This article is written by Saswata Tewari who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
“An enemy of my enemy is my friend.”
Who knew that this ancient proverb can be applied not only in wars but in the world of business too?
Businesses all over the world want to work in the most lucrative business sectors to make huge profits but it is not easy as the market will most likely have dominant players ruling the market and it can be tough to beat a competitor by building your business model, arranging investors, complying with the rules and regulations and after going through a whole lot of documentation, bringing that business into life. This whole process can be exhaustive and time-consuming and to be honest, even if one builds the business it will take time to compete with the other market players where on the other hand your competitor is just exploiting the whole market by themselves.
But if you acquire a close competitor to your competitor that can solve most of your problems leaving you with your dream business on one hand and a whole new customer base to boost your profits and enough resources to contend with your competitor. It is killing two birds with one stone. This whole method can be seen in the acquisition of Selz, an Australian company by Amazon. This acquisition is seen as an attempt made by Amazon to compete with Shopify in the selling website.
Background information
This acquisition was not the first time when Amazon had decided to grow its business in the e-commerce industry.
In the year 2010, Amazon launched Webstore, which was a full packaged e-commerce product that helped all retailers and manufactures to promptly design, build and operate e-commerce business using the technology of Amazon. Webstore became a dominant player in the market but however new competitors like Shopify and BigCommerce rushed in and enticed the customer base of Webstore by offering increasingly advanced rival products which resulted in the shutting down of Webstore in 2016.
Amazon’s revenue from Webstore was very small as it mostly came from the monthly fee that Amazon used to charge from the sellers as subscription fees which were not enough to maintain the high-class engineering that was needed to manage all the operations. The shutting down of Webstore left the whole market of selling web stores to the other players, out of which Shopify outshined. Shopify went to add features such as analytics and other small-business friendly services like accounting software, financial services and live chat. These small things compounded the success of Shopify significantly.
Now before we go further into the details of the acquisition, let us have some insights about the competitor Shopify and the target company, Selz.
Shopify
Shopify was founded by Tobias Lütke, Daniel Weinand, and Scott Lake in the year 2006. It is a Canadian multinational e-commerce company having its headquarters in Ottawa. Before becoming Shopify, the platform was known by Snowdevil, a platform that used to sell snowboards. Shopify is a platform that allows individuals to set up their stores online and sell their products. It dominates the market of selling web stores as it is designed in a way that helps businesses irrespective of their sizes. It does not matter whether you sell products online, on social media or out of your garage, Shopify is there to help you. Shopify is spread across 175 countries and helps power more than one million businesses in those countries.
In 2020, Shopify reported impressive top and bottom-line results having revenue of $978 million, which was established as 94 per cent year over year and not only this, Shopify had also left Ebay’s marketplace behind in the second quarter of 2020 and it was reported that Shopify had already reached the size of 40 percent of Amazon’s marketplace. This was big news as a couple of years back Shopify was just 25 percent of Amazon and it was not long before Amazon realized that selling web stores to businesses is a lucrative market and something had to be done to grasp the opportunity.
Selz
Selz is a 7-year-old Australian startup launched in 2013, which provides technology to help small businesses create their online stores and at the same time allows them to add payment options to existing websites. Selz has less than 50 people employed and previously had total funding adding up to $11 million.
Details of the acquisition
In January 2021, Amazon quietly acquired Selz and this acquisition was noticed for the first time in a blog post published by the CEO of Selz, Martin Rushe and this news had also surfaced on Twitter. The blog post made it clear that this acquisition will not be changing anything for Selz’s customers and things will operate in the same way as they used to.
It is very clear why Amazon acquired Selz but still the reason for specifically choosing Selz isn’t as the details of this transaction are not publicly available and no official statement regarding the terms of the deal has been made by any officials.
This acquisition can be identified as a product extension merger.
What is a Product Extension Merger?
Product Extension Merger happens when two business institutions that work in the same market but both supply different products or services, come together for a merger to serve a bigger customer base and to earn big profits. As a result of this merger, a new product or a new service is usually added to the previously existing product or service line of the organization. The customer gets satisfied with the augmented products and services provided by the organization post-merger.
A well-known example of a Product Extension Merger is the merger of Pizza Hut and Pepsico in 1977. It was obvious that the products offered by both the companies were different but to expand the reach of Pepsi, Pepsico merged with Pizza Hut by making Pizza Hut a subsidiary of Pepsico. Sales had surged by more than $436 million.
In this Amazon-Selz case, both the companies offer different products but with the help of this transaction, new augmented products and services will be provided to the newly extended customer base as a result of which in future the organization can earn huge profits.
Why did Amazon acquire Selz?
To make it easy for readers, the author has enumerated all of the reasons why Amazon could have purchased Selz:
- The foremost reason is that Amazon is getting access to such a lucrative and profitable market in 2021. Selz has a customer base of 125,000 which is far less when compared to Shopify but at the time it is enough for Amazon to kick start its new business.
- Selz was better suited for Amazon to acquire as it is more affordable than going for other direct competitors in the field such as BigCommerce which is a public traded company.
- It was previously alleged that sellers in the Amazon marketplace are kept in the dark as they don’t have any knowledge about the customers who bought their products. Acquiring a platform that will enable the sellers to list their products on their websites will mitigate these allegations and will allow Amazon to engage all these sellers in such a way that they will retain their customers.
- One of the other main reasons is that even if Amazon is a strong marketplace for the world’s largest third-party sellers, many sellers would still want to have their own web stores. As Amazon diversifies, it may want to take advantage of these scenarios and try to capture third-party sellers.
- Along with being a direct competitor, Selz has all the new technology Amazon needs to make a potential jump ahead of the competitors in the e-commerce industry.
How did it help Selz?
Previously, Selz had nothing new to offer as compared to its competitors. But with this acquisition, it’s very much likely that Selz would be able to considerably develop its offering. Not only this Selz would also be able to market more aggressively, given the significant amount of security it has now owing to the acquirer’s seemingly unending wealth.
Currently, Selz gives out three monthly pricing plans which give the user the power to create your web store using Selz’s platform or attach Selz’ smarts to an existing site. Selz also gives out a $599 monthly offer named “Do It For Me” plan under which Selz’s team of developers do all your work regarding the webstore as per the user’s specifications. It will not be surprising to notice in future if Selz starts to give out better value plans or exclusive features such as the use of Amazon storage lockers or even the Amazon delivery drivers.
Conclusion
A decade ago, sellers wanted to be on Amazon’s marketplace to get their customer exposure but now things have changed. They no longer want to be a part of the sale process in which they get lost among all the competition they face from the other sellers. They want to connect with customers, get their feedback, improve their products and have more power over the commerce journey of their products. Shopify had long been considered the alternative to Amazon because it was profitable for businesses to build their marketplace using Shopify rather than giving a cut of their sales and at the same time being ignorant about their customers using Amazon.
The acquisition of Selz by Amazon makes it clear that Amazon wants to compete with Shopify in the seller services market and this signals the next e-commerce platform wars. Otherwise, the only other reason for acquiring Selz can be to expand Amazon’s reach in Australia’s market.
One has to understand that both Amazon and Shopify have different business models. Amazon is the destination marketplace for sellers to list their products whereas Shopify helps business organizations to build their webstores. But this acquisition is only proving the point that Amazon wants a share in this lucrative market enjoyed by Shopify. Shopify challenged Amazon’s marketplace by doing the e-commerce business differently and the rampant growth of Shopify is a clear-cut signal signifying the success of direct-to-customer retail and with this acquisition, Amazon has officially entered the race competing against Shopify for winning the seller service market.
References
- https://www.borndigital.com/2015/09/04/a-brief-history-of-shopify-2015-09-04
- https://www.nasdaq.com/articles/amazons-acquisition-of-selz-speaks-volumes-for-shopif y-bigcommerce-2021-02-23
- https://www.modernretail.co/platforms/with-amazons-selz-acquisition-seller-services-may -be-the-next-e-commerce-gold-rush/
- https://www.marketplacepulse.com/articles/shopify-is-40-as-big-as-amazon-marketplace
- https://tech.co/news/amazons-selz-acquisition-is-encouraging-news-for-small-businesse s
- https://efinancemanagement.com/mergers-and-acquisitions/product-extension-merger
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