OTTAWA, Canada — 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, said Ric Kostick, chief executive of 100% Pure.
The natural skincare 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 US. 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,” said Kostick, who co-founded 100% Pure in 2004. “This is something I’ve wanted for years.” When Shopify said last month that it was moving into the fulfilment business — essentially charging online merchants to store and ship their products — the shares spiked and analysts began talking about the Canadian upstart as a potential competitor to Amazon.com Inc.
It’s unlikely to become a serious threat to Amazon at this point. But many analysts believe the Ottawa-based 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 mega brands like Procter & Gamble Co.
“A merchant is doing tens of millions of dollars in revenue but their fulfilment is a complete mess and that could prevent them from being successful,” said 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.”
You can customise your own website however you want. Basically, you’re empowered.
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 percent since the company went public in May 2015, making it one of Canada’s most successful start-ups. The stock has been hitting records almost daily and now has a market value of C$48.73 billion ($37 billion), bigger than two the country’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 August 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 percent 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, which amounted to over 820,000 as of June, are smaller and tend to flame out on a regular basis, creating considerable churn.
That’s where the fulfilment 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 together, making shipping faster and cheaper and gaining some of the same advantages Amazon gets from its centralised fulfilment network.
It’s partnered with logistics firms to offer the service to merchants shipping orders of 10 to 10,000 items in seven warehouses in states including Nevada, California, and Texas 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,” said Harley Finkelstein, Shopify’s chief operating officer.
[Amazon] do whatever they can in their power to squeeze money out of the merchant... Shopify is the exact opposite.
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 fulfilment service will also let them slap their brand on the shipping cartons, something some fulfilment companies don’t offer.
Kostick, who also sells his products on Amazon and uses its fulfillments network says the US company provides access to one of the fastest-growing distribution channels for beauty products in the US, but Shopify offers more control.
“You can customise your own website however you want,” he said. “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 fulfilment service. Others say it could be difficult and expensive to get out of existing contracts with standalone 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 Seattle leviathan.
“Amazon is all about trying to satisfy the customer,” said Anurag Rana, a senior analyst at Bloomberg Intelligence. “They do whatever they can in their power to squeeze money out of the merchants to give it to customers. Shopify is the exact opposite. They will do whatever it takes to help the merchant and maximise their profit.”
By Simran Jagdev; editors: Jacqueline Thorpe, Jillian Ward, Robin Ajello.