How Shopify became the new retail empire
A few weeks ago, Shopify president Harley Finkelstein proudly proclaimed that his company could be considered “the second largest online retailers,” adding the important caveat “if you were to think of us as a retailer.”
It’s both true, and a telling admission — something the company likely would not have said a few years ago. For a decade, Shopify has been slowly growing, describing itself as a quiet no-nonsense back-end tool to help merchants grow their businesses. And over the last year it became an empire. Now, as Shopify has created more programs to bring in new merchants, the company has become a new e-commerce default — and it has big plans to expand beyond mere DTC brands.
When the pandemic first hit, Shopify cemented its dominance. At its first quarter earnings last year, revenue increased 47% to $470 million and new storefronts grew by 62%. Cut to the third quarter 2020 and revenue skyrocketed 96% year-over-year to $767.4 million. Of course other e-commerce businesses saw similar growth. Namely, Amazon reportedly sales increasing 37% to $96.1 billion. But Amazon also saw increased pressure as the pandemic caused supply chain hiccups and heightened scrutiny of its business practices.
Shopify, however, was simply able to grow. What made it work, said Andrew Lipsman, principal analyst at eMarketer, was Shopify’s “anti-Amazon strategy.” The company has “very explicitly aligned [itself] with the merchants,” he said. “That’s worked particularly well with many retailers’ platform dependence.”
An invisible platform dependence
Indeed, as soon as the coronavirus first hit, Shopify began pushing out new programs and marketing to position itself as the platform for small businesses. It built out new templates for businesses that were once primarily offline to more easily come online. “We saw in the early weeks a real sign that these businesses that are predominantly offline are trying to get online,” Shopify’s head of retail Ian Black told Modern Retail back in July.
The company focused on facilitating retail services that businesses desperately needed. In February, only 2% of Shopify’s businesses in English-speaking areas offered in-store or curbside pick-up — by July, more than a quarter turned on those features.
“The point of collision was click and collect,” said Lipsman. “For a lot of merchants, that’s hard to digitize.” But Shopify pushed hard to make sure retailers knew they could use its platform to offer such services.
Meanwhile, it also began recruiting bigger companies trying to wrap their heads around the direct-to-consumer channel. Companies like Heinz and Chipotle began launching online websites powered by Shopify.
As more businesses turned to Shopify to go online, the platform began increasing the services it provided. Shopify Capital, the company’s business loan arm, lent more than $252.1 million in the third quarter of 2020, a 79% year-over-year increase.
Shopify also began testing out new services to further expand its domain. While still in beta, Shopify’s new fulfillment network continued to grow. The strategy was simple. Shopify seeks out old warehouses ailing retailers like Abercrombie and American Eagle used to use, transform them into e-commerce fulfillment centers “and make those warehouses more efficient,” Finkelstein said.
Currently, Shopify has about a dozen merchant beta testers, but it’s slowly expanding and adding more nodes to better cover certain geographies. A dozen is certainly small — Marketplace Pulse estimates that 85.5% of Amazon’s top sellers use the platform’s fulfillment network — but Shopify claims it is trying to get all the elements into place before opening it up more widely.
All these elements put together has made for an anti-Amazon playbook. Instead of growing an internal flywheel to rope customers into one channel, Shopify has done the opposite. “Amazon sellers have realized that a lot more people are buying from independent websites than before,” wrote Juozas Kaziukėnas in Marketplace Pulse. “Shopify happens to be a popular tool to build one.”
And with Shopify building offerings and ancillary services that allow for all that, it’s positioning itself as an invisible puppet master — simply because of its ease. As Finkelstein described on the Modern Retail podcast, the strategy is to use its growing power for good. “Now that we have so much volume — so much GMV — we give those economies of scale to the businesses on Shopify,” he said. Which is to say: Shopify has the ability to take money-losing moonshot services for merchants simply because it’s gotten so large.
Even Amazon is becoming hip to this industry shift. It has reportedly launched its own business unit, called Project Santos, that aims to mimic Shopify’s business model. But even this very attempt undermines the overall Amazon vision. As Kaziukėnas wrote, “Amazon is in the business of getting more people to shop on Amazon. Building tools for brands to host independent stores could drive some revenue and maybe even provide benefits to Prime members, but it would not fuel the Amazon flywheel.”
The new default
In the past, choosing an e-commerce platform was a difficult choice. Some would choose Magento because they wanted complete control of the experience, others chose WordPress because it was so ubiquitous and easy. But this year, “Shopify is the default,” said Mark Lewis co-founder and CTO of the e-commerce agency Netalico. “You need a reason to go to a Magento, WordPress or BigCommerce,” he said. “Otherwise, Shopify is the first choice basically.”
The huge growth has created some difficulties. “They are still struggling to keep up with the support demands of growing so fast,” said Lewis. One of the perks of using Shopify Plus — the company’s enterprise platform — is having an instant and direct line to the company if any problems arise. Before coronavirus, the wait time to reach support used to be a couple of minutes. Now, said Lewis, a multi-million dollar storefront often has to waits upwards of 20 minutes, which is a big a change from before.
But, he went on, new clients are still increasingly opting for Shopify as default. “Inbound is a lot more Shopify,” he said, “the word of mouth, the referral stuff is pretty strong.”
Now that it’s become so strong among merchants, the platform is seeking out new ways to expand. Shopify sees influencers as potentially the next e-commerce frontier. The idea, as Finkelstein described it, is “taking someone that has an audience and commercializing that audience through authentic products.” Already, celebrities like Drake, Kylie Jenner and Jeffree Starr have used Shopify for their own stores. The latter, in fact, broke the platform when his makeup line went live in 2019.
Technical hiccups aside, that may be Shopify’s next growth horizon. Last September, the company hired Jon Wexler, who oversaw Adidas’ Yeezy business, to oversee Shopify’s creator and influencer program. The hope is to merge audience and commerce — and by extension create another way for people to rely on the commerce platform.
The billion dollar project is finding “someone that has an audience and can sell directly to that audience,” said Finkelstein. “We’re going to figure out how to do more of that.”