Shopify is preparing to compete for a piece of big retail commerce

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Shopify Inc. SHOP-T is entering 2024 with a clear message: It is no longer just a platform for entrepreneurs. Increasingly, the company is putting itself in competition with some of the world’s largest sales businesses to fight for a piece of big retail commerce, in its long-held goal of becoming a hundred-year company.

Although Ottawa-based Shopify became known for helping small and medium-sized businesses and entrepreneurs each create an online e-commerce shop, over the past year the company has ramped up its enterprise offerings and is promising to spend 2024 solving long-standing problems that are keeping larger businesses away.

Expanding its enterprise offerings is part of Shopify’s strategy to get back the momentum that made it Canada’s most valuable company early in the COVID-19 pandemic. But its share price plummeted by nearly 80 per cent in 2022, as consumers cut back on discretionary spending and returned to brick-and-mortar stores.

In 2023, Shopify sold off its logistics division and cut 20 per cent of its staff, on top of 10 per cent the previous year. The company’s stock rose by about 100 per cent during the year, but it is still worth less than half of what it was at its 2021 peak.

Targeting larger clients is part of Shopify’s bid to expand its total addressable market. In a December note to investors, RBC Capital Markets analyst Paul Treiber said that expanding its enterprise offerings provides the company with “a large market share opportunity.”

In catering to enterprise customers, Shopify is now competing for market share with the likes of Adobe Inc., Oracle Corp. and Salesforce Inc. Chief revenue officer Bobby Morrison told financial analysts at an investor event in December that Shopify is already displacing rivals.

In the enterprise segment – clients with more than US$125-million in annual sales – Shopify is gaining 38 clients for each one lost. And in the large client category – those with between US$20-million and US$125-million in sales – that figure is 26 wins for every loss, Mr. Morrison said.

“They’re trying to be forward thinking and recognize that the small and medium business market won’t grow at the rate it has in the past forever,” said Richard Tse, National Bank of Canada analyst in an interview. “It’s really a risk to incumbents, because if they don’t innovate, they’re at risk of losing their clients.”

ATB Capital Markets analyst Martin Toner says Shopify is seeing success because its products are cheaper and faster to deploy than those of its competitors, and much more flexible.

Shopify launched its enterprise platform, Shopify Plus, in 2014, as a path for the company’s most successful merchants. While there was a concern that those clients would move onto competing platforms once they scaled up, the company proved capable of growing with them. Since then, the Plus platform has increasingly become an attractive option for existing enterprises hoping to expand their product lines quickly, Mr. Toner said.

“The areas where they’re having the most success are when an enterprise customer starts something new, and they want to do it as quickly and with as little capital as possible. And Shopify solutions are perfect for that because they’re quick and easy to deploy,” Mr. Toner said.

At the beginning of 2023, Shopify rolled out a series of à-la-carte retail features for enterprise clients, made for global retailers with gross merchandise volumes – or product sales – of more than US$500-million a year. These “Commerce Components” allow enterprises to pick and choose the tools they need for their commerce platforms, such as inventory management and checkout, and add them to their existing platform. Toy maker Mattel Inc. was an early user.

Shopify is also working on tools to help enterprise clients integrate with social media and other e-commerce platforms, which has been a point of friction among incumbents, Mr. Tse said. In June, the company opened its checkout portal to enterprise customers who use their own custom e-commerce infrastructure.

“Enterprises often are struggling under the weight of their own integrations. They can’t adopt new technologies,” said Glen Coates, Shopify’s vice-president of product at the company’s December Investor Day event. “A huge part of the value that we offer to our customers is that it’s everything in one place.”

Mr. Coates told investors the company added support for clients’ brick-and-mortar stores in 2023, and plans to add capabilities for local payouts for international merchandisers with locations in several countries.

During Shopify’s second-quarter earnings call in August, president Harley Finkelstein said that sales from the company’s Plus platform were growing strongly year over year and had outpaced those of its regular merchants.

For its third quarter ended Sept. 30, the company reported that Shopify Plus contributed US$44-million, or 31 per cent, to total monthly recurring revenue, the total per month generated by active subscriptions. This was down compared with 33 per cent of monthly revenue in 2022, but up from 28 per cent in 2021.

There’s a broad expectation that the company will increase the price of its Shopify Plus plan, said Rick Watson, an e-commerce expert and founder of RMW Commerce Consulting in New York – a factor which could help Shopify further boost its revenue from big retailers.

While expanding to enterprise businesses boosts the company’s total addressable market, it also adds risk: Big companies often make decisions slowly, said Mr. Watson. As a result, Shopify’s enterprise clients will have to produce more sales to justify the drop in absolute numbers of merchants coming on board, he said.