Why Salesforce had to buy Demandware: E-commerce everywhere

Salesforce paid a hefty premium and $2.8 billion for Demandware. There's a good reason for that premium: Salesforce had a big product gap without e-commerce. Can it expand beyond retail and inject commerce everywhere?

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Salesforce's $2.8 billion acquisition of Demandware plugs a big hole in its portfolio--e-commerce--and likely forces marketing rival Adobe into a similar purchase with a company such as Shopify and Magento.

According to Salesforce, Demandware will ultimately serve as the company's Commerce Cloud. Demandware and Salesforce have a series of joint customers and the latter needed to enable more e-commerce along with its customer relationship management tools.

Previously: Salesforce snaps up e-commerce provider Demandware in $2.8 billion deal | Can Salesforce continually expand, become relationship operating system?

Demandware also targets the retail industry and Salesforce has been targeting more verticals for the last three years, but success will depend on bringing more e-commerce to more industries. "It was becoming increasingly obvious that Demandware's name was coming up more and more. Customers have been asking for this," said Salesforce operating chief Keith Block. "We believe there are a number of synergies in retail and customer product goods."

To hear Salesforce execs tell it, commerce, CRM and marketing all blend together. There was also a bit of urgency due to competition with Oracle, which already has a Commerce Cloud in place.

Pacific Crest analyst Brendan Barnicle said in a research note:

In channel checks, we have heard that when Oracle wins in marketing deals, it wins because of its e-commerce solutions, which are very strong. Salesforce and Adobe did not offer e-commerce functionality. As a result, we expected that both of them would likely do acquisitions to fill that hole. Demandware is the leading cloud e-commerce solution, so it will be a strong addition for Salesforce. We believe that Adobe may still buy an e-commerce vendor like Shopify or Magento.

What Salesforce paid for Demandware indicates a bit of urgency. Barnicle noted that Salesforce's purchase is creating elevated multiples for software as a service companies. Shopify, HubSpot, Zendesk, AmberRoad, Five9, MINDBODY, Channel Advisor and AppFolio are among Barnicle's likely takeout targets.

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Block added that as Salesforce has more high-level conversations at enterprises CEOs want more of a suite and platform approach. "This was an opportunity to complete the conversation about digital transformation for customers," said Block.

The rough plan for Salesforce is to mirror its purchase of ExactTarget. Salesforce acquired that company, let it run independently for a bit and then integrated its technology throughout its platform.

Initially, Salesforce is using Demandware to target the retail industry and potentially uproot a series of custom systems that are already in place. In Demandware's annual report, it noted: "As of December 31, 2015, we had 331 revenue generating ecommerce customers operating sites on Demandware Digital, up from 204 and 267 as of December 31, 2013 and 2014, respectively."

Block and other executives didn't address e-commerce ambitions beyond retail and consumer goods, but it's obvious that the Commerce Cloud could extend to other verticals. Demandware also touches on back office processes somewhat.

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Demandware CEO Tom Ebling said Salesforce will open up conversations with larger companies as well as international expansion. Ebling said the combined company can also better target multichannel systems along with 1:1 commerce.

Should e-commerce impact every company beyond retail and direct consumer goods sellers, Salesforce's Commerce Cloud can have a much longer runway. "The walls between sales, service and marketing have come down," said Block. Toss commerce into that mix of blending functions and you get why Salesforce acquired Demandware.

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