are also going to make a mistake, what does that mean for some of the people that honest, smart? [00:09:11][110.6]

Sascha: [00:09:11] Well, I think that's the perfect time to turn to them in just a moment. But first, a break to hear from our sponsors. Welcome back to the Dive. Mark, you mentioned Shopify before. It's down 80% and PayPal as well, it's down 77%. Can you give me a sense of just how bad it is at these companies? [00:09:36][24.7]

Mark Di Stefano: [00:09:37] I mean, I'll take Shopify first. It's a kind of not well known outside of the e-commerce or business nodes. So if I talk about this Canadian e-commerce company, what people probably don't realise is that actually power is pretty much every store that is not Amazon on the Internet. [00:09:53][16.4]

Sascha: [00:09:54] It's time to do it bigger. It's time for Shopify. [00:09:57][3.3]

Mark Di Stefano: [00:09:58] So if you've got a candle maker from Melbourne or if you've got a somebody who is selling a massage service in Brisbane, what they will have to do is they can just go on to Shopify and they can plug and play the credit check out and then they can put that basket together and they can put they think what you need to know is that there are two big behemoths in the in the ecommerce space. Amazon does everything that's on Amazon.com, obviously, and then Shopify pretty much does all the others and Shopify relies. If you're a merchant who sells their products on Shopify, usually it's because you don't trust Amazon. It's because you don't want to sell your stuff through Amazon. You want to sell stuff through your own channels. But to acquire new customers, what you need to do is you need to spend money on Facebook advertising for and that whether that's on Facebook or whether that's on Instagram. So not to get too deep into the weeds here, but basically what happened was Apple changed privacy settings for the way that advertisers were targeted. Earlier this year, Facebook's Mark Zuckerberg came out and said, well, that change has cost us $10 billion for the coming year. And what that happened, what that effect was all through the supply chain of Facebook's business, there was a massive problem that hit the bottom line with all of all of them. And chief amongst them were Shopify merchants, because it suddenly became a lot harder to find new customers online. So actually, unlike the Amazon situation, which is we overbuilt, we overspent, Shopify is problem is is that Apple made some changes that changed Facebook that changed Shopify. So that's what saying its stock crashed so hard. And there was obviously a very humbling quote in the story where the CFO of Shopify expected these trends to stick that they were saying at the end of 2020. But the people that I speak to Shopify at the time say is they still build the best tools to for merchants on the Internet, but they're going through a very, very painful period, especially because if you're an employee of Shopify, you get paid X amount of your salary in stock, and that stock is down 80% in the last year. And I think on the PayPal situation, you know, PayPal is a fantastic product. I use it all day, every day. [00:12:17][138.8]

Speaker 3: [00:12:17] PayPal is headed for its worst day ever after missing fourth quarter estimates and slashing forecast. [00:12:23][6.1]

Mark Di Stefano: [00:12:24] But fintechs, right. FinTechs are a funny thing because they're essentially challenging the big banks, whether that's in the UK, in the US or in Australia, New Zealand. And they've done excellent jobs to build products that we love using. You know, there are there are some retail banking products in the UK that I use all day, every day, but they actually don't make a lot of money. And PayPal's problem is, is that it's provided the piping for a lot of the new retail banking across the US and Australia in the West. But it has done a bad job at doing things like lending, which is actually where banks make all their money. And I think that when you think about whether PayPal is going to whether it should be a 100 billion stock or a $200 billion stock, or whether it should be a 10 to $20 billion stock, you look at the results and it doesn't suggest that they are like a big bank where they're spitting off cash. They don't have a consultancy arm to do investing. And I think that, you know, PayPal and some of the buy now pay later firms potentially are going to be acquisition targets for bigger banks because they have got they have built products that are actually very valuable to especially Millennial and Gen Z people. I don't know how I would transfer money to my parents in Australia without the use of paper. So that's the that's the that's the weird thing is that they're building indispensable products, but their business models aren't great. [00:13:49][84.7]

Sascha: [00:13:49] I think the way that you've talked about that obviously leads really nicely into the final section, which is payments. You know, talking about lending or buy now, pay later is a form of lending. Zip is down over 90%. And Klarna, which did have a valuation of 46 billion in June 2021. Last week, it raised at a valuation of 6.5 billion. So then our question is, is the buy now pay later business model broken? [00:14:16][26.8]

Mark Di Stefano: [00:14:17] Well, I don't think it was broken as much as it never really existed, I. The buy now pay later is an excellent feature and again Afterpay Affirm in the US Klarna. They all deserve points for introducing a lending feature that US Millennials and young love. They again Goldstar that they have built businesses that have shown that if you allow people that check out a really simple form of spreading out your payments with no fees to the customer, that's the most important part. There's no fee and the fee is actually in the merchant. Then, you know, we spoke to somebody, I think it was at Macy's who said, you know, as soon as you introduce the Klarna thing to the page, the sales went up 20%. So it's an excellent products. Right. But is it a business like is it something to you know, is it is it is buy now highlight a more than just a feature? And I think that what we're starting to see is investors, you know, some of the people that drank the Kool-Aid in 2020 and 2021 about saying affirm and Afterpay and closeness numbers, I think that some of those people are starting to wake up with a bit of a hangover and realise what they've bought. You know, it's suede, it's a Swedish bank is klarna, right? This is a a lender in Europe that makes losses and is worth $46 billion like it didn't make any sense to to, for it to make sense. Klarna as growth would have had to continue on for the next ten years. And in the current environment, which is we're heading towards a possible recession around the world, will then one and one no longer equal to. So I think that good on the good on the boys from Australia at Afterpay for selling out at the top because it was described to me as one of the great smash and grabs in Australian corporate history that they sold. What I mean there's an all stock deal to square but like tens of billions of dollars. And I tell you what, because if they didn't and they, they were hanging around into this year, they would see the same declines as as a klarna or affirm. So good on those boys. [00:16:28][130.8]

Sascha: [00:16:28] Yeah, absolutely. It looks like they read the tea leaves at the right at the right moment. You've mentioned the R-word. You mentioned recession. So do you have any final thoughts about where to from here for e-commerce in light of the climate that we're all heading into? [00:16:42][13.9]

Mark Di Stefano: [00:16:43] I think that it's a bit of back to basics. And, you know, we talk to investors and Start-Up people all the time. And the number one thing that everyone is now talking about is free cash flow, which is what a radical idea. You know, businesses need to make money. They can't just be an investor. Cash. There is a there's a whole nother industrial sector that I find to be completely nonsensical, which is the ultra fast delivery sector. It's not nonsensical. It makes sense, but it's it all it does is burn through investor money. Of course, people are going to love to have their toilet paper and bananas delivered in 5 minutes. But does it make sense to do that at scale and for the next five, ten years? Not when we're staring down the barrel of high interest rates. You know, people are going to get people going to be losing jobs. A lot of these businesses don't make a lot of sense. I think that the big boys, whether that's Amazon or Shopify, will not last the winter. But I think a lot of these companies that were one click checkout companies or buy now pay later with nothing else attached, I think they're really going to struggle to outlast not just this year, but heading into next year as well. [00:17:51][68.2]

Sascha: [00:17:51] Oh, well, thank you so much for your time, Mark. Really interesting pace and certainly got us talking here in the office. So thanks again for your time. [00:17:58][6.4]

Mark Di Stefano: [00:17:58] Thanks, Sascha. [00:17:58][0.0]

[1059.9]