Shopify signs deal to buy logistics company Deliverr for US$2.1 billion

Shopify sign

Shopify upped the ante in its fight against Amazon.com Inc. with a US$2.1-billion deal Thursday to buy logistics company Deliverr Inc., but shares in the company slumped after it reported disappointing financial results for its latest quarter.

By the end of Thursday's trading, the Ottawa e-commerce company's stock had fallen by more than 14 per cent or $88.67 to $529.63 on the Toronto Stock Exchange, well below its 52-week high of $2,228.73 achieved in November and back to levels not seen for the company since March 2020.

The deal will see Shopify pay about 80 per cent of the purchase price in cash and 20 per cent in shares for the San Francisco fulfilment technology company, which ships over a million orders per month across the U.S.

The transaction, which is still subject to regulatory approvals, will help Shopify deepen its inventory capabilities, broaden its storage and freight services and tap into a network of warehouses and couriers Deliverr has built.

The aim is to use automation and logistics technology to build out a network of both Shopify-owned and third-party warehouses that can deliver packages in two days or less to more than 90 per cent of the U.S., said Harley Finkelstein, Shopify's president.

“This is complicated stuff and this is stuff that is not easy to do, but that is sort of where Shopify shines,” Finkelstein said on a call with analysts.

“The goal is to make fulfilment something that our merchants, particularly in the U.S. don't have to think about.”

"This was a very astute move. This is going to enhance Shopify’s competitive advantage and make them a stronger, better company."

Delivery and logistics have become increasingly important aspects of Shopify's business since the company announced it would build a network of fulfilment centres in the U.S. in 2019.

The network, which includes a self-operated and leased warehouse in Atlanta, was meant to help merchants of all sizes access new warehousing and shipping opportunities and was seen as a natural progression for the company, which already helped companies manage sales and payments.

The acquisition, the largest in Shopify's history, will add about 400 employees to its headcount and double the size of its fulfilment network workforce. The deal immediately drew praise from some observers who said it will give the e-commerce giant greater control over a growing part of its overall business.

“This was a very astute move," said Ian Lee, a professor at Carleton University's Sprott School of Business who teaches business strategy. “This is going to enhance Shopify’s competitive advantage and make them a stronger, better company.”

Lee said a huge part of Shopify's value proposition is providing merchants with a reliable way of getting their goods to customers. As if to underscore that point Thursday, the firm unveiled a new feature called "Shop Promise" – a badge on merchants' sites indicating the day merchandise is expected to arrive at a consumer's door.

Competition from Amazon

“What they’re doing by acquiring (Deliverr) is they’re ensuring reliability because it’s now under their control and ownership, so they’re not at the mercy of a supplier,” Lee said. “You have the ability, if you own the firm, to make changes to the way it’s operating.”

However, the move placed Shopify more directly in competition with U.S. e-commerce goliath Amazon. Deliverr currently orchestrates deliveries for a variety of Shopify's competitors, including Amazon, but Shopify brass said Thursday that didn't worry them.

“The great part about Deliverr is it accelerates what we've been planning to do with this end-to-end logistics network,” Finkelstein said, explaining that Shopify plans to "adopt" existing businesses on the platform. “The idea here is we want to give our merchants high-reliability, fast, affordable delivery, and we think we can do that much faster with Deliverr.

”We really are excited by the fact that Deliverr ... is trusted by thousands of merchants. Some of those merchants are not on Shopify; some of them may come to Shopify eventually. But the idea is really about product acceleration.”

Lee said Shopify will likely sever ties with other Deliverr customers such as Amazon once it's finished integrating the firm into its operations.

“If this is part of the competitive advantage, the last thing you want to do is share it with your competitors,” he said.

Shopify's rivalry with Amazon has heated up in recent years as Shopify has expanded its fulfilment network. Meanwhile, Amazon last month unveiled its "Buy With Prime" feature, which combines its payments and fulfilment networks and makes them available on other merchants' websites, in a bid to beat Shopify at its own game.

Shopify CEO Tobi Lütke brushed off any suggestions that Amazon is a mounting threat to his business, instead arguing that services like Amazon's benefit the e-commerce ecosystem as a whole and will ultimately encourage even more entrepreneurs to join Shopify's platform.

“It’s not nearly as zero sum as some people make it out to be, whatever is good for merchants will cause more entrepreneurship, which is exactly the vision of our company,” he said. “And from a business perspective, the more channels that exist that are valuable for selling, the more important Shopify too has become.”

Still, keeping up with Amazon has proven difficult for Shopify, which has disappointed investors in recent months. According to the Globe and Mail, the company has been the worst performer on the S&P/TSX Composite Index so far in 2022, shedding more than $155 billion in market value.

The company, which keeps its books in U.S. dollars, reported Thursday a first-quarter loss of US$1.5 billion or US$11.70 per diluted share on US$1.2 billion in revenue.

The result compared with a profit of US$1.3 billion or US$9.94 per diluted share on US$988.6 million in revenue in the same quarter last year.

On an adjusted basis, Shopify says it earned 20 cents per diluted share in its most recent quarter, compared with an adjusted profit of US$2.01 per diluted share for the first quarter of 2021.

Analysts on average had expected an adjusted profit of 68 cents per share for the quarter and US$1.25 billion in revenue, according to financial markets data firm Refinitiv.

Costly venture

Shopify is positioning the fulfilment network as its way of turning things around, but the venture will be costly. 

Achieving two-day delivery will mean Shopify will need many warehouses in proximity at a time when such spaces are in high demand and often selling for a premium. The company will also have to contend with worker shortages and staff who are demanding increasing wages and more benefits.

"It takes a lot of footprint and a lot of manpower," said Mike Croza, the founder and managing principal of Supply Chain Alliance, a logistics company used by Walmart Canada, Canadian Tire and Lululemon.

"Shopify is taking this on knowing it is not an easy task, but if you have capital and good management and good plans, you can do it. It never was easy, but it's harder today."

Also making it so difficult is Amazon, he said. Few companies have Amazon's precision, discipline and sophistication, meaning any rival must match its offerings and innovate in a new way to build a customer base.

"It is totally doable, but you need to be as aggressive as Amazon has been and have big pockets to expand and go in and take over real estate and with job hiring and paying people a bit more," Croza said.

When the company announced its fulfilment venture in mid-2019, it intended to spend about $1 billion over the following five years.

Shopify has so far spent $117 million of that total, with some of the cash covering operating losses and capital expenditures, chief financial officer Amy Shapero said on the same call as Finkelstein.

She anticipates Shopify will ramp up its fulfilment-related capital expenditures in 2022, with self-operated, leased warehouses in key U.S. regions opening in 2023 and 2024 being responsible for about $1 billion in such costs.

“While this requires higher upfront spend, it pays back through operating efficiencies over time and allows us to achieve our desired margin profile more effectively than solely via partners,” she said.

She envisions Shopify offering one-day delivery coverage in the U.S. and enhancing return capabilities over the next three years, when she thinks fulfilment volumes will really begin to scale.

“We are planning to be able to handle progressively larger merchants with broader set of needs through 2024,” Shapero said.

Lee said Shopify's struggles aren't surprising, given the widespread lifting of COVID-related restrictions that shuttered brick-and-mortar stores for much of the past two years and triggered a surge in e-commerce spending. 

“This is just a return to normality,” he said. “But the long-term outlook for online shopping is still very strong in every forecast I’ve examined.”

– With additional reporting from OBJ staff