Sent Items #140: Wednesday, June 28, 2023

Hi!

Plenty to discuss so let’s get right into things:

1. I’ve wondered why some were so passionate about Buc-ee's. I finally went for the first time last month. It’s a paradise for those of us who enjoy having options. 37 different types of bottled water; 15 types of milk for your coffee; 8 ways to get a chopped brisket sandwich; 200 types of nuts and jerky; and 120 gas pumps (truth!)

   So of course I went down a rabbit hole to learn the history of the brand, employee pay (Store GMs make $150k-$225k+), and store economics (gas is only 60% of sales - much lower than a typical gas station— food margins are much greater than gas). But then I stumbled upon this Tweet (link) of how this guy in 2020 walked into a Buc-ee's, spent $3,000, and walked out with an unofficial partnership to sell all of their products online. Incredible story of entrepreneurship.

2. Speaking of entrepreneurship, the story behind Hoka is an incredible one too (link). Yes, those ugly sneakers you see everywhere. In 2012, Deckers acquired Hoka for approximately $1.1 Million. At the time, Hoka had less than $3 Million in sales. In 2022, Hoka did $1 Billion in sales and is nearing $2 Billion. Not often you find large company acquire small company and see it succeed.

3. Can’t write this newsletter without discussing Shopify. The Information does some great long-form reporting on eCommerce and published this story on why Shopify ditched fulfillment (link). It hits on both Shopify's internal decision-making and the decision to sell, as well as some of the red flags related to Deliverr that came up when Shopify was evaluating the deal.

   Some glaring details: Deliverr lost up to $5 per delivery ahead of the Shopify acquisition. As losses mounted, the Executive team discussed several proposals to curb costs, including scaling back plans to build out two million-square-foot warehouses, one in Southern California and another in New Jersey, and to improve automation at a 550,000 sqf warehouse in Georgia. The cost of getting the three warehouses fully equipped for the 2023 holiday rush under the original plan was expected to run between $500 million and $600 million.

   Compared to Amazon, who from 2019 to 2022 alone has invested $88 Billion in transportation and fulfillment CapEx, Shopify was little more than a rounding error.

   The fulfillment network and Deliverr units were pacing to bring in between $200 million and $250 million in revenue this year, while 6 River Systems set a revenue goal of $80 million to $90 million for 2023.

   Bought for $2.1 Billion in cash last year; sold for a 13% stake in Flexport, roughly equivalent to $600 Million (based on the $1.5 Billion impairment charge they said they would take). A debacle, and glad it’s now Flexport’s problem.

4. Another thought-provoking piece from Stratechery (link). Made me think: What if Amazon only allowed Prime members to place orders? Do non-Prime members get equivalent service (“free rider problem”)? I suspect these are questions regularly discussed inside Amazon. It likely makes more sense for Amazon to optimize its logistics around the delivery promises it makes for Prime customers, instead of carving out a less efficient delivery mechanism for non-Prime customers that would actually increase overall coordination costs.

5. OpenStore (link). What a strange, strange business. I have been confused all week about this one. This past Monday I took to Twitter and to Founder Keith Rabois to ask a few questions. He was kind to respond, but his responses left me scratching my head even harder. The questions start around here (link) and there’s a series of about 10 back and forth.

   While I’m not a Web UI/UX guy, the homepage (link) has a very random collection of products. Doesn’t appear to be any synchrony in the selection —> skirts to yoga pants to inflatable baby seats, drones and water flossers. People need a reason to know who you are to actually show up. Successful businesses ought to be famous for something.

   The thinking with OpenStore, is that they could combine orders from many brands into a single carton, to save on fulfillment and shipping. I believe OpenStore has acquired 40 brands. The concern is unlike Amazon where it is conceivable to purchase an iPhone screen protector, AA batteries, laundry detergent, and an extension cord in one fell swoop, the tail of products OpenStore has are just not common purchases altogether, let alone together. Further, Amazon placing these items into a single carton isn’t as tough when they control the supply chain. Doing the same with disparate Shopify brands, most of whom are disorganized and sporadic will be near impossible.

   The closest thing I’ve seen that could work is Amazon’s Buy with Prime, where it is possible for Amazon to offer Prime delivery, combining Amazon orders and multiple separate Shopify (i.e. DTC) orders in a single carton. But they have density to do so, and trust to be visible on brand websites. The brands I see on OpenStore are uninspiring.

   His responses were all so odd. When I asked he said they have "specialized agreement with a 3PL" (link). There's no way one 3PL is consolidating all of those brands. I have so many questions, but at the end of the day, 'this ain't gonna work'.

   This feels like a model that Private Equity guys thought looked great in Excel - shared service model, reduced marketing, combining fulfillment and shipping costs, etc etc etc. But as Warren Buffett says, “Risk comes from not knowing what you're doing.”

   My biggest takeaway: This ain’t gonna work.

6. Finally - UPS. Yes, there’s a greater than 0% probability that they strike at the end of July. Despite mainstream media beginning to cover it like it’s going to happen, it appears to be unlikely. Negotiations have been progressing relatively smoothly, in stark contrast to the severe contentiousness in 1994 or 1997. Today, both sides have already agreed on all 55 noneconomic issues; we believe the key issues left are related to the 22.4 "combination" workers and general wages (link). A strike would be devastating to UPS, and to the U.S. economy as a whole. UPS has a 24% market share in domestic parcel volume, and its trucks carry 6% of U.S. GDP daily.

Cheers!

- Matt

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