In this piece, we examine Shopify’s current and future identifiable e-Commerce Platform market share versus Magento (Adobe), Oracle Commerce, Demandware (Salesforce), BigCommerce,
Squarespace Commerce, IBM Websphere Commerce, Wix Stores, Weebly (Square), Shappify (Shopify App), Volusion, StackCommerce, Hybris, Amazon Webstore, Elastic Path, MadMobile
Ecwid Plug-in (WordPress), 3D Cart, FoxyCart, GoDaddy Online Store, ePages, K-eCommerce and (Microsoft Dynamics & SAP). We also look at Shopify’s customers and the obstacles to achieving continuous market share growth in the future.
Shopify’s e-Commerce Sales Growth was 400%+ vs. Competitors in Q1/18
Shopify sales have grown 68.3% Y/Y in Q1 2018 versus the U.S. e-Commerce market growing at 16.4% Y/Y. Most of Shopify’s growth is coming from either those new to e-Commerce platforms or from merchants switching to Shopify. We anticipate with less than a 10% U.S. market share, growth in U.S. e-Commerce sales will continue to grow at a similar rate. Over the next four years, we expect both Shopify’s sales and merchants to grow at a 36% CAGR versus a 16% CAGR in U.S. e-Commerce sales and Global merchants (Shopify growth 225% greater than the market over that time). This is primarily driven by increasingly difficult market share gains to be had.
Forecasted Shopify Revenue Growth versus U.S. e-Commerce growth until 2022
Source: Perspectec, U.S. Census Bureau
Shopify has a 0.6% Market share of Identifiable e-Commerce Reseller Revenue
We estimate that SHOP’s total addressable market (TAM) is $182 million, putting Shopify’s market share at 0.6%. This includes e-Commerce sellers who choose to run their e-Commerce platforms through 3rd parties. This excludes payment gateway markets, retail chains with their own e-Commerce stores such as Wal-Mart, Nordstrom, etc. and a large number of smaller reseller store sites that are difficult to identify. It also excludes China companies such as Tencent as the Chinese market is generally closed to foreign store owners with a few exceptions. It is possible we are missing tens of millions of dollars in reseller revenue but is a reasonable first guestimate.
Identifiable e-Commerce Platform, Marketplaces and Mobile Store Product Sales Market Share
Source: Perspectec, Builtwith
U.S. e-Commerce sales are growing at 16% a year and we would expect this to continue over the next four years driven by:
– Improving delivery logistics
– Improved price matching with A.I. using browser cookies
– Improving mobile experiences/browsers Globally
– Increasing credit being provided for sellers and buyers
– Increasing use of payment platforms such as PayPal for those who do not have bank accounts
90% of the Reseller Market Will Be Difficult For Shopify to Enter
We do not believe Amazon’s roughly $150 million in reseller sales and e-Bay’s $11 billion in revenue is available to Shopify. This is primarily due to:
- Amazon and e-Bay have strong traffic – Shopify requires a significant ongoing cash and time investment in social media (Facebook, Instagram posts, etc), advertising (Adwords, Post boosts, etc), email (Email updates and Mailchimp subscriptions) and Apps/Themes. Even with these investments, traffic to a site will likely not come close to matching being a good search result on Amazon or e-Bay.
- Nothing stopping merchants from selling on Shopify and Amazon/e-Bay – Currently selling products on Shopify or e-Bay is limited to imperfect Apps. Support is nearly non-existent, perhaps on purpose. To sell products from a Shopify store on Amazon, sellers still need to sign up for an Amazon Pro Seller Account for $40 a month.
In general, a Shopify merchant has chosen Shopify rather than Amazon or e-Bay in order to:
– Create a brand with hopefully repeat customers
– Dropship products and reduce the effect resulting bad reviews might have on future sales
There are very few if any examples of even a modestly successful Amazon reseller abandoning Amazon or e-Bay for Shopify. A well-reviewed reseller with product results showing up on the first page for a product search is worth something at Amazon and e-Bay.
We Estimate 75% of Subscriptions Are Trending Towards Eventually Closing
Stores with sales over $1,000 are normally either drop shipping, have a niche product from local manufacturers, have an Amazon/e-Bay presence or are larger brands. Based on App downloads, App websites, Shopify Exchange listings, store searches, and Shopify’s previously reported number of merchants. we believe these stores represent only about a quarter of all of Shopify subscriptions, but 90%+ of GMV.
The remaining subscriptions we believe are those figuring out ways to make money on Shopify. Currently, we see a large number of people opening a store (or multiple stores), but not figuring out a way to generate sales. Most Merchants are in discovery mode. Generating revenue is easier on Amazon or e-Bay and cheaper to maintain on Wix or Weebly. If Shopify is not able to have merchants generate significant profits fairly easily, they are at risk of losing a large portion of subscribers in discovery. We believe losing these customers will have an oversized impact on Customer Lifetime Value and the share price relative to the GMV lost.
We estimate Shopify subscriptions can be classified into the following buckets, all of which are likely growing:
- Trying out / Unsuccessful / Inactive Shopify Subscriptions (50% of merchants) – No popular App downloads. Run rate sales do not reach $100/year. High potential churn candidates in a given year. Shopify also gives away multiple advanced subscriptions to employees as part of a severance package. This has played out with our survey which noted a 14% annual churn for Shopify by entrepreneurs using Shopify.
- Downloaded Apps / Unsuccessful Shopify Subscribers (25%) – Have downloaded popular App downloads such as Privy, Sales Pop, which we estimate have been downloaded to 300K stores. Run-rate sales are usually under $500/year. Merchants are high potential churn candidates in a given year and are likely a material contributor to our 14% annual churn survey result.
- Niche Dropshippers over $1K (12%) – These merchants buy products from 3rd parties (usually through AliExpress) and then ship directly to a customer. They often use the Oberlo App. About 80% of the businesses for sale on Shopify are drop shipping sites. They typically use the Shopify or Shopify Plus plans. This group would be sensitive to changes in Amazon rules regarding drop shipping.
- Sellers with Own Niche Inventory over $1K (7%) – Often in conjunction with a physical store or warehouse. Inventory is either self-made or purchased through a local manufacturer. Run-rate sales are over $1K a year. Often times have downloaded Inventory management Apps. Example: Canadian Made.
- Amazon and e-Bay Sellers Using Shopify as another option (4%) – A small portion of the over 2,000,000 3rd party sellers on Amazon and e-Bay are selling on Shopify in order to de-risk their business and give themselves the option to drop ship some products. Example EzClipse.
- Emerging Niche Brands (1.5%) – Sales above $100K/year serving niche markets using the Advanced Plan, deeply into customization (Shopify liquid) and Apps. Tens of thousands spent on advertising. Examples: Seven Treasures, CuteCuteWorld
- Established Brands (<0.5%) – Around 3,000 merchants with online sales generally above $500K including Global stores such as Tesla, the Economist, Red Bull, Penguin Books and soon the LCBO for marijuana sales in Ontario. These are primarily Shopify Plus customers.
Drop Shipping is the Most Lucrative and Largest Market for Shopify has given Drop shipping on E-Bay or Amazon Result in bad reviews.
Why Shopify is the Best Platform to Dropship – A drop shipping store on Shopify, where products are purchased on AliExpress for example, and shipped directly to a customer, often times result in a larger portion of bad reviews. Issues such as the drop shippers invoice included in the customer’s package, slower than expected delivery and a lack of effective communication. If the product delivered is unsatisfactory in any way, the added negative of long wait times often times manifests itself into a lower review for that reseller.
No Direct Reputation Comparison – With a high reputation threshold necessary to be a successful and sustainable large reseller on Amazon and e-Bay, we have not seen a drop shipping business model work consistently on a large scale. Shopify store, on the other hand, allows the merchant to not be compared to other resellers
Lax Return Policy – Returns policies for Amazon and e-Bay are strict. In most cases products are returned directly to the merchant. With Shopify merchants, they can enforce a more lax return policy.
Specialized Apps – Shopify has become the de-facto option for drop shipping with its Oberlo App, allowing merchants easy access to overseas suppliers. China offering ePacket shipping from China at free or low costs and delivery times half that of other options with the ability to track packages has been a large driver to Dropshipping.
As a result, Shopify is and will continue to be more highly correlated with drop shippers versus Amazon and e-Bay.
Bad reviews are pushing Drop Shippers to sell their stores
Often times drop shipping stores have suffered from a bad reputation and will not see any repeat customers. There are hundreds of cases where drop shipping sites with thousands of dollars in sales are put up for sale in well under a year. At last check, 63% of stores for sale on Shopify were technically classified as drop shipping, while nearly 90% of them worth over $1,000 were drop shippers at a practical level.
Drop Shippers are a headwind to Shopify sales growth
As a result of not being sustainable businesses, we believe the number of merchant stores will see an increasing number of closures. We expect this to push net additional merchants lower over time.
Shopify’s Current Identifiable -e-Commerce Platform Market Opportunity Just Under $3 Billion
Source: Perspectec and BuiltWith
We believe the current number of subscription accounts available to Shopify is about 1.8 million, with revenue from subscriptions and skimming off GMV roughly $3 billion a year. We estimate that both the number of merchants and sales will grow by 16% a year from 2018 to 2022. The number of merchants we see increasing to about 3 million.
Adobe (Magento), Square (Weebly), Microsoft, SAP, and Oracle Are Intensifying Their Efforts To Gain Share
Shopify is currently taking the low hanging fruit of merchants using Etsy, Demandware, Amazon Webstore, 3D Cart and a few other smaller platforms. A number of these platforms offer very little in relation to Shopify. As these easy legacy platforms fall off, Shopify will be facing increasingly harder market share wins against better funded and run solutions.
Source: Perspectec and Builtwith
By 2022, we see Shopify’s market share growing to 51%. At this point, growth will become more difficult as Shopify has set limitations for its platform that technically are difficult to change. Among the opportunities Shopify is leaving on the table for others to take are:
No self-hosting options outside of offering a Shopify Buy button – Subscription costs are among the highest in the industry. No self-hosting options outside of offering a Shopify Buy button. Magento allows self-hosting.
Rigid in basic customization – There is little flexibility in the basic structure of Shopify’s website build and classification of products. For example, products must be put under a ‘Collection’ and products can’t number more than 50 per page. Wix and Weebly allow drag and drop customizable web layouts for non-programmers. For Shopify, limited website customization can be done using Shopify’s own coding (liquid).
Rigid in advanced customization – Shopify is rigid in not allowing users to add code in programming languages to its page (PHP or Java for example). Introducing code must be done through Apps. Magento allows for full customization
Pushing Shopify Payments and Shipping – This makes Shopify less attractive to larger merchants who prefer using their own payment gateways at a potentially lower transaction cost. BigCommerce offers zero costs per transaction on 3rd party payment gateways.
Apps Often Conflict with Each Other – Many Apps used on Shopify are not easily compatible and the monthly costs are often relatively high and sometimes recurring. This limits the number of Apps a particular store may use.
Focused on Selling physical products – Shopify is not set-up to easily offer subscription services, software or digital assets to a large extent.
No clear ability to link to an ERP system – Microsoft and SAP’s solution (k-eCommerce) have introduced this functionality to go after larger sellers. Oracle’s solution will likely focus on ERP integration as well.
We also believe by 2022, share growth will become more difficult as e-Commerce retail penetration in the U.S. approaches 18% (up from about 10% today). Over the last month alone, larger players have entered the market including Adobe acquiring Magento and Square acquiring Weebly. Each of these platforms will increasingly carve out a niche for themselves.
Shopify’s Identifiable Market Opportunity in 2022 (Primarily Drop Shipping) we Estimate to be Over $6 Billion
Source: Perspectec and BuiltWith
Our conclusion is that the future competitive landscape for Shopify’s customers and drop shipping over the next four years is significant. However, this has more than played itself out in valuation. We continue to believe investors should sell their shares now as we believe expectations remain too high for Shopify in the near-term and long-term.
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
