Shopify’s decision to slash its workforce and jettison its entire logistics division will likely pay off in the long run, business experts say – but a prominent analyst is questioning whether the e-commerce giant has the right leaders in place to steer it on a path to sustained growth.
The Ottawa-based software firm said Thursday it is laying off 20 per cent of its employees and selling its logistics business to California-based supply chain management company Flexport.
In a memo to staff, CEO Tobi Lutke framed the moves as an effort to eliminate “side quests” that have distracted Shopify from its primary goal of making e-commerce easier for merchants.
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“Technological progress always arcs towards simplicity, and entrepreneurs succeed more when we simplify. But now we are at the dawn of the AI era and the new capabilities that are unlocked by that are unprecedented,” he said.
“Our main quest demands from us to build the best thing that is now possible, and that has just changed entirely.”
Ian Lee, who teaches business strategy at Carleton University’s Sprott School of Business, called the moves “a step in the right direction,” saying they’ll allow Shopify to focus on what it does best.
“What they’re doing is they’re making adjustments to their strategy in real time, which is exactly what they should be doing,” Lee told OBJ. “They’re exiting a business that is maybe closely (related) and is essential to their business, but it’s not something that they’re good at. That will make Shopify, at the end of the day, a stronger and more competitive firm.”
Markets reacted favourably to the news, which came as Shopify announced its first-quarter revenues rose 25 per cent to US$1.5 billion. The company’s shares were up nearly 25 per cent to $78.27 in early afternoon trading on the Toronto Stock Exchange.
“I think you have to give Shopify management credit for making a really hard decision,” Rick Watson, CEO and founder of New York-based RMW Commerce Consulting, said in an interview on Thursday morning.
Shopify’s prime product – software – generates high margins, whereas logistics is low-margin and often volume-oriented, and required Shopify to purchase other companies in order to compete, Watson said.
“A lot of analysts were increasingly seeing fulfilment as a boat anchor to Shopify. You cut the rope on the boat anchor and the stock is going to go up.”
Shopify’s decision to eliminate its logistics division comes almost a year to the day after it announced it was buying California-based logistics company Deliverr for more than US$2 billion.
Since then, Shopify has shaken up its management team, trimmed its headcount and initiated other changes amid a widespread tech downturn.
Watson said there are “legitimate reasons” to be concerned about the company’s future given its about-face on building out its own shipping and warehousing network and the turnover in its executive suite.
“Is this the right management team moving forward? To me, that’s the most critical question that’s kind of left being (unanswered),” he said.
“Clearly, Tobi doesn’t have to go anywhere if he doesn’t want to. He could probably fight off any activists even if people were extremely concerned.”
The veteran software analyst also said he was “a bit perplexed and confused” by Shopify’s apparent decision to target managers in the new round of cuts rather than coders and other staffers who work on software – or “crafters,” as the company refers to them.
“The balance of crafter to manager numbers is a tricky one to strike,” Lutke said in his memo. “Too few and you risk misalignment on the most important things, too many and you add heavy layers of process, approvals, meetings and … side quests. Our numbers were unhealthy, just like it is in much of the tech industry.”
Watson said Lutke appears to be “actively disparaging management” despite its importance to charting the direction of the company.
“The manager is supposed to be setting a strategy and executing it,” he said. “If Shopify is getting rid of all those people, then who is going to be driving the ship?
“It just seems like, increasingly, (senior) management doesn’t want to hear dissenting opinions. They trust in Tobi and (president) Harley (Finkelstein), and I’m skeptical that they have enough firepower on the management team.”
While Shopify’s revenues continue to rise, Watson said he wonders if its leaders are “focused enough to succeed in their objectives.”
The company’s effort to court enterprise-level retailers through partnerships with big professional services firms is still a work in progress, he said. Its flagship Shopify Plus platform is a “great fit” for small and mid-sized merchants, Watson argues, but he believes the company needs to up its game if it’s serious about attracting more global customers.
“The big question is, can they maintain their focus on both markets? I don’t think they’ve answered all the questions yet.”
On the conference call with analysts to discuss Thursday’s financial results, Finkelstein maintained that “Shopify is staying at the cutting edge of commerce,” in part because of its use of an AI in a shopping assistant it launched in March.
Shoppers tell the assistant what they are looking for, and the technology serves up relevant product recommendations from Shopify merchants.
“It’s like having your own shopping concierge powered by ChatGPT, one of the most advanced technologies that we have seen in decades,” he said. “We believe that we are in the early innings of unlocking the true power of AI.”
Watson said AI, which has dominated tech industry chatter, is “a shiny object that they’re trying to wave,” but said it’s unlikely to be “some kind of critical linchpin for their future business.”
The latest staff cuts mark the second major round of layoffs in the past year at Shopify, which terminated about 1,000 workers last summer.
In recent months, the company also reduced the number of meetings staff have, split workers into two career tracks – managers and crafters – with equivalent compensation levels and gave employees a “total rewards wallet” last year that allows them to choose between cash and stock options for their compensation.
Invest Ottawa CEO Michael Tremblay said that even though Shopify is the region’s biggest tech success story of the past decade, the company is not immune to macroeconomic headwinds like rising inflation that are battering the entire tech sector.
“At this point, the world is full of uncertainties,” he said. “These are issues that are very difficult to navigate.”
At the same time, Tremblay said he remains “bullish” about the future of Ottawa’s tech industry despite a recent wave of layoffs at other prominent local firms such as Fullscript and Rewind.
The sector bounced back with a vengeance after the dot-com bust of the early 2000s, he noted, and he expects the city’s tech community to show the same resiliency this time around.
“I do believe we’re going to see that spinoff effect, where you’ve got people that are incredibly skilled, incredibly talented, that will form their own businesses,” Tremblay said. “We’ve got a really nice, diverse capability in the region. I think that bodes well for the potential that we have going forward.
“We still have to keep our heads up because these markets are unforgiving, but at the same time, I’d place a bet on Ottawa for sure.”
– With additional reporting from the Canadian Press
Shopify stock surges after firm announces plans to cut workforce by 20% and sell logistics business