Does Shopify have the potential to be the next Amazon?


The growing enthusiasm for Shopify seems to stem from the idea that it will be the next Amazon.

Significant reason

Shopify provides a cloud computing solution for independent merchants and companies to help them build their own e-commerce website. In addition, Shopify is increasingly providing additional services to these merchants, including payment services, credit, and now even logistics services.

On the surface, this behavior may be similar to Amazon. Specifically, Amazon offers a huge online store where sellers can offer their goods to consumers, and in turn Amazon provides them with logistics services such as FBA.

Although there are similarities, there is a key difference:

Amazon owns this platform and the seller is only responsible for sales. Shopify only provides the seller with the tools to build a store. This key difference has had a huge impact on Shopify’s economics.

No network effect

This is obvious. Amazon is like a destination, it is like a very popular online department store. The more popular Amazon sites, the more sellers they want to sell to the public. The more sellers and deals on, the more popular it is. This reinforces the platform’s own influence and constitutes a network effect that increases the value of the people involved.

Like high-traffic physical stores, this phenomenon means that Amazon can set a variety of trading terms to regulate sellers’ sales behavior. Amazon is an online retailer that charges a commission for each item (usually 8-15% plus other fees). In general, Shopify won’t. It only charges the seller a small fee.

The reality is that Shopify is neither a core nor a source of Amazon. The high-traffic physical business is the value.

One more thing to show sellers the value of Amazon, and Amazon’s superior position, is what happens if the seller leaves Amazon: the related sales will collapse because the consumer belongs to Amazon, not the merchant.

Now, what happens if a Shopify seller moves to another website for sale? The whole process will be transparent and consumers will remain in the hands of the seller. This seems to be an advantage for the seller, but for Shopify itself, this is a huge disadvantage.

The following data can more intuitively reflect the difference between the two:

 Amazon charges 26.7% of its total merchandise transaction volume (GMV) to sellers selling goods in its third-party market. In 2018, this cost was $42.7 billion, while the GMV was $160 billion.

 eBay is a more pure market with a charge of 11.7% ($10.86 billion in 2018 and $92.6 billion in GMV). Note that this is just a margin payment or a logistics commission. eBay’s operating margin is 20.7%, including stock-based compensation.

 Shopify only charged 2.63% of GMV last quarter (GMV was $13.75 billion, and Shopify charged sellers $360 million). Although Shopify is expanding its services, this ratio is actually lower than 2.68% in the second quarter of 2018 (seller fees are $245 million at GMV of $9.14 billion.)

These differences are critical and structural. For example, eBay’s gross margin accounted for 77.8% of sales, while Shopify’s gross margin was about 56% (the company’s gross margin in the second quarter of 2019 increased slightly to 57.2%). Due to the poor structure of the business model, the income statement has become more and more complicated. Therefore, if you use a similar base to eBay (not to exclude stock-based compensation), Shopify’s operating margin is -10.9% (eBay’s operating margin is +20.7%).

other aspects

The commissions charged by Amazon and eBay are quite different from those of Shopify. This also indirectly illustrates why Shopify will not become Amazon. Amazon offers consumer groups, which makes Amazon more valuable to sellers.

Having said that, the services provided by Shopify do pose a threat to Amazon. For sellers, store sales created through Shopify are much cheaper, so this also allows sellers to set lower prices. Over time, this may cause Amazon to be eroded to some extent.

At the same time, through the payment protection plan, Shopify has hindered the economic development of Amazon and eBay.

to sum up

Although the market thinks Shopify will be the next Amazon, it is obviously not. Shopify does not bring a large number of consumers to the seller, which is a key part of adding value to the seller (can charge the seller a considerable commission).

Amazon collects commissions from the same GMV ten times that of Shopify. Even though Shopify’s merchants add up to the same GMV as Amazon’s third-party market, Shopify’s business value is still far lower than Amazon’s third-party market.