As reported by Tae Kim, Barons.com
Shopify ’s ambitions keep getting bigger, and the company is making some big moves to match. In June, Shopify (ticker: SHOP) took another step toward becoming a viable alternative to Amazon.com (AMZN) by unveiling the Shopify Fulfillment Network, which gives merchants cheaper shipping, warehousing, and picking/packaging services.
Earlier this month, Shopify announced an agreement to acquire 6 River Systems, a provider of warehouse fulfillment solutions and automation robots, for about $450 million. Two founders of 6 River were previously executives at Kiva Systems, which was acquired by Amazon.com. And on Monday, the company said it offered 1.9 million class A subordinate voting shares at a price of $317.50 each. Shopify plans to use the $603 million in proceeds to strengthen its balance sheet and for opportunistic internal investments and future acquisitions.
The stock dipped a bit on the secondary offering—shares fell 2.7% to $328.82 on Tuesday. But shareholders are more generally buying into the company’s vision. Shopify stock is among 2019’s best-performing stocks. The shares have risen more than 135% year to date as investors become more optimistic about its e-commerce infrastructure platform, services, and tools.
On Tuesday, Harley Finkelstein, Shopify’s chief operating officer, stopped by Barron’s offices and made an impassioned case for Shopify’s latest growth initiatives.
Here’s an edited transcript from our interview with the Shopify executive.
Barron’s: History is littered with disappointments in the online store e-commerce software space such as GSI Commerce, Art Technology Group, and Blue Martini. How was Shopify able to thrive when so many others have not?
Finkelstein: Two things have really made us unique from a product offering perspective. One, the barrier to entry is really low to get started. Second, once you grow, we can grow with you. Most of these other software packages [failed because] they had scalability issues. At a certain point you graduated off one of those platforms and had to find a new platform.
People were starting on Shopify when they were very small. And when they grew really big, they never left the platform. That was the story behind All birds and Kylie Cosmetics.
Over the years, we’ve also realized as we grow bigger, we have incredible economy of scale. If you were to aggregate all our U.S. stores [customers’ sales volume] we would be the third-largest online retailer in the U.S. Amazon is first, eBay second, and Shopify is a very close third. What that means is when we go to the payment companies, when we go to the shipping companies or go to anyone, we negotiate on behalf of more than 800,000 merchants. Instead of keeping the economies of scale for ourselves, we distribute [the benefits] to the small businesses. I think that’s why we have been really successful.
Why are merchants choosing Shopify versus the third-party marketplaces on Amazon and eBay? It seems like many companies are deciding to use Shopify for their direct to consumer channel.
Direct to consumer is not a trend. I think it’s going to be the steady state of retail. I think consumers want to buy direct to consumer. I think most brands want to sell direct to consumer.
The best way to do a direct to consumer business is on Shopify. But I think also from a brand perspective, Shopify is unequivocally on the side of merchants. That’s who we care about. And when you sell on a marketplace, you effectively are renting customers from that marketplace. It means you don’t have direct relationship with the customer and you don’t keep the entirety of your profit margin.
In some cases, the marketplaces are not always on the side of merchants. Some of the marketplaces can decide, in a snap, to compete with those particular brands because they think they can make more money or they create a white [private] label themselves.
That is not what we’re doing. We’re giving these entrepreneurs and merchants’ brands complete independence.
Shopify Fulfillment Network (SFN) is a huge $1 billion bet for Shopify. What was the thinking process behind it? What are the opportunities and prospects?
First of all, the reason we did it is because we felt that we’re uniquely positioned. We heard from some of our merchants that it is their biggest barrier to success. They’re spending all their time shipping out products as opposed to spending time making products, marketing their products, and driving traffic.
So we thought: what if we actually take our merchants, aggregate them, and then create a network of fulfillment centers. With our software we can actually anticipate—using machine learning and A.I.—where the next order is going to come from. Merchants can effectively put [products] into this network and the network will anticipate where the orders go out, and then on their behalf, it ships them out in their own [branded] boxes.
We announced [SFN] in June. We’ve been overwhelmed with demand from both merchants, but also from third party logistics partners saying we would like to be part of this network.
Earlier this month, Shopify announced the acquisition of 6 River Systems. Why did the company buy it? How good is the automation robot technologies versus Kiva Systems/Amazon Robotics?
These are some of the smartest people on the planet thinking about automation and robotic efficiencies when it comes to warehouse and fulfillment. They came out of Kiva. We have known them for a while and we’ve always been really impressed with them. What it does for us, it allows us to accelerate our plans for SFN [Shopify Fulfillment Network].
We’re really excited. We get hardware, we get software, and we get such an incredible team.
Barron’s: So it makes things more efficient? Makes the warehouse workers more productive?
Correct. You combine humans with machines. It’s a G.P.S. for warehouses. It allows you to do things a lot faster, a lot quicker.
Consumer expectation has changed. Consumers want things in two days. They want lower cost shipping and now—even if you’re a small business just getting started on your mom’s kitchen table—if you’re leveraging the SFN, it means you can compete with the biggest retailers on the planet. That wasn’t possible three years ago.Customer Loyalty Accelerator, an innovative solution to ignite greater customer loyalty, is available for download on the Shopify App Market, https://apps.shopify.com/encorecla. A 30-Day Free Trial is offered, along with a bonus, free 3-Month Booster package. For more information, visit https://customerloyaltyaccelerator.com, contract Customer Support at 480-686-7033 or email to info@encoreincentives.com.
