These Companies Are Succeeding Despite Amazon Or A Slowing Economy (#GotBitcoin)
These Companies Are Succeeding Despite Amazon Or A Slowing Economy (#GotBitcoin) Not Being On Amazon Is A Selling Point For These E-Commerce Players
Retail Upstarts Tap Into Wariness Of E-Commerce Giant’s Dominance; ‘Shop Boroughs, Not Bezo$’
On a Wednesday afternoon earlier this year, workers at an industrial center raced back and forth grabbing items such as paper towels, children’s toys, and liquor, then sorted them into packages destined for customers expecting delivery just hours after placing their orders.
The scene was playing out not at one of Amazon.com Inc.’s myriad fulfillment centers, but at a warehouse run by ShopIN.nyc, a New York-based company that is part of a growing group of businesses and organizations positioning themselves as anti-Amazons.
They’re working to unite small businesses that have lost sales and margins to the e-commerce giant and tap into concern about its growing clout and competitive practices.
ShopIN.nyc pools inventories from local businesses to create a local version of the “everything store” that Amazon is known for, thanks to the vast selection and lightning-speed delivery that founder Jeff Bezos made central pillars of the Seattle company’s strategy.
ShopIN.nyc’s marketing is unsubtle: social-media campaigns carry slogans such as “Shop Boroughs, Not Bezo$” and “An ‘everything store’ that delivers faster than Amazon.”
The e-commerce pushback against Amazon is coming from small firms along with other tech giants—and their efforts have gained speed and urgency with the pandemic battering many traditional retailers.
Facebook Inc. in May of last year launched a new service called Facebook Shops to help mom-and-pop shops sell on its platform. Alphabet Inc.’s Google unit last month announced tools to help small businesses sell through its shopping platform and integrate with other services such as Square Inc. and Shopify Inc. SHOP 6.33%
Shopify, which helps smaller brands and retailers—including ShopIN.nyc—set up online, is something of a standard-bearer for the retail uprising. Chief Executive Tobias Lütke once quipped that “Amazon is trying to build an empire, and Shopify is trying to arm the rebels.” Its revenue doubled in the year through March, to $3.4 billion.
The pandemic rallied anti-Amazon forces, but it benefited their nemesis even more. Amazon’s sales rose 38% in 2020, giving the company a market value of around $1.7 trillion. Its profit in the four quarters since the start of the pandemic topped that of the previous three years combined.
The upstart movement is pressing on multiple fronts. Trade groups representing thousands of small grocers, hardware stores and other merchants banded together in a national coalition launched in April to campaign for stricter antitrust laws and other checks on Amazon’s power.
Amazon said at the time that its critics were suggesting misguided interventions in the free market that would hurt independent retailers and consumers.
Amazon and its tech peers are already the focus of antitrust scrutiny, with Congress, the Federal Trade Commission and the Justice Department exploring whether these companies inhibit competition in their current forms.
Last Friday, a bipartisan group of House lawmakers proposed a slate of bills to constrain Big Tech, including a bill that seeks to make Amazon and other large companies effectively split into two companies or shed their private-label products.
Amazon said that 1.9 million small and medium-size businesses sell on its site, accounting for nearly 60% of its retail sales. The company estimates that its selling partners made more than $25 billion in profits last year.
Bookshop Inc. is another company that sees commercial opportunity in an Amazon backlash. The Brooklyn-based operator of the website Bookshop.org serves as the online infrastructure for 1,000 independent bookstores throughout the U.S., allowing them to set up a digital shop and distribute their wares to shoppers around the country.
“There is more consumer awareness than there was 10 years ago,” said Andy Hunter, Bookshop’s chief executive. “I think the Covid crisis has made people more aware of the needs of local businesses.”
Individually, companies like Bookshop are mere blips compared with Amazon’s colossal sales, but they are growing.
Mr. Hunter said that Bookshop, since launching in January 2020, has sold $70 million worth of books and delivered $14 million in profits for independent bookstores. “Amazon outsells bookstores 300 to one when it comes to books delivered to people’s homes. The idea was to take away all of the obstacles for bookstores to get online: inventory, delivery times, etc.,” he said.
ShopIN.nyc has 90 stores signed up and says its sales are growing between 20% to 30% each month. Chief Executive Maya Komerov said it is helping Main Street retailers emulate the convenience of Amazon’s one-stop-shopping. “We needed to allow them to provide that experience” she said.
Amazon rates among the top U.S. companies in consumer surveys of brand popularity. Even before the pandemic, though, there were signs of public wariness about it and other tech giants. A 2019 CNBC/SurveyMonkey poll of 10,000 Americans found that 59% of respondents said Amazon was bad for small businesses, its highest percentage since it began its poll in 2017.
A recent Gallup poll showed that 45% of Americans have a “somewhat or very negative” view of big tech companies, including Amazon. In the same poll, 57% of respondents said that government should increase its regulation of the companies, up from 48% a year earlier.
Stefanie Hargreaves, a former Amazon employee who was the company’s No. 18 hire, said she has scaled back on shopping with the site during the pandemic, instead spending her money with local retailers who are struggling. “There are plenty of people who need a hand right now.
Amazon is not one of them,” said Ms. Hargreaves, who lives in Seattle. Numerous other former Amazon employees expressed similar views in interviews.
Mocking the company has been a successful marketing strategy for Peak Design, which long sold its high-end camera bags on Amazon. Peter Dering, the San Francisco-based company’s CEO, grew angry when he noticed late last year a bag under the Amazon Basics private-label line that looked nearly identical to his company’s most popular product, the “Everyday Sling.”
Amazon gave its bag the same name, among other similarities, and priced it at $34.99, compared with Peak Design’s $99.
Mr. Dering created a cheeky video in which he and an employee impersonate Amazon executives discussing how to copy Peak Design’s product using inferior materials. The video went viral, with more than 4.5 million views on YouTube.
Amazon declined to comment on Peak Design’s claims.
The day that the video ran, Peak Design saw a 25% jump in its sales and a rush of traffic to its website, said Mr. Dering. “We had an overall sales lift that really hasn’t even let down yet.”
For starters, CEO Michelle Gass says she doesn’t think of the company as a department store.
How Kohl’s Is Succeeding Where Other Chains Haven’t
Department stores, once the go-to destination for the shopping needs of the entire family, have been under assault as buying has shifted online and to more value-oriented chains such as Walmart Inc. and T.J. Maxx.
While other types of retailers, including Best Buy Co. and Target Corp. , have pivoted enough to survive the retail crisis of recent years, in which dozens of chains went under and hundreds of stores closed, department stores have been slower to change.
Sears Holdings Corp. and Bon-Ton Stores Inc., two venerable department stores that dominated their markets for much of the past century, filed for bankruptcy protection this year. Others are struggling to stay relevant, including J.C. Penney Co. , which is on its third chief executive in seven years as it has careened from one strategy to another.
Kohl’s Corp. , by contrast, is surviving the onslaught better than many of its peers. It has tried to do things differently, including striking a controversial partnership with Amazon.com Inc. and teaming with social-media platform PopSugar Inc. to design a line of clothes. The result has been a string of strong sales.
Chief Executive Michelle Gass, a 50-year-old former Starbucks Corp. executive who took the helm of Kohl’s in May after joining the company in 2013, spoke about about the changing retail market and what Kohl’s is doing to stay ahead of the competition. Edited excerpts follow.
Q: Why do you think Kohl’s is having success when so many other retailers, especially department stores, are struggling?
MS. GASS: We don’t think of ourselves as a department store. We aren’t in malls. Our stores have a racetrack design, which makes them easy to navigate. The cash registers are at the front of the store, rather than dispersed in departments, which makes checkout easy to locate. From the early days, we created a model that is easier and more convenient for shoppers than a typical department store.
Q: You have more than 1,100 stores. Unlike other retailers, you haven’t had mass closings. Why is that?
MS. GASS: We haven’t faced the same pressure to close stores as other retailers have. The moves we are making to use our stores differently are helping us to keep them relevant. We are making our stores smaller. We are looking at opportunities to lease out extra space. In Milwaukee, we are leasing space to Aldi [the supermarket chain]. We put up a wall. We’re reducing the inventory by double digits and assorting as a smaller store.
Q: Last year, you launched a partnership with Amazon.com. You’ve created dedicated departments to showcase some Amazon electronic products such as Echo. And you are allowing shoppers to return purchases from Amazon at Kohl’s stores. Weren’t you nervous about getting in bed with a company that is upending the retail industry?
MS. GASS: There is a lot of space for both of us. In thinking about the partnership, it was how do we take Amazon’s dramatic customer base and combine it with Kohl’s physical stores to create value for both of us.
Q: How is it going so far?
MS. GASS: We now accept Amazon returns in 100 stores and have dedicated Amazon departments in 30 stores. Based on the volume of returns we are getting, people are using the service. What we are trying to determine is, of the people coming in and returning something from Amazon, how many are crossing the aisle and buying something from Kohl’s?
‘Mindset of Experimentation’
Q: Department stores tend to have an older customer base. What are you doing to reach younger shoppers?
MS. GASS: That’s where PopSugar comes into play. It’s one of the most wide-reaching social-media properties for millennial females. We were already advertising some of our brands on PopSugar. That told us they are reaching the customers we want to reach.
We designed and produced a clothing collection with them. The first line is in stores now.
Q: How can you tell whether it’s resonating with younger shoppers?
MS. GASS: Thirty-five percent of the sales are online, which is much higher than our overall average.
Q: Another way department stores tend to get younger shoppers is through their gift registry business. Yet, you chose to exit that business. Why?
MS. GASS: We weren’t creating a great customer experience, so I’d rather not be in the business. We’ll probably bring it back someday, but it will look a lot different. When you do things like that, it forces you to think about making a sea change versus an incremental change.
Q: Change can be hard for people in big organizations. How have you tried to get your team to embrace it?
MS. GASS: I tell them the most important thing is around innovation and speed. Those that are too slow will be left behind. You aren’t always going to get it right, but you’ve got to be out there trying things and really have a mind-set of experimentation.
Q: With so many retailers disappearing—Toys “R” Us Inc. recently closed all its stores—where do you see opportunity to pick up market share this holiday season?
MS. GASS: We’re getting into the toy business in a bigger way. We added the Lego and FAO Schwarz brands. With Bon-Ton not around, that store had a lot of overlap with Kohl’s. We plan to go after those customers.
How To “Amazon-Proof” Your Business
A sales slowdown at department-store giants like Macy’s and Nordstrom has scared investors away from retail stocks. Williams-Sonoma has fallen along with its larger rivals, and its shares trade at a discount to the broader market—opening up a rare opportunity to buy a healthy retailer whose business model should shelter it from the worst of the storm.
Williams-Sonoma owns several well-known brands that should benefit from an improving housing market. Tasteful Americans, and those who aspire to tastefulness, outfit their homes with Williams-Sonoma cookware, West Elm sofas, and Pottery Barn napkins. Their customers tend to spend a bit more than they would at Bed Bath & Beyond but quite a bit less than at Restoration Hardware Holdings (RH). Williams-Sonoma had 618 company-owned stores at the end of fiscal 2015, with more than 90% located in the U.S.
Williams-Sonoma shares have fallen 33% in the past year, less than competitors like Bed Bath and Restoration Hardware, which plunged 21% last Thursday alone on a reduced profit outlook. But the broad SPDR S&P Retail exchange-traded fund (XRT) is down just 14% over the past year. At $52.14, the stock trades at 14.3 times forward four-quarter earnings estimates, well below the market and the company’s five-year average of 17.5.
Williams-Sonoma has differentiated itself from the sector with one of the most robust Internet operations in retail, a crucial advantage as brick-and-mortar stores struggle with an existential crisis. The company garners just over half its revenue online and has built a customer database of nearly 60 million households. It calls the stores “billboards for our brands” that inspire customers to shop online. Internet sales also carry higher margins than in-store sales and are growing faster—8.2% versus 4.7% in the most recent quarter.
Bullish analysts like Oppenheimer’s Brian Nagel think shares could hit $65 in the next year to 18 months if the earnings multiple rises to 16 times 2017 estimates, more in line with its growth prospects. Add the 2.8% dividend yield, and the stock could return more than 25%.
“Williams-Sonoma is very Amazon-proof,” says Cody Wheaton, an analyst and assistant portfolio manager at Janus Capital, which boosted its stake in the company in the most recent quarter. “Because Williams-Sonoma controls its own inventory—it’s exclusive to their channel and their brand—and it has a very strong e-commerce business, the company is more immune than most to the lurking Amazon threat.”
Williams-Sonoma’s head start in online sales, which grew out of its decades-long experience as a catalog retailer, should help it gain market share in a fragmented industry. It has a 5% share of the furniture and home furnishings markets in an industry that has been slow to adapt to the Internet age; the company estimates that about 90% of home-furnishings sales still come from physical stores. That leaves plenty of room for the company to gain market share and expand profits. The company earned $310 million on $5 billion in sales last year, and is expected to earn $320 million on $5.2 billion this year. Earnings per share are seen rising 6%, to $3.58 from $3.37.
Analysts expect Williams-Sonoma’s earnings to grow at 10% a year over the long term, slightly below the company’s own target of low-double-digit to mid-teen growth.
Beyond Internet Sales, several trends should help spur that growth. Home-goods stores have contended with a depressed housing market for eight years, but home construction and sales appear to be picking up. Over the first four months of the year, housing starts rose 10% above the same period in 2015. The annualized rate of home sales eclipsed six million in April for the first time in nine years.
Williams-Sonoma, which got its start in 1956 as a cookware store in Sonoma, Calif., has expanded slowly and strategically, adding West Elm stores while closing outlets of its slower-growing namesake brand. In total, the store base is growing about 3% a year.
Morningstar analyst Jaime Katz expects Williams-Sonoma to allow leases to expire in malls with weak traffic, while opening new stores in spots with higher growth potential. Among the most promising growth avenues is the company’s international franchise business, which sports higher operating profit margins than the rest of the company. Williams-Sonoma’s partners plan to open at least 20 franchise locations in Mexico, the Middle East, and the Philippines this year. A similar strategy at L Brands (LB) paid off handsomely, according to Katz. Its franchised stores have operating margins that are more than five percentage points above the overall company.
Williams-Sonoma also has a strong balance sheet, with negligible net debt and a substantial dividend and buyback program. The company could return more than $1.4 billion—over a quarter of its market value—to shareholders over the next five years, says Katz. And the payout has grown at a 19% annual clip over the past five years.
In retail, a bargain like this doesn’t come around very often.
When Amazon Spots A Hot-Seller
Thousands of small merchants depend on Amazon.com Inc. to reach customers who otherwise wouldn’t know they exist. A few of them complain, though, that Amazon sometimes eats their lunch.
According to some small retailers, the Seattle-based giant appears to be increasingly using its Marketplace—where third-party retailers sell their wares on the Amazon.com site—as a vast laboratory to spot new products to sell, test sales of potential new goods, and exert more control over pricing.
Jeff Peterson, owner of Collectible Supplies Inc., a Garden Grove, Calif., retailer of sports merchandise, last summer began selling $29.99 Pillow Pets—stuffed-animal pillows modeled after NFL mascots—through Amazon’s site. For several months, sales were relatively robust, with as many as 100 of the Pillow Pets a day.
Then just ahead of the holiday season late last year, Mr. Peterson noticed Amazon had itself begun offering the same Pillow Pets for the same price while giving the products featured placement on the site.
Kathy Wojtczak, owner of a jewelry boutique in Seattle, appears in an Amazon ad as one of many ‘thriving’ small businesses on the site. She says she hasn’t had to compete with Amazon on products she carries.
Sales of Collectible Supplies’ Pillow Pets soon fell to 20 a day “because Amazon was offering it,” Mr. Peterson said. “I tried lowering the prices, but Amazon would always match my price or go lower until I eventually gave up” and set it at the manufacturer’s suggested price, he added. Prices fluctuate, but Amazon was recently selling a Baltimore Ravens Pillow Pet for $12 with free shipping, while Mr. Peterson is again offering the product for $29.99.
“Amazon is a double-edged sword,” said Thomas Frenchu, chief operating officer of Tabcom LLC, owner of dog.com, garden.com and others. “You have to deal with them, you have to be on their site, but we also have to fight harder and harder every day to compete with them.”
For certain, small retailers are drawn to Amazon Marketplace by the promise of tapping into the Internet company’s roughly 85 million unique monthly visitors, 45% greater than eBay Inc. and nearly 7-fold more than Sears Holding Corp., both of which host their own third-party marketplaces, according to comScore data.
Amazon executives declined to discuss pricing or purchasing strategies. “All of our focus is on helping making sellers successful,” said Peter Faricy, Amazon Marketplace vice president, who added the company has more than two million third-party sellers world-wide. “If we can identify hot products and make suggestions to them, we do that.”
Sellers report an average 50% increase in sales when they join Amazon’s marketplace and use its storage and shipping service, added Tom Taylor, vice president of fulfillment by Amazon, in an interview. He attributed that to lower-cost delivery and the quality of Amazon’s customer service.
Hadi Irvani, director of e-commerce for Okabashi Brands Inc., a producer of flip-flops and other sandals, said he saw sales grow immediately after joining Amazon’s marketplace in May 2010. The Buford, Ga., company now gets about 10% of its $3 million in online sales annually from Amazon and Mr. Irvani said he would likely use Amazon’s fulfillment to help save as much as $100,000 in annual shipping costs. “It transformed our business to be on Amazon,” said Mr. Irvani.
Amazon takes a commission for every marketplace sale—a 6% cut for personal computers, for instance, to as high as 15% for mobile phones and musical instruments—and charges larger sellers a monthly membership fee. Overall, the marketplace generates 9% to 12% of Amazon’s total $48.1 billion in annual revenue, according to analyst estimates.
Third-party sellers increased their unit sales by 60% in the first quarter, compared with a year earlier, and such sales now represent 39% of Amazon’s total, the company said.
Yet some sellers say they suspect Amazon uses sales data from outside merchants to make purchasing decisions in order to undercut them on price and give items featured placement under a given search, a prominent position on the page known as the “buy box.”
“There are countless items that they (Amazon) didn’t sell before that they sell now because of Marketplace,” said Brad Howard, president of Las Vegas-based CuffCrazy.com, which sells about $2 million annually of specialty men’s items like Darth Vader cufflinks.
Amazon declined to comment beyond its earlier statement.
Mr. Howard said Amazon recently began selling a Rick Steves brand travel bag that he believed it identified as a strong seller through its marketplace retailers. “It happens fairly regularly that Amazon finds a new product to sell themselves and when they do it’s pretty much impossible to compete,” Mr. Howard said.
Amazon will often list in the buy box the cheapest item under a given search, unless the company offers it itself within 1% of the lowest offered price, sellers said. Mr. Howard estimates 90% of customers purchase what’s in the buy box, rather than searching deeper within Amazon’s site.
Amazon is willing to lose money on the sale of some products and can drive down prices by buying items in larger quantities than many competitors, says Piper Jaffray analyst Gene Munster. That, in turn, can force third-party retailers to lower their own prices.
Some of these issues are set to grow as third-party sellers become an increasing part of the Internet retailer’s business. Within five years, third-party vendors could make up 55% of all Amazon unit sales, said Mr. Munster, up from 36% in 2011.
Some third-party sellers are already scaling back from selling on Amazon’s marketplace. Melissa Van Flandern, co-founder of Seattle-based Tottini, said she’s discouraged by Amazon’s constant price changes and is putting less inventory on the marketplace.
“It was great in the beginning, we got our brand out there,” said Ms. Van Flandern, whose baby products store generates about $500,000 in annual sales. But she pointed to a giraffe-shaped teething toy dubbed Sophie as one product Amazon capitalized on in the wake of third-party retailers. “We used to sell a ton of Sophies on Amazon,” she said. “Not anymore.” Tottini no longer lists the Sophie teething toy on Amazon.
Five Below, the Amazon-Proof Store
Retailer of items for $5 or less has nearly quadrupled its locations, including a new one in Manhattan.
Many retailers are closing stores. Five Below Inc. FIVE +1.69% can’t seem to open them fast enough.
The chain, which sells everything from Spalding basketballs to Bluetooth headphones and yoga mats for $5 or less, might be the most successful retailer you’ve never heard of.
By the end of this year, Five Below’s store count will have nearly quadrupled to 750 locations since its 2012 initial public offering, with its latest location opening Friday in Manhattan—the chain’s first in the New York City borough.
All that growth hasn’t cannibalized existing locations, which have posted sales increases in all but one of Five Below’s 25 quarters as a public company. Total sales over that period have nearly tripled to $1.28 billion. Profits are up roughly sixfold, and its stock has climbed 608% to $120.31 through Thursday’s close since the IPO.
Five Below uses a formula that has largely insulated it from competition from Amazon.com Inc. The chain keeps prices low by creating products from scratch with hundreds of suppliers around the world and sells them in an environment where children want to hang out. Its own e-commerce sales are so negligible the company doesn’t break them out; shipping often costs more than the entire purchase.
“Online is great when you know what you want,” Five Below Chief Executive Joel Anderson said. “When you walk into one of our stores, you will discover things you didn’t know you wanted. It’s like a treasure hunt. We’re the T.J. Maxx for kids.”
At 8,000 square feet, its stores are relatively small, making it easy to wander the mazelike floor plan grouped around eight categories: sports, technology, party, candy, style, create, room and now—the latter filled with seasonal products such as Halloween costumes or Christmas decorations.
Shelving is no higher than 5 feet, creating a comfortable space for preteens and teenagers who have outgrown traditional toy stores and are Five Below’s core customers. They are encouraged to bounce the basketballs, test-drive radio-controlled cars and participate in slime-making contests—anything that will help them spend their allowance money.
Five Below also has items for grown-ups, including cucumber face-masks, yoga mats, storage bins, greeting cards and vintage candy from Mike and Ike fruit-flavored chews to Goetze’s Caramel Creams.
Unlike other bargain stores like Dollar Tree or Family Dollar that focus on necessities such as laundry detergent and toothpaste, Five Below is the place to come to find things you didn’t know you wanted, such as squeezable foam toys called “squishies” that have gone viral on YouTube.
“It’s like a dollar store—but more,” said Steve Luvender, a 28-year-old web designer, who recently visited a Five Below near his home in Allentown, Pa., for Halloween decorations, including a shark costume for himself. “I wouldn’t have searched Amazon for that, but it was fun to pick up something unexpected.”
A study last year by KeyBanc Capital Markets Inc. found that a basket of 67 items was 52.6% less expensive at Five Below than on Amazon.com.
“No retailer is truly Amazon-proof, but they are in a better position than most,” said Bradley Thomas, a KeyBanc managing director of equity research. “You will save money if you shop at Five Below rather than on Amazon. Most retailers can’t say that.”
An Amazon spokeswoman said the KeyBanc study was flawed and misleading. “We continue to offer our customers low prices and incredible deals on a vast selection of products, in addition to fast and free shipping options,” she added.
When Five Below was founded in 2002 by David Schlessinger and Tom Vellios, the pioneers of the now defunct Zany Brainy toy chain, they had to come up with creative ways to keep prices low. Mr. Schlessinger left the company in 2015. Mr. Vellios remains chairman.
One breakthrough was to ship basketballs deflated without boxes, allowing more to fit in each container, which lowered freight costs. The balls are inflated once they arrive at the store.
“The No. 1 thing we like is they don’t get greedy,” said Chuck Grom, an analyst with Gordon Haskett Research Advisors. “They could have better margins, but they take that money and put it into better products.”
Keeping prices low is getting harder, because most of what Five Below sells is made in China and many of the products are subject to U.S. tariffs. The company is looking at ways to alter items to make them tariff-free, and it is considering moving some production to other countries. Mr. Anderson, a former Toys “R” Us Inc. and Walmart Inc. executive, said raising prices is a last resort.
It also is testing “Ten Below” sections in four stores that offer items such as wireless home speakers and skateboards for $10 or less, though company executives said the move is unrelated to pricing pressure.
Mr. Anderson said he sees a huge opportunity to pick up toy sales with Toys “R” Us Inc. out of the picture this holiday season. Five Below has added 20 feet of space to the toy sections in each store and is working with major manufacturers such as Hasbro Inc. and Mattel Inc. to get fresh products.
Five Below was one of the first to spot the fidget spinners trend last year, and it was early to the make-your-own slime craze, after one of its buyers noticed that sales of Elmer’s glue had shot up. (It is a key ingredient in slime.)
“Slime has been hot all year,” Mr. Anderson said.
How One Independent Bookstore Succeeds In The Amazon Age
A Cappella Books has survived, even thrived, the same way other indie bookstores have: by rethinking the way it makes money.
Frank Reiss’s business spent 10 years on the edge of collapse.
During the late 1990s and 2000s, his independent bookstore—like so many of its peers—faced intense pressure from Amazon and big-box chains. At his lowest point, Mr. Reiss was a quarter of a million dollars in debt, with wavering hope that he could survive the digital age.
Now Atlanta-based A Cappella Books has become a success story. Its sales have doubled from a decade ago and are now closing in on $1 million. Profit margins have risen, too, as have many of its peers’.
First, Mr. Reiss added a whole other side to his operation, author events, which proved lucrative and bolstered his storefront operation. And he focused his events and his bookstore selections to reflect his interests—a personal touch that resonates with a lot of customers these days.
“I think the facelessness of e-commerce has stirred in enough people…a sense of nostalgia for real stores, buying real products from real people having conversations,” Mr. Reiss says.
The story of how Mr. Reiss turned his business around says much about the surprising revival of the independent-bookstore industry, which was pretty much left for dead a short time ago. In part, the stores have been helped by the fall of large chains—their prime nemesis before the advent of Amazon and other online sellers. But independent bookstores have also had to leverage that opportunity to the fullest, and more often than not, that has meant rethinking the whole way they make money.
The Big Turnaround
The numbers tell a stark story. Experts who track the industry say that the mid-1990s saw a huge erosion of privately owned bookstores. But now the American Booksellers Association, an industry trade group, says that those independent stores are making a strong comeback, with the number of locations rising to 2,470 currently from 1,651 in 2009, the first year the ABA started tracking the number.
Oren Teicher, chief executive of the association, credits the boom to several factors, including cheaper back-office technology; the use of social media for promotion; and more favorable distribution terms from publishers.
Customers themselves have also changed. More people want to shop local, and they want shops with personality.
“Book curation is a critical part of the story for indie booksellers that are not just surviving, but are growing,” says Ryan L. Raffaelli, assistant professor at Harvard Business School, who studies industries in transition, with a focus on bookstores in recent years. Customers seem to be willing to pay a higher price, he says, for books that have been “carefully selected from the mass of options.”
Most successful longtime bookstores have their own distinctive flavor. The King’s English in Salt Lake City, in business since 1977, specializes in literary fiction. R.J. Julia in Madison, Conn., 30 years in business, offers a subscription service that sends books based on readers’ personal preferences. Chartwell Booksellers in New York City specializes in books about Winston Churchill.
In Mr. Reiss’s case, the selling point has evolved into speakers and a book selection that generally represent his liberal political slant, distinctive musical interests, such as protest and folk music, and a fresh take on Southern history.
It’s a combination that has delivered rising sales and earnings for most of the past seven years, he says. In 2018, he recorded $830,000 in sales, and earnings of $37,000 before tax, for a margin of 4.4%. In his best year, 2017, he posted sales of $880,000, profits of $74,000, and margins of 8.5%.
Mr. Reiss’s biggest expenses are the cost of goods sold—that is, the books—which eat up half his sales. Then there are salaries for the store’s five full-time employees—including Mr. Reiss himself—which take up 25%. Rent, licenses and other expenses account for the rest.
Mr. Reiss expects sales to climb in 2019, “with that $1 million mark something that I’m always keeping my eye on,” he says.
Still, Mr. Reiss emphasizes that even though book selling is better than it was a decade ago, it remains a highly unpredictable business—and his trade isn’t a lucrative one. This is “not a business to get into to make money, at least in the traditional way,” he says.
Sales, however, aren’t the only measure of his success. There’s also influence. “For its size and scope as a new and used bookstore with a proven ability to host celebrity artists, musicians and politicians, A Cappella is one of the most successful indie bookstores in America today,” says Linda-Marie Barrett, assistant executive director of the Southern Independent Booksellers Alliance.
A Changing Field
Mr. Reiss founded A Cappella Books in 1989, in Atlanta’s bohemian neighborhood of Little Five Points. It got its name from Mr. Reiss’s interest in music—he was a onetime aspiring musician himself—and because he figured he would have to work without accompaniment.
The place started as an antiquarian bookstore, its shelves crammed with used and rare books. Mr. Reiss picked up inventory from retiring philosophy professors or widows of Civil War buffs, often for pennies, then turned them around for $40 or $50. Some especially rare titles went for thousands of dollars. The store quickly became successful, and Mr. Reiss took on an employee and moved to a new, larger location.
A Cappella Books evolved into a gathering place for intellectuals, musicians, writers and artists, earning the store cachet.
But the “cool” factor wasn’t enough to overcome the tsunami that hit book selling in the 1990s. At first, Mr. Reiss didn’t worry. He was selling something different than the big guys. But by 2000, he says, the store was struggling. With rare titles easy to find online, it was tough to get even $5 for books that Mr. Reiss had once sold for as much as $50.
In 2005, he moved to a new spot, hoping to give the store a refresh, and experimented with running a dessert shop next door. Now the slim profits went to paying down debts incurred on a renovation, and to prop up the side business—which failed.
Then he tried adding new books to the mix to attract people who might otherwise buy from big operators. But in contrast to carefully selected rare books, which had enjoyed wide profit margins and could be purchased in manageable quantities, new books had to be bought in bulk, based on what sales reps pushed.
Mr. Reiss bought the new titles from publishers on credit, at up to 46% off the cover price. He then sold the books at 20% off the cover price, hoping to move enough to cover forthcoming payments. What didn’t sell had to be returned—a job that was both costly and labor-intensive. Margins shrank to almost nothing.
What’s more, the store underwent an identity crisis as new, mainstream titles began crowding out titles reflecting Mr. Reiss’s tastes.
Sales held steady in the high $200,000s—much of it from the lower-margin new books—which covered Mr. Reiss’s costs but didn’t afford much breathing room. He had to keep staff lean, and he cut his salary below $30,000. He and his wife, a government attorney, increasingly relied on her salary to support themselves and their two daughters. Even in more profitable years, Mr. Reiss says, his salary has never exceeded $50,000.
Eventually, Mr. Reiss went to friends and family, who agreed to lend him money at low interest, which helped save him from defaulting.
Then Mr. Reiss got advice from his dad, who also owned a bookstore. Author events, his father told him, could be the answer.
Mr. Reiss gave it a shot. The events were slow at first, and not lucrative. Then, in 2005, Mr. Reiss heard that Al Franken would embark on a tour for “The Truth (With Jokes).” Mr. Reiss begged Sen. Franken’s producer to include Atlanta on his tour; he got a “yes.” (Sen. Franken says he doesn’t specifically remember the conversation with Mr. Reiss but recalls that he did want to go to Atlanta.)
Mr. Reiss asked the Jimmy Carter Presidential Library and Museum to host a talk and signing at no cost, and the venue agreed. He then rented the 750-seat Variety Playhouse for about $1,500 for another event: Sen. Franken was doing his radio show on the road, and listeners could attend.
“I tried to act like I knew what I was doing,” Mr. Reiss recalls. “But this was all uncharted territory for me.”
The venues were packed—and Mr. Reiss was there with plenty of books to sell to attendees. He sold them at full retail price, and kept all the proceeds.
Mr. Reiss figures that between the signing and radio show, he sold 500 books for full retail price—$25.95 each—clearing about $13,000 in sales in one day and one night. That equaled almost half of his revenue for an average month.
Other events and off-site book sales followed. Mr. Reiss sold books at comedy clubs, Atlanta City Hall, museums, libraries, churches and synagogues. His growing cachet reacquainted him with author-customers from the past seeking promotion. And it attracted ever more prominent authors, among them Pat Conroy and Malcolm Gladwell.
Although sales at the bookstore stagnated, sales at book signings and events at other venues boomed. He continued to purchase books for events at the usual 46% discount to the cover price and then sell them at full cover price. To keep as much of that money as possible, Mr. Reiss hosts nearly all of his 200 or so annual events at free venues, and never pays speakers nor covers their expenses.
For most of those events, admission is free, but for some—up to 15 each year—Mr. Reiss sells tickets. In free venues, the ticket price is the cover price of the book plus tax, and a copy is included. In the rare cases when a venue is rented, as with a Bernie Sanders event, ticket buyers get a copy of the book, but the price is higher than the cover price.
He keeps about 75% of the total proceeds for most events, after paying for website listings, setting up online ticket-sales programs and paying his staff to promote the event on social media.
In 2012, Mr. Reiss moved to a smaller space, which was all he figured he needed as events got more popular. During the first year there, he recorded his highest sales volume up to that point. Today, Mr. Reiss figures book sales through events account for up to half of A Cappella’s overall sales, with the rest generated by the bookstore operation.
His older books remain as distinctive as ever, Mr. Reiss says, but the new ones are curated more subtly; he chooses a broader selection of new titles than he used to, but avoids books that don’t interest him and picks up more of those that do.
These days, most of the books that A Cappella sells are new. Although rare books occasionally go for big money—signed first editions of “Gone With the Wind,” “To Kill a Mockingbird” and William Faulkner’s “The Town,” to name a few, each sold for more than $10,000 in recent years. But Mr. Reiss says, in most cases, these kinds of titles don’t hold their value in the internet economy.
On the other hand, he feels that he is now in a position to charge full cover price, without the old practice of discounting. And that’s a sign of health for the industry, he says.
“Like many indie bookstores, we’ve been lucky to see a genuine rebound of interest among people,” he says. “So now I can sell books for full retail even without having the author signing and visiting, because once again, people are reminding themselves that they really do like real bookstores, and they will pay what it costs to keep us in business.”
Imitating Amazon: E-Commerce Battle Bolstered by Companies Mimicking the Market Leader
From shipping startups to warehouse providers, a virtual network aimed at competing with Amazon is growing in the company’s long shadow.
When entrepreneur Patrick Coddou was looking to boost sales at Supply, the specialty shaving products company he and his wife, Jennifer, founded four years ago, he turned to Amazon. com Inc.
He added the company’s single-blade razors and marble shaving bowls to Amazon’s marketplace in 2016 and used the e-commerce giant’s fulfillment service to package and ship the orders, supplementing the business the couple was handling themselves out of their garage in Fort Worth, Texas.
Three years later Mr. Coddou has pulled his products from Amazon, citing fulfillment costs and seller fees that shaved his margins, among other issues. He moved the company’s online order fulfillment over to e-commerce technology company Shopify Inc., which this year began rolling out its own physical distribution service.
Despite the vast reach of Amazon’s marketplace, “If you’re trying to build something, a brand, a relationship [with customers], Amazon’s not a good place,” Mr. Coddou said. “Before I took it off Amazon, they started advertising their Amazon razors on my page.”
Companies like Supply that are looking to reach customers and fulfill orders have many more options these days. Amazon’s dominance of digital retail sales has spawned a fast-growing ecosystem of startups and services aimed at matching different parts of Amazon’s sprawling network and at helping retailers and brands of all sizes meet consumer expectations set by the e-commerce heavyweight.
Taken together, the businesses are creating what amounts to a virtual logistics system in Amazon’s shadow for retailers racing to keep up with the sector’s leader. This is creating new competition for the online giant even as Amazon itself continues to upend traditional retail and distribution strategies.
Some of the new offerings cater to brands that may sell on Amazon but don’t want to pay the company’s fulfillment charges, or that view Amazon as a potential competitor. Some major brands such as Nike Inc. have pulled back from selling directly through Amazon, choosing for a variety of reasons to use tools they’ve either built themselves or brought in from other companies.
Businesses including Shopify, Wix.com and Squarespace help sellers set up digital stores and process payments. A growing lineup of new and established software firms offer tailored technology to tell retailers where to keep their inventory.
Operators like ShipBob and Quiet Logistics fulfill orders for direct-to-consumer brands through their own warehouses that help sellers put their inventory closer to customers for faster shipping, To help companies match Amazon’s growing network of distribution centers, on-demand warehousing startups such as Flowspace Inc. and Flexe Inc. connect retailers to warehouses with space to share. Robotics companies like Massachusetts-based 6 River Systems and Singapore-based GreyOrange Pte. supply automation to mimic Amazon’s robot-heavy handling while software companies such as Shippo, ShipHawk and ShipHero help merchants book shipments and track order deliveries.
The upstarts have built business as more established companies including the big parcel carriers have tailored services to businesses looking for fast and nimble ways to reach consumers.
Before 2005, when Amazon’s Prime program launched, online fulfillment involved two basic choices: “Fast and expensive or slow and inexpensive,” said Jim Tompkins, chief executive of supply-chain consultancy Tompkins International. Now, “it’s a whole new game,” he said.
“It’s not cheap to use FBA [Fulfillment By Amazon], and it’s dangerous,” because Amazon may choose to provide competition for the sales, said Jun-Sheng Li, a former senior vice president of global e-commerce supply chain at Walmart Inc. who is now an executive in residence at venture-capital firm Canvas Ventures, a Flowspace investor.
Amazon “has invested tens of billions of dollars in developing a world-class fulfillment network and we offer that network to sellers at highly competitive fees when compared to other options,” the company said in a statement. Amazon said it doesn’t “use an individual seller’s data to determine which private label products to launch” and prohibits the use of that data “to compete with them through our first-party offerings, including through our private label products.”
Amazon accounts for an estimated 37.6% of U.S. e-commerce sales, according to research firm eMarketer. The site’s seemingly endless range of goods has conditioned shoppers to order everything from paper towels to couches online. Many expect shipping for those purchases to be fast, free and trackable.
“It created a huge level of expectation, but Amazon by itself can only fulfill part of it, from a service provider standpoint,” Mr. Li said.
This year Shopify and online marketplace eBay Inc., companies best known for helping customers sell goods online, said they plan to offer physical distribution services, using technology to stitch together networks made up of third-party warehouse operators.
Shopify, which bought logistics automation company 6 River Systems this year and has seven U.S. fulfillment locations so far, says it gives smaller logistics providers access to technology and can offer merchants lower rates than they could negotiate on their own. ”We can tell them where to send their products, and we can fulfill their products in two days to 99% of the population at a reasonable rate,” Chief Operating Officer Harley Finkelstein said.
Investors are pumping more money into such businesses.
Chicago-based ShipBob has raised more than $60 million in funding rounds that have backed expansion of a budding network of warehouses from Pennsylvania to California. The company focuses on direct-to-consumer companies that want one- or two-day shipping, and it also fulfills Amazon orders.
At one stage “the options were extremely large incumbents, the local mom and pops, fulfill yourself or FBA,” said Casey Armstrong, ShipBob’s chief marketing officer. Now, “some of the people we compete against are newer than we are.”
This year real-estate firm the Related Cos. and property investor Greenfield Partners jointly acquired digital fulfillment operator Quiet Logistics for an undisclosed amount. The Devens, Mass., company. has a network of U.S. warehouses where robots help workers fulfill orders for digital brands such as Bonobos and Outdoor Voices, and it plans to open more to increase its same-day and next-day shipping options.
“Amazon is a large reason we ended up being purchased by Related and Greenfield,” said Quiet Logistics Chief Revenue Officer Kate Klemmer Terry. As big players like Amazon and Walmart push for faster delivery, “our ownership’s vision is you take someone like Quiet, put them in city centers where you’re closer to the end consumer.”
Traditional logistics providers are developing e-commerce services pitched at direct-to-consumer brands and smaller businesses. This year United Parcel Service Inc. launched a fulfillment service to help merchants manage sales from web storefronts and marketplaces including Amazon and Walmart Inc.
Rival FedEx Corp. unveiled a similar e-commerce offering in 2017. The company this year severed its shipping contracts with Amazon and said it is positioning itself instead as a likely carrier for Amazon rivals such as Target Corp. and Walmart and for consumer-goods makers going directly to shoppers.
“The way the war is going to evolve, it’s essentially going to be Amazon with their 150 fulfillment centers … against the Walmarts with 4,700 stores or the Targets with 1,800 stores or the Best Buys with 1,000 stores,” FedEx Chief Executive Fred Smith said in a September interview.
Harley CEO Says Company No Longer Selling Merchandise On Amazon
Most retailers fight for greater visibility on Amazon.com Inc.’s dominant platform. Harley-Davidson Inc. wants to get off of it.
The motorcycle maker is no longer selling branded apparel on the internet giant’s website because that’s undercutting sales at its own dealers, Jochen Zeitz, Harley’s chief executive officer, said in an interview.
“We want to have a fully integrated, digital e-commerce business with our dealers,” Zeitz said. “Amazon was not really something that got our dealers into the mix.”
A spokesperson for Amazon had no immediate comment.
Harley is not the first iconic brand to part ways with the online retailer. Nike Inc. made waves when it stopped selling sneakers and apparel on Amazon two years ago.
The Milwaukee-based company, which posted a surprise fourth-quarter loss Tuesday, is in the midst of a transformation as Zeitz tries to reignite growth after six years of slumping sales in the U.S., its largest market.
The CEO’s turnaround strategy for the 118-year-old manufacturer, dubbed “Hardwire,” is designed to strengthen the biker brand and its pricing power — not only with motorcycle sales but also in related components, accessories and premium apparel.
As part of that strategy, he created the role of chief digital officer to revamp the company’s online retail platforms.
Zeitz’s predecessor, Matt Levatich, who stepped down a year ago amid slumping sales and pressure from activist investors, rolled out a “digital storefront” on Amazon.com in October 2018. It was part of his “More Roads” plan to broaden Harley’s appeal and reach a new generation of riders.
How Shopify Outfoxed Amazon To Become The Everywhere Store
Tobi Lütke transformed the Canadian upstart into an e-commerce giant by being the anti-Bezos. How long can the formula keep working?
Last February e-commerce company Shopify Inc. replaced the “Ottawa, Canada” dateline that began its press releases and earnings reports with a strange new one: “Internet, Everywhere.”
The geographical shift came at the insistence of Shopify’s founder and chief executive officer, Tobi Lütke, who tends to view such matters through the prism of cold, hard logic.
In May 2020, only a few months into the pandemic, he’d made the early, seemingly rash decision to terminate the leases on Shopify’s offices in Ottawa and six other cities, declaring that his entire 7,000-person workforce would remain virtual—forever. Shopify, he concluded, was now omnipresent, located with its employees and customers in the digital ether. His senior execs were perplexed at the strange phrasing, but they knew better than to argue.
The dateline thing may be a bit pompous and a little too cute, but after an almost two-year run that’s turned the quiet enterprise-tech company into a global e-commerce power, Lütke has earned some creative license.
Since he started Shopify 15 years ago, the company has sold software that allows about 2 million merchants worldwide to run websites—free from the complicated embrace of Shopify’s chief rival, Amazon.com Inc. For $30 to $2,000 a month, Shopify offers sellers more than a dozen services to run an online store, from the actual e-commerce website to inventory management to payment processing.
Its technology now undergirds the websites of giant retail chains such as Staples Inc. and Chipotle Mexican Grill Inc.; recently ordained public companies that grew up on the platform, including shoemaker Allbirds Inc. and medical scrubs maker Figs; and the retail side-hustles of Kylie Jenner, Taylor Swift, Lady Gaga, and other celebrities.
But the company’s biggest impact has been at the smaller end of the scale, in the vast constellation of mom and pops, venture-capital-backed startups, influencer mini-moguls, twee entrepreneurs, merch heads, and more obscure outfits, like Offlimits—a two-person New York City startup trying to reinvent, of all things, breakfast cereal.
What Zoom was to corporate America during the early days of the pandemic, Shopify was to small-business owners, many of whom had never sold a single product online until it became the only way they might stay alive. At the time, Shopify, a little-known company powering some 1 million merchants, was more likely to be confused with the music service Spotify than synonymous with e-commerce.
But when businesses everywhere had to close en masse, Shopify armed them with the tools to become instantaneous online stores. While Amazon’s reputation as a vampiric partner to merchants was reinforced in 2020 by sellers’ testimony in front of a congressional subcommittee investigating Big Tech, Shopify suddenly emerged as their biggest ally.
The global quarantine boosted the company’s market capitalization from $46 billion in early 2020 to $177 billion today. In 2020 its sales jumped to $2.9 billion, an 86% increase from 2019. Over the recent Black Friday / Cyber Monday weekend, Shopify merchants brought in $6.3 billion in sales, a 23% rise from a year earlier. Now Canada’s most valuable company, it accounted for 8.6% of U.S. e-commerce sales in 2020, well behind Amazon’s 39% but ahead of Walmart and EBay, according to EMarketer.
“The pandemic just turbocharged them. It’s ridiculous,” says Rick Watson, an e-commerce consultant and host of Watson Weekly, a podcast about online selling.
As the success of Zoom, Peloton, and other pandemic breakouts starts to fade, Shopify is working furiously to keep its momentum going and weave itself into the zeitgeist. Recently it hired a veteran of Kanye West’s Yeezy brand to run a new influencer program, opened a slick entrepreneurs’ hub in Manhattan, teamed with the actual Spotify to help musicians become merch machines, and rolled out a feature that allows shopkeepers to sell unique digital artworks—“I am creating NFTs,” tweeted Martha Stewart, now a Shopify merchant, in October, tagging the company.
Pharrell Williams, who sells his skin-care line on Shopify, is a fan, too. “If you’re able to come up here and be part of this platform, you’re in great, great, great company,” the producer-rapper-singer-entrepreneur told a group of business owners over Zoom at the company’s annual conference in October.
Lütke, who decided to develop the underlying tools to build retail websites after shuttering his online snowboard store when he was 24, is now Canada’s second-wealthiest person, according to the Bloomberg Billionaires Index. In the insular circles of tech and retail, he’s become a popular and recognizable figure—41 years old, whip thin, Bezos bald, and never without his trademark pageboy cap (until recently, when he abruptly stopped wearing it amid the ceaseless quarantine). “It was defensible when I actually went outside at times,” he says.
In a sense, Lütke and his colleagues are the opposite of Jeff Bezos’ army of techno-capitalists. Amazon, which has enjoyed its own Covid-fueled boom, celebrates the almighty customer. It will happily risk alienating small businesses by knocking off their products or soliciting new competition, if it means lowering prices and accelerating shipping times.
Shopify, on the other hand, has a romantic view of the merchant—its executives rapturously extol the virtues of “democratizing commerce” and “making entrepreneurship cool.” If Amazon’s devotion to customers and an infinite selection earned it the nickname “the everything store,” Shopify, as its new dateline suggests, wants to be the everywhere store.
A few years ago, Lütke sensed there was an advantage in contrasting Shopify with its widely feared competitor, remarking, “Amazon is trying to build an empire, and Shopify is trying to arm the rebels.” But it’s difficult to argue you’re still an insurgent force when you have a Death Star-size market cap. To keep the rebel alliance intact, Lütke has to make Shopify more useful to the world’s largest retailers, while helping smaller ones caught in the grip of supply chain shortages and inflation.
At the same time, he has to contend with growing pains at home, including C-suite turnover and questions about whether Shopify should get into the most laborious parts of e-commerce, like shipping. Winning over hordes of retailers by giving them a simple and sturdy online presence, it turns out, was the easy part.
“I have huge blind spots just because, I mean, I grew up as a nerd, programmed all day long, and spent my entire 20s building Shopify,” Lütke says during a two-hour interview at his one-person office in Ottawa. “I have some catching up to do about how everything kind of fits together.”
“Shopify made us look like fools,” says a former Amazon executive
Trying to talk to Lütke about pretty much anything is a perilous journey into an intellectual labyrinth built out of management books and discursive thoughts. His current fixations include the concept of the Trust Battery, which is how he gauges his confidence in employees, along with the hypothetical that one of the most critical pieces of technology, the web browser, couldn’t be introduced today because Apple Inc., Google, and other app store owners wouldn’t allow it.
In any Lütke discussion, you’ve got to be ready for sentences like “I know how to exoskeleton my time” and “I fundamentally find nondeterminism more interesting than determinism.”
Before the pandemic, like a lot of tech CEOs and investors, he read Nassim Nicholas Taleb’s Antifragile: Things That Gain From Disorder and became fascinated by chaos engineering, the idea that allowing for both unanticipated calamities and intentionally introduced failures can make people and organizations stronger. “Nothing can become truly resilient when everything goes right,” Lütke says.
He couldn’t resist testing the theory on his own company. Among other quirks, he’s wary of needless gatherings, so he started periodically exploiting “god mode” on his employees’ calendars and deleting regularly recurring meetings. Then, in 2017, he sent everyone home to work virtually for a month, just to see what would happen. The experience, partially dependent on Skype, was lacking. “The tools were terrible,” he says.
Shopify eventually moved into 10 floors in an Ottawa skyscraper. A go-kart track snaked through one floor. For a while there was a collection of gallery-size portraits depicting Lütke and the rest of his early executive team wearing Napoleon-era military regalia. The office also had a virtual-reality game room, pingpong room, and yoga studio. Employees said it was a great place to go to work every day.
But Lütke wasn’t over his obsession with remote work. As an early contributor to Ruby on Rails, an open source programming language, he’d collaborated for years with people he’d never met in person.
And Shopify’s headquarters may as well have been located off the grid when it came to trying to recruit experienced execs and hotshot engineers who would pick up and move to the Canadian capital (average low in December: 18F).
When the pandemic sent his thousands of employees home, Lütke decided to solve all these problems at once. Shopify’s fancy offices, he decreed in May 2020, just as e-commerce sales were taking off amid quarantine, would close forever, and the company would be a digital company—headquarters: Internet, Everywhere.
Lütke was only too happy to turn inward. He rented an apartment near his home and transformed it into that office for one, accented with old snowboards and an original Macintosh computer. His recruiting efforts immediately got a boost. Shopify hired one executive from Facebook and another from Slack; both have remained in Silicon Valley.
Others who’d moved to Toronto relocated back to the U.S. to be closer to family—and sunlight. “For the first time in our 15-year history, our global talent pool was not limited to who is willing to move to Ottawa, Canada, or Toronto or wherever, but rather who wants to come in and help with the future of commerce,” says Lütke’s extroverted frontman, Harley Finkelstein, the company president and a telegenic veteran of Canada’s Shark Tank version, Dragons’ Den.
Not everyone was happy. Some employees loved the tightknit culture and fraternizing of the physical office. “I was legitimately opposed to it and thought it was the dumbest idea,” says Kaz Nejatian, a Facebook alum who joined Shopify in 2019 as vice president for merchant services.
Nejatian, who felt Shopify’s culture was dependent on in-person collaboration, eventually came around—but others did not. “I was into the humans and the people I worked with at Shopify,” says Craig Miller, who was chief product officer at the time. “I remember thinking that it felt like a giant loss.”
There were other unanticipated consequences. Extending his CEO arm virtually into discussions, and sometimes reprimanding underlings for mediocre work in his blunt way, earned Lütke the internal nickname “Tobi the Tornado.” He says the moniker is “a little bit irritating” and challenges anyone “to point out the moment I raised my voice.” But that’s just it: You can’t gauge the volume of an online comment. “Slack exacerbated things,” Miller says. “In a company with thousands of people, they can all see Tobi laying into someone.”
Then, amid the global protests in May 2020 stemming from the killing of George Floyd, remote Shopify employees rushed to express their emotions on Slack. Lütke had long encouraged a diversity of perspectives, with company values such as “conformity kills creativity” and “act like an owner.”
On a channel called #belonging, employees debated various issues related to race and inclusivity. But when someone discovered an emoji of a noose had been uploaded to the Slack, according to a report at the time by news site Insider, the discussion got heated, and Lütke decided it was becoming a dangerous distraction. Rather than use it as a moment to open up dialogue with his staff, he converted the channel into read-only.
Then he wrote an internal memo to senior execs, declaring that Shopify “is not a family … and not the government. We cannot solve every societal problem here.” Although the memo, which predictably contained esoteric references—this time, to Lewis Carroll and concepts in electrical engineering—wasn’t meant for broad distribution, it was leaked to the media and criticized by outsiders as unduly harsh.
Lütke doesn’t disavow his memo but says, “I have to probably look at my messages once over, you know.” (Says his wife, Fiona McKean, of her husband’s emotional intelligence, which she says has come a long way since they met 20 years ago playing the online fantasy game Asheron’s Call from different continents: “You can’t logic your way through cultural upheaval.”)
But Lütke wasn’t budging on his principles and, during the crises of 2020, moved to exert more of a grip over his company, not less. In the fall, Miller, the chief product officer, left after nine years; Lütke swiftly absorbed his responsibilities.
Four other senior execs, including the chief technology officer and top HR exec, also exited over the next few months, as bonds frayed and internal camaraderie dissolved. If Shopify was going to navigate out of a “new box that we don’t understand yet,” as Lütke wrote in the leaked memo, he was going to have to be firmly at the helm.
In 2015, after 10 years of tidy growth, two milestones propelled Shopify into the stratosphere of online retail: its initial public offering and an inexplicable decision by Amazon to essentially sell its website-building division to Shopify for a meager $1 million.
Up until that spring, Lütke had been reticent about raising money. He flew to Silicon Valley a few times during Shopify’s early days, sleeping in hostels and biking to visit venture capital firms. Not a lot had changed since those first few fundraising attempts.
When Lütke and Finkelstein, then the chief operating officer, started making the rounds on Wall Street, few prospective investors had heard of Shopify. “We just said, ‘If you bought something on the internet and it wasn’t on Amazon but the experience was good, it was a Shopify store,’ ” Lütke recalls.
When Shopify went public that May, its stock was boosted by the ineptitude of industry giants that had once dominated this corner of the enterprise software market. Yahoo Inc., which offered retailers its own tools, was distracted by internal turmoil.
Another market leader, Magento, which offers open source software to build online stores, had been acquired by EBay Inc., and later spun out and bought by Adobe Inc. IBM, Salesforce, Oracle, and others offered similar services but mostly to big companies, not the small businesses that wanted to quickly and cheaply hang a shingle on the internet.
An even more critical event came a few months after the IPO. Amazon also operated a service that let independent merchants run their websites, called Webstore. Bang & Olufsen, Fruit of the Loom, and Lacoste were among the 80,000 or so companies that used it to run their online shops. If he wanted to, Bezos surely had the resources and engineering prowess to crush Shopify and steal its momentum.
But Amazon execs from that time admit that the Webstore service wasn’t very good, and its sales were dwarfed by all the rich opportunities the company was seeing in its global marketplace, where customers shop on Amazon.com, not on merchant websites.
At the time, the company was also developing house brands such as Amazon Basics, and Webstore sellers had to get comfortable with the possibility that the tech giant might see their success and knock off their best products. It was a “fox-in-the-henhouse problem. Merchants were sleeping with one eye open,” says a former Amazon executive who worked on Webstore, who spoke on condition of anonymity because he wasn’t authorized to speak publicly about the issue.
In late 2015, in one of Bezos’ periodic purges of underachieving businesses, he agreed to close Webstore. Then, in a rare strategic mistake that’s likely to go down in the annals of corporate blunders, Amazon sent its customers to Shopify and proclaimed publicly that the Canadian company was its preferred partner for the Webstore diaspora.
In exchange, Shopify agreed to offer Amazon Pay to its merchants and let them easily list their products on Amazon’s marketplace. Shopify also paid Amazon $1 million—a financial arrangement that’s never been previously reported.
Bezos and his colleagues believed that supporting small retailers and their online shops was never going to be a large, profitable business. They were wrong—small online retailers generated about $153 billion in sales in 2020, according to AMI Partners. “Shopify made us look like fools,” says the former Amazon executive.
For Shopify the deal paid immediate dividends. On the day it was announced, the stock price leapt so dramatically—from $7 to $23—that the company got requests from Finra, a U.S. regulatory authority, asking for more information on the agreement.
(Finra later dropped the matter, Shopify says.) Amazon’s endorsement also gave Shopify new credibility. Only later would Amazon realize its mistake and view Shopify—and the incipient trend of brands selling directly to consumers—as a critical threat to its dominance.
Merchants, it turned out, were not only eager to pay $30 a month for a basic Shopify subscription, they’d also happily pony up for all the extra trappings that helped them sell more stuff: for example, access to apps made by other companies for the Shopify app store, which let them send marketing texts and emails to customers or put reviews on their sites. When a large merchant uses one of those apps, Shopify takes a cut.
In 2016, Shopify introduced a lending service to help small companies that otherwise wouldn’t get the time of day from a traditional bank. The program, like one that Jack Dorsey’s Square (now called Block) had started two years earlier, lets vendors start their companies by buying inventory and hiring employees.
In return, borrowers pay a percentage of their sales to Shopify until they pay off the principal and related fees. In November the company said Shopify Capital had lent a total of $2.7 billion to merchants since inception.
Similarly, Shop Pay, a competitor to PayPal Holdings Inc. that it introduced in 2017, lets shoppers store credit cards as they go from one Shopify merchant to the next. Shopify collects up to 2.9% of every sale plus 30¢ per transaction; it’s now one of the fastest-growing online payment tools in the U.S.
Mainly, though, what Amazon missed was the sheer number of entrepreneurs ready to put their business notions into action. These were self-starters such as Emma Mcilroy, who left a career at Nike Inc. in 2013 to start Wildfang, a fashion brand with a mission to “disrupt gender norms.”
Before the pandemic, Mcilroy operated stores in Los Angeles, New York, and Portland, Ore., as well as an online storefront using Magento, which tended to crash during the traffic surge every holiday season. “Black Friday used to be my worst week of the year. I didn’t sleep,” she says.
In October 2020 she switched to Shopify and closed the underperforming New York store, in SoHo. Now her business is predominantly online and growing. “I talk to a lot of entrepreneurs, and if I could give them just one piece of advice, it’s that I wish I had gone to Shopify eight years earlier,” Mcilroy says. “It would have made my life so much easier.”
During the first few weeks of the pandemic, Lütke warned employees in a virtual town hall meeting about the danger to merchants like Wildfang. “Every single time that there is a crisis, the biggest losers are small and medium businesses,” he recalls saying. “They are always wiped out, because they have the least amount of adaptability.” The company’s new mission, he declared, was to help sellers survive the tumult.
Shopify did that, but now many sellers are again in distress. With supply chain problems plaguing the global economy, even the largest retailers are having trouble getting merchandise from manufacturers to customers’ homes in anything resembling a timely manner.
Amazon, of course, has an advantage here: a well-honed logistics network devoted to ferrying products across oceans and among about 930 warehouses around the world, then delivering packages right to people’s doorsteps. Shopify sellers sound desperate for this kind of support.
“I don’t know why Shopify hasn’t done more,” says Patrick Coddou, co-founder of 11-employee Supply Co., which operates a men’s grooming-product website. “It sure would be nice if they did something to help us compete against Amazon.”
For years, Lütke toyed with the idea of getting into the gritty business of fulfillment. In 2019 the company introduced what it called the Shopify Fulfillment Network, which connects merchants with privately owned fulfillment centers offering Amazon Prime-level reliability, as well as shippers including United Parcel Service Inc. and FedEx Corp.
Shopify promised to invest $1 billion over five years to expand the service and paid $450 million to acquire a robotics startup in Massachusetts, 6 River Systems, that makes the same kind of robots that roam the floors of Amazon warehouses. To observers it appeared Lütke was ready to buy warehouses, employ blue-collar workers, and start moving pallets and packages around the real world.
But it hasn’t happened, and Shopify still largely leaves the last mile to its merchants. In January 2021 it hired an operations executive from Amazon named Nitin Kapoor—who left after nine months. (Kapoor declined to comment.) Lütke says logistics “is a tough nut to crack for byte companies”—meaning firms that have gotten comfortable writing software, with none of the headaches of employee injuries and high-profile union campaigns. If a ruthless, Amazon-style efficiency is required to run such a network, Lütke says, “then I don’t think we’re going to succeed. We’ll do it differently, because we don’t want to show up like this.”
It’s also true that Amazon has mastered a kind of operational efficiency Shopify never had to cultivate. Instead, Shopify executives claim improbably that rapid delivery of the kinds of boutique products its merchants sell isn’t that important to shoppers. “My guess is that is not going to hold water,” says Mark Mahaney, head of internet research at Evercore ISI. “Over time, if someone delivers you a product within a day, and someone doesn’t, you will go with the solution that gets you the product in a day. I think that will be a big challenge to Shopify.”
Back in the virtual world, Lütke has struck deals with social media companies from Pinterest to TikTok, allowing sellers to better advertise and sell things on the sites where internet users spend the most time. But sellers who advertise on social networks are getting hurt on the other end, too.
With Apple changing the rules around data tracking and user privacy on iPhones, Facebook ads have become more expensive and less effective, squeezing small businesses. Because of the switch, Supply’s Coddou says, his company was unprofitable this summer for the first time in its six-year history.
Shopify could lessen the blow if it helped its merchants find customers more directly—as Amazon does with every search on its website. But here, too, Lütke has been treading carefully. While Shopify launched a search feature on its Shop app in 2021, it positions itself as a neutral broker. The way the company sees it, if a customer searches for cosmetics, and Shopify sends them to Rihanna’s Fenty Beauty website instead of, say, Kylie Cosmetics, Shopify could be facing some angry Kardashians. So its search results prioritize brands that customers have already purchased from, or lists them at random.
But if a competitor figures out how to send torrents of buyers to its sellers, and then takes over the headache of shipping once they make a sale, Shopify’s 2 million merchants could easily defect with just as much enthusiasm as they’ve flocked to it over the past decade.
One of those competitors could—once again—be Amazon. Since late 2017, former company executives say, it’s been working on a project, internally code-named Santos, that would let retailers run independent sites off Amazon. They say the division is trying to recapture the opportunity Amazon squandered when it shut down Webstore. It’s nestled within the Amazon Web Services cloud computing unit, the former domain of Bezos successor Andy Jassy, and could premiere as soon as next year. (Amazon declined to comment.)
Lütke sounds a bit fatalistic about that. “I think of Amazon as a worthy rival,” he says. “If they knock it out of the park and make it super easy to start new businesses on it, then I’m like, I actually accomplished my mission.” He says he’s up for being the underdog again—perhaps to reclaim the mantle of the rebel alliance. It’s an attitude he might need in light of a 10% drop in Shopify’s stock price over the past month, as investors fret over the prospect of sluggish post-lockdown online sales and inflation. “For all the years that I’ve done Shopify, people have very consistently underestimated the size of the internet and the size of retail,” Lütke says. “It’s just very big.”
For now he’s focused on continuing to build a company untethered to any physical place, though he concedes that Shopify’s tumultuous year might’ve been easier with after-work rituals like going for drinks. “The internet hasn’t figured out how to make communities self-heal past a certain point,” he says. He also doesn’t rule out the possibility of one day reversing his position, hunkering down in new offices, and writing “a fun mea culpa.”
More pressing, though, is reconnecting with senior Shopify executives, including some he’s still never met in person. This fall he invited his management team to the Opinicon, a rustic 1880s-era hotel and resort he and McKean bought and painstakingly restored in 2015, about 80 miles from their home. During the day, the Shopify execs played laser tag.
At night they talked around a bonfire. And for the first time in months, like the old days, Shopify wasn’t Everywhere, but in a more conventional location, its leadership concentrated near Ottawa, Canada.
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