Dushan Batrovic, Vice President dbatrovic@differencecapital.com
Shipping-as-a-Service
Sorry, we couldn’t help but pile on to the “…as-a-service” theme
April 2015
With barbecue season fast approaching, we felt compelled to splurge on a special new cutting board
worthy of our masterful steak. Reminded of its recent IPO, we start browsing on Etsy and found the
most wonderful Heisenberg cutting board. For the non-Breaking Bad fans, we offer our sympathies.
Salivating at the prospect of cutting meat on our new board, we hit the checkout button and to our
horror, the shipping costs come in at $44.06, which is more than the actual cutting board. How can this
be? Everything is supposed to be instantaneous in the digital age. Where are those fancy drones that
Amazon has been working on? After recovering from our post Heisenberg cutting board depression, we
started doing some digging on how shipping and fulfillment actually works in the world of eCommerce.
Fortunately, we found some intriguing new tech startups that have the potential to really disrupt today’s
shipping and logistics infrastructure. Dare we call them “Shipping-as-a-Service” pioneers.
The Horror of the Shipping Cost
Source: Etsy
Difference Capital – Quick Insights
Page 1 of 6
Digital Money – April 2015
Dushan Batrovic, Vice President dbatrovic@differencecapital.com
Interesting Fact #1
Amazon spends a lot of money on shipping and that amount has been consistently growing, even as a
percentage of revenue. In 2010, Amazon had $2.6 billion in shipping costs or 7.5% of revenue. In 2014,
the number was $8.7 billion or 9.8% of revenue. We would have expected that a giant the size of
Amazon would see increasing shipping cost leverage as it scales. Not the case.
Amazon Shipping Costs as a Percentage of Revenue
Source: Amazon
Interesting Fact #2
The leading cause for cart abandonment in the online world is high shipping costs. A comScore survey
from 2012 indicated that 57% of consumers had abandoned their purchase due to high shipping fees.
And costs aren’t the only problem. Another report from StellaService said that 52% of survey
respondents would abandon a holiday purchase if the delivery estimate exceeded 7 days. So the
conclusion is that consumers deem fast and cheap delivery as a meaningful differentiator when
considering where to purchase their online goods. One of our portfolio companies, Shop.ca has figured
this out. They offer standard free shipping across Canada.
Difference Capital – Quick Insights
Page 2 of 6
Digital Money – April 2015
Dushan Batrovic, Vice President dbatrovic@differencecapital.com
Interesting Fact #3
The free shipping threshold is getting higher, not lower. Again, we would have expected thresholds to
come down over time as ecommerce volumes increase and online players look to build loyalty with their
customers. Nope. A StellaService survey of 113 major retailers in the US showed that the average
minimum spend to qualify for free shipping has increased to $82 from $76 last year. Amazon raised
their cut-off to $35 from $25, which is still reasonable. Others like JCPenny at $99 or J. Crew at $150 are
on the higher end of the spectrum, although these pricing decisions may be strategic. Consumers have
been known to raise their order size to qualify for free shipping. A WSJ article suggested that a survey of
5,800 US online shoppers showed that half have abandoned their cart if they didn’t qualify for free
shipping.
Interesting Fact #4
It’s not just about cost and speed. A European survey conducted by Copenhagen Economics showed
that delivery is a more nuanced consideration for online purchasers. Low prices are still at the top of the
list but things like convenient return options, flexible delivery, date accuracy and electronic notification
are all very important. In order to address these issues, online retailers are seeking better delivery
options. The same study from above indicated that about 95% of retailers would like to be able to offer
evening delivery to shoppers but are unable to because it is simply not available or is price prohibitive.
Saturday delivery is also high on the wish list with 85% of retailers wanting to offer this feature.
Important Features for Shopping from Same Web Shop Again
Source: Copenhagen Economics
Difference Capital – Quick Insights
Page 3 of 6
Digital Money – April 2015
Dushan Batrovic, Vice President dbatrovic@differencecapital.com
Interesting Fact #5
There are already a number of budding startups that are tackling this shipping and logistics problem in
the marketplace. The largest is probably Instacart, which you might recall is that $2 billion grocery app.
Actually, Instacart is really a supply chain/logistics company that has found a cheap and easy way to get
groceries delivered to your front door. No expensive trucks or warehouses. Instacart simply connects
consumers with a bunch of ordinary people that go to existing supermarkets to purchase groceries on
your behalf and deliver them to your door. The company is in 15 cities and contracts with over 4,000
personal shoppers. Beats the old Grocery Gateway failure that our Toronto readers will remember.
Sales for Instacart have risen from $10 million in 2013 to $100 million in 2014. We list a few other
interesting companies following the same theme below:
Shyp – an on-demand shipping app that lets you simply take a picture of the item you want delivered,
enter a destination and request a pickup. Somebody shows up at your door, packages your item and has
it delivered using existing shipping networks like UPS, FedEx, and the post office. We think this is an
interesting idea but if you’re relying on existing shipping infrastructure, can you get the best prices and
delivery times? Or maybe that’s not the point. Maybe Shyp’s value add is simply convenience – not
having to wait in line or find the right box for your item. Perhaps that’s enough of a differentiator.
Some big VCs seem to think so, having just invested $50 million into Shyp at a $250 million valuation.
Roadie – this one is kind of neat. It’s like a carpooling for cargo app that connects ordinary travelers
with people who want to ship something. The founder of the company, in a TechCrunch article recently
said, “I think to myself… somebody is leaving Birmingham right now and heading to Florida…that person,
would probably be willing to pick up some tile and drop it off at Perdido Key for the promise of a little
extra money, especially since they’d be making the trip anyway, he reasoned. And so, Roadie was born.”
The company claims that roughly 115,000 people have already applied to be Roadie drivers. We are
intrigued by this opportunity because it creates a virtual shipping and logistics network outside of the
traditional incumbents.
ShipHawk – its differentiator is shipping large, heavy or unusually shaped items. ShipHawk knows that
simple, small items can be handled pretty effectively by FedEx and UPS. But when items don’t fit the
standard mould, a bunch of specialized regional carriers need to be employed, which raises costs,
increases delivery times and generally reduces transparency. The company’s secret sauce is a backend
software platform and APIs that allow merchants to figure out the most effective method to ship
something. The company recently raised $5 million and our sense is they are growing quickly.
Incidentally, our portfolio company, BuildDirect, knows all too well the issues of shipping large complex
orders. A core element of its value proposition is its proprietary warehousing and logistics network
along with big data analytics so that it can avoid the perils of the standard large freight network.
Cargomatic – this one is similar to Roadie but applies to truckers and B2B shippers. Truckers often have
excess capacity and shippers often need to make an ad hoc delivery that is out of sync with standard
schedules. Cargomatic fills in to close the gap. So my store needs to deliver a pallet of goods across
town. The app will notify a series of local truckers that have capacity to make the trip. One of the
truckers will accept and problem solved. It’s an intriguing idea. The company raised $8 million recently.
Difference Capital – Quick Insights
Page 4 of 6
Digital Money – April 2015
Dushan Batrovic, Vice President dbatrovic@differencecapital.com
Shipbeat – this is an earlier stage European company that recently raised a $1.6 million seed round.
They seem to be somewhat similar to ShipHawk in that they are seeking to more intelligently connect
many of the existing shipping incumbents from UPS and FedEx to Deutsche Post and DHL. With visibility
into everyone’s delivery service and pricing, merchants should be able to make the best shipping
decisions for their customers.
We’ve tried to segment a few of the above companies and a few others below. The x-axis differentiates
between consumer-focused companies and business-facing companies. The y-axis differentiates by
whether these vendors rely on existing shipping and logistics infrastructure or create a virtual
infrastructure through crowdsourcing and other means.
Landscape of Shipping as a Service Vendors
Source: Difference Capital
Conclusion
Ecommerce has changed the game for so many industries that it shouldn’t be a surprise that existing
logistics and shipping infrastructure isn’t equipped to handle the online tidal wave. We pay close
attention to this theme because eCommerce represents about 10% of our asset base. Perhaps the most
encouraging takeaway from our note is the number of cool companies that have already begun to take
on the challenge of meeting ever increasing consumer demands for lower prices and faster deliveries.
We are optimistic that it won’t be too long until we are able to order our Heisenberg cutting board for a
few extra bucks in shipping and handling, not the 100% premium noted above.
Difference Capital – Quick Insights
Page 5 of 6
Digital Money – April 2015
Dushan Batrovic, Vice President dbatrovic@differencecapital.com
About the Authors
Dushan Batrovic, Vice President, Difference Capital
Mr. Batrovic brings over 10 years’ experience in capital markets and equity research. He is recognized as
a technology industry thought leader, having published reports related to software, networking, wireless
and digital media and making regular appearances in news media including the Financial Post, Globe and
Mail and BNN. Prior to joining Difference, Mr. Batrovic was a co-founder of 4Front Capital Partners and
was a Vice-President of Equity Research. Previously, Dushan was a senior technology analyst with
Dundee Securities and an equity research analyst at Canaccord Capital. Dushan graduated with a
Bachelor of Applied Science and Engineering from the University of Toronto, where he ranked top of his
senior year class. Dushan has a Master of Business Administration from the University of Toronto, where
he earned Deans’ List Honours status in both years of the program.
About Difference Capital Financial Inc.
Difference Capital Financial Inc. invests in and advises growth companies. We leverage our capital
market expertise to help unlock the value in technology, media and healthcare companies as they
approach important milestones in their business lifecycle. Difference Capital Financial Inc. is traded
under the Toronto Stock Exchange under the symbol “DCF”. www.differencecapital.com
Legal Disclaimer
This report is provided for informational purposes only and does not constitute an offer or solicitation to
buy or sell any of the securities discussed here. The securities mentioned in this report may not be
suitable for all types of investors. This report does not take into account the investment objectives,
financial situation or specific needs of any particular client. Individuals should consult with an
independent financial advisor prior to making any investment decision.
Difference Capital – Quick Insights
Page 6 of 6