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Shopify In Competition With Amazon With Announcement Of New Fulfillment Network, But Will It Succeed?

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Shopify In Competition With Amazon With Announcement Of New Fulfillment Network, But Will It Succeed?
There are few e-commerce platforms in a position to compete with Amazon, but Shopify is one of them, and it has recently announced a 1 billion USD proposition to operate a fulfillment network capable of delivering items to 99% of the USA within 2 days.
 
This article will consider the Shopify plans in depth and consider how likely it is to succeed.
 
 
Shopify Inc.
 
Shopify is a Canadian e-commerce platform, founded in 2004 by Tobias Lutke, Daniel Weinand and Scott Lake, and rebranded as Shopify in 2006.
 
Retailers can access Shopify features by syncing their websites with Shopify software, which allows retailers to create and operate their own online “shop front”. Other services offered by Shopify include payment management systems, marketing solutions, shipping and customer marketing and engagement tools.
 
In 2009 Shopify launched as free mobile app, available through the Apple App Store, which allowed for shopfront management on iOS platforms. As of June 2019, the total number of apps installed reached 25.8 million and as of 2018 merchants had spent more than 100 million USD in the App Store. 87% of merchants have stated that they run their businesses entirely through their mobile phones, and on average each merchant has 6 apps installed to assist in the running of their businesses. 
 
As of 2019, Shopify has 820,000 merchants using their software. Of these, 200,000 were gained in 2017. Their enhanced functionality software, Shopify Plus has 5300 merchants using it. In terms of active users, Shopify had more than 1 million in 2017 including multiple employees of the merchants, but this figure was calculated when there were 400,000 merchants registered as users of Shopify. In June 2019, it was reported that the platform had 218 million active buyers on the platform, with a combined retail spend of in excess of 100 billion USD. In 2018, the total retail spend on the Shopify platform was much lower, at 55 billion USD. Most Shopify traffic comes through mobile devices, with 79% of traffic reported to be from mobile devices. 69% of total orders on Shopify stores, in 2019 were found to be from mobile devices.
 
In 2018 Shopify total revenue was 1.073 billion USD, which represents an increase of 57% since 2017. Projections for the 2019 tax year estimate the current value of Shopify at 1.48-1.50 billion USD. In 2018, more than 1.5 billion USD in sales were reported on Black Friday, with peak sales per minute estimated at $870,000 in retail spend, and almost 11,000 orders per minute. Of these Black Friday sales, 66% were made on mobile devices, with 35% made on desktops.
 
In October 2018, Shopify opened its first bricks and mortar store in Los Angeles and shortly after this more than 10,000 merchants were using Shopify in their bricks and mortar stores. Of these 10,000 merchants, 400 of them has each earned more than $1 million USD in retail spend.
 
The popularity of the Shopify app gathered pace through Shopify initiatives like “Build-A-Business”. This was a competition run by Shopify, where merchants were offered cash prizes and mentorship from Richard Branson and other high profile entrepreneurs, if they could build a successful e-commerce business, using the Shopify platform. Shortly after launching these initiatives, Shopify received venture capital funding between 2010-2011 which enabled it to become more mainstream, by expanding its network and hiring more employees. In 2013, Shopify launched Shopify Payments, and in 2017, its software is capable of integrating with Amazon. Also in 2017, Shopify created a Bluetooth enabled debit and credit card reader for purchases made in physical bricks and mortar stores. As of 2019, Shopify has diversified into television and film content production.
 
Shopify has ended an integration with MailChimp in 2019, due to privacy and data disputes, but 2019 saw Shopify begin an association with Snapchat which allows Snapchat users to purchase and manage story ads from the Shopify main platform. In 2019, Shopify announced the acquisition of Handshake a b2b e-commerce platform for wholesalers.
 
In terms of the progress and Shopify, there are many similarities with the growth of the Amazon business model, for example the diversification into television and media production. Amazon has recently launched their popup shop initiative, which in many ways mirrors the Shopify Entrepreneur Space, which operates in LA. Shopify Entrepreneur Space aims to create a system of retail space rental with a difference, because it offers business support and a community to their rental clients, through the provision of educational classes, workshops and a community of like-minded entrepreneurs.
 
Powered by this steady growth, Shopify announced their fulfillment network plans in 2019, placing them in direct competition with Amazon.
 
 
Shopify Fulfillment Network
 
The Shopify investment in a logistics network capable of going into direct competition with Amazon is set to be fully operational over the “next few years”, according to Shopify Chief Product Officer, Craig Miller. Shopify aim to be capable of matching Amazon in terms of delivery of a similar product itinerary and in doing so it claims to be “democratising e-commerce”, which is being interpreted as a criticism of Amazon, which doesn’t have a lot of competitors and as such has been labeled unaccountable and undemocratic.
 
The physical delivery logistics will be achieved by entering into partnerships with third party delivery providers, and the new Shopify initiative will employ machine learning, warehouse systems and a range of cutting edge technologies to implement its new fulfillment network and claims to be able to provide a more accessible and more affordable service, compared to Amazon.
 
In outlining the Shopify plans, Chief Product Officer, Craig Miller specifically made reference to a recent controversy where Amazon was found to be using data entered by their own customers (i.e. their marketplace retailers), and using the data to make pricing and other decisions on behalf of Amazon. This appropriation of data for other purposes allows Amazon to market their own range of Amazon Basics products at competitive prices, placing it in a unique position as both competitor and retailer to many of its own marketplace clients. It is clear that Shopify sees this controversy as an opportunity to “poach” Amazon business. However, some experts will ask, is there really a controversy here, in light of the many, many software systems that will gather the same data to be used for competitive pricing purposes?
 
Amazon has also been plagued by other controversies recently, adding fuel to the contention that they are vulnerable to competition right now. What is being dubbed as the “break-up” of FedEx and Amazon has been a massive blow to Amazon. FedEx recently announced their intention to end their partnership with Amazon at the end of August 2019, with marketing experts noting the particularly poor timing and proximity to the Shopify announcement of their new fulfillment network. Some have suggested that this may even cause disruption in Amazon deliveries over Christmas 2019. Any level of disruption to sales of Amazon goods over the holiday season could spell catastrophic instability for Amazon, which is expected to deliver over half of all online shoppers Christmas purchases over Christmas 2019. Moreover, Amazon has recently rolled out Amazon Prime, which promises free delivery within certain timescales. Disruptions in these commitments could have a deeply problematic effect on Amazon’s brand and ultimately its profitability.
 
This “breakup” debacle has brought the importance of shipping costs squarely into focus. Research from Avionos has recently suggested that customers (more than 50% of the shoppers they surveyed) were choosing Amazon above other brands because of their shipping options, including amazon prime which offers a range of delivery options including next day delivery. Adding to the woes caused by the breakup with FedEx, research suggests that the number of e-commerce packages being delivered worldwide is likely to increase from 50 million per day in 2019 to 100 million per day in 2026. This really places the “breakup” with FedEx into perspective, in terms of how disruptive it might be for Amazon, who is now faced with the problem of finding another provider, fast.
 
There is no immunity from a loss of consumer confidence. Amazon itself had to cope with negative publicity surrounding the failure of their next day delivery service over Christmas 2018. Disappointed customers took to social media to complain that Christmas Day had been ruined because Amazon had failed to meet their delivery promises. Brand after brand has experienced mass exodus of customers due to similar loss of confidence issues. For example Gillette faced a backlash after a failed #MeToo inspired ads campaigns provoked ire from social media posts, ultimately losing the company up the 5 billion USD over one quarter in 2018. Amazon will have to work hard to ensure it isn’t the next example.
 
To develop their delivery processes, Amazon has invested heavily in technologies aimed at making the process of delivery quicker and easier through using drones and AI to deliver packages. The premise, Amazon Air, like Amazon itself once was, is ambitious. It aims to revolutionise the package delivery process, through reliance on drones, robotics and AI, while at the same time reducing pollution and traffic congestion by taking massive fuel-guzzling trucks off the roads. The initiative has faced a whole plethora of unexpected problems, leading to unfortunate media headlines like Forbes’ recent article entitled “Fixing Amazon’s Drone Delivery Problem”. One of the main problems is said to be power. Drones tasked with carrying heavy loads over long distances need to be recharged along the way, and this means that a whole new “charging” infrastructure needs to be created so that drones don’t run out of power, mid-journey (which can cause disaster, if for example a drone collides with traffic, or loses control and causes accidents or loss of life).
 
Ideas being considered as potential workarounds to this ‘power” problem include solar powered drones, but solar power still takes considerable time to produce and there are doubts as to whether enough power can be generated quickly enough to power drones to ensure a fast and effective delivery system. The technology to merge solar energy with drone delivery doesn’t even exist yet, and Amazon is working on developing chargeable solar panels that are lightweight enough to be incorporated into their drone prototypes. Moreover, any drone technology powered by solar energy will need to be able to cope with bad weather, for example when there is not enough sun to charge a drone. This creates a need for chargeable cells that can store solar energy for long periods of time. Again, this technology, which is needed to make a solar-powered drone delivery system a reality, does not exist yet. Battery startups like Sila Nanotechnologies have attracted millions of dollars of venture capital funding, such is the appetite to solve these problems, but experts agree that the technology needed is years away, which isn’t the best news for Amazon. 
 
These aren’t the only issues that look set to thwart Amazon’s development of drone delivery. Problems surrounding communication with the drone are also being worked on. Amazon hopes to communicate with the drone delivery network using GPS and wireless technology, which allow for tracking and real-time updates as to delivery progress for customers. However, these tracking and communication systems remain fault-prone. For Amazon a communication fault can cause all manner of problems including possible collision, or loss of drone control. Although the drones are being equipped with sense and avoid technology, this too can fail and cause problems for reliability of the service and also unforeseen problems.
 
Despite these teething problems Amazon Air tested their first fully autonomous drone delivery in 2016 and it aims to have an operational fleet of drones within 5 years. The Amazon Air project is also buoyed by the fact that there are other drone projects, currently testing prototype drones, and many of these projects have successfully addressed problems that have plagued Amazon. For example UPS recently formed an association with drone business, Matternet, in an initiative involving the use of drones to deliver blood samples in North Carolina. The host hospital previously used to deliver these samples by road, but the road delivery system was thwarted by delays and accidents. Matternet received $16 million USD in funding to address this problem, using drone technology, and the startup is expanding its remit to assist in drone technology development at federal level, in a new work contract with the US government.
 
Another drone technology startup, Zipline has devised drones capable of delivering medicine, and drone startup DroneDek was able to patent a solar-powered drone delivery system called mailbox, capable of being charged at existing solar or grid electricity infrastructure.
 
However, none of this drone technology is of any assistance to Amazon currently, when it is facing serious competition from Shopify’s new fulfillment network. The system is being marketed by Shopify as a way to get orders to customers, more quickly and easily, with better customer service. The new system uses a smart inventory-allocation technology, which is powered by machine learning. The cutting edge inventory technology uses predictive technology to predict the best fulfillment centres to use and to predict what optimal inventory quantities should be, in an effort to generate speedy and convenient order fulfillment for customers.
 
In creating their new fulfillment network, Shopify sees opportunities to add better customisation to checkouts, and allow for the management of multiple sites and brands under a single administrator. Shopify also plans to develop better order editing and better integration with external point of sale software. Extra features will be marketed as Shopify Plus, which allows a basic service to be operated for cheaper prices, with more features available to those willing to pay a little more. A phased “roll-out” of the new fulfillment network is planned to begin in 2019, with Shopify offering early access to their new system to large retailers shipping between 10 and 10,000 items per day.
 
 
Will The Shopify Fulfillment Network Be Successful?
 
Amazon appears to be beset by numerous problems affecting the quality of their unique delivery service, Amazon Prime. Furthermore, their standard delivery service has proven problematic for a number of reasons, most notably their failure to reliably fulfill orders in time for Christmas 2018. It also faces a challenging time as it searches to replace FedEx as its main delivery partner. That’s not to mention Amazon’s heavy investment in Amazon Air, which is taking some time to resolve its own set of problems. Amazon was also placed under considerable pressure when their controversial use of data belonging to retailers using their marketplace hit the headlines in 2018. All of these factors have created a possible space for a sharper competitor to enter the domain of order fulfillment, and this is what has happened with Shopify’s announcement that they are investing $1 billion USD in the creation of their own fulfillment network.
 
 
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