Schumpeter

Shopify and the return of the merchant class

A Canadian tearaway is doing to sellers what Amazon has done to
buyers
Aug 31st 2019
For a class of businessman that has been out of fashion for hundreds
of years, the word merchant still has a ring to it. It conjures up
medieval Europe, with its mercers, skinners, haberdashers, guilds
and gold-buttoned liveries. It brings to mind ambitious venturers,
bankrolling crusades and conquests, opening up spice routes and
making history—for good and ill. It runs through literature and art,
from Chaucer to Shakespeare to Holbein. Then it practically
vanishes, first under the iron wheels of industrialisation in the 19th
century, then crushed by consumer culture in the 20th. Until
recently, the few merchants left sold only grain—or doom. Then
came the e-commerce era. At last, merchants are staging a
comeback.

Many of today’s e-merchants sell in a digital marketplace, akin to a

medieval town square. That mostly means Amazon, which handles
almost half of American online sales on behalf of 1.9m suppliers. Its
reputation for providing support to sellers is iffy. But it compensates
by offering them an endless stream of customers, including 100m
Prime subscribers who buy frequently and enjoy free, speedy
delivery. That persuades sellers to put up with a lot.
inRead invented by Teads
Some online retailers, however, prefer to strike out on their own, like
the craftsmen of old. They are developing “microbrands” they
peddle themselves, handling payment, delivery and other customer
relationships. But they can use assistance, of the sort that the guilds
of yore offered their predecessors. Enter Shopify, a Canadian
software firm whose value has rocketed by 180% in the past year, to
$45bn, eclipsing eBay, a better-known veteran of e-commerce. It is
a mite compared with Amazon, valued at $870bn. Nonetheless, the
Seattle-based giant has reason to look over its shoulder at the
upstart tearaway in Ottawa. For Amazon excels at making consumers
cheerful. Shopify, by contrast, is focused squarely on its merchants.

The company came about by accident. Its boss, Tobi Lütke,

epitomised the new breed of digital merchants when he set out, with
friends, to build an online snowboard shop, Snowdevil, in 2004. At
the time, selling online meant one of a few things. You could spend
a small fortune, either on developing your own sales channel or
paying someone like ibm to build one for you, which only deep-
pocketed firms could afford. Alternatively, you could rely on
Amazon, sacrifice part of your margins and, with your product being
delivered in Amazon’s boxes, cede control over your relations with
the customer. Worse still, you risked being elbowed out if it created
its own version of your wares.

Instead, Mr Lütke built his own platform. Within two years he had
switched from selling snowboards to software. In the process
Shopify glided stealthily into the e-commerce big leagues without
going head to head with Amazon, as Walmart, Target and other big
retailers have done, sometimes with soul-sapping results. Its success
has put further strain on bricks-and-mortar shops, which were
already dying in droves.

Unlike Amazon, Shopify keeps out of the relationship between

merchants and their customers. To the buyers, it is invisible. To the
sellers, who flogged $41bn-worth of stuff on its platform last year, it
can be indispensable. They range from fashionistas of the Kardashian
clan, mattress sellers, gym-wear specialists and Canadian marijuana
growers to venerable brands such as Lay’s potato chips (owned by
PepsiCo). Some have grown with Shopify from scratch to selling
billions of dollars of merchandise. No wonder Mr Lütke shares a
Schumpetarian reverence for entrepreneurs.

Shopify’s “software as a service” business is cheap to scale up. It says

it is America’s third-largest online retailer by volume of goods sold
after Amazon and eBay. It generates high margins and recurring
revenue from merchants, who pay a monthly fee for the software,
based on their sales. On top of that, Shopify collects fees for helping
run each stage of their e-commerce business, from designing an
online store and advertising on social-media sites such as Instagram
to processing payments and arranging logistics. This is the fastest-
growing part of its business, though it is less profitable than selling
software subscriptions.

As it expands, Shopify is using its clout to secure better terms for

advertising on social media, financing and payments for its clients. It
is also adapting as e-commerce rapidly changes. To reach more
shoppers, e-merchants are building bricks-and-mortar stores. They
are using e-commerce to buy from wholesalers. Shopify has used
small acquisitions, like a recent purchase of Handshake, a platform
for business-to-business e-commerce, to keep up with these trends.
In June it said it would offer merchants warehousing and shipping in
America using third-party firms that guarantee two-day delivery.
This is partly in order to prevent customers from migrating to
Amazon Prime. For the most part, it has wisely avoided throwing
down the gauntlet directly to Amazon.

The Hanseatic e-League

A longer-term challenge is to overcome its focus on the English-
speaking world, where about three-quarters of its clients are based.
As with the merchants of old, the biggest opportunities lie in faraway
lands, especially Asia. To get a toehold, Shopify has enabled 17
languages on its platform besides English, including several Asian
ones. But it faces stiff competition. Asia’s biggest markets are already
in the grip of giants such as Alibaba in China, Amazon and Walmart
in India, and local firms in South-East Asia. In poorer countries trust
in e-commerce remains fragile, making it hard to sell directly to
consumers. Yet as Harley Finkelstein, Shopify’s chief operating
officer, notes, in the early days of e-commerce, when people
recoiled at handing over their credit-card details, trust was lacking in
the West, too. In their heyday members of the merchant class were
considered grubby hucksters—at least by Europe’s medieval nobility
and clergy. That did not stop them then. And, if you take Mr Lütke’s
word for it, it won’t stop them now. ■

This article appeared in the Business section of the print edition

under the headline "The return of the merchant class"