Shopify: A Pandemic Proof Platform?

COVID 19 presents both a significant challenge and a massive opportunity for Shopify. Will one of the recent darlings of the public markets prevail?

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’t 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.

What is Shopify?

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 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 – all the merchant has to do is bring the customers.

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’s 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.

Shopify during COVID 19

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’s 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.

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 (“SMBs”). 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’s customer acquisition, it relies on each individual merchant’s ability to bring in revenue. In normal times, that is not an issue because of Shopify’s 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’s 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 “supplier” side. Many of Shopify’s 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’s fulfilment capabilities, as any decline in fulfilment reliability or speed might push merchants towards Amazon, despite its much less merchant friendly terms.

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.

Strategies post COVID

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?

It seems that the Company itself has already come up with one potential solution: Only a few days ago, on 28 April, it launched “Shopify Shop”, 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’s 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’s 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.

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.

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’s revenue is tied to the merchant’s 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.

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’s 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

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.






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Student comments on Shopify: A Pandemic Proof Platform?

  1. I also saw this development by Shopify to release a shopping app and was impressed! I tried it out and it asked me to share all of my gmail email contents in order to know what shopify store fronts I had bought from in the past. Even though Google had apparently approved it and a third party audit had been done and I am normally pretty liberal with data sharing, this was too much for me. Why couldn’t they just use my email to identify what shops I had emails from? Also, their app appears to be a new version of “Arrive” which had been used just for tracking packages. If I were shopify, I would aggressively use their wide presence among SMBs to try to compete with Amazon as a more shop-friendly platform competitor and not only have an app, but also a standalone website. Their app is new, and has a long way to go to promote discoverability of new products across storefronts, but if anyone can compete with Amazon, maybe it’s Shopify!

  2. Nice analysis on Shopify and the risks it bears re. concentration of the customer base (not in terms of few big customers, but in terms of mostly SMBs in non-essential industries), that is exposed to liquidity crunch. One point I’d explore more is the one related to logistics, as in a period of uncertainty I would prioritize flexibility and working with 3PL exactly to have a variable cost (since demand will be uncertain). Going forward, Shopify should anyway be well positioned to support eCommerce companies and compete with Amazon, especially if it could add extra services like an advertising targeting capability (Amazon Advertising is growing 30% YoY, exactly as they can leverage purchase data). Shopify could have a service where sellers that opt-in could both receive / give data (non-PII) from / to other sellers, so that advertising could be targeted to people with highest purchases likelihood (based on purchases of complementary processes or overall purchase behavior of look-alike consumers).

  3. Great article! Wow the Mega Shopify app is genius! I really believe that the only company capable of disrupting the giant Amazon is Shopify. I think this solution addresses only one of the challenges though: loss of customers to AMZ. It should still solve the problem of declining commission revenues due to decline in total GMV on its platform (the cyclicality problem will persist post COVID), and relying on subscription revenues might not be enough. One way SHOP can address this issue is by providing marketing/CRM services to its SMBs (similar to Mailchimp and Klaviyo) which helps its customers acquire more customers leveraging existing data that Shopify already collects on its website leading to an increase in GMV and hence revenues for Shopify. Shopify can monetize these services in a competitive way that SMBs don’t mind paying this additional fee which would still be more affordable relative to services provided by Mailchimp for example.

  4. Great article C Xu! Thanks for sharing – I agree with the recommendations you have developed.

    Trust is vital for a platform such as Shopify. Multiple sites were added to the platform during this pandemic related to covid, most of which were not real. The company should be wary about letting these kind of sites and should worry about the impact it would have on its reputation. One way to deal with this is to require more information when registering to the platform to very the sites are legit (right now all you need is an email address and a card) – this could registration process less seamless but would ensure a certain level of quality.

  5. Thank you for the interesting article. I agree that focusing on increasing fulfillment capacity is more important and dedicating some resources on Shop might not be a good option in the short-term. While Shop would have a high upside potential and I’m personally curious to see whether Shopify can be a solution to the problem that SMBs are facing when use Amazon (that we saw in XFire case), it would require new resources such as branding, marketing, and end customer services. In addition, the company is facing the lack of fulfillment capacity, which might deteriorate existing customer experiences and let them leave from Shopify. Therefore I believe the company should prioritize an increase of fulfillment capacity.

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