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09 May 2022
Shopify shock masks deeper trends in retail
Money & financePurchase behaviourE-commerce & mobile retail
Last week, Shopify’s earnings had the markets in gloom, and predictions of e-commerce’s boom fading as the world reopens – but this is a story of skittishness, leisure, and difficult economic times coinciding with the need for investment.
Why it matters
Has the music stopped? Market convulsions don’t make a bad business, and e-commerce platform Shopify’s testing times are more a result of difficult economic times and fundamental investments coinciding than deep changes in consumer behaviour. What this is really about, however, is that the e-commerce darlings will have to work for their growth.
Last week, Shopify reported that its sales were up (just) 22% to $1.2 billion, which was short of the $1.25 billion that Wall Street and Toronto had expected. As ever, the markets didn’t like how the frenzied rush to e-commerce appears to be slowing. It also comes at a time of a much broader tech selloff.
In the second quarter, the firm, which benefited from said rush during the pandemic and which used the acceleration in uptake to position itself as modern retail’s operating system, is now posting losses, this time of $1.4 billion.
The reason for slowing sales is harder to pinpoint.
First, 22% sales growth is still significant, while a 16% growth in Gross Market Value – a critical metric: how much trade is taking place on the platform – still shows that the numbers are heading in the right direction.
We appear to have forgotten that shopping is not simply about need-fulfilment; many people like going out shopping to browse, with many store visits ending without a purchase.
The need for investment
But this comes at a time of major investments as Shopify seeks a larger stake in what it sees as the vital, if normalised, role of e-commerce in the future. As a result it is acquiring a fulfilment start up Deliverr for $2.1billion, which better allows it to compete with much bigger rivals like Amazon on fast deliveries.
Yet Shopify is trying to learn from Amazon’s rare missteps with recent losses blamed on too many costly warehouses which have left the everything store exposed to difficult economic times. Shopify is trying to remain asset-light in contrast.
Where it goes
Amid an inflationary global economy, with costs rising for companies and, therefore, consumers, the threat of economic slowdowns or even recessions are very real in Europe. This is a worry to Shopify.
So too is the threat of Amazon’s opening up of its “Buy with Prime” service which allows other merchants to offer Amazon’s Prime delivery benefits on their own websites, this has sparked major fears inside the company. The e-commerce cat is out of the bag, and it won’t be undone; online shopping channels are now an expectation rather than an added benefit.
But the company has told investors that it can’t be complacent with the accelerated growth that had driven interested merchants towards it in the pandemic; Shopify is now investing “aggressively” in its marketing to expand its addressable market and bring on board new merchants in existing markets.
This could well lead to a high reach, awareness building campaign as it strives to differentiate from Amazon with retailers. This is also important for boosting the merchant solutions part of the business (a suite of additional services on top of the subscription, such as payments), which is slightly less profitable, but will likely set it up more robustly for a world returning to physical stores. It wouldn’t be the first internet darling to run up against the internet’s limitations.