SIMON BROWN: I chat with Craig Antonie, CIO at AnBro Capital. Craig, I appreciate the time. Last week, Shopify was doing a round of layoffs, and I was reading the CEO’s letter like I often do… But what really stuck out to me was the chart included in the post. He talks about the kind of pushback we’ve seen during the pandemic when we were locked down and [doing] online shopping. It was bigger than that. It was Netflix, it was everyone [that] really benefited and it looked like that growth trajectory had jumped back a few years – some people said five years, some said 10 years. But the Shopify letter [was] to say no, in fact, is to reverse, to sort of revert to the mean.
Your meaning? Is this a good idea or maybe an isolated issue, more fair to Shopify?
CRAIG ANTONIE: Hi Simon. Thanks again for having me. I’m always happy to be here. I think it certainly seems like it was a trend that kind of accelerated and then started to reverse. This is likely true for both e-commerce and retail in general. If you look at the numbers that we’ve had recently from Walmart and Target as well, they’re all saying there’s been like a pandemic stimulus and surge that’s basically coming out of the system.
Now if you consider e-commerce as a percentage of retail sales in the pandemic, it was increasing by about 14% per year on average. We then had a very big spike during the Covid. Since then, the trend has returned to that 14% level. If you look at it in absolute terms, it was about 11% of total retail sales before the pandemic; which then spiked to around 16.5% at its peak and now it’s back down to around 14.3%, an odd level. Thus, over a two-year period, it has practically gone up and down, but it remains in line with long-term average growth rates.
SIMON BROWN: I guess that’s an important point. Also, Shopify is kind of like an Amazon for individuals, in that I can take anything I sell and use Shopify as my platform. Etsy would be another example, although you sort of use their warehousing in a sense. It’s not that the growth has disappeared, it’s just that it has accelerated. Everyone had a really good 2020, to a lesser extent a 2021, and now some normality is coming back and it’s back, as you mentioned, to 14% a year – [which is] good growth anyway.
CRAIG ANTONIE: Yes. So I definitely think it looks like that kind of Covid spark turned out to be a bit of a blip. What we’ve seen in this spike is that businesses have been under a lot of pressure. They decided to increase a lot of things in terms of spending. You see this in the Shopify numbers that were released late last week. General and administrative expenses increased by 85% compared to the previous year. R&D [research and development] expenses increased by 100%, sales and marketing by 63%.
So they made the decision to increase that spend to ensure they remain relevant to their customers and, therefore, to the market. But it is clear that this then coincided with a fairly rapid slowdown, reversion to the mean.
As a result, the numbers have been hit pretty hard because of this.
SIMON BROWN: We see this, again, in all industries. There were headlines towards the end of last week: Amazon cut its workforce by 99,000 people, I think. I guess a lot of companies really boomed during this time, and maybe overcapitalized. In some cases, this will result in layoffs of staff. Of course, if you’re big, if you’re Amazon, I imagine that’s probably an easier thing to swallow, even if they’re still laying off staff.
CRAIG ANTONIE: Yes of course. I think the problem you have is… deep down I’m thinking maybe the CEOs knew at some point that this might be the case. But the problem you would have is that the alternative could have been worse.
In such a competitive market, if you have massive, urgent demand and you don’t have a product or capacity or something like that, customers just go elsewhere. So they probably did what they had to do to make sure they kept their competitive position.
When things start to normalize, they obviously look a little bloated and need to lean back a bit – in your opinion, Amazon cutting some employees, Shopify announcing 10% of their workforce is also going to be cut.
SIMON BROWN: I understand your reasoning. They were almost between a rock and a hard place. They couldn’t do nothing; if they did anything, they might end up here.
One last quick point. We are witnessing winning seasons. You mentioned a few. If I look at the big ones, Apples, Amazons – we can even add Alphabet and Microsoft in there, and I guess non-social media to a large extent – the results have been good. They don’t pull the lights but, all things considered, like a tough economy, like rising rates and inflation and such, these companies are doing well. Apple’s growth was in the single digits, but they still had the best quarter ever.
CRAIG ANTONIE: Yes. I think the important thing to realize, and it’s something we’re focusing on quite intensely here, is that growth rates may have slowed, but they’re still going up. This growth is, arguably, a considerably higher base because you’ve had all this Covid success for many businesses.
So the ability to continue to grow after a year or two of massive ramp-up, I think, shouldn’t be lost on investors.
So yeah, rates have slowed, but they’ve topped some pretty hefty comp numbers in the previous year or two. And you’ll probably find, I guess in a year or so, that you’ll get normalized growth rates again once things get to some kind of steady state.
SIMON BROWN: That’s a great point. They compare to the second quarter of last year where yes, we had vaccines but we were overall still locked down.
A quick point, something you and I have discussed before: when considering technology investments – I’m thinking in particular of your Unicorn Fund – you want this lead. You are not looking for a quarter of the wonders. Can this business grow for many years at a steady pace?
CRAIG ANTONIE: Yes exactly. And if you look at something like Shopify as an example, they obviously work as an enabler of retail, if you will, and e-commerce. Now, to put that into context, I guess the retail market in the United States is around $6 trillion on an annual basis. This market has experienced average growth of just under 5% per year over the past 30 years. Now, e-commerce as a part of that is growing at about three times the rate of total retail sales, and that’s the space where these e-commerce providers like Shopify are really playing.
Now, Shopify estimates that its total addressable market is around $153 billion and its market share is currently only 3%. It’s very, very low. The opportunity is therefore enormous.
They spend a lot of money to make sure they can capture that, and one thing we’re watching very closely is the big investment they put into their fulfillment network (Shopify Fulfillment Network). If they can get it right, it could really be a game-changer for them.
SIMON BROWN: Absolutely. I take stock. Online shopping is just huge and I know my tendencies have changed and yes I am doing less. But I’m still here and probably doing more year after year as time goes on.
We will leave it there. Craig Antonie, CIO at AnBro Capital, I appreciate the time.
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