Shopify’s big e-commerce bet failed. What does that signal for retail’s future?

Click to play video: 'Shopify posts US$1.2 billion net loss in 2nd quarter amid job cuts'
Shopify posts US$1.2 billion net loss in 2nd quarter amid job cuts
WATCH: Shopify Inc. posted a US$1.2 billion net loss in its most recent quarter, after it found the rate of spend its merchants see online is lower than what the company planned for. – Jul 27, 2022

A slower-than-expected shift to e-commerce and decades-high inflation are among the headwinds slowing Shopify’s growth, but experts say these trends also have a significant bearing on the future of retail itself.

“We do not get the future right 100 per cent of the time,” Shopify’s president, Harley Finkelstein, told investors and analysts during the company’s earnings call Wednesday morning.

He was referring to a big bet the Ottawa-based company made during the COVID-19 pandemic, when lockdowns forced brick-and-mortar stores to go online: that the overall transition to e-commerce would continue its rapid acceleration once the economy reopened.

Shopify, best known for its online store software, saw a huge sales boom during the height of the pandemic as it met the surge in demand. Accordingly, it scaled up its team — the company effectively doubled to 10,000 employees by the start of this year from roughly 5,000 in March 2020.

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On Tuesday, the company announced its big bet on retail’s accelerated digital transition was misguided, as e-commerce adoption is returning to its pre-pandemic pace.

The company said it was letting go of 10 per cent of its workforce as a result, or around 1,000 employees.

“In short, we overshot our prediction,” Finkelstein conceded Wednesday.

Click to play video: 'Business News: Shopify stocks crater'
Business News: Shopify stocks crater

Is retail’s digital future guaranteed?

Shopify, which reigned as Canada’s most valuable company during much of the pandemic, has long been a champion of retail’s digital future.

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The missed mark for the company, which posted a US$1.2-billion net loss on Wednesday and signalled further losses are coming this year, draws questions, then, about the overall e-commerce trajectory post-pandemic.

Statistics Canada data shows that four per cent of total spending in 2019 was done online, a figure that ballooned to 11 per cent at the pandemic’s peak in April 2020. That figure has since dropped down to just five per cent, however, as in-person shopping makes a comeback.

Bruce Winder, a retail analyst and author of the book RETAIL Before, During & After COVID-19, tells Global News that e-commerce has “fallen to earth,” but that doesn’t mean it’s going anywhere.

“It was growing nicely before the pandemic. The pandemic turbocharged it and Shopify’s valuation went along with that,” he says.

Now, he expects e-commerce to grow to a more modest pace — and Shopify likely will too, he adds.

“E-commerce is not going away. It’s not retreating. It’s not going back into its shell. It’s just going to probably grow at more of a normal rate.”

Technology in general, such as apps for food delivery that surged in popularity during the pandemic, will remain popular as consumers cling to conveniences, Winder says.

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Ted Mallett, director of economic forecasting at the Conference Board of Canada, notes that the difference between four per cent and five per cent of spending being online might seem small, but it’s an overall increase of 25 per cent in total spending in the segment.

That e-commerce affinity likely won’t go away as shoppers became accustomed to creating accounts and checking out online while stuck at home in isolation, Mallett tells Global News.

“That’s the lasting legacy of the pandemic, it brought people into the 21st century of buying,” he says. “The pandemic didn’t change the future. What it did was it brought it to us faster.”

Winder adds that the current return to brick-and-mortar retail as pandemic restrictions lift and consumers enjoy warmer weather marks a “honeymoon” of sorts.

Click to play video: 'Inflation shifts consumer spending habits'
Inflation shifts consumer spending habits

Finkelstein argued in his comments Wednesday that Shopify did anticipate some of the in-person shopping resurgence. He said the company invested in its point-of-sale technology for retailers during the pandemic as a method of “futureproofing” the company’s merchants against future ebbs in the market.

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“We believe the future of retail is retail everywhere,” he said.

Inflation hurting brick-and-mortar and e-commerce alike

Shopify is not the only retail player warning of significant headwinds in the industry this week.

Walmart announced on Tuesday it was slashing its profit forecasts for the rest of the year and cited high inflation as a major drag on the bottom line.

Consumers are scaling back discretionary spending, the mega-retailer noted, avoiding high-margin items like clothing and instead putting more of their budgets towards staples such as food and gasoline.

This, too, is bad news for Shopify. The “majority” of what Shopify’s merchants sell on the platform are discretionary items such as clothing and makeup, the company’s chief financial officer, Amy Shapero, said Wednesday.

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She said Shopify is expecting the “softness” in consumer spending will “persist” through to the end of the year.

Winder agrees and says the fall and the first half of 2023 is going to be “a little tough for retailers, both e-commerce and brick and mortar” as consumers rein in spending amid biting inflation and fears of a possible recession.

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How to prepare for a recession

Where does retail grow from here?

Some segments of the industry are primed to continue growing even through a downturn, experts say.

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Growing retail models such as thrifting will remain popular post-pandemic, Winder predicts, as younger generations have adopted used clothing as affordable, chic and more environmentally-friendly.

Mallett highlighted a future for virtual reality, which has emerged in the gaming and tourism spheres, as something that hasn’t broken through yet in retail as VR headsets are not yet ubiquitous in households. He has an eye on it as a “longer-term” trend, he says.

Shopify CEO Tobi Lütke told analysts on the call Wednesday that he thinks it’s a “very, very easy bet” that retail will remain a fundamental aspect of human lives throughout the future.

“This is how we make our decisions,” he said. “Every single one of them is some such bet. Some of them fail.

“I would be extremely bored to be invested in a company that isn’t sometimes failing. Because that just means they’re not very ambitious, I would say.”

Click to play video: 'Buyer beware: Shopify is not an online marketplace'
Buyer beware: Shopify is not an online marketplace

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