Closing Case

The Story of Shopify

As we have noted previously (see this chapter’s opening case), tradi=onal brick-and-mortar
retailers are being seriously challended by electronic commerce. In addi=on, industry sectors
that had resisted the shiD from physical retail to online retail are now making the transi=on,
largely as a result of the COVID-19 pandemic. For instance, physicians and therapists are
offering telemedicine appointments, fitness providers are offering remote sessions, and schools
and universi=es have moved classes online.

The transi=on from physical to digital is also crea=ng problems in the labor force. Specifically,
people who can work online are doing so, while workers who depend on face-to-face contact
are suffering. This problem stands out in the retail industry, one of the largest employment
sectors in the United States, with nearly 16 million workers in February 2020. As state and local
authori=es ordered nonessen=al businesses to close to slow the spread of the new coronavirus,
unemployment in the retail industry soared.

As foot traffic rapidly declined at tradi=onal retail stores, it was impera=ve for these stores to
move into electronic commerce by crea=ng online stores. Enter Shopify (www.shopify.com), a
soDware-as-a-service (SaaS; see Technology Guide 3) plaVorm founded in 2006 that enables
merchants to quickly and cheaply set up an online store and sell their products.

Shopify offers a suite of services including payments, marke=ng, shipping, inventory levels, and
customer rela=onship management tools to simplify the process of seXng up and opera=ng an
online store. Shopify’s mission is to “make commerce beZer for everyone, so businesses can
focus on what they do best: building and selling their products.” A $29 monthly fee buys a
virtual shop and all of the func=ons necessary to operate it.

Shopify began as a simple tool for businesses to set up a home page. Tradi=onally, merchants
used different applica=ons to manage different channels to reach their customers. Shopify
integrated all of these applica=ons into a single plaVorm. The idea is that no maZer where or
how a merchant sells, all sales ac=vi=es feed into one centralized back office where merchants
can see and operate the en=rety of their businesses.

As just one example, in early April 2020, Heinz (www.kraDheinzcompany.com) decided to open
its first-ever online store. Within days, Shopify helped the well-known food brand establish a
website selling its products for home delivery across the United Kingdom. The virtual shop
performed so well that Heinz quickly expanded to offer its trademark condiments and baby
food.

Very early in the coronavirus crisis, Tobi Lutke, Shopify’s CEO and founder, instructed his staff to
“delete all our exis=ng plans and re-derive them from this new reality.” Over the next three
days, employees dropped their usual jobs and focused on iden=fying what small businesses
needed the most to survive.
In subsequent weeks, Shopify rapidly deployed features to help merchants set up curbside
pickup and local delivery. The firm also announced new partnerships with Facebook and
Pinterest to expand social media as a shopping tool.

Shopify’s huge scale indicates that an en=re industry has grown up around the plaVorm. For
instance, smaller technology companies are selling soDware tools and templates that enhance
the customer experience. One firm, for example, has developed an app that automa=cally
converts prices into the local currency of the person browsing, thereby increasing the chances
that the customer will make a purchase.

Shopify has visibility across all of its merchant customers on which products and services are
trending and which apps are leading to sales. Shopify analyzes these vast amounts of data to
help businesses increase their odds of making an online sale.

Shopify does face compe==on, notably from Amazon, but also from Aus=n, Texas–based
BigCommerce (www.bigcommerce.com). BigCommerce CEO Brent Bellm stated that his
company and Shopify lead the market in electronic commerce soDware-as-a-service, but the
two firms have different strategies. Shopify’s plaVorm provides the full spectrum of soDware
that companies need to set up their online opera=ons. In contrast, BigCommerce offers a
soDware plaVorm that works with third-party soDware. Bellm contended that Shopify might be
a beZer op=on for companies with no exis=ng e-commerce offering, but that BigCommerce is a
beZer choice for established companies.

In the United States, the world’s largest e-commerce market aDer China, any purchase not
made on Amazon.com is probably made through a website powered by Shopify. The company
had the second-largest share of online retail sales in the United States in 2019 (passing eBay).
Globally, Shopify powers more than 1 million merchants across 175 countries. In total, Shopify
helped sell $61 billion of goods in 2019.

One reason for Shopify’s success is the difference between this company and its major
compe=tors, Amazon and eBay. Amazon and eBay are large enough to dictate how sellers must
operate on their plaVorms. Merchants have no op=on other than to follow the plaVorms’
stringent rules and lack of op=ons. In contrast, Shopify enables merchants to custom-build their
online stores. Shopify’s tools allow merchants to manage an e-commerce opera=on on their
own websites rather than rely on Amazon or eBay’s plaVorm.

New stores created on the Shopify plaVorm increased 71 percent for the second quarter of
2020, compared with the first quarter. The shiD to electronic commerce, due largely to the
COVID-19 pandemic, drove this increase. Gross merchant volume totaled $30 billion, an
increase of 119 percent in the second quarter of 2020 compared to the same period in 2019.
Gross merchant volume is the amount of goods that merchants sold who had their stores on
Shopify’s plaVorm.
Shopify’s financials also looked healthy for the second quarter of 2020. Total revenue was $714
million, a 97 percent increase over the same period in 2019. Net income for the second quarter
of 2020 was $36 million, compared with a net loss of $28 million for the same quarter in 2019.

A caveat: the rapid increase in the number of stores on Shopify’s plaVorm, the increase in gross
merchant volume, and the plaVorm’s sound financials are due, at least in part, to the COVID-19
pandemic. It remains to be seen what Shopify’s performance will look like aDer the pandemic
begins to come under control.

Sources: Compiled from J. Brumley, “Forget Amazon: eBay now Has a Shopify Problem,” The
Motley Fool, August 5, 2020; E. Bary, “Shopify Stock Surges toward Record High as Pandemic
Drives Booming E-Commerce Growth,” MarketWatch, July 29, 2020; “Shopify Announces
Second-Quarter 2020 Financial Results,” Business Wire, July 29, 2020; D. Balji, “Shopify Sales
Double as Merchants Forced into Online Future,” Yahoo! Finance, July 29, 2020; D. Freedman,
“Shopify Saved Main Street: Next Stop: Taking on Amazon,” marker.medium.com, July 22, 2020;
“Mastercard Research Shows Surge in Digital Payments as E-Commerce Reaches New Heights
around the World,” Business Wire, June 18, 2020; J. Koetsier, “COVID-19 Accelerated E-
Commerce Growth ‘4 to 6 Years’,” Forbes, June 12, 2020; N. Pearson and D. Balji, “Shopify Is
Enjoying a Big Moment and Hoping It Will Last,” Bloomberg BusinessWeek, June 9, 2020; G.
Khusainova, “Shopify Has a Plan for E-Commerce Domina=on and It Just Might Work,” Forbes,
May 21, 2020; “Shopify Unveils Its Consumer App: Shop,” Shopify.com, April 28, 2020; L.
Columbus, “How COVID-19 Is Transforming E-Commerce,” Forbes, April 28, 2020; C. Schoenauer,
“Buying Behavior aDer COVID-19: E-Commerce Boom Will Remain,” The Future of Commerce,
April 27, 2020; “Consumer Spend Is ShiDing to Ecommerce: The Untold COVID-19 Story,”
eMarketer, April 24, 2020; D. Bosa, “Canadian Tech Rises again as Shopify Becomes the Second-
Most Valuable Company in Canada,” CNBC, April 23, 2020; K. Bakx, “Shop Owners Fran=cally
Launch Online Stores to Stay Open during Pandemic,” CBC News, April 20, 2020; H. Torry,
“Coronavirus Pandemic Widens Divide between Online, Tradi=onal Businesses,” Wall Street
Journal, April 1, 2020; www.shopify.com, accessed July 30, 2020.

Ques=ons
Describe the various services that Shopify provides to merchants. Why wouldn’t merchants
develop these services themselves?

Discuss why and how the COVID-19 pandemic gave Shopify such a huge boost. How will
Shopify’s success be affected as the pandemic recedes?