Shopify President Harley Finkelstein joins Yahoo Finance Live to break down the company’s missed first-quarter results, its purchase of fulfillment center vendors like Deliverr, and the outlook for retail and digital sales.
– Welcome everyone. Shopify announced the purchase of e-commerce fulfillment specialist Deliverr for $2.1 billion. To take a closer look at this decision and how the company’s earnings affect the stock price, let’s welcome Harley Finkelstein, president of Shopify. Holly, thanks for joining me today.
So, as we’ve seen, first quarter revenue and earnings per share were wrong. So talk about the most impactful macro changes you’ve highlighted in terms of impacting Shopify‘s business and how long you expect the pressure to last.
HARLEY FINKELSTEIN: Thanks for inviting me on the show. It’s always so nice to be sure. First of all, I think, you know, it was a tough quarter in the markets in general. But Shopify still posted a profit of $30 million this quarter. And we developed two really important metrics. Our turnover recorded a compensation over two years and an annual growth rate of 60%. GMV, which is the amount of sales on the platform, had two-year compensation and ended up growing at 57%, so two great metrics.
And I think what’s even more important is that if you think about the value proposition, the service that Shopify provides to our merchants, in an inflationary environment, it’s unprecedented. Our merchant solutions revenue, as a percentage of GMV, was the highest ever. It was almost 2%.
This means more of our merchants are using our products more. They use Shopify Capital and Shopify Payments and Shopify Shipping. And we’ll talk about that in a moment. But that means we’re solving more problems for our merchants.
And I think Shopify was really, you know, this pandemic story that’s becoming a reopening story as brick-and-mortar retail reopens. We’ve seen brick-and-mortar retail outlets grow nearly 80% in the last quarter. And so we like where we are right now. We are very optimistic for the coming year. But it is certainly a difficult environment. And this is where operational discipline really matters.
– But as you mentioned, so as you see that demand there, that also means better execution options. So talk about Deliverr, your biggest acquisition yet. What’s the game there, and why now?
HARLEY FINKELSTEIN: Yeah. So I think if you know of any small businesses or, frankly, any businesses at all over the last couple of years, supply chain management and execution is really among the biggest challenges they face. Today, as a small business in particular, you have to grope through this maze of freight and 3PL providers and mid- and last-mile carriers. And it’s really difficult.
And so a few years ago we announced Shopify Fulfillment Network. And really, the reason for that was this. We have millions of stores on Shopify. If you’re a consumer and buy from your favorite brands, whether it’s Figs or Allbirds or Gymshark or Kylie Cosmetics or James Purse, for that matter, they’re all powered by Shopify.
But if you had to pretend Shopify was just one retailer for a second, we’re not. But if you claim that, you’ll notice that we’re the second largest online retailer in America. Well, what ensues are massive economies of scale. So we wanted to move forward and put those economies of scale to good use. So we created SFN to allow merchants in the post-order phase to easily ship products from the warehouse to their end consumer.
But what we’ve done with execution, with Deliverr, is that by combining with Deliverr, Deliverr has this technology-driven, asset-light service that makes it easy to anticipate where products should be. And because we have that balance in combination with SFN, we believe we can create the best end-to-end logistics network. And we can do it faster with Deliverr.
And unlike other fulfillment providers, merchants will own their customer relationship. Thus, they can offer high reliability, fast and affordable delivery. And Deliverr fits perfectly into this mission.
– And many investors have asked the question. For many of these companies that have been very, very successful during the pandemic, what does the next phase look like? I would like to take a look at your economic impact report.
You said that Shopify merchants generated over $444 billion in global economic activity. That’s a 45% increase from 2020. It would form the world’s second largest company by revenue, bigger than Amazon, Apple, BP and Volkswagen. Now obviously COVID played a big part in that. So what are your expectations for the future?
HARLEY FINKELSTEIN: Yeah. It’s pretty amazing if you kind of look at the Shopify merchant base. Again, we have millions of merchants on our platform. That they can generate over $444 billion in economic activity is incredible. They also have – just another point, which is really important, is that Shopify merchants supported 5 million jobs last year.
So collectively, if you consider the Shopify merchant base as a single entity, they would be the largest workforce in the world. So look, when the pandemic hit and physical stores closed, all of these physical retailers came to Shopify to open online retail very quickly. And they started selling online using us.
And for the most part, we were the most popular place for them. But now that things are reopening and retail is rebalancing and physical retail is reopening, those same retailers are asking us to help them with their physical retail needs. And so we actually believe that the future of retail isn’t just online, it’s not just offline. It’ll be everywhere consumers want to buy, which is why you hear Shopify talk about our partnerships and integrations with Facebook and Instagram and TikTok and Spotify and Google.
We actually saw a 400% increase in GMV going through these services this quarter compared to this quarter last year. And so more trade is happening in many different services. And Shopify’s role in all of this is really the retail operating system for the future of retail.
– And I want to ask you, in terms of the future of retail and some of the consumer trends that you’re following, what do you think are going to be the top consumer trends that are really going to shape the way Shopify runs its business?
HARLEY FINKELSTEIN: Yeah. Well, again, I have already mentioned that future retail must be everywhere. So the brands that are going to do very well, that are really successful – they will sell where their consumer wants to buy, whether that’s online or offline, in an app like our Shop app, or on a social media platform. And we make it really easy on Shopify.
But the second thing we’ve been seeing for a while– and this isn’t new. What happened in the last 12 to 18 months, around the time the pandemic hit, was that consumers started voting with their wallets to buy direct from independent retailers.
So if you think about your favorite brands you’re buying from right now, consumers around the world are mostly choosing to buy direct whenever they can rather than going through an intermediary. I don’t think it will go away. I think it will be stable. And this sort of direct-to-consumer trend will continue for a long time.
But again, what we’re trying to do is level the playing field. For so long, small business has been at a disadvantage to big business. So, coming to Shopify, you get payout rates that only big companies usually got or shipping rates or capital rates.
We provided more than $300 million in cash advances to small businesses during the quarter. These are companies that would not otherwise be able to obtain capital. And that’s why we see ourselves as the entrepreneurial company in the world.
And although right now the economy is in a weird state and kind of rebalancing, I think our operational discipline is really important. If you think about how Shopify has run its business, in total, over our business history, we’ve raised about $7.7 billion. At the end of March, at the end of the quarter, March 31, we had…I think we had about $7.2 billion left on our balance sheet. It is therefore a company capable of balancing both growth and profitability. It’s not something that many companies are able to do.
– Now, since we’re talking about e-commerce, obviously, we have to talk about Amazon. And we’ve seen the CEO of Shopify say he welcomes competition with Amazon’s decision to have some of these third-party sellers create independent online stores. He said that would mean he accomplished his mission. How does Shopify plan to compete with some of these big retailers in this space?
HARLEY FINKELSTEIN: Again, using economies of scale. If you think about what you need as a small business, you know, I talked about payments earlier. But if you’re a small business and you’re trying to get rates on payments to process credit cards, you come in and you get retail rates.
But when you come to Shopify, we look to these credit card companies. We go to payment companies. We negotiate on your behalf, which means you are able to be more competitive.
And by the way, the point on Amazon, Amazon Buy with Prime – we really love that more and more companies are taking their scale and infrastructure to benefit small businesses around the world. And so it’s a really wonderful thing.
But making sure small businesses own their business is really important to us. You know, when you sell in a market, you are effectively renting customers in that market. When you open a Shopify store, an online store, or sell in a physical location, they are your customers, which means you have that direct relationship. You own 100% of the profit margin. This is important, especially in an inflationary environment like the one we are facing right now.
– It certainly is. We appreciate your ideas. Harley Finkelstein here, president of Shopify. Thank you very much for your time this afternoon.