OTTAWA — Shopify said on Tuesday it would lay off about 10 per cent of its workforce, citing a bad bet on the post-pandemic growth of e-commerce. Here’s what you need to know.
The move: The firm ended last year with more than 10,000 employees, suggesting about 1,000 workers will lose their jobs today. The layoffs will focus on recruiting, support and sales staff, as well as “over-specialized and duplicate roles” and teams that were “too far removed from building products,” Shopify CEO Tobi Lütke said in a memo the company published on its blog. The Wall Street Journal first reported the layoffs.
The market reaction: Shopify’s stock was down as much as 16.7 per cent from Monday’s close in early trading on the New York Stock Exchange on Tuesday. It closed at US$31.67, down 82 per cent from its mid-November 2021 high, adjusted for a recent stock split.
The explanation: With the advent of COVID-19, “almost all retail shifted online” and “demand for Shopify skyrocketed,” Lütke wrote. It was a heady time for the firm. Between April 2020 and March 2021, Shopify clients sold US$139-billion worth of cosmetics, gymware, snacks and other products. The Ottawa-headquartered commerce platform itself took in US$3.45 billion in revenue over that period.
Watching the surge, Shopify “bet that the channel mix—the share of dollars that travel through e-commerce rather than physical retail—would permanently leap ahead by five or even 10 years,” Lütke wrote. In 2021, it worked to double its engineering staff via 2,021 technical hires. This year, it had promised to spend aggressively on sales and marketing.
But the speed with which e-commerce was eating brick-and-mortar’s retail share has slowed. “It wasn’t a meaningful five-year leap ahead,” Lütke wrote. The firm’s own revenue growth peaked at 110 per cent year-over-year in the first quarter of 2021. Gross merchandise volume—a measure of Shopify clients’ sales using its technology—amounted to US$43.2 billion between January and March this year—more than twice what it was two years ago, but up just 15.8 per cent on an annual basis.
What comes next: Shopify will report its second-quarter financial results tomorrow. In May, the firm said it expects lower year-over-year revenue growth in the first half of this year, picking up in the final three months when its sales and marketing push begins to pay off; the company stopped providing numerical guidance in April 2020. It’s as yet unclear how laying off sales staff will affect its expansion targets.
Company watchers are tempering expectations. Stock analysts’ consensus estimate, as compiled by FactSet, is US$1.33 billion in revenue for the second quarter, which would represent 19 per cent year-over-year growth. Shoppers are starting to watch their wallets, with consumer confidence in the U.S.—by far Shopify’s largest market—dropping fast. Still, “Shopify’s consumer discretionary merchants continued to outperform peers in terms of [year-over-year] web traffic growth, particularly within fashion, confirming that the value proposition of Shopify’s direct-to-consumer retail model endures,” wrote CIBC Capital Markets analyst Todd Coupland in a Friday investor note; the bank maintained its neutral rating.
The sector at large (e-commerce): Other firms that rode the pandemic e-commerce rocketship have fallen back to Earth. At logistics giant UPS, the volume of business-to-consumer package deliveries fell 8.2 per cent year-over-year in the second quarter. The Amplify Online Retail ETF, which has US$249 million in assets, is down 49.2 per cent so far this year.
The sector at large (tech): In Canada, Shopify follows the likes of Toronto-headquartered Clearco and Wealthsimple and Vancouver’s Thinkific among large tech firms that have laid off staff. That leaves fewer landing spots for the workers who lost their jobs today, as venture-backed and publicly-traded firms alike cut headcount amid recession fears.
