Shopify has been one of the hottest companies in the tech space recently. Almost ancient for a tech company, Shopify was founded back in 2004, but didn\u2019t come to the forefront of tech until almost ten years later, culminating in its 2015 IPO. Since then, its share price has performed extraordinarily well, nearly tripling in 2019 alone. However, the COVID 19 crisis has put the company in a precarious position. If it navigates this crisis well, it could come out even stronger. But challenges lay ahead.<\/p>\n
What is Shopify?<\/u><\/strong><\/p>\n Shopify is a prime example of a platform business. It connects hundreds and thousands of merchants on one side with all the resources needed to build an e-commerce store on the other side. That includes 3rd<\/sup> parties such as developers and designers. It includes services such as transaction management, web hosting, analytics and mobile app as well as integrations with other platforms, including Facebook and Google for ads. Most importantly, Shopify offers two critical pieces of infrastructure to merchants looking to move their business digital. Firstly, it has developed its own payment gateway, Shopify Pay, while also integrating options such as PayPal, Amazon Pay, Worldpay or Stripe. Secondly, it announced in 2019 the launch of Shopify Fulfillment Network, a network of thousands of third party logistics providers, managed by Shopify, that merchants can use to fulfill their orders. In a nutshell, Shopify takes care of everything e-commerce store related for the merchant \u2013 all the merchant has to do is bring the customers.<\/p>\n Shopify makes money in two ways: Through its subscription model, via which merchants can set up their e-commerce store and enjoy various different levels of service; and through its merchant solution offering, where it charges a merchant every time it uses its Shopify\u2019s payment infrastructure or fulfilment network. While the company was primarily a subscription revenue business at the onset, merchant solutions has grown tremendously and surpassed the revenue from subscription in recent years.<\/p>\n Shopify during COVID 19<\/u><\/strong><\/p>\n The coronavirus pandemic, however, has complicated things significantly for the Company. On the one hand, its shares continue to perform. In 2020 so far, Shopify\u2019s share price is up ~60%! And a significant portion of that increase came recently in April 2020. This, one the surface, seems to make a lot of sense because the coronavirus crisis has only accelerated the digitization of commerce, and as a consequence, Shopify has seen a significant increase in merchant sign ups.<\/p>\n On the other hand, things might become a lot more challenging, particularly in the short term. One of the key concerns for Shopify is that a vast majority of its merchants are small and medium sized businesses (\u201cSMBs\u201d). Because Shopify only takes care of all the back end work needed to run an e-commerce store for its merchants, but is not actively involved in the merchant\u2019s customer acquisition, it relies on each individual merchant\u2019s ability to bring in revenue. In normal times, that is not an issue because of Shopify\u2019s merchant diversification. Unfortunately, in a pandemic, diversification does not work as well, because all merchants suffer. Small and medium businesses are hit especially hard by the disappearance of all demand during this crisis, and many might not survive, especially once the federal stimulus money dries up. To make matters worse, a large share of the SMBs on Shopify\u2019s platform do not sell essentials like food or toiletries, but rather discretionary items like high end cosmetics or clothing, items that will likely bounce back last post-recession. Unfortunately, the SMB problem exists not only on the customer side, but also on the \u201csupplier\u201d side. Many of Shopify\u2019s third party logistics providers, designers and developers also face the risk of bankruptcy, which would the service Shopify could provide to its merchants. This is particularly critical in regards to Shopify\u2019s fulfilment capabilities, as any decline in fulfilment reliability or speed might push merchants towards Amazon, despite its much less merchant friendly terms.<\/p>\n In general, the public still seems to be bullish on Shopify, valuing its stock in line with e-commerce giants like Amazon and SaaS success stories like Slack. However, both these comparisons are invalid from my perspective. Amazon benefits from an in house fulfilment capability that it built up over decades. Slack benefits from stable, large corporate customers for which it provides essential infrastructure. Shopify on the other hands, relies on third parties for its critical fulfilment network, and on SMBs offering discretionary items as revenue generators, both of which lead to a lot increased uncertainty and volatility in this pandemic.<\/p>\n Strategies post COVID <\/u><\/strong><\/p>\n That being said, while it is likely to incur significant losses, Shopify will survive this crisis. So what can it do to come out of it even stronger and better prepared for a similar situation in the future?<\/p>\n It seems that the Company itself has already come up with one potential solution: Only a few days ago, on 28 April, it launched \u201cShopify Shop\u201d, a mobile app where consumers can directly browse and purchase different products from its merchant network. In other words, Shopify has decided to help its merchant with customer acquisition, by allowing consumers to reach all of its merchant\u2019s products through one Shopify app, rather than having to download individual apps of each merchant. Unfortunately, this solution to me is at best a short term fix. In the long run, Shopify\u2019s competitive advantage and moat is not in building its own brand, or acquiring customers, or offering a seamless purchasing experience. Rather, it should invest into improving and de-risking its core platform business of connecting merchants with the resources needed to run an e-commerce store.<\/p>\n First, Shopify needs to invest heavily in bringing some of its fulfilment capabilities in house. Similar to payments, which Shopify has partly brought in house, fulfilment will increasingly become a key differentiator for any e-commerce business. Relying on a web of third party logistics providers was an adequate and fast intermediate solution, but will not suffice in the long run for such a critically important area, especially when your main competitor is fulfilment wizard Amazon.<\/p>\n Secondly, Shopify should try and shift its merchant mix to include more merchants that provide essential services like food or toiletries. Shopify could incentivize these merchants through a more flexible payment structure, where a larger proportion of Shopify\u2019s revenue is tied to the merchant\u2019s success. While this might prove a slight drag on growth when times are good, it will be an important hedge for when the market turns again.<\/p>\n Lastly, unlike with the countercyclical merchants that I just described, Shopify should more broadly shift its revenue mix towards recurring subscription revenue, away from merchant solutions which depends heavily on the merchant\u2019s success. While this might once again cause a slight revenue drag when times are good, it will not only lead to more stable revenue in downturns, but also serve as an automatic filter for merchant quality, as only merchants that are high performers will be inclined to accept a payment model where they share less of their revenue upside<\/p>\n To conclude, while it certainly faces short term challenges caused by the COVID 19 pandemic, Shopify is well positioned, via a few adjustments and changes, to become a dominant platform in the future of digital commerce.<\/p>\n <\/p>\n Sources:<\/span><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" COVID 19 presents both a significant challenge and a massive opportunity for Shopify. Will one of the recent darlings of the public markets prevail? <\/p>\n","protected":false},"author":11942,"featured_media":13156,"comment_status":"open","ping_status":"closed","template":"","categories":[],"class_list":["post-13152","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/digital-innovation-and-transformation-during-the-covid-19-pandemic\/","yoast_head":"\n\n