When snowboard enthusiast Tobias Lütke launched an online sporting goods shop two decades ago, few would have guessed that his frustrations in doing so would drive him to build one of the world’s largest ecommerce companies by market cap.
But that is what Shopify has become, since Lütke set it up in 2006 as a simple maker of ecommerce websites. His aim, as he put it in a since-deleted 2019 Twitter post, was to “arm the rebels” against “the empire” of Amazon. That same year, Shopify’s market cap overtook that of another ecommerce rival: eBay.
Now, the Canadian company has been ranked 173rd in the FT-Statista list of the Americas’ fastest-growing businesses — and its challenge is to target more growth from bigger clients.
Shopify, itself, is all but invisible to consumers, but the platform powers more than 10 per cent of all online shopping in the US, producing $236bn of sales in 2023 for millions of merchants around the world. It allows brands to have an online store that appears as “theirs” rather than listing solely on Amazon, where vendors have much less control.
The company’s success stems from its unique product, says Ken Wong, software analyst at research company Oppenheimer. “It’s very rare where you have something that can cater to the smallest of the small merchants . . . while also catering to multinational . . . companies,” he says.
Lütke and his co-founders’ creation began as a simple subscription-based platform enabling merchants to create a customisable online shop with minimal expertise. Its cheap monthly fee was liberating for entrepreneurs faced with expensive and clunky options.
While most of Shopify’s merchants are still small, clients now include big brands such as toymaker Mattel and food group Nestlé.
In addition, it has succeeded in keeping merchants on its platform even as their businesses grew. It has done this by creating an “ecosystem” of services from third-party partnerships that can help to boost a seller’s business, for a fee. Wong says that this has created mutually dependent relationships.
These services include marketing, analytics, stock management, and business loans. But the dominant one is payments, including ShopPay, its one-tap checkout button. In total, payments accounted for around 60 per cent of Shopify’s revenues last year.
For Brent Ridge and Josh Kilmer-Purcell — who co-founded US goat-milk skincare products company Beekman 1802 after losing their jobs in the 2008 financial crisis — Shopify has proved crucial to international expansion.
The company, which has become one of Shopify’s larger clients, has benefited from the platform’s ability to handle market analysis, tax, customs, and payments abroad. “You can just roll out to another country using the same Shopify store that you’re using at home,” says Kilmer-Purcell. “You may be adding incrementally, but you’re not doubling the efforts.”
Shopify can typically charge a relatively high transaction fee of 2-3 per cent to small and medium-sized merchants, notes Harshita Rawat, a payments analyst at research company Bernstein — and she says that can make for “very lucrative economics”. Those fees helped revenues to increase rapidly during the Covid-19 pandemic, with growth hitting 86 per cent in 2020, year on year.
In response, Shopify’s share price nearly quintupled between March 2020 and November 2021. But all those gains were given up in the following year, as the pandemic-era boom in online shopping faded. The company also tried to take on Amazon’s dominance in deliveries, buying fulfilment company Deliverr for $2.1bn in 2022, only to sell it a year later.
Since then, however, Shopify’s share price has recovered, rising 124 per cent last year. And, while the US ecommerce sector has been shaken up by Temu and Shein — the ultra-cheap Chinese retailers that ship directly from the factory — some analysts think Shopify should be unaffected. Shopify is “far less likely to be disrupted by Temu or Shein because its customers are unique brands, like [eyewear retailer] Warby Parker”, says Wong. “They are not cheap Chinese knock-offs . . . you can’t say the same for a lot of the third-party merchants on Amazon.”
For now, the company has set its sights on large companies by offering its services individually rather than as a package, and by developing products to compete with those made by software companies Salesforce, Adobe and SAP. “That is a process that takes time, but is also expensive,” says Stefan Slowinski, a software analyst at bank BNP Paribas.
Shopify’s real challenge will come from overextending itself, suggests Slowinski. Its failure to set targets for margin and free cash flow at an investor day in December was worrying, he says, and was a sign the company may lack the necessary discipline and “revert to its old ways of potentially overinvesting”.
A further risk is that vendors opt out of using Shopify’s payments service, and switch to an alternative. “You’d have to hope that it doesn’t get disintermediated,” says Slowinski.
For example, Nautilus Designs, a UK office furniture distributor, is moving away from the platform because of its transaction fees. “When revenue is in the millions, that 2 per cent is quite expensive,” says Nautilus’ chief executive Tinkle Jain. “I’d rather pay a marketing person.”
But, for Ridge at Beekman 1802, the services and advice Shopify provides are invaluable. “For us, it’s just ease of use,” he says. “At our size, we don’t have a team who can really investigate [new technologies] thoroughly
. . . but we know Shopify has a team and they’re going to filter out the best practices to us via their platform.”
