SHOP - Buy With Prime A Win-Win Deal For Shopify And Amazon

2023-09-02 02:53:28 ET

Summary

• Amazon and Shopify have announced a partnership for Buy With Prime, allowing Prime members to use their Amazon's fulfillment on Shopify shops.
• We look at what Buy With Prime is exactly and Amazon's history of trying to break into this market.
• The partnership benefits both companies, with Amazon monetizing its distribution and Shopify expanding its reach and keeping control over the payments.

Introduction

Last year in April, Amazon ( AMZN ) introduced Buy With Prime and it was generally seen as an attack on Shopify ( SHOP ). I'm long both stocks, so I saw advantages for both companies to partner. And that's exactly what was announced today.

What is this about?

In April 2022, Amazon announced the launch of Buy With Prime.

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

Amazon started with FBA merchants (fulfilled by Amazon) but it will also roll out the service to merchants not using anything from Amazon so far. This is an overview of the pricing.

Why?

Why does Amazon want to do this? Amazon sells a mindblowing amount on its own platform, and much of the $570B revenue estimate for 2023 comes from its shopping platform.

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

That's a problem for Amazon as those young but growing brands will often not sell on Amazon. That's why Amazon hopes it can take a piece of that pie with Buy With Prime. If there is one place where Amazon has a significant advantage over Shopify, it is its delivery and it wants to leverage that advantage now to take on its competitor. Shopify had a panic reaction to this, buying Deliverr. The company realized its mistake quickly and shifted quickly by selling Deliverr after just nine months. But this showed how nervous Buy With Prime made Shopify.

Shopify reacted positively to Buy With Prime initially, but changed its mind a few days later as it became clear that it would mean Amazon would do all the payments. Shopify then sent out a message to all of its merchants stating that Buy With Prime violated the terms and conditions, so it was forbidden to use it.

Amazon couldn't do much about this, which also shows the solid position Shopify has built out. Despite the fact that Buy With Prime was accepted by BigCommerce ( BIGC ) and others, it would still be seen as a failure without Shopify.

History

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

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

So, this was a new attempt from Amazon to break into shopping outside its own platform. The former attempts failed miserably and Amazon really didn't want to miss another time.

What was the problem?

This is what I wrote in a previous article about Shopify and Buy With Prime:

It's a potential risk for Shopify, but it's not as if this is a clean sweep for Amazon, contrary to what some pundits seem to suggest. The comments are pretty bearish, as if this is the end for Shopify. However, I think that it's not so one-sided.

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

One of the reasons I named that I saw no one else bringing to the discussion is that Shopify charges fees for all other payment methods. So, as for the money from the transactions, the impact could have been limited. But Shopify lost a lot of valuable data, especially when it comes to its loans business.

Shopify has consistently sided with merchants and there could be advantages for merchants using Buy With Prime.

Why this deal is so great for both Amazon and Shopify

There are two reasons why merchants would choose Amazon over Shopify: reach and distribution. We all know Amazon has a big reach and especially in the US, it's the most dominant player with a market share of almost 40% . All Shopify shops together have a market share in the low teens. Shopify is working hard on improving reach and discoverability by rolling out collaborations, better user interfaces that link to other stores and other initiatives, but there is no discussion Amazon is the place to be when it comes to discoverability.

I don't think I have to convince anyone that Amazon is a world-class logistics company, maybe even the best in the world. Competing with Amazon is suicide for most companies.

But Shopify also has many advantages for merchants. It's by far the leader when it comes to social shopping. That is why it has so many celebrity brands: Mr. Beast, Kylie Jenner, Drake, Messi and Ronaldo, Kourtney, Kim & Khloe Kardashian, Diddy, 50 Cent, Logan Paul, Justin Timberlake, Beyoncé and dozens of others.

Shopify is also great for personalizing your store and controlling the full customer experience. That's not the case for Amazon.

Now, both combine their strengths. For several consecutive quarters, there was a question on Shopify's earnings call about the negotiations and each time, the answer was that they were talking. Many will know that Amazon is a notoriously tough negotiator, but here, Shopify had very strong reasons not to budge.

This announcement is great for both. Amazon will be able to leverage the monetization of its distribution network and offer even more value to its Prime members. Shopify will benefit because it keeps control over the payments and the Buy With Prime feature could convince many more customers to buy. On top of that, maybe Amazon could also leverage its foot in the door for ads. That's again a win-win, as it will draw more traffic to Shopify shops and Amazon can benefit from high-margin ad revenue and additional fulfillment revenue.

Conclusion

From day one when Buy With Prime was announced, I argued that this could be beneficial for both parties as long as one didn't want to strangle the other. With a great compromise, this partnership is a prime example of a win-win.

The e-commerce market is still very early and will continue to grow at a fast pace for years to come. It's so big that there will be more than one winner and I would be shocked if Shopify was not one of the winners. Buy With Prime can add to that success.

As a shareholder of both, I'm very happy with this news today.

In the meantime, keep growing!

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