Shopify president: ‘The future of retail is not just online’

Shopify President Harley Finkelstein joins Yahoo Finance Live to break down the company's Q1 earnings miss, its purchase of fulfillment center distributors like Deliverr, and the outlook of retail and digital sales.

Video Transcript

- Welcome back, everyone. Shopify announced it's buying e-commerce fulfillment specialist Deliverr for $2.1 billion. For a closer look at that move and how the company's earnings are affecting the stock price, let's welcome Harley Finkelstein, Shopify's president. Holly, thank you for joining me today.

So as we did see, the first-quarter revenue and earnings per share were amiss. So talk about the most impactful macro shifts that you highlighted in terms of how it's impacting Shopify's business and how long you expect the pressure to last.

HARLEY FINKELSTEIN: Thanks for having me on the show. It's always so nice to be on. First of all, I think, you know, this was a difficult quarter in the markets very generally. But Shopify still showed a profit of $30 million this quarter. And we grew two really important metrics. Our revenue had a two-year comp and annual growth rate of 60%. GMV, which is the amount of sales in the platform, had a two-year comp and ended growth at a 57%, so two great metrics.

And I think what's even more important is that if you think about the value proposition, the service that Shopify provides to our merchants, in an inflationary environment, it's unparalleled. Our merchant solutions revenue, as a percentage of GMV, was the highest it's ever been. It was almost 2%.

What that means is that more of our merchants are using more of our products. They're using Shopify Capital and Shopify Payments and Shopify Shipping. And we'll talk about that in a little bit. But it means that we are solving more problems for our merchants.

And I think Shopify really, you know, was this pandemic story that is now transitioning to being a reopening story as retail physical retail reopens. We saw physical retail point of sale grow almost 80% this past quarter. And so we like where we're at right now. We're very optimistic about the year ahead. But it is certainly a difficult environment. And that's where operational discipline really matters.

- But as you mentioned, then, as you're seeing this demand there, that also means better fulfillment options. So talk about Deliverr, your biggest acquisition to date. What's the play there, and why now?

HARLEY FINKELSTEIN: Yeah. So I think if you know any small businesses or, frankly, any businesses at all in the last couple of years, supply chain management and fulfillment are really some of the biggest challenges that they face. Right now, as a small business, especially, you have to sort of fumble through this maze of freight providers and 3PLs and middle and last-mile carriers. And it's really difficult.

And so a couple of years ago, we announced Shopify Fulfillment Network. And really, the rationale of that was this. We have millions of stores on Shopify. If you're a consumer and you're buying from your favorite brands, whether it's Figs or it's Allbirds or Gymshark or it's Kylie Cosmetics or James Purse, for that matter, those are all powered by Shopify.

But if you were to pretend that Shopify was one single retailer just for a second-- we're not. But if you pretend that, you would notice that we are the second-largest online retailer in America. Well, what comes along with that is massive economies of scale. So we wanted to go ahead and put those economies of scale towards fulfillment. So we created SFN to make it easy for merchants in the post-order phase to ship products from the warehouse right to their end consumer.

But what we did with fulfillment, with Deliverr, was by combining with Deliverr, Deliverr has this asset-light, technology-driven service that makes it easy to anticipate where products should be. And because we have that balancing in combination with SFN, we think we can create the best end-to-end logistics network. And we can do it faster with Deliverr.

And unlike other fulfillment providers, merchants will own their customer relationship. So they can give high reliability, fast, affordable delivery. And Deliverr fits right into that mission.

- And a lot of investors have been wondering. For a lot of these companies that did very, very well during the pandemic, what does the next phase look like? I want to take a look at your economic impact report.

You said that Shopify merchants drove more than $444 billion in global economic activity. That's a 45% increase from 2020. That would form the world's second-largest company in revenue, bigger than Amazon, Apple, BP, and Volkswagen. Now, obviously, COVID played a big role on that. So then what are your expectations going forward?

HARLEY FINKELSTEIN: Yeah. It's pretty amazing if you sort of look at the Shopify merchant base. Again, we have millions of merchants on our platform. That they can drive more than $444 billion in economic activity is amazing. They also-- just one other point, which is really important, is Shopify merchants supported 5 million jobs last year.

So collectively, if you think of the Shopify merchant base as a single-- as one single entity, it would make up the largest workforce in the world. So look, when the pandemic hit, and physical stores shut down, all of these physical retailers came to Shopify to very quickly open up online retail. And they started selling online using us.

And for the most part, we were the most popular place for them to go. But now that things are reopening and retail is rebalancing and physical retail is reopening, those same retailers are asking us to help them with their physical retail needs. And so we actually think the future of retail is not just online, nor it's just offline. It's going to be everywhere consumers want to buy, which is why you hear Shopify talk about our partnerships and integrations with Facebook and Instagram and TikTok and Spotify and Google.

We actually saw 400% increase in GMV going through those services this quarter relative to this quarter last year. And so more commerce is happening across a lot of different services. And Shopify's role in all this really is the retail operating system for the future of retail.

- And I want to ask you, in terms of the future of retail and some of the consumer trends that you are tracking, what do you think are going to be the top consumer trends that are really going to shape the way that Shopify directs its business?

HARLEY FINKELSTEIN: Yeah. Well, again, I mentioned already that future retail needs to be retail everywhere. So the brands that are going to do really well, that are be really successful-- they will sell wherever their consumer wants to buy, be that online or offline, in an app like our Shop app, or on a social media platform. And we make that really easy on Shopify.

But the second thing that we've been seeing for a while-- and this is not new. This has been happening over the last 12 to 18 months sort of as the pandemic came on-- is that consumers began to vote with their wallets to buy directly from independent retailers.

So if you think of your favorite brands that you're buying from right now, predominantly, consumers all over the world are choosing to buy direct whenever they can as opposed to go through intermediary. I don't think that's going away. I think that's going to be steady state. And this direct-to-consumer sort of trend will continue for a long time.

But again, what we're trying to do is we want to level the playing field. For so long, small businesses were at a disadvantage relative to the big companies. So by coming to Shopify, you get payment rates that only big companies typically were getting or shipping rates or rates on capital.

We gave out more than $300 million of cash advances to small businesses in the quarter. These are businesses that wouldn't be able to get-- get capital otherwise. And so that's why we view ourselves as the world's entrepreneurship company.

And while right now the economy is in a weird state and kind of rebalancing, I think our operational discipline is really important. If you think about the way Shopify has ran its business, in total, over the course of our business history, we've raised about $7.7 billion. At the end of March, at the end of the quarter, March 31, we had-- I think we had about $7.2 billion left on our balance sheet. So this is a company that can balance both growth and profitability. That's not something that a lot of companies are able to do.

- Now, as we talk about e-commerce, obviously, you have to talk about Amazon. And we saw that Shopify's CEO said that he welcomes the competition with Amazon's move to have some of these third-party sellers build independent online stores. He said it would mean he's accomplished his mission. How does Shopify plan to compete against some of these big retailers in this space?

HARLEY FINKELSTEIN: Again, by using the economies of scale. If you think about what you need as a small business, you know, I talked about payments earlier. But if you're a small business, and you're trying to get rates on payments to process credit cards, you're going in, and you're getting retail rates.

But when you come to Shopify, we go to those credit card companies. We go to the payment companies. We negotiate on your behalf, which means that you're able to better compete.

And by the way, the point about Amazon, Amazon Buy with Prime-- we actually love the fact that more and more companies are taking their scale and their infrastructure to benefit small businesses across the world. And so that's a really wonderful thing.

But it's really important to us that we ensure small businesses own their business. You know, when you sell on a marketplace, you're effectively renting customers from that marketplace. When you open up a Shopify store, an online store, or you're selling in a physical location, those are your customers, which means you have that direct relationship. You own 100% of the profit margin. That matters, especially in an inflationary environment like we're dealing with right now.

- It certainly does. We do appreciate your insights. Harley Finkelstein there, Shopify's president. Thank you so much for your time this afternoon.