September 4th, 2023: Gartner releases digital commerce Magic Quadrant, Shein & Forever21 build a partnership learning from Instacart’s IPO filing, & Klaviyo IPO sets bar for software companies

Today’s episode of the Watson Weekly podcast is sponsored by Commercetools.

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It’s September 4, 2023  and this is the Watson Weekly - your essential eCommerce Digest!

Today on our show:

• Gartner Releases Its Digital Commerce Magic Quadrant

• Shein and Forever21 Build a Partnership

• Learning from Instacart’s IPO Filing

• Klaviyo IPO Sets the Bar for Profitable Software Companies

- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.

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To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.

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[PAUSE]

BUT FIRST in our shopping cart full of news….

Gartner Releases Its Digital Commerce Magic Quadrant

Platform vendor evaluation is one of the most complex jobs a retailer or brand will tackle for their Digital Roadmap. This exercise has at least a few distinct phases: deciding when your current situation has reached its end, where you are headed next, and, most importantly, the change management in-between.

Recently, Gartner released its Digital Commerce Magic Quadrant, which was introduced in the 80s and '90s to provide an overview of a particular software market segment -- in this case, eCommerce platforms.

My big beef with the Magic Quadrant overall is that it presupposes that each vendor wants to build a suite of all the things. Frankly, if you ask this observer, the Quadrant is a little out of step with its Pragmatic Composability message.

I wanted to provide a phrase from the report from the point of view of each vendor who made that happy quadrant.

Adobe: Experience Manager and Analytics-focused

Commercetools: Large Enterprises

Salesforce: Buy extra licenses

SAP: Monolith

Shopify: Innovation

VTEX narrowly missed the quadrant this time, but I'll give them an honorable mention here for being on the line ;-)

As far as RFPs overall, given the volume out there, it must be RFP season as we are starting to inch towards Fall and companies think about their 2024 roadmap. One advice for brands and retailers during an evaluation is not to compare static lists of features. Watch the motion instead.

What do I mean?

It's nonsensical to make a 7 to 10 year decision based on a particular set of features you value at any time. 

As part of your decisionmaking, think about these three items:

1 - The platform meets all your basic security, data, and functionality requirements.

2 - Best-in-class partners are available, and integrations are commonplace to them.

3 - The list of system integrators is plentiful, referenceable, and experienced. It also helps if there are several of them at each level (complex, middle, and simple) so you can find the ones that meet your needs.

Another piece of advice? If you are having your existing system integrator run your RFP, I'll just go ahead and say that you are likely not running an RFP. Instead, you are more likely a part of a sales process by a primary vendor favored by the SI (which is easily discoverable).

Selecting the system integrator first is the same as tilting the scales... instead, choose the platform and SI as a matched pair. As part of this consideration, ensure that your ISV ecosystem partners match that pair.

[References:]

• https://www.linkedin.com/posts/ecommercestrategyconsulting_gartner-releases-digital-commerce-magic-quadrant-activity-7100446861156593665-gK18

Our Second Story

Shein and Forever 21 Build a Partneship

The Wall Street Journal reported that online (ultra) fast-fashion retailer Shein has signed a partnership agreement with Sparc Group, the owner of Forever 21.

Who is Sparc Group? It's a little complex to understand; let me try and break it down.

Sparc Group is a global full-service retail firm that manufactures, distributes, and operates retail and eCommerce properties for major brands like Forever 21, Lucky Brand, and Eddie Bauer. 

Sparc Group has historically been a 50/50 partnership between two major firms: Authentic Brands Group and Simon Properties.

* Authentic Brands Group - IP licensing firm that owns the brand and collects royalties from owning the intellectual property of the brand from its partners, and

* Simon Properties - Real estate investment trust owning major malls globally.

So what happened with Shein? A partnership that looks like a two-way investment.

* Shein now owns one-third of Sparc Group. 

* Sparc Group invested a minority share in Shein.

What they say it means is that

* Shein can sell products it doesn't manufacture - presumably the brands managed by Sparc Group and perhaps even the broader Authentic Brands Group portfolio.

* Consumers will be able to return clothes purchased online at Shein at Forever21 stores and perhaps other Sparc Group-owned stores.

* Forever21 will have access to Shein's customer base and be able to market its clothes there - not clear if this is through Shein's marketing channels or its own. Jamie Salter, the owner of ABG, says that additional Sparc Group brands will likely funnel through this partnership.

* Sparc Group and Forever21 are also looking to learn from Shein and its real-time, small-batch manufacturing processes, which have been disrupting the industry over the past few years -- significantly outgrowing the rest of the fast fashion industry.

What I think it means:

* This is part of the legitimizing and de-risking of Shein, who has been making moves to shake the "slave labor" claims.

* Plus, there is a lot of potential political risk in being a Chinese online retailer in the US market. Giving US companies a stake in Shein, Shein acquires a greater sense of legitimacy.

* Sparc Group may also see Shein as a way to create the world's largest global fashion marketplace, which would be an interesting proposition.

* Authentic Brands Group, which owns part of Sparc Group, makes money each time a sale happens or a new licensee signs up. This is about giving all the brands in the portfolio a multiplier effect: How can we turbocharge sales, encourage others to sign up, and take a piece of that too?

* I'll give Jamie Salter this: he is a smart one. This deal blunts a huge threat to his portfolio and creates a new business opportunity and potential revenue engine simultaneously.

[References:]

• https://www.linkedin.com/posts/ecommercestrategyconsulting_shein-and-sparc-group-strike-a-partnership-activity-7100813152409268224-H37o

Our Third Story

Learning from Instacart’s S1 Filing

Last week Instacart filed its S1 document for its IPO and I thought I would spend a little time unpacking it here.

Instacart's products include its Marketplace, the Enterprise platform, and Ads.

Here are a few items that I thought were the most interesting from their filing:

* First, this is not just an IPO. It's also a private placement of stock to a strategic partner: Pepsi, who agreed to invest $175M in the company of their Series A stock. Previously, I thought Instacart might get acquired rather than go public, and they have split the difference! This new stock issued to PepsiCo is senior to all common stock.  PepsiCo seems like a great partner.

* Gross Transaction Volume (GTV) was $28.8B in 2022 and is growing 15.8% year over year. Notably, they are growing profit dollars much faster than transaction volume. That is about an 8.6% "attach rate" of revenue to GTV. (Shopify right now is about at 3% -- which gives you some idea of the leverage and power of advertising). This is the key to the entire business.

* 2022 Advertising revenue was $740M, which grew 29% y/y. I was surprised at how small this was compared to Amazon’s advertising business which is 50 times larger, and growing almost as fast.  I know I’ve said this before, but when most people talk about retail media, this is really shorthand for Amazon.

* Instacart charged retailers and consumers combined about 14.9% of the gross transaction value in 2022. (This is growing). How long can this grow in a low-margin industry with inflation?

* Instacart's "shoppers" earn about 8% of gross transaction value, not including tips.  I would also say that the status of these shoppers - and if they are or are not Instacart employees could be a huge threat to the business model in the future.

* 2022 Revenue was $2.5B, growing 38% y/y (up from 24% y/y prior), 72% gross margin (up from 66% prior year)

* 2022 Operating income loss was $86M. Grew opex by 34% while growing revenue by 39% and profit dollars by 49%. The key for Instacart is to keep growing profit dollars. Their profitability so far seems tenuous.

While Instacart is growing and has become profitable, there are still a number of risks out there for the firm, so it will be interesting to watch going forward.

[References:]

• https://www.cnbc.com/2023/08/25/instacart-files-to-go-public-on-nasdaq-to-unfreeze-tech-ipo-market.html

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And Our Last Story

Klaviyo IPO Sets the Bar for Profitable Software Companies

Well it finally happened, one of the most anticipated IPO filings in the Shopify landscape, and I’m here for it Watsonians!

Klaviyo hopes to raise at least $750M in capital for its initial public offering.  The company most recently raised $320M in its last funding round in 2021, which gave it a pre-money valuation of $9.15 billion. 

What are Klaviyo's Key Metrics?

Here are some information based on the six months ending June 30, 2022:

• 1,548 employees

• 130k+ customers (up from 105,000 customers in June 2022) = 23.8% y/y

• $585M Annual Recurring Revenue (ARR)

• $4,500 Annual Revenue Per Account (ARPA)

• $7.9M operating income in 1H 2023

• Over 110% Net Recurring Revenue Retention

• The company has raised $454 million, but it has only spent approximately $10M of it.

• 14-month CAC payback period

How Efficient and Profitable is Klaviyo?

Klaviyo's 38.6% Sales and marketing as a % of revenue did not happen overnight. As you can see, in 2021, this number was 53.8% of revenue, which is a serious problem. Going forward, the big risk to Klaviyo is that a lot of its revenue growth (58%) comes from existing customers and 42% from new customers.  I expect the ratio to continue to favor existing customers more each year.

Klaviyo’s growth does appear to be decelerating, especially when you back out the effects of price increases, which it did in both 2022 and 2023.  While it looks like 2023 growth so far was 54%, Klaviyo sad that 15% of that growth was directly attributable to price increases.

What Does Klaviyo’s Go-to-market Engine Look Like?

Klaviyo breaks down its market segments into three buckets:

• SMB = $100k - $20M

• Mid-Market = $20M - $400M

• Enterprise = $400M+

These are very solid definitions and a useful starting point for any SaaS eCommece founder looking to segment their market.

Klaviyo primarily has a product-led growth motion that targets the Chief Marketing Officer, Chief Customer Officer, and other functional marketing leaders.

To measure the effectiveness of its sales and marketing efforts, it measures net new Annual Recurring Revenue (ARR), which is evenly distributed through these channels:

• Inbound channels (product-led growth)

• Outbound channels (sales-led growth)

• Agency partnerships

Klaviyo estimates that these sales channels contribute equally to Klaviyo’s growth.  This is a good rule of thumb for any SaaS company, and I have even seen partner-acquired sales reaching 50% of ARR for other SaaS companies.

Klaviyo reports that 10% of its new ARR was through the App Store.  Assuming that Klaviyo’s inbound channels generate 33% of net new ARR in a period, that means Klaviyo gets about one-third of its inbound sales through App Store installs.  A reminder not to over-focus on the App Store as a source of revenue.

What is Klaviyo’s Relationship with Shopify?

Shopify’s relationship with Klaviyo is quite complex.  Let’s start with some basics.

• Shopify owns 11.2% of Klaviyo, and Klaviyo’s platform concentration is 77.5% Shopify.

• In July 2022, Klaviyo signed a strategic agreement with Shopify.

Here are the terms of Shopify’s that agreement with Klaviyo:

• Shopify must maintain Klaviyo as a Shopify Plus partner.

• Shopify must promote Klaviyo as its “Recommended” E-mail Provider for Shopify Plus merchants.

• Klaviyo got a $100 million investment from Shopify as part of this agreement.

• Shopify can purchase additional shares at a specified price until 2030.

• The agreement terminates in 2029, and Shopify cannot terminate for convenience.

Here are the terms of Klaviyo’s current agreement with Shopify:

• For Shopify Plus, Klaviyo must pay Shopify a monthly integration fee for each Shopify Plus merchant.  

• For lower Shopify tiers, Klaviyo must pay Shopify a fixed percentage of revenue not greater than what Shopify charges other Shopify partners.

Anyone familiar with Shopify’s App Store pricing knows that percentage of revenue is the normal model.  Allowing Klaviyo to use a fixed amount per merchant per month is a discount for larger Shopify Plus customers and allows Klaviyo to grow these customers without paying more and more to Shopify.

I expect that Klaviyo’s status as a Recommended Email provider for Shopify Plus is quite lucrative, particularly if you understand Klaviyo’s land and expand strategy.   You can compare these fees to the fees that Google pays to Apple for being the default search engine on Safari.

What are Klaviyo’s Biggest Opportunities Going Forward?

• The company has a lot of room to run within its existing Retail and e-commerce vertical.  Klaviyo’s estimated serviceable addressable market opportunity within this vertical is over $16 billion (585M captured) = 3% of the market. 

• Klaviyo believes its platform applies to other verticals: education, events and entertainment, restaurants, travel, and B2B.  In the US Klaviyo estimates its TAM in these verticals at $34 billion in the United States.  This is all theoretical, however.

This gives Klaviyo a lot of room to run. However, not all elements are addressable.  Both Hubspot and Salesforce are well-positioned in both the B2B space. From my point of view, Klaviyo’s easiest addressable growth opportunities include:

1. Penetration of new product offerings like SMS, Reviews, and CDP into existing customers.  (SMS Usage, for instance, is used by 14.8% of customers as of June 2023, up from 8.5% at the end of 2021 — steady progress)

2. SMB segments Internationally.  (As of June 2023, 30% of revenue is from non-US accounts).

3. Mid-market segments in the United States and later Internationally.

4. New verticals that act similarly to eCommerce and Retail are not well-served by competition.

5. Enterprise segments in Retail and eCommerce.

What Are My Top Takeaways from Klaviyo’s S1 Filing?

First, Klaviyo has only spent $15 million to get to $585m in ARR and an IPO filing.  This is despite raising $454 million. Most of it has gone unused, which reflects a core Klaviyo value to remain capital-efficient.

Second, Greater than 100% Net Revenue Retention helps you grow faster.  If you have a leaky bucket problem, you have a tough future as a SaaS business.

Third, Be willing to pay bounties to partners like agencies and platforms, especially if you can be named a preferred provider of a valuable service.

Fourth, Shopify has quite a complex relationship with Klaviyo, and many of these agreements for the service providers are about reducing their marketing costs to acquire customers as a % of their revenue.  That, in addition to the capital infusion!

Fifth, If you are considering going public as a software provider, serious preparation is needed 2-3 years before getting the company in the right shape to be attractive to outside investors. This is very different than acquiring customers at any cost.

And Finally, I don't care who you are, it's difficult to build a $500M+ ARR SaaS business with metrics like these. Ultimate respect to these founders Andrew Bialecki and Ed Hallen.

[References:]

• https://www.sec.gov/Archives/edgar/data/1835830/000162828023030618/klaviyoincs-1.htm

• https://www.linkedin.com/pulse/klaviyo-ipo-sets-bar-profitable-saas-going-forward-rick-watson/

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Hey, Watsonians, did you know that Amazon UK customers will have to pay an extra fee on top of their Prime membership in order to get same-day service?  If you were in our online community, you would!  To stay on top of what’s going on in eCommerce and join the conversation, visit  community.rmwcommerce.com today.

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It’s That Time Friends, for our Investor Minute.  We have 5 items on the menu today.

First

Brain Health Startup MOSH Raises $3M Series A

MOSH, a brain health brand that manufactures protein bars, raised a $3m Series A, which will be used to enter retail locations. Maria Shriver and Patrick Schwarzenegger founded the company to create products to counteract dementia and other mental health conditions.

Link: https://techcrunch.com/2023/08/23/maria-shriver-patrick-schwarzenegger-mosh-3m-food/

Second

Beauty Private Label Platform Blanka Raises $2M Seed

Blanka, a B2B sourcing platform for North-American made beauty and wellness products raised $2m seed. This end-to-end solution enables entrepreneurs and brands to find great beauty products from local manufacturers without the need to travel.

Link: https://www.businesswire.com/news/home/20230823423096/en/Blanka-a-Platform-to-Launch-Beauty-Brands-Raises-Oversubscribed-US2M-Seed-Round

Third

H.I.G. Capital Acquires Ascent Global Logistics 

An affiliate of private equity fund H.I.G. Capital has acquired Ascent Global Logistics for an undisclosed amount from affiliates controlled by Elliott Investment Management. H.I.G. Capita will support the company by growing its strategic carrier network through organic initiatives and acquisitions.

Link: https://www.freightwaves.com/news/ascent-global-logistics-lands-new-owner

Fourth

Bankrupt Online wholesaler Boxed acquired by MSG Distributors

Boxed, which filed for bankruptcy in April 2023, has been acquired by regional distributor, MSG Distributors for an undisclosed amount. The company acquired the intellectual property of a bankrupt business to quickly scale its operations.

Link: https://www.grocerydive.com/news/boxed-acquired-by-msg-distributors/691378/

AND FINALLY…

1WorldSync Acquires PowerReviews

1WorldSync, a product content platform, acquired PowerReviews, which provides brands with ratings and reviews for an undisclosed amount. 1WorldSync claims to be the only platform that can now power all of the elements of a product detail page for brands.

Now I know what you’re thinking — PowerReviews is still a thing?

Link: https://www.powerreviews.com/events/1worldsync-acquisition/

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That’s all for this week! Till next time Watsonians.....

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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.  

Our production partner for the series is CitizenRacecar. The show is produced by Jose Baez; Production Manager, Gabriela Montequin.

To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.