Why Shopify Should Buy Kohl’s

TL;DR

- How I create my best opportunities by over-delivering.

- Why Shopify should acquire Kohl’s to launch the Shopi-store.

🧠 The Takeaways

Today, we’re breaking down how Shopify would buy Kohl’s and create the Shopi-store.

Move into the largest market Shopify needs to play in: Retail.

Why Retail stores are dying.

How Shopify can completely reinvent the Retail model.

+ How over-delivering has created every opportunity I now work on.

Newsletter-wide disclaimer: As always, this is not legal, financial, tax, or any other sort of advice. I have no insider knowledge on Shopify, Kohl’s, or any of the brands mentioned. And I was never here. 😉

LBAB Community - Over-Deliver in Key Moments.

All the best opportunities in my career have come from over-delivering on expectations. 

I haven’t been able to do it all the time, but when I think about the massive step functions in my career, they’ve stemmed from someone from earlier jobs reaching out.

I’m not going to sit here and lie to you and say I over-deliver in every situation. 

That wouldn’t be true or possible. The concept of over-delivering means you put an over-optimal amount of effort into one opportunity at the expense of another.

Put in the extra-extra effort on a project

Make an extra introduction (or two). 

Send an extra lead. 

Do something for free.

Does it work 100% of the time? Absolutely not.

There have been plenty of times I’ve over-delivered and… Who knows if I’ll ever see a return.

But without exception, the best opportunities in my life have come from someone I’d worked with before, where I’d over-delivered on their expectations. In a few situations, it has taken years before the opportunities came knocking.

It may have cost me a lot at the time, but the resulting opportunities have always opened up much, much bigger doors.

And at the end of the day, you need to deposit more in the bank than you withdraw.

The bigger the deposits you make (relative to what you have at the time), the more you’ll see outsized returns later.

Let’s Talk Deals

Shopify ($80bn Cap) should buy Kohl’s ($2.2bn) for their 1.1k+ retail locations to become the 10th largest retailer in the US and create a direct pipeline for their brands to sell in-store.

Shopify is already the 2nd-largest online retailer. By adding Kohl’s massive retail distribution, they can create an omnichannel experience that would make them the most valuable Commerce platform.

They can take everyone’s favorite Consumer brands and build the Shop-istore.

Physical department stores are struggling to create captivating experiences to attract foot traffic.

DTC brands don’t have the capital or inventory scale to support real retail footprints. 

Shopify can play middleman again, facilitating retail access for more brands (traditionally, a complex, capital-intensive, painful process).

+ Kohl’s won’t go bankrupt! They’ll have compelling products that shoppers want to buy and attract them to shop in stores with uniques store within a store experiences.

Deal Terms

Since Shopify is so much more valuable than Kohl’s, they have many options of what to do here. With the standard 30% premium on Kohl’s $2.2B cap it’d cost Shopify $2.9B.

Shopify could also take debt out against their current biz to finance the acquisition, but Kohl’s has $10B in Liabilities on their books that Shopify would assume in the acquisition. That can add up real fast.

Stock is another option. Shopify’s stock is clearly more valuable and has more potential upside growth.

With Kohl’s having $228m in cash, losing $27m/qtr, and paying $83m/qtr in interest expenses, Shopify has the upper hand: they could structure the deal however they want.

TLDR Terms: Split of Debt + Cash + Stock

$0.4B in cash

$1.5B in debt

$1B in stock

Shopify has $1.6B in Cash & Equivalents coming out of Q1 2024, so, this time we are unfortunately giving up more in stock than cash. Doing this deal in with more cash would leave Shopify in too weak of a position if anything were to happen to the core biz.

We could lever up the debt more if we need to, but we need to be careful that it doesn’t get out of control with the additional $10B in additional liabilities hitting the books.

Let’s Make This Deal!

Here are the 3 reasons why Shopify needs to buy Kohl’s and reinvent the retail experience. 

1) eCommerce is only 15% of US sales + Mid-Market Brands need to be in store.

eCom is growing exponentially, but it’s growing exponentially from a speck of dust. 

The cold hard truth is consumers still spend 85% of their budget in-store. eCommerce only makes up 15% of total US consumer spending. 

While Shopify is pushing Retail POS that’s geared for brands building their own retail footprint, it’s not piggybacking on where most of a scaled brand’s revenue comes from: wholesale.

The greatest challenge to Shopify’s POS strategy is that virtually all of its current brands lack the capital to support massive (or even small) retail footprints. Shopify needs to make selling in-store accessible to Shopify Plus brands. The same as they did with selling online. 

They will:

Enter a much larger market (IRL retail)

Provide an upsell opportunity + expand the market by making it more affordable to smaller brands.

Shopify will pack Kohl's with everyone’s favorite DTC brands + build a store-within-a-store concept based on data. Shopify has all the purchase data to know what customers are buying what products in what locations at what times.

They’d bring an unfair natural advantage that no other department store has. They already have brands’ sell-through data, which would help them choose whose products to stock, how much to stock, and where to stock it. 

Now, this offering really only makes sense for Mid-Market brands on Shopify ($10m+) who are looking to expand into Retail channels, but at ~5k merchants, they have enough data to fill in those 1.1k stores.

The real opportunities for Shopify:

It’s the ultimate testing ground for Retail POS and turns their stores into the ultimate case study.

It provides another Product/Service line for Merchants to grow their sales + charge new services.

(Shopify doesn’t need to buy at wholesale prices to make this work).

It greatly expands their GMV payment processing. (The real cash cow.)

At the end of the day, Shopify’s greatest value unlock is processing more payments. Adding Kohl’s $3.3B in annual sales is a major addition to their overall GMV.

More importantly, it opens up the playing field for Shopify to level up their POS integration and sell larger brands on the full Commerce suite. Making the brands that sell on Shopify more successful with fewer commerce vendors.

Takeaway: Shopify needs to meaningfully break into Retail to hit its next $250B cap growth curve.

2)  Department stores are dying because they lack the data.

Department stores have poor product selections and experiences. You don’t go into a Kohl’s anymore, because they don’t carry compelling products you want to buy.

The mistake every brand who isn’t Amazon or Walmart has made over the last 2 decades is thinking they could survive by discounting meh products.

Kohl’s is teetering on the edge of bankruptcy and has maybe 2 years to live. It’s not just them: 

Macy’s is in a take private bout.

Saks and Neiman Marcus are merging, 

Nordstom’s founding family is trying to take them private.

These bizs come down to 1 key bet. How good they are at predicting what products customers want. And more importantly, exactly the right amount.

But the fundamental challenge they (+ all other retailers) face is the lack of data on what will sell. They may have 50-100 years of their own sales data, but not for the brands’ total sell through. Retailers can only see if a brand is trending up or down in their stores, not across the board.

Shopify has that data.

Shopify can see what products are moving, and where, across 2m+ stores. And they have access to so. Much. More. Data. 

Social integrations. Sales channels. ERP/3PL inventory syncs. 

They can build 1 of the most powerful sales prediction models because they have all the data.

Combine that with the in-person sales data from owning a retailer like Kohl’s, and it gives them another valuable data point that makes the flywheel that much more powerful.

Should we launch that new product heading into Spring? What channels should we launch it in? How much should we stock? In what regions?

Not only would it make their department stores more successful and reduce their inventory risk, it would also create a whole new service offering where no matter what channels a brand uses Shopify to sell in, it would be enormously valuable.

And that unique service offering is how you would win + keep Fortune 500 brands.

Takeaway: Data is the key to revolutionizing Retail.

3) Shopify Can Reinvent the Department store model

Shopify keeps making the same mistake over and over again as it tries to create new sales opportunities for its brands.

It introduces more online competition for its brands. At a certain scale, anyone else spending $$$ on online ads is driving up the ad prices for other brands selling on Shopify.

The Shop App, Audiences, and a Shopify digital marketplace are all going to introduce more online competition. Exactly what Shopify brands don’t need. Scaling brands need more sales opportunities in the largest pools of customer demand.

What those brands really need is a better on ramp into Retail. And in Shopify’s unique position, they could reinvent the Retail biz model.

Retail has always been a miserable experience for everyone involved. The problem steps from the core model of:

Buying a product from another biz at wholesale pricing

Reselling that product at the list price to the end consumer.

But it leaves:

The retailer with low margins + an incredible amount of inventory risk (aka why most retailers go bankrupt). 

The brand with incredible capital risk + low control working around the retailer's constraints.

The challenge is for retailers to be more profitable, but to do so, their incentives become misaligned with the brands’.

The delta between how much retailers pay the brand for a product vs. how much they sell it for to the customer = the retailers’ profits.

Shopify doesn’t need to operate within this system and has the opportunity to disrupt the entire retail model. Shopify makes its money from charging brands feature (subscription) + service (payments/loans) fees to sell products.

It would become more complicated than Shopify's current pricing model, but they can align incentives, so they charge brands a set of fees to sell in Shopi-stores.

Result: the more the brand sells, the more Shopify makes.

Shop can monetize:

In-store design fees (Costs $XX to have a 30x30 micro-store)

In-store design placement (location matters)

Logistics fees (Placement costs)

Analytics fees (Instore reporting + tracking)

Inventory Loans

Payment processing fees (Bread & butter)

The massive difference in this model that solves the classic Retail death trap? It’s a cash flow optimization vs. flipping products while holding massive Retail + Labor overheads. 

Shopify can offload some of the upfront real estate expenses by charging brands to design the space (a massive real estate investment that usually doesn’t get paid back for decades). 

But the real win: Shopify doesn’t need to outlay the cash to buy + hold inventory. 

They can capture service payments upfront + have a recurring model SaaS fees + payment fees on the backend. The inventory risk remains with the brands. Shopify is providing the scale + brand co-op to make it more affordable to enter retail.

Also, Shopify’s data instantly creates additional services opportunities.

Shopi-store has all the seasonal purchasing data to advise brands.

Brands could offer in-store pickups + returns nationally.

Tying in-store + online advertising would rival Walmart, Costco, and Target.

They’d have the scaled footprint of the largest retailers + the data cutting-edge SaaS.

Takeaway: Retail needs eCom’s data. eCom needs Retail’s scale.

Final Thought

Why would Shopify take the nightmare that is in-person retail? Because they don’t have the 50 years to wait for consumers to completely shift to online shopping. (Which I’m not bullish will happen anyway).

If Shopify could execute this, they’d sit on a goldmine:

Recurring SaaS for Retail

In-store advertising

Additional debt services (that actually make sense)

More POS sales for owned retail

Ideas I haven’t thought of yet

The most valuable of them all?

Expanding their real business: Payment Processing.

Shopify’s destiny is becoming the digital version of NCR (tech behind cash registers). But to fulfill that destiny, they need to move more aggressively into in-person retail, because it’s where the vast majority of the payments are being processed.

The real reason I want to see this happen is because they can reinvent retail to make it more accessible for brands. The same way they did for eCommerce. 

Now it’s time for Shopify’s next step function: provide incredible innovation for brands + customers' largest opportunity. And start conquering the 85% of the remaining household consumer spend.

Whether Shopify literally buys Kohl’s or builds the infrastructure that enables this for brands…

The next 2 decades of brands’ success hinges on better Retail access for all.