Shopify is Serious About Its Distribution Ambitions

Unbundling the 6 River Systems Acquisition

By: Santosh Sankar

News broke on Monday that Shopify has agreed to purchase 6 River Systems for $450M (60% in cash and 40% in stock). The news comes three months after Shopify announced its Fulfillment Network. The network provides Shopify merchants with the ability to store and distribute products from a nationwide network of warehouses run by 3PL partners that are powered by Shopify software.

Shopify Fulfillment Network

  • One back office: Reduce errors and frustration with always up to date order, inventory, and customer data that syncs across all warehouse locations and channels—all backed by our high-level service agreements.

  • Maintain inventory integrity: Schedule regular or ad-hoc cycle counts to maintain accurate inventory levels.

  • 99.5 percent certainty and accuracy: Orders are picked, packed, and out on time without error.

  • Your eyes at the warehouse: Work with a dedicated account manager who has logistics and Shopify expertise.

Source: Shopify

The Shopify Fulfillment Network is an asset-lite approach to building a robust distribution footprint and empowers those warehousing partners who own and maintain the assets with software. The 6 River acquisition shows promise of bolstering the network further.

The State of eCommerce Fulfillment

In 2018, American consumers bought $517B worth of merchandise online (up 15% y/y), accounting for 14% of total retail sales. By our estimates, that would imply associated supply chain spend of $134B (based on Armstrong & Associates research in 2017). This is a market that can crown three, four, or even five major winners. Amazon FBA has long been viewed as the best-of-breed solution for small and medium sellers. However, it now has credible competition that’s delivering a data-driven solution that’s affordable, effective, and scalable. 

Shopify’s ambitions to expand into warehousing and fulfillment underscore the troubles small and midsized shippers have in getting their customers' products where, when, and how their customers want. Legacy options are highly analog, offer little control over the customer experience, and offer no operational visibility to optimize the distribution footprint and inventory allocation recommendations to power fast, low-cost delivery experiences. 

Unbundling the Acquisition

I can’t help but parallel the Shopify/6 River deal to the 2012 acquisition of Kiva Systems by Amazon for $775M. Over the last seven years, Bezos & Co. have rolled the famous orange robots out across its fulfillment network. At last count in 2017, the fleet is now over 100,000 strong (have heard 160,000+ from some) and benefits independent merchants using FBA. 

I have little doubt that Shopify desires to own all of the “behind scenes” workflows that its merchants require. It might be using a similar playbook now that it has 600,000 merchants selling using its eCommerce software. Activity among those accounts is also strong, considering in Q4 2018 alone, merchants added 40M products to their stores. The captive demand Shopify has provides baseline volumes into the fulfillment network.

Focus on an inexpensive and scalable network. With a line of sight to volumes, the question now is - how do we make our distribution network as efficient (think cost) and scalable (think service quality) as possible? The announcements in June bring the necessary software tooling to the equation around network and inventory optimization. Less obvious/appreciated value is in the unified experience around order management, inventory management, pick/pack, labeling, and shipping. Now, mechanization is in place that can act on the telemetry and insights to automate routine operations while allowing people to focus on higher value workstreams.

Consider that Shopify is not taking responsibility for the warehouse asset (as far as we can tell). This is a capital-efficient and collaborative approach to increasing the velocity of freight through its network. Items can be all put-away, picked, counted, replenished in a manner that “doubles productivity and accuracy.” A 6 River deployment only requires “Chuck” (the robots) without the need for special racking or conveyor systems. The simple configuration requirements allow one to scale with demand where the step function change equals the cost of a bot. This also allows for a more straightforward path to ROI vs equipment like a sorter that can cost $3M. 

Get proven automation talent into the fold. Automating materials handling workflows in warehouses is challenging and requires experienced leadership to assess situations, design systems, implement solutions, and run operations. At Dynamo, you’ll notice that our robotics investments are generally led by industry veterans who are familiar with the challenges of building and selling such products. Shopify is clearly thinking about retaining and developing talent as it offered $69M of shares and options to 6 River founders and employees. I suspect this team will be charged with developing the future of “Shopify Robotics.”

Further-to, unlike Kiva, 6 River will keep selling to third parties where it can stay abreast of best practices and market knowledge, and maintain key relationships in the ecosystem. This decision won’t leave existing customers high-and-dry but instead bring them assurance that Chuck is a long-term member of their operations. I can’t ignore the back door strategy to capture some of the technology spend of major Fortune 500 retail shippers, many of whom are underserved.

Empowering a supplier network with baseline automation. Automation is commonplace in the captive distribution centers of major retailers like Walmart and Target, and select facilities operated by major supply chain outfits like UPS, FedEx, Geodis, et al. The “belly” of the warehousing industry lacks the capex budget (consider Amazon spends $60M automating a facility), knowledge of automation, and consistent baseline volumes to justify investments in robots. That’s all about to change as 6 River’s automated guided vehicles (AGVs) help warehouses deal with high volumes of throughput on behalf of the Shopify merchant, with an operational base made for dynamic environments. Tobi Lütke, CEO of Shopify’s seems to have similar expectations, “With 6 River Systems, we will bring technology and operational efficiencies to companies of all sizes around the world.” 

If I had to guess, the Shopify Fulfillment Network largely comprises long-standing 3PLs that have been in eCommerce fulfillment for some time but didn’t have the wherewithal to handle a meaningful book of business. Speaking with A.K. Schultz, CEO of SVT Robotics, “6 River’s offering can be dropped into existing brownfields without much modification.  This is not only a cost-benefit but also a time benefit.  Existing real estate can be occupied in months instead of waiting 12 to 24 months to build.” 

As Shopify seeks a leadership position in eCommerce enablement, the 6 River acquisition certainly shows promise as it scales its Fulfillment Network. 

Thanks to Matt for editing and A.K. Schultz at SVT Robotics and Erik Nieves at PlusOne Robotics for offering perspective.