Shopify looking to rival Amazon
Canadian company makes inroads in fulfillment business
Same-day shipping is becoming the norm for online shoppers but for smaller merchants it can be a logistical nightmare.
That’s where Shopify Inc. can step in, says Ric Kostick, chief executive of 100% PURE.
The natural skin care company ships up to 5,000 orders a day from its own warehouse in San Jose, California. That works fine for customers on the West Coast but it can take up to a week to get its bamboo blur powder and coconut shower gel to the rest of the U.S. The company contemplated setting up an East Coast warehouse but the prospect was technically daunting.
“The hardest thing is programming the technology to route the packages the right way and route the orders based on what a customer orders and what inventory is available at each site. Shopify has built the technology to calculate this,” says Kostick, who co-founded 100% PURE in 2004. “This is something I’ve wanted for years.”
When Shopify said in June that it was moving into the fulfillment business — essentially charging online merchants to store and ship their products — the shares spiked and analysts began talking about the upstart as a potential competitor to Amazon.com.
It’s unlikely to become a serious threat to Amazon at this point. But many analysts believe the Canadian company’s decision to add logistics to its range of online services is smart because it could help keep customers loyal, fend off competition and create an additional source of revenue. The move also could potentially pry small merchants from Amazon, which is focusing more on megabrands like Procter & Gamble Co.
“A merchant is doing tens of millions of dollars in revenue but their fulfillment is a complete mess and that could prevent them from being successful,” says Taylor Sicard, a former Shopify employee who now runs a company that helps merchants set up e-commerce businesses. “It is a massive opportunity for Shopify.”
Founded in 2006, Shopify had a simple pitch: Pay us $29 a month and we’ll give you all the tools required to start an online business. Many Shopify customers fail, but the more successful they are, the more money Shopify makes through transaction fees and higher-priced subscription tiers. Its Shopify Plus premium service, which counts Kylie Jenner, The New York Times and 100% PURE as its customers, can cost at least $2,000 per month.
Investors love the model. Shopify shares have soared more than 1,800% since the company went public in May 2015, making it one of Canada’s most successful startups. The stock has been hitting records almost daily and has a market value of $37 billion, bigger than two of Canada’s oldest financial heavyweights, Manulife Financial Corp. and Canadian Imperial Bank of Commerce.
But Shopify has struggled to make a profit and is poised to report a net loss of $35 million on sales of $320 million for the second quarter on Aug. 1, according to the average of analyst estimates compiled by Bloomberg.
As the company matures, meanwhile, it will be harder to sustain the average 74% year-over-year revenue growth rates it has managed over the past three years. There are also concerns that Shopify relies too heavily on a few, large merchants that use its premium services. Most of the company’s customers, over 820,000 as of June, are smaller and tend to flame out on a regular basis, creating considerable churn.
That’s where the fulfillment service comes in. The company has pledged to negotiate low rates with warehouses and shipping companies, then pass those savings on to its customers. In the future, Shopify could pool shipments from different merchants, making shipping faster and cheaper and gaining some of the same advantages Amazon gets from its centralized fulfillment network.
It’s partnered with logistics firms to offer the service to merchants shipping orders of 10 to 10,000 items in seven US warehouses in the initial phase.
“Right now it is really important that we invest in the right growth opportunities for the future and not necessarily take our foot off the gas,” says Harley Finkelstein, Shopify’s chief operating officer.
Many merchants prefer using Shopify because they can create a brand on their own website, rather than being subsumed into an Amazon-style marketplace. The new fulfillment service will also let them slap their brand on the shipping cartons, something some fulfillment companies don’t offer.
Kostick, who also sells his products on Amazon and uses its fulfillment network says the U.S. company provides access to one of the fastest-growing distribution channels for beauty products in the U.S., but Shopify offers more control.
“You can customize your own website however you want,” he says. “Basically, you’re empowered.”
Jennifer Harper, who also sells sustainable cosmetics through Shopify, says she will wait until Shopify sorts out any kinks before trying the fulfillment service. Others say it could be difficult and expensive to get out of existing contracts with stand-alone services in the short term.
Shopify says it could eventually build its own warehouses. While Shopify’s finance chief, Amy Shapero, has said that the company will be able to offset the cost with fees for the new service, some analysts say revenue will be limited at first because Shopify will need to offer discounts to lure merchants.
Amazon may have little to fear from Canada’s most valuable tech company at this point. Still, Shopify offers a serious alternative to the U.S. leviathan.