Closing Case : The Story of Shopify

As we have noted previously (see this chapter’s opening case), traditional brick-and-mortar retailers
are being seriously challended by electronic commerce. In addition, industry sectors that had
resisted the shift from physical retail to online retail are now making the transition, 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 universities have
moved classes online.

The transition from physical to digital is also creating 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 authorities ordered
nonessential businesses to close to slow the spread of the new coronavirus, unemployment in the
retail industry soared.

As foot traffic rapidly declined at traditional retail stores, it was imperative for these stores to move
into electronic commerce by creating online stores. Enter Shopify (www.shopify.com), a software-as-
a-service (SaaS; see Technology Guide 3) platform 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, marketing, shipping, inventory levels, and
customer relationship management tools to simplify the process of setting up and operating an
online store. Shopify’s mission is to “make commerce better 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 functions necessary to operate it.

Shopify began as a simple tool for businesses to set up a home page. Traditionally, merchants used
different applications to manage different channels to reach their customers. Shopify integrated all
of these applications into a single platform. The idea is that no matter where or how a merchant
sells, all sales activities feed into one centralized back office where merchants can see and operate
the entirety of their businesses.

As just one example, in early April 2020, Heinz (www.kraftheinzcompany.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 existing plans and re-derive them from this new reality.” Over the next three days,
employees dropped their usual jobs and focused on identifying 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 entire industry has grown up around the platform. For
instance, smaller technology companies are selling software tools and templates that enhance the
customer experience. One firm, for example, has developed an app that automatically 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 competition, notably from Amazon, but also from Austin, Texas–based
BigCommerce (www.bigcommerce.com). BigCommerce CEO Brent Bellm stated that his company
and Shopify lead the market in electronic commerce software-as-a-service, but the two firms have
different strategies. Shopify’s platform provides the full spectrum of software that companies need
to set up their online operations. In contrast, BigCommerce offers a software platform that works
with third-party software. Bellm contended that Shopify might be a better option for companies with
no existing e-commerce offering, but that BigCommerce is a better choice for established
companies.

In the United States, the world’s largest e-commerce market after 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 competitors,
Amazon and eBay. Amazon and eBay are large enough to dictate how sellers must operate on their
platforms. Merchants have no option other than to follow the platforms’ stringent rules and lack of
options. In contrast, Shopify enables merchants to custom-build their online stores. Shopify’s tools
allow merchants to manage an e-commerce operation on their own websites rather than rely on
Amazon or eBay’s platform.

New stores created on the Shopify platform increased 71 percent for the second quarter of 2020,
compared with the first quarter. The shift 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 platform.

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 platform, the increase in gross
merchant volume, and the platform’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 after 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
Domination 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 after COVID-19: E-Commerce Boom Will
Remain,” The Future of Commerce, April 27, 2020; “Consumer Spend Is Shifting 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 Frantically Launch Online Stores to Stay Open during Pandemic,” CBC News, April 20, 2020;
H. Torry, “Coronavirus Pandemic Widens Divide between Online, Traditional Businesses,” Wall Street
Journal, April 1, 2020; www.shopify.com, accessed July 30, 2020.

Questions
1. Describe the various services that Shopify provides to merchants. Why wouldn’t merchants
develop these services themselves?
2. 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?