Shopify, Physical POS, and Buy with Prime.
Shopify reported earnings last week. While they beat revenue and earnings estimates, weak guidance for 2023 sent the stock down after hours. The days of being a pandemic darling are long gone, and investors’ focus on profitability is unfortunate for a company that has to spend heavily to succeed in delivery. Shopify also has to contend with three other problems: Amazon, the slowdown of e-commerce growth in a post-pandemic world, and a potential recession on the horizon. This is obviously a non-ideal combination for a company initially built to help small businesses sell online. I won’t spend much time addressing the possibility of a recession, but Shopify’s price increases and increased attention on Shopify Plus are promising ways to help mitigate a slowdown. The enterprise opportunity was emphasized on the most recent earnings call with the release of Commerce Components (link), a modularized version of Shopify the enables enterprises to keep their existing tech stack and use only the Plus features they want. This should reduce friction in the selling process and lead to revenue expansion over time.
Physical POS: Hedging against an E-commerce Slowdown
“Now that physical retail is reopening and retail in general is rebalancing, the bigger position we’ve earned and the trust that we’ve earned with our merchants represents a huge opportunity for us. The hundreds of thousands of businesses that shifted their business to Shopify during the pandemic and stayed with us since can now take advantage of our powerful retail point-of-sale offering a unified view of their sales online and offline” - Harley Finkelstein, Q1 2022 Earnings Call.
At the risk of pointing out the obvious, e-commerce was already experiencing secular growth pre-pandemic. Shopify’s focus was on powering online businesses, not physical ones. This made perfect sense; the raison d’être of the company was that starting an e-commerce business was far too challenging. Simplifying that process meant Shopify could both ride e-commerce tailwinds and enable more business creation than would’ve occurred otherwise. Physical businesses didn’t present the same opportunity, and the compelling POS opportunities were in industries where a massive shift online was unlikely. There’s a reason Toast serves restaurants and not bookstores.
Covid accelerated e-commerce growth, but in an unusual way. Businesses moved operations from in-store to online not because of a permanent strategic shift or gradually changing customer preferences, but out of necessity. In many cases, Shopify went from handling none of a merchant’s business to all of it, but only temporarily. Once these businesses re-opened, the only option was for Shopify to lose some of their GMV and corresponding payment volume. The combination of an e-commerce slowdown and businesses reopening explains why a physical POS is now such a compelling product to offer. Having a presence at retail locations lessens the effect of this slowdown and gives Shopify a chance to continue processing payments for all of a merchant’s GMV. Going forward, it’ll also reduce churn for these merchants. It’s harder to switch off a service when it handles not just your online business, but your physical one, too.
The Amazon Threat: Buy with Prime
“So I encourage you to think about the company’s growth, not just simply in merchant count, but merchant count and GMV and especially our attach rate, which really does reflect the amount of value that our merchants are taking and their usage of those products” - Harley Finkelstein, Q4 2022 Earnings Call.
The threat to Shopify on everyone’s mind is posed by Amazon, which recently rolled out ‘Buy with Prime’, letting merchants offer prime shipping on their own websites. The benefit to merchants here is clear: faster shipping increases shopper conversion. The threat to Shopify is also clear. Part of the reason Shopify is so valuable is because it’s not just a subscription business, but a payments business. It’s also a business investing heavily in building out their own delivery capabilities. Buy with Prime not only uses Amazon delivery, but also cuts Shopify Payments out of the loop. Tobi Lutke often emphasizes that when merchants succeed, Shopify succeeds. Buy with Prime shifts this to when merchants succeed, Amazon succeeds. Increased shopper conversion no longer means higher Shopify Payments numbers, but instead benefits Amazon’s Prime business. Additionally, Shopify can only scale its delivery business so fast. Amazon’s delivery expertise has the potential to hurt current Deliverr/Shopify Fulfillment Network numbers and the terminal value of these business segments. These delivery investments, paired with investors’ current focus on profitability, puts the company in a challenging position. It’d be easy to trim back investments and appease investors now, but it comes with the risk of making it significantly easier for Buy with Prime to succeed. Cutting delivery investments now makes it less likely that Shopify Delivery can become a real business, and makes it more likely that Shopify Payments comes under increasing pressure. The upshot of all of this would be that Shopify shifts from a subscription + usage based business to just a subscription business, which is still valuable, but not nearly as valuable as some combination of the two.