Shopify Saved Main Street. Next Stop: Taking On Amazon
The Canadian e-commerce company is breathing down Silicon Valley’s neck as the next great enterprise behemoth
David H. Freedman
Marker via Medium
Jul 22 · 16 min read
Photo illustration: Jon Han, sources: Lonely Planet Images / Photolibrary / Getty Images
In late March, 15,000 gallons of beer were sloshing around in Peter Bulut’s tanks and barrels with nowhere to go. Bulut, the owner of Great Lakes Brewing Co., first started working in his father’s tiny craft brewery in Toronto almost 30 years ago, when he was 21. Since taking over five years ago, Bulut, now 50, had transformed it into a model small-scale brewer — quintupling its production capacity, opening an onsite restaurant and retail store, and building up a force of nine full-time salespeople who landed the company’s beer into bars, restaurants, and liquor stores all over Ontario.
Back on March 13, when Covid-19 was creeping its way into Toronto, Bulut started taking small precautions, like suspending in-store beer tastings. Then the full weight of the calamity struck with stunning speed. Two days later he closed the restaurant and store. Most of the bars and restaurants he supplied beer to were closing, too. Five days after that, facing a 50% drop in business, he laid off a quarter of his 52 employees. “I didn’t sleep for two weeks after that,” recalls Bulut. “When you’re the owner, it’s your fault.”
He didn’t want to do more layoffs — but what was he going to do with the tens of thousands of gallons of beer piling up? Maybe he could sell it online and do home delivery? One of his employees had set up an online shop to sell T-shirts and caps with the company’s logo. Bulut had the employee call Shopify, the company powering the site, to find out what it would take to convert it into an online beer-sales-and-delivery store. Bulut was surprised by Shopify’s response. “They jumped all over it,” he says. “They wanted to help us hit big sales volumes.”
Two days later Great Lakes transformed into a fully functioning e-commerce operation, taking home delivery orders on its website. They made a few dozen sales the first day. Within a week they were up to 500 orders daily. There was so much business that Bulut kept all of his nine salespeople busy full time delivering the beer to customers’ homes. Meanwhile, Shopify helped Great Lakes set up a contactless credit-card reader and a point-of-sales system that tied into the home delivery system, so it could also offer curbside delivery. Shopify told Bulut it was working on an app that could find the most efficient delivery routes, and let him use a pre-released version, too. Not only was Bulut able to hold onto his remaining staff, he has since rehired most of the people he laid off. “I feel guilty saying it,” he says, “but sales-wise we’re about 15% ahead of where we were before the pandemic.”
Only Amazon takes in more money online, dollar-wise, than Shopify’s sites, which in aggregate brought in more than $60 billion in 2019, $20 billion more than the year before.
Bulut was just one of hundreds of thousands of small business owners desperate for a lifeline this spring when the pandemic hit. While offices everywhere were able to pivot en masse to Zoom, retailers on Main Streets all across the globe were getting crushed. Many had never before processed a single online transaction, now needing to somehow flip a digital switch in order to stay alive.
Many of them ultimately discovered, like Bulut, that switch was Shopify, the e-commerce platform that has quietly mushroomed from a home-grown website into a publicly traded tech behemoth over the past 14 years. It now powers the online shopping carts for millions of companies, from buzzy startups like Allbirds and Bombas to big brands like Heinz and Nescafe. Only Amazon takes in more money online, dollar-wise, than Shopify’s sites, which in aggregate brought in more than $60 billion in 2019, $20 billion more than the year before. The company’s prospects have seemed limitless, with its own revenue increasing nearly 50% last year to $1.6 billion.
The pandemic has accelerated that already rocket-ship growth, with analysts predicting an average 75% annual rise in the next five years. In early July, Shopify’s stock price surpassed $1,000 per share, more than triple its mid-March price. Aside from Zoom, arguably no other tech company in the pandemic has had such a massive groundswell than Shopify. Now, with an even more intense grip on the small-business landscape, the low-key Canadian company is plotting to go head-to-head with platforms from Amazon to Facebook.
At its center is an unlikely foil to the Silicon Valley tech titans — Shopify founder and CEO Tobi Lütke, a German coder who first started the business a decade and a half ago after trying to launch an online snowboard shop. If Lütke can continue toeing the line between friendly hero to small businesses, and viable threat to Big Tech platforms, Shopify could be on its way to becoming the most dominant retail engine powering the economy.
In early January, an unsettling agenda item popped up at a meeting of senior managers at Shopify’s headquarters in Ottawa, Canada: Its Hong Kong office was warning that the severe outbreak of a flu-like illness in China had the makings of a pandemic. Throughout the month, that concern rose higher and higher on the agendas at successive meetings. How big would this thing get? How badly would this affect businesses around the world?
By March, hundreds of thousands of small business owners would realize that their only shot at staying alive during an indefinite, unprecedented shutdown would be e-commerce.
By the beginning of February — as President Trump was claiming the coronavirus would disappear by April — Shopify realized helping retailers move their operations online in the face of a possible shutdown had to become the company’s top priority. “We knew we had to be two steps ahead of this thing,” says Lynsey Thornton, Shopify’s vice-president of user experience and general manager of core product.
They made the right calculation. By March, shoe stores, bakeries, boutiques, toy stores, cafes, card shops — basically any business that had never before sold a thing online — were faced with one option to stay alive: to sell anything they possibly could virtually.
These businesses had alternatives to Shopify, of course. There were sites like Squarespace and Wix, which make it relatively easy to whip up a website, but don’t specialize in e-commerce. And there were thriving marketplaces like Etsy and eBay that offered a large built-in customer base but less control of the shopping experience. But by removing all the barriers to setting up a slick-looking website with all the e-commerce trimmings — from site design to tracking inventory to taking payments to capturing customer data to promotion to customer service — Shopify was by far the most comprehensive and streamlined.
Shopify doesn’t push merchants to mention its name anywhere on the site; the branding is all the customer’s, at a cost of as little as $29 a month for the most basic Shopify plans, plus a 2.9% cut of sales. It’s why the company has managed to power retailers that account for about 6% of all online sales in the U.S. — ahead of all other e-commerce channels, like eBay and Etsy, though trailing behind Amazon’s staggering two-thirds share.
With the number of new Shopify customers growing between March 13 and April 24, spiking 62% above the previous six weeks, managers throughout the company — most of them working from their homes in Canada — put their regular day jobs aside to personally handle calls from small businesses. The conversations were wrenching, recalls Thornton, with many business owners left reeling after letting most of their employees go. One owner simply sobbed into the phone. “We wanted to be in the trenches with the entrepreneurs, to feel what they were feeling firsthand,” says Thornton.
Shopify quickly rolled out a series of changes. The free trial it normally offered for two weeks was extended to three months. It added $200 million to its Shopify Capital service, which loans money to customer businesses that can be repaid out of online sales. As local sales among Shopify merchants doubled over the next six weeks, it beefed up features that support local pickup and delivery, such as online tipping, and connecting to local delivery services that could stand in for overburdened postal, UPS, and Fedex facilities. The excess server capacity it typically reserved for flash surges in sales like Black Friday and Cyber Monday would help it handle the rapidly climbing volume of e-commerce transactions.
Employees throughout the company — from sales to product development — helped onboard the deluge of new business customers. Shopify merchants that had previously or entirely relied on brick-and-mortar sales would later report they were able revive nearly 95% of that revenue online. For now, at least, Main Streets all across America had a decent shot at stopping the bleeding.
Shopify has become the de facto e-commerce platform for small businesses, but with massive corporate retail customers including Nestle, Unilever, and Pepsi, it’s also now in the crosshairs of the e-commerce marketplace giants, from Amazon to Facebook.
Shopify doesn’t compete directly with these marketplaces; in fact, its platform works well with all of them, including via recent partnerships with Facebook and Walmart. But to continue to grow, Shopify needs consumers to buy directly from its merchant-customers’ websites where it provides a full range of services, rather than buying on Amazon or Facebook and letting Shopify merely track inventory and do the accounting. That means Shopify is now locked in a battle with the big platforms not so much to be the primary choice of merchants, but to attract more consumers to its online-shopping ecosystem.
“Big companies think, ‘How hard could what Shopify does be?’ Then when they try to do it, they find out.”
The driving force behind Shopify’s massive ambitions is its enigmatic founder, 40-year-old German-born Tobias Lütke — or Tobi, as he goes by. For a company holed up in what by Silicon Valley standards is a backwater, and that is run by someone who seems to have little in common with his tech-giant counterparts, Shopify’s success has been a fairly quiet phenomenon. Virtually no one seems to say a critical word about either Lütke or Shopify. “It’s a genuinely brilliant company with a great culture and a great product,” says Ruslan Fazlyev, CEO of Ecwid — a direct competitor to Shopify. (Lütke, who declined to speak to Marker, also rarely grants interviews and has seemingly managed to inhibit almost anyone who knows him from talking to the press about him.)
In Shopify’s early years, Lütke, a world-class coder, tried hard to duck the CEO job, until his backers insisted on it. He first became interested in computers in 1986, when, at age six, he received a bare-bones hobbyist computer as a gift from his parents in Koblenz, Germany. He was diagnosed with a learning disorder, which included signs of ADHD and dyslexia. A doctor prescribed medication, but Lütke instead found liberation at the keyboard, particularly through video games. By the time he was 12, he was coding his own games. At 16, he dropped out of school to become an apprentice programmer for high-tech giant Siemens.
On a snowboarding trip to Canada in 2000 he met the woman he would soon marry; two years later at the age of 22, he left Germany and moved to his wife-to-be’s home town of Ottawa. Unable to get a job without a work visa, he teamed up with Scott Lake, a friend of his wife’s family, to start that online snowboard company. But Lütke was appalled by the services available for setting up e-commerce and spent two months writing his own software. Soon Lütke and Lake were getting as many inquiries about the software behind their site as they were about snowboards, and realized they were in the wrong business.
Shopify was born in 2006. Friends and family staked the cofounders $200,000, though Lake left in 2008. As the company grew, Lütke headed to Silicon Valley in 2010 to hit up VCs. He biked to meetings, using his time before each appointment to Google the unfamiliar financial terms that were thrown at him at the last one. He ultimately raised $7 million. It’s been nothing but crazy growth since.
Based on the few interviews Lütke has done over the last decade, you can piece together a picture of his management style, and how it has shaped Shopify’s culture. His approach was influenced in large part by video games and poker playing, domains that, he points out, call for situational awareness, a need to read other players, and a willingness to take risks. It’s their repetitive nature — letting you try your hand at these skills hundreds of times in a single evening — that enable immediate feedback with direct results. The rest of his entrepreneurial philosophy, he says, he picked up from reading business books. A particular favorite, High Output Management, by legendary former Intel CEO Andy Grove, frames all the challenges that a manager faces, including dealing with people, as problems that can be solved with the right analytics and algorithms.
Having chafed at authority, expectations, and routine since childhood, Lütke seems to have cultivated a culture that downplays them, at least to hear Thornton tell it. “It’s gloriously different here from any experience I’ve ever had,” she says. When she joined the company in 2013 as a market researcher, she immediately bailed — with her boss’s blessing — from her first assigned project in back-end software, and instead started researching how merchants were using Shopify’s various products, because she thought it would be more helpful. (She was right.) The company has repeatedly made Glassdoor’s 25 Best Places to Work in Canada list, based on employee input, including the 2019 list.
None of this is to say that Lütke is all soft edges. He had to learn to stop routinely telling people their work was “shit” when it didn’t meet the sort of high standards he sets for his own work, he admitted in an interview last year. Many employees have learned not to take his harsh criticism to heart, and they’ve come to respect Lütke’s instincts — because he so often turns out to be implausibly right. He built the company’s original software in a then-obscure programming language called Ruby on Rails, which ended up becoming a huge favorite of programmers everywhere, giving the company a significant edge. By 2009 he was steering the company to a mobile-first position, years before most companies recognized how dominant phone-based shopping would be.
Lütke’s tendency to downplay his accomplishments may be one reason why competitors tend to underestimate what he has managed to pull off with Shopify. “Big companies think, ‘How hard could what Shopify does be?’” says Ken Wong, technology analyst at Guggenheim Partners, a financial services advisory firm. “Then when they try to do it, they find out. All the bits and pieces behind the scenes from payment to fulfillment are complex, but Shopify does it seamlessly and packages it in a way that’s simple for users. They’re the Apple of e-commerce website builders.”
When Ralph Montemurro and his wife decided to start a business making and selling nursery room furniture in 2005, they immediately considered selling on Amazon. Montemurro observed that half of all online purchases start with an Amazon search, yet Amazon didn’t feel right for his high-end furniture, including his rocking chairs that can cost well over $1,000. “On Amazon all the product listings are in the same cluttered format, with the same low-quality photographs,” he says. “We wouldn’t be able to differentiate ourselves there, or have any control over our placement in searches.”
Shopify’s efforts to keep its customers in the limelight stands in stark contrast to Amazon’s rigid domination of the shopping experience.
Nor, Montemurro adds, would they be able to get much data on their customers, including their email addresses, because Amazon’s system is designed to keep customers loyal to Amazon, not to any of the individual third-party vendors who sell there. Indeed, Amazon often seeks to siphon away its successful merchants’ sales by bringing out and promoting its own versions of popular products under the AmazonBasics brand. Montemurro’s Toronto-based company, Monte Design, eventually went with a Shopify website, and hasn’t looked back.
Shopify’s efforts to keep its customers in the limelight stands in stark contrast to Amazon’s rigid domination of the shopping experience. “There’s distrust among third-party vendors toward Amazon,” says Guggenheim’s Wong. “Amazon promotes its own value at the expense of merchants.” Add on the typical 15% cut that Amazon takes from sales, he notes, and it’s no wonder that merchants are increasingly driven to try to sell directly to consumers instead of going through Amazon or other platforms, including eBay and Etsy.
The advantage to merchants of controlling customer communications and data, as opposed to ceding that control to a marketplace platform like Amazon’s, has been telling during the pandemic. Shopify merchants are able to email customers about what products and services are or aren’t available in the face of disrupted supply chains, what sort of delivery delays might be involved, and what they’re doing to try to keep running smoothly — challenges that most people can relate to these days.
Many Amazon merchants, in contrast, are losing ground with their customers, notes George John, a professor of marketing at the University of Minnesota who studies e-commerce. “Merchant customer ratings have been plummeting to historic lows over the last three months, as out-of-stocks have increased and delivery times have lagged,” he says. And those merchants have no way to tell their story on Amazon. In fact, when in March Amazon increased delivery times on non-essential items shipped from its warehouses, it didn’t show shoppers that in many cases other merchants who sold through Amazon could ship those same items faster. (The company later claimed that was an accidental oversight.) These problems may partly be why the pandemic has seen Amazon’s share of the online commerce market fall from 42% to 34%.
Of course, retailers don’t have to choose between Amazon and Shopify; they can do both, with Shopify neatly integrating the Amazon inventory and sales data into the software, as it does for most e-commerce platforms. But many companies find that making goods available on Amazon can end up steering customers away from their own website, making the customers less profitable and anonymous.
That was the case for Manuel de la Cruz, whose toothbrush company, Boie USA, sold $2 million worth of products on Shopify last year. He set up his business on Amazon, too, but after two months he pulled the plug on that, even though it was accounting for a fifth of his sales. “I wanted to know who my customers were, and you can’t do that on Amazon,” he says. Still, Amazon remains by far and away the leader in where Americans go to buy online, with the company’s Prime membership hitting 112 million households last year.
“Shopify has come out for the little guy trying to fight against Amazon’s domination. Tobi has given entrepreneurs voices and power.”
Shopify merchants’ relationship with Facebook, on the other hand, has long been more mutually beneficial. Advertising on Facebook to its 2.6 billion active monthly users, as well as on its subsidiary Instagram, has been the leading way to bring customers to Shopify merchants’ sites. But in May, Facebook announced its own Shopify-like service, called “Shops,” which enables merchants to build their own online stores within the Facebook platform, complete with payment capabilities. As with Amazon, Shops integrates smoothly with Shopify’s software, but the prospect of consumers staying on the Facebook platform through the entire purchase cycle is an ominous one, threatening to cut Shopify out of some of the most important and lucrative elements of the business, including payment processing.
Shopify is now striking back at its giant rivals by adding a range of new services, including small-business bank accounts, its loan business, and email marketing tools — as well its own logistics network that will allow the company to provide Amazon-Prime-like two-day delivery, potentially erasing to some extent a key Amazon advantage.
Though there was little fanfare around it, three weeks before Facebook’s “Shops” reveal, Shopify also rolled out a new app called “Shop,” which lets you find, “follow,” and make purchases from businesses that use Shopify to power their e-commerce. Shop is not quite a marketplace like Amazon or Etsy (you can search for a specific business but not for specific items like “jewelry”). For now, Shop’s main function is tracking packages from any vendor — it scans the user’s email (with permission, of course) to get the tracking info. But the app has the potential to deliver something much bigger, and something Shopify’s merchants need more than anything else: new customers. Funneling consumers to third-party merchants is where Amazon and Facebook shine, and Shopify whiffs. The Shop app could narrow the gap.
It’s a critical move, because more than anything, Shopify’s customers look to it to provide an alternative to Amazon’s powerful marketplace. “Shopify has come out for the little guy trying to fight against Amazon’s domination,” says de la Cruz. “Tobi has given entrepreneurs voices and power.”
The Shop app could in theory bring in millions of consumers to the Shopify ecosystem of networks to funnel them to its merchants’ websites. In other words, it could eventually create an online marketplace, which would go a long way toward leveling the playing field with Amazon — as well as reducing its merchants’ current dependence on Facebook ads and Google search results. “The vision is that Shop can provide a list of Shopify stores that right now many consumers have no way to discover,” says Thornton. The ability to highlight local stores will be a special strength of the app, she adds.
For now, however, the company is officially downplaying that grander vision. After Thornton’s comments, a Shopify spokesperson wrote to say that “at this time, there’s no plans today to add product search to Shop.” The hesitation to promote Shop as a marketplace is understandable. For all the extra business a Shopify marketplace might be able to funnel to its merchant sites, the move would set Shopify up for complaints from merchants over search placement. And it would start establishing Shopify as a visible brand in its own right among consumers, something the company has bent over backwards to avoid since its birth. “Shopify has always been the Switzerland of online commerce,” notes Wong. Gaining the power to steer consumers toward one merchant over another would undercut that reputation.
There is currently no end in sight to the pandemic’s devastation of indie retailers. Hopes of smoothly reopening millions of U.S. businesses were dashed in June and into July by soaring infection rates that have been leading to more and more about-faces in state and local policies. All of this also suggests there is also no end in sight for the continued Shopify surge.
To support this—and what comes next—will require Lütke to hold onto and attract the best talent. In May, he tweeted that Shopify “will keep our offices closed until 2021 so that we can rework them for this new reality. And after that, most will permanently work remotely.” And in June, immediately after Trump signed an executive order suspending foreign work visas, Lütke tweeted with a wink, “If this affects your plans, consider coming to Canada instead,” along with a link to Shopify’s career pages.
There’s no way of knowing if Bezos or Zuckerberg saw those tweets. But it’s quite possible that many of their employees, always on the lookout for the next great tech company to work for, took note.