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Jun 30, 2023

Shopify Stock: The Impact Of Amazon's Buy With Prime (NYSE:SHOP)

Bennett Raglin/Getty Images Entertainment Amazon (AMZN) introduced Buy With

Bennett Raglin/Getty Images Entertainment

Amazon (AMZN) introduced Buy With Prime and it was generally seen as an attack on Shopify (NYSE:SHOP). I'm long both stocks, but I still want to know the impact of this move. Can Amazon kill Shopify, as some seem to think?

Last week, Amazon announced that it would launch Buy With Prime.

If merchants include it in their shop checkout, customers with a Prime membership will be able to use their Amazon payment information to check out. They will get delivery and checkout as if they are on their Amazon account, with the same payment and shipping information.

For now, it will be on an invite-only base for merchants who want this and expectations are that this will take several years to roll out. Amazon has said that it will start with FBA merchants (fulfilled by Amazon) but it will also roll out the service to merchants not using anything from Amazon so far. Merchants will have to pay, but Amazon has not disclosed how much yet. This is the only thing that Amazon reported about the pricing of Buy With Prime:

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.

Why does Amazon want to do this? Amazon sells a mindblowing amount on its own platform, $445B is estimated for 2022 in the US alone.

But Shopify has grown faster than Amazon because merchants can create the whole customer experience when they have a Shopify shop. They can set their own prices and Amazon cannot undercut them with their own product if they become big. Five brands that use Shopify to sell directly to consumers have already had their IPO: Oatly (OTLY), FIGS (FIGS), Olaplex (OLPX), Vita Coco (COCO), and Flow Beverage (FLOW.TO).

That's a problem for Amazon as those will often not sell on Amazon at all. It now hopes that it can take a piece of that cake. If there is one place where Amazon has a significant advantage over Shopify, it is its delivery and it wants to leverage that advantage now to take on its competitor. Shopify seems to realize its weakness, and this week, the news was out that it's looking into buying Deliverr. (More about that later in this article)

If you know the history of Amazon, you know that this is not their first attempt to lure independent merchants into their ecosystem. Amazon Pay, the company's payments business, was relaunched in 2013 to integrate into other web stores but it has not seen significant success in reaching that goal, to use an understatement.

Amazon also had Amazon Web Stores, a competitor to Shopify, to let merchants create their own web store. However, it was closed in 2015 and the few merchants that had used it were advised to go to Shopify.

So, this is a new attempt from Amazon to break into shopping outside its own platform. The former attempts failed miserably and the question is now what this will do.

As in most things in life, the answer is not black or white, no simple yes or no. It's a potential risk for Shopify, but it's not as if this is a clean sweep for Amazon, contrary to what some pundits seem to suggest. The comments are pretty bearish, as if this is the end for Shopify. However, I think that it's not so one-sided.

Of course, we don't have to put our heads in the ground. Shopify gets about 50% of its gross profits from payments and if that would go through Amazon, that's a problem for Shopify. But I'm not so sure that will happen that fast. It is potentially a big threat, but I think that in reality, for several reasons, it will be less harmful than it could be.

First, it's essential to know that Shopify charges fees for its merchants using another payment method than Shopify's. I don't hear that in the discussion about Buy With Prime. In that way, Shopify could make almost as much money if it handles the payments itself. I'm not claiming that everything is blue skies then, as Shopify loses valuable data, for example for its loans business, but it's not the total revenue disaster that some paint it to be now.

Secondly, Shopify could simply not allow Shopify merchants to use Buy With Prime. That would probably be a hard decision for the company as it has consistently sided with merchants and there could be advantages for merchants here. But, on the other hand, to many of its merchants, Shopify will not have to explain that Amazon has often acted against the interest of independent merchants.

The third thing I see playing for Shopify is that this could even work the opposite of what Amazon intends. Suppose Amazon's third-party merchants see that Buy With Prime becomes generally available. They know that, while not everybody is a Prime member, those members buy much more. In that case, it might be even the last push for them to switch to Shopify to give their customers the customer experience they want to offer, to gather data for retargeting themselves and without Amazon's sometimes very limiting and strict conditions and constraints. Some of the disadvantages are the strict rules, the stale layout, no flexibility in the customer experience, no differentiation, cut-throat competition, etc. The advantages are the opposite of these then. If these merchants see that they have the benefits of Buy With Prime and the independence that Shopify offers, there may even be a movement of sellers to Shopify.

So, I think it's clear that Amazon will have to be careful not to kill the goose that lays the golden eggs by going after what is essentially Shopify's market. It's all more nuanced than you think at first sight.

There has been no reaction from Shopify so far, but BigCommerce (BIGC) which does more or less the same as Shopify, has already reacted. This is what Troy Cox, Senior Vice President of product at BigCommerce says:

Buy with Prime represents a compelling value-add for BigCommerce merchants who wish to increase their sales and optimize the omnichannel experience they provide their customers. Prime set the bar for a shopping experience customers trust, including convenient and fast shipping. As one of the top ecommerce platforms collaborating with Amazon to add Buy with Prime, extending these benefits to our merchants will help elevate their online shopper experiences, build brand loyalty, and power them to grow and scale.

Shopify has won in this market so far (and not BigCommerce or other players) because it has the best ecosystem of apps. If you use Shopify, there is a whole App Store of apps to add to your shop, making everything very customizable. Shopify has even gone so far that it waived its fee for the first $1 million app developers make.

The most challenging part for Shopify has always been delivery and merchants know this. It's one of the reasons (next to reach, of course) why some merchants keep selling on Amazon, as logistical problems are hard to solve. But Shopify has worked on that with its SFN (Shopify Fulfillment Network), which guarantees a 2-day or less delivery time for 99% of mainland US. But Amazon of course still has the advantage in distribution, no doubt about that.

Shopify's delivery approach should get better but it doesn't mean that Shopify should play Amazon's game there. In logistics, it's never going to win against the distribution king that has poured billions and billions of dollars into its fulfillment network. Shopify has other advantages for merchants, but delivery should also remain a long-term focus for Shopify.

That's why I like the rumored Deliverr acquisition. Deliverr uses software to connect independent warehouses, which makes shipping much faster. Shopify looked into this to build it in-house, but it stopped investing in warehousing recently. This worried investors but with the acquisition of Deliverr, Shopify shows that it has taken another road and that Deliverr could leverage the existing independent network of warehouses and delivery transport.

It is not announced yet and it might take a few more years, but I would be surprised if Amazon would not do more with Buy With Prime. They can do that by leveraging their colossal reach. Amazon is becoming one of the most prominent advertisement platforms. If outside sellers using Buy With Prime could also advertize there, it could mean a massive difference in their traffic.

I think the biggest threat to Shopify is that Amazon has much more reach and that's why I believe that Shopify should work more on the discovery approach for its merchants. That could be a unified platform with categories, for example. Or it could be allowing merchants to work together much more seamlessly. What I mean is suggestions. If you have shopped at one merchant, you could get a recommendation for a shop that offers something adjacent, but doesn't directly compete with the shop you bought from. If you purchased new coffee cups, you might get a suggestion for another merchant selling coffee, tablecloths, or utensils to make cakes, for example.

Just to make sure, Shopify already has this, but it should definitely double down on this. And the company is a leader when it comes to social shopping: something you discover on Facebook (FB) or Instagram will very often lead to a webshop powered by Shopify. Facebook and Shopify also partnered and Shopify also has Google (GOOG) (GOOGL) on its side for better discovery. So, it's not that Shopify is not aware of where it still has to catch up and it's working on those points.

When a stock price has fallen as dramatically as Shopify's, every possible negative news is highlighted and put into dramatic context. People always want to explain stock price drops, even if it happens after the stock has already dropped so much.

The e-commerce market is still very early and will continue to grow at a fast pace for years to come. It's so big that there will be more than one winner and I would be very surprised if Shopify is not one of the winners. Buy With Prime is a good move by Amazon but it's not such an obvious Shopify threat as some seem to suggest.

While we will have to follow this, even if Buy With Prime is a big success, which remains to be seen, it doesn't automatically mean that this initiative will hurt Shopify, let alone kill it.

In the meantime, keep growing!

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This article was written by

I am a 46-year old investor with a long-term perspective, so I mainly think about the future when I invest. In my Investing Group Potential Multibaggers, I try to uncover multibaggers early on. Picks include Shopify ($7.78), and The Trade Desk ($19.5).

The strategy is simple but not easy: find disruptors that have a very high quality and hold them for a very long period. I try to identify stocks that have the potential to go up 1,000% and more over the next 10 years. I do deep research for the stocks that I pick to know if the quality is high indeed.

I do not care about what my selection of stocks will do next year, but what the result will be over the long term. To paraphrase Warren Buffett: "You should only have stocks that you would feel comfortable having if the stock market closed up for 10 years."

I appreciate your comments because I believe I can learn a lot from your feedback and I believe in the wisdom of crowds.

Analyst's Disclosure: I/we have a beneficial long position in the shares of AMZN, SHOP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Our 7-year-old daughter has shares of Facebook and Oatly. She can select the shares herself (with a qualitative check from daddy) from things she sees in her daily life.

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