Front Burner - How Shopify’s pandemic bet led to losses and layoffs

Episode Date: July 29, 2022

This week, days before a call to investors that announced net losses and a “transitional” period for the company, Canadian tech giant Shopify laid off 1,000 employees – 10 per cent of its workforce. Not long ago, Shopify’s numbers told a very different story. The online shopping juggernaut hit it big during the pandemic, at one point becoming the most highly valued company in Canada, with a market cap of $177 billion. CEO Tobias Lütke announced this week that during the pandemic the company made a bet – that online shopping would “permanently leap ahead” by years – and hired accordingly to meet the growing demand. “It’s now clear that bet didn’t pay off,” he said. To break down where the company goes now – and what this says about the tech industry more broadly – Temur Durrani joins us from the Globe and Mail.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm J.B. Pussum. Let me take you back to March 2020, which I know is a place that you don't want to go. We're trapped in our houses and apartments and small business owners, some of whom have never thought about selling online, are wondering what to do with their stores. Enter Shopify. Shopify wants to grow your small business, or as they call it,

from first sale to full scale. Shopify was built to help anyone that has an idea start a great business and sell to a global audience. Staples uses Shopify, so does Kylie Jenner's makeup line, and so do plenty of small indie shops selling pottery or hats or surfboards. The digital retail platform had already been this huge Canadian success story, but suddenly in the pandemic, its market cap soared from $46 billion in early 2020 to $177 billion in 2021. At its height, Shopify was the most valuable company in Canada, surpassing the likes of RBC. But by this week, their numbers were telling a new story. Shopify pacing for its largest percentage decrease on record since about March of 2020. Shares of Shopify SHOP now down 14% on this day and a staggering 77% year to date.

We identified certain areas where we could improve our operations and team that resulted in the elimination of approximately 10% of Shopify's total headcount on July 26th. approximately 10% of Shopify's total headcount on July 26th. Shopify's spectacular fast fall is obviously awful news for the many employees who've now lost their jobs. But it's also an indication of how the tech sector as a whole is faring right now. And it might tell us another story about how we thought the pandemic would shape the future and whether we were wrong. To break this down, we're talking to Timur Durrani. He covers Shopify for The Globe and Mail, and he's joining me today to talk about Shopify's ascent, where it's at now, and how the company is planning to push forward. Hey, Timur. Thank you very much for joining me today.

Thanks for having me. So the Shopify news really started this week when CEO Toby Lutka said in a memo, sent company-wide, that 1,000 jobs were going to be cut. That's actually 10% of Shopify. And when he made this announcement, he did something that you don't always hear from CEOs in these situations, right? Can you tell me about that? That's correct. He apologized and he acknowledged something that was really interesting for the CEO of an e-commerce company. He said that he made a wrong bet and that he leaped ahead with a trend that he thought was going in a certain direction where it was skyrocketing during the pandemic and that he felt that it was going way beyond that at the time, but it isn't.

In that he said, ultimately, placing this bet was my call to make and I got this wrong. I know we're going to get into that a little bit more, but these layoffs, they were a big hammer, obviously, but I know you learned about some other cuts that went under the radar leading up to this, right? Like this wasn't it. That's correct. Yeah. So I mean, leading up to this, Shopify had already started rescinding offers and canceling

any fall internships, which really affects a lot of people at Shopify. But on top of that, they were also slowly but surely laying people off under the radar by either giving them a notice, by giving them a reason for it or not. We heard that at least 50 were already laid off since April. But then on top of that, this decision was made to confirm that 10% at the very, would be laid off as of Tuesday, effective immediately. Okay. And so my understanding is that the big 10% number was, you know, an attempt to get ahead of this earnings call that they had this week. And I know you have sat through many earnings calls, I have too. So they are very boring. but so for the sake of our listeners on this

Friday morning without getting like too into detail here um about the call like how badly do we know the company is doing now yeah so I mean I think things became really clear on Wednesday uh when that earnings call happened in the morning I think our company especially is defined by us not following some kind of orthodox playbook. There's no, this is how you build Shopify on the shelves of Barnes & Noble, and we have to make it up on the fly. Shopify reported a massive quarterly loss and warned of further losses in the third and fourth quarter this year. It was a net loss of $1.2 billion compared with a profit of US$879.1 million, which was just in the same period last year. This was a pretty big net loss. Clearly, they weren't doing well, and it was as a result of these profit margins. But then on top of that, they also started clarifying a lot of the macro

economic issues, and we'll probably get to that, that are really affecting tech companies at large and not just Shopify. This company has been this huge Canadian success story, right? For a while, it seemed like Shopify could do no wrong. And take me back to the beginning. Paint a picture for me of how Shopify got started. So 41-year-old Tobias Lippke, Toby, grew up in rural Germany where he first tinkered with computers and wrote code. In 2002, when he was in his early 20s, a personal love story brought him to Canada,

where he first tried his luck as an entrepreneur. He opened this online snowboard shop called Snow Devil, and he quickly started hearing from people that they really liked the way his online store looked, that it was doing really well. You know, people were really interested in it. And they started asking Toby, you know, if he could help them build their shops, or if he could even lend them the software for them to do so themselves. That was what sparked this light bulb moment for him, where he realized

that the real business opportunity here was to provide tools that make it easier for other businesses to sell any of their products or services online. And that's the basis of what founded Shopify in 2006 before it then went public in 2015. And do you think it's fair for me to say if we sort of compare it to another place where we like to buy stuff online, right? Amazon. While Amazon put customers first, Shopify's culture was really all about the vendors, right? Like the businesses first. Yeah, yeah. You're definitely not wrong in comparing it to Amazon because, of course,

Amazon started this e-commerce boom in a lot of ways, right? And it's still to this day the industry leader in that, you know, quick, seamless paying for something online and getting it shipped to your door. Shopify, what it did was it thought about it in a different way. And that's where then it dominated that side of the market. It decided, you know what, everyone needs to sell their products online at some point. We're going to help them make their process so much easier that then they get those customers to their stores. And that's how we get them as our customers. I remember in 2015, when they went public, when they IPO'd, the stock just really kind of took off, and then it kept going up and up. Canada has a new most valuable company. It is no longer RBC, Scott Peterson.

It is not, and this is Shopify. This is the e-commerce site. A lot of people say that if you're in e-commerce in general, you're doing well. But if you look at the performance of the stock, it's up 100% just since the beginning of the year and up over 200% in the last 52 weeks. A lot of people have made a lot of money off Shopify stocks. And even so, they have still been consistently dogged by skepticism, right? And take me through some of the controversies that we've seen like leading up to today. There have been a lot of controversies. You know, the one that comes to mind first is on January 6, 2021, following then President Donald Trump's defeat in the 2020 presidential election, a mob of his supporters attacked the Capitol building in Washington, D.C., which we now know is obviously in the news because of the January 6th committee.

Shopify, which hosted shops related to Trump's campaign, paraphernalia and, you know, his personal brand Trump store, had to take down both of those properties. So that was one big controversy it had. In 2017, there were allegations that Shopify was running a pyramid scheme. Critics, yeah, critics, the most prominent of whom were, you know, this Citroen research. It's a California based stock commentary source has said Shopify is massively overvalued and that its business model where returns for older investors are paid by new investors rather than from apparently legitimate business activities should be deemed unlawful. These are people who have bought into become a millionaire at home, get rich quick And promises that completely violate every FTC rule imaginable.

It's all in the report. Now, I'm not quite sure about that one because Shopify's business model has clearly been doing OK. If anything, a lot of people have tried to replicate it. But Toby did fire back at Citroen Research and call their executive director a short selling troll. Yes, I remember this. Yeah. And then there's one controversy that's going on as we speak right now. And it's a pretty big one, too. It's about anti LGBTQ social media account Libs of TikTok, which continues to sell merchandise through

Shopify, even though the platform claims that its services may not be used to promote or condone hate. And it's using Instagram's link sticker feature to direct people to its shop. Yeah. Yeah. So the pandemic hits, and I know this is gonna seem very obvious for a lot of people why Shopify starts doing better. Of course, we're all like confined to our homes and using the internet so much more. But just very briefly, like explain to me exactly why they just start to, this rocket ship, already a rocket ship, it just takes off to a whole nother level. You know, there were two reasons for this, Jamie. So Shopify's merchant base grew and the people that were shopping at those merchant stores

were also increasing. So those were two big reasons that led to the third reason, which was obviously their stock soared because people were like, you know, this is a great company to invest in now, even more so than before, because everyone's going to be using this. And so a tech company like Shopify was almost built to do really well in that market because here it was helping these many businesses that had never even thought of being online. And it was making this whole process seamless for them. Consumers, on the other hand, online spending took off at the beginning of the pandemic. Consumers were stuck at home because of public health restrictions, and they were flush with cash because they weren't spending on vacations or entertainment, or maybe they were

getting extra government stimulus. These trends gave e-commerce leaders like Shopify and Amazon a big boost. But we've now started seeing that that slowly started reversing because people are going back to physical stores, and they're also tightening that discretionary spending because of this big economic uncertainty for a number of reasons that are affecting Shopify. When do things start to turn? When do things start to go badly for these guys? I think in a lot of ways you can look at it since November of last year. Its stock was at the peak at the time, but it really plummeted since then. And this year it's gone downhill and it's also gone downhill in a lot of other ways

that have affected it that are related to the economy, which we call macroeconomic issues. So this economic uncertainty right now is stemming from, of course, the war in Ukraine. But then there's soaring interest rates and there's inflation that just doesn't seem to be cooling off. And these are big reasons for how consumer related technology companies like Shopify will have to think, you know, and build and they are going to have to lay people off. This is that's exactly what's happening at Shopify this year. Right. And like you said earlier, it's not just Shopify tech companies, especially ones so tied to consumers are taking a beating like all over the place, right? Amazon, Peloton, Netflix.

Because tech's mega caps have shed more than $1 trillion in value. Apple, Microsoft, Tesla, Amazon, Alphabet, NVIDIA, and Meta all lost billions in value over the past year. Yeah, many tech companies have had to significantly scale back their hiring plans. Of course, we've heard the big names even not doing well. So it's a sharp turn towards this direction. Another criticism I've heard of Shopify is they don't do that much for their online stores in the way of shipping. Like once the item is bought, how do you get it to the customer really quickly? Of course, we know Amazon's doing that quite well,

right? And do you think that ties into the problems that they're having right now? Yeah, it's been really mum about those efforts in terms of fulfillment services to compete, you know, directly with the likes of Amazon that have been dominating the scene when it comes to this fulfillment and these delivery sort of mechanisms. But, you know, this year, they made their biggest deal so far in their history as a company. It was a $2.1 billion deal. They bought the San Francisco startup Deliver, Inc. And what they would do is they would be able to do the same things that essentially Amazon does in warehouse and fulfillment, but in a different way again, because it doesn't deliver directly to the customers.

It just helps these different stores deliver to the customers. So there's a two-step process there. Yes, it's competing with Amazon in this way, and it's probably the biggest, most confrontational competitive move that Shopify has done. But at the same time, it's nowhere near the scale that Amazon lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about

money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income. That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Cops. He made a mistake. This week, I feel it, why more managerial-run companies tend to not engage in bets. Mathematically, they make a lot of sense. You know, obviously, you ought to take a 20% chance at a 10x increase. But, you know, you feel it when they don't work.

Right, like he overestimated how much people would be shopping online. And he said that in his memo and said he shouldn't have expanded, hired as many people as he did. And now, of course, they have to they have to fire people. And what are their next steps? What are they going to do now? Shopify has always been this growth company. Right. And, you know, so they've been based around this idea and their entire, you know, charisma in the tech world and, you know, business world at large has been based on that they will never stop growing.

You know, this year with all of this stuff still going down where, you know, their company isn't doing exactly the best. Just last month, they announced that they have unveiled more than 100 new products for e-commerce, including a variety of partnerships with Apple, Google, Twitter, TikTok, all of these different social media companies to make their platform accessible on those. If you're on Kim Kardashian's Instagram, you can now buy this exact product that she's selling through that app instead of having to go online and do that extra step. But Shopify allowed by partnering with all of them may entrenches itself in our social media fabric, which is now a big part of what we do on the Internet. Right. You know,

that's how we spend our time on the Internet most of the time. And so that's allowing them, regardless of all these losses, to still be relevant in some way. The thing is that the stocks rallied quite a bit. You know, it's more like you don't really often hear about tech, employees in tech getting laid off en masse unless like the company implodes, right? Like, like, usually they're hiring. And so how do employees at Shopify feel right now? I think there's been a lot of employees that after this round of layoffs that have suddenly started thinking differently about Shopify. You know, they all bought this Kool-Aid. They love the mission of Shopify. They were very excited. And a lot of them still are. Even those that have been laid off are still, you know, they still

believe in the mission. But the idea that these cushy benefits that were given to them by Shopify to keep them around when the market was so competitive for tech workers, that seems to be going away. So the power has gotten back to the employers who are laying these people off, and they're not treating them necessarily the same way. The culture does seem to have shifted a little bit. For my interviews with a lot of the people that got laid off this week, I've heard that leading up to these layoffs, they just didn't feel welcome anymore. It suddenly was a sharp turn this year when the stock was plummeting, when Shopify wasn't doing well. And that seems to be a reflection for their experience at Shopify. So for a lot of them, it wasn't surprising when they were laid off. But for

some of them still who continue to believe in the mission of Shopify, they felt blindsided by these cuts. Two more. Thank you. Thank you very much for this. Thank you. Thanks for having me. All right, that is all for today. Fremdbrenner was produced this week by Imogen Bertard, Derek Vanderwyk, Simi Bassi, Ali Janes, and Katie Toth. And a very special thanks this week to Rose Daynon. Our sound design was by Matt Cameron and Sam McNulty. Our music is by Joseph Chavison.

Our executive producer is Nick McKay-Blocos, and I'm Jamie Poisson. Thanks so much for listening, and we will talk to you next week. For more CBC Podcasts, go to cbc.ca slash podcasts.