For years, Amazon (NASDAQ:AMZN) has ruled the e-commerce space, as it benefitted from being an early entrant. But after more than 20 years, it has found a contender worthy to give it a tough fight in its own game. Shopify (TSX:SHOP)(NYSE:SHOP) entered the e-commerce space in 2006 with a different strategy, and it is now providing merchants a viable alternative to Amazon.
Amazon’s growth story
Amazon is the preferred marketplace for consumers where they can find everything from A to Z at a lower price. When it opened the Marketplace in 1999, third-party sellers flocked into the platform. The platform helped them reach out to a large consumer base, boost sales volumes, and fulfill orders.
But its business model doesn’t give merchants the liberty to highlight their brand in their packaging or on the e-commerce platform. All they can add is their product and price. Moreover, the competitor product will be displayed in suggestions. The only branding that users see on the platform and delivery boxes is that of Amazon.
After the order is placed, Amazon handles everything from payment to delivery to after-sales customer service. For all these solutions, it charges merchants up to 40% of their sales. Moreover, it prohibits merchants from selling their product at a lower price on another platform. However, it removed this clause in 2019.
Even with high charges, retailers were happy as they got volumes. But the problem started when Amazon misused its monopoly to rob merchants of their customers. Amazon serves merchants, but its Marketplace serves end-users. The Marketplace identifies top-selling products and manufactures cheaper copies of the same under the AmazonBasics label. Allbirds exited Amazon’s Marketplace when the e-commerce giant made cheaper copies of its premium quality shoes.
The Shopify twist to Amazon story
Many premium brands like Allbirds flocked away from Amazon and nested their online stores on Shopify. Unlike Amazon, Shopify works on the backend. The end-user will not even know that they made their purchase on Shopify, as it allows merchants to do the branding, designing, pricing, and marketing of their store. Their product is not displayed against their competitor’s products.
In a Twitter remark in 2019, Shopify CEO Tobias Lutke said, “Amazon is trying to build an empire, and Shopify is trying to arm the rebels.”
That is what happened in 2020. For the first time, Shopify’s Black Friday/Cyber Monday weekend sales surpassed sales of Amazon’s third-party sellers by $300 million. This shift shows that retailers now have an alternative to Amazon Marketplace. What has triggered merchants to move to Shopify was Amazon’s commissions, which surged from 19% of sales in 2015 to 30% at present.
Shopify has only one customer, and that is merchants. It is empowering merchants with solutions like shipments, buy now and pay later, business loans, order fulfillment, and marketing. Merchants can choose which solutions they want according to their budget.
Both Shopify and Amazon will co-exist
Amazon is now feeling the pinch of competition from Shopify. But Shopify doesn’t want to compete but co-exist. Just like brands are displayed on their customized outlet and on Walmart, they will appear on Amazon and Shopify.
Riding into the future, I believe Amazon will become a marketplace for commoditized products where consumers are sensitive to price. Shopify will become a marketplace for premium brands that want to stand out.
While Amazon is already leading the U.S. e-commerce market with a 37% share, Shopify has immense growth potential to increase its 6% market share.
Shopify stock is currently trading at $1,500. Some bullish analysts believe that the stock can touch the $2,000 this year. While there is no doubt the stock can hit this mark, the stock is not a good buy at a $1,500 price. The stock will see some correction, as the market recovers from the pandemic.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify and Twitter. The Motley Fool owns shares of and recommends Amazon, Shopify, Shopify, and Twitter and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon.