Shopify and the return of the merchant class
The old fashioned merchant – who was almost crushed in the 20th century – is staging a comeback, not in the real world, but on the internet. There are two ways that merchants can ride on the internet. First up is Amazon: “Many of today’s e-merchants sell in a digital marketplace, akin to a medieval town square. That mostly means Amazon, which handles almost half of American online sales on behalf of 1.9m suppliers. Its reputation for providing support to sellers is iffy. But it compensates by offering them an endless stream of customers, including 100m Prime subscribers who buy frequently and enjoy free, speedy delivery.”
Secondly, merchants can strike out on their own: “Some online retailers, however, prefer to strike out on their own, like the craftsmen of old. They are developing “microbrands” they peddle themselves, handling payment, delivery and other customer relationships. But they can use assistance, of the sort that the guilds of yore offered their predecessors. Enter Shopify, a Canadian software firm whose value has rocketed by 180% in the past year, to $45bn, eclipsing eBay, a better-known veteran of e-commerce…Amazon excels at making consumers cheerful. Shopify, by contrast, is focused squarely on its merchants.”
Shopify’s accidental birth explains why it has became a valuable route-to-market for merchants who are wary of Amazon: “Its boss, Tobi Lütke, epitomised the new breed of digital merchants when he set out, with friends, to build an online snowboard shop, Snowdevil, in 2004. At the time, selling online meant one of a few things. You could spend a small fortune, either on developing your own sales channel or paying someone like IBM to build one for you, which only deep-pocketed firms could afford. Alternatively, you could rely on Amazon, sacrifice part of your margins and, with your product being delivered in Amazon’s boxes, cede control over your relations with the customer. Worse still, you risked being elbowed out if it created its own version of your wares….
Mr Lütke built his own platform. Within two years he had switched from selling snowboards to software. In the process Shopify glided stealthily into the e-commerce big leagues without going head to head with Amazon, as Walmart, Target and other big retailers have done, sometimes with soul-sapping results. Its success has put further strain on bricks-and-mortar shops, which were already dying in droves.
Unlike Amazon, Shopify keeps out of the relationship between merchants and their customers. To the buyers, it is invisible. To the sellers, who flogged $41bn-worth of stuff on its platform last year, it can be indispensable. They range from fashionistas of the Kardashian clan, mattress sellers, gym-wear specialists and Canadian marijuana growers to venerable brands such as Lay’s potato chips (owned by PepsiCo). Some have grown with Shopify from scratch to selling billions of dollars of merchandise.”
Not only has Shopify grown fast (it is America’s third-largest online retailer by volume of goods sold after Amazon and eBay), it has also built formidable competitive advantages: “It generates high margins and recurring revenue from merchants, who pay a monthly fee for the software, based on their sales. On top of that, Shopify collects fees for helping run each stage of their e-commerce business, from designing an online store and advertising on social-media sites such as Instagram to processing payments and arranging logistics. This is the fastest-growing part of its business, though it is less profitable than selling software subscriptions.”