Tech Brew Ride Home - (Bonus) Why Shopify Is #Winning With James McLeod

Episode Date: April 25, 2020

As you’re about to hear, I’ve wanted to do a deep dive episode discussion on Shopify and how they’re suddenly the big up and coming, potential tech behemoth… arguably the most successful tech IPO of the last five years; seemingly the only company that can challenge Amazon in ecommerce… so when James McLeod from the Financial Post got in touch wanting to talk about Shopify, it was like someone was reading my mind. You’ll see why I’ve found the Shopify story so interesting because… well, we get right into it… Sponsors: ReadyCloud.com/pod TinyCapital.com James’ recent reporting on Shopify and other tech stories: https://business.financialpost.com/author/jmcleodpostmedia Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the Tech Meme Right Home. I'm Brian McCullough. As you're about to hear, I've really wanted to do a deep dive episode discussion on Shopify and how they're suddenly the big up-and-coming potential tech behemoth. Arguably the most successful tech IPO of the last five years, seemingly the only company that can challenge Amazon in e-commerce. So when James McLeod from the Financial Post got in touch wanting to talk about, Shopify, it was like someone was reading my mind. You'll see why I've found Shopify's story so interesting lately because, well, actually, we get right into it. Please enjoy. Crazy weird times,

man. Well, also, though, I mean, thank God I've wanted to do something on Shopify, because it's weird, and maybe I'll even, we'll get into this for the thing. But like, Shopify is clearly going to be potentially one of the big players now, but there's never been a story that I could like hang a segment on, you know what I mean? So like I'm so happy to do this because I want to like alert the audience, hey, these guys are the big up-and-comer, but I haven't had a way to do it yet. Well, and it's weird. I don't know if you've taken a look at their stock price, but it's, I mean, And if you want to sort of turn on a recorder and start getting into it. Yeah.

Okay. Consider us going at this point. Okay. So like if their stock just hit like this crazy all-time high, the market cap is, in Canadian dollars, it's just above $100 billion now, which obviously. I just checked. It's 73 billion U.S. as of the time of this recording. And so, like, I mean, every stock on the market has gone through wild swings in the last month or so. But, like, in early March, the stock was trading it around $670.

This is all in the TX, actually, but for the sake of numbers. It was $670 at the beginning of March. And then it dropped down to, like, $460. They pulled their guidance and all of that. And then in the last week or so, it has just shot up so that there were, it was briefly the second most valuable company in Canada. It didn't hold that because I thought it had just happened this week, right? Yeah. Like, I think, I think that reversed itself.

I'd have to double check. That was like literally on Monday. And it's, but yeah, it's basically the Royal Bank of Canada, Toronto Dominion Bank and Shopify are, right at the top of the heap in terms of like publicly traded company values. And it is, it is down to the pandemic, really. Well, okay. So then maybe let's, let's do a little basic table setting here. Like, just give us real quick, like the 60 second, like what Shopify does, maybe even like the founding story. Like, I think it was literally guys that wanted to sell ski equipment or something like that and they couldn't find an easy way to do it.

it? Yeah, it was the sort of main founder, a guy named Toby Lutka, who is a German immigrant Canada, was, he had a snowboard shop and wanted to sell snowboards online, and there was just no good e-commerce software. This would have been, I think, 2004, 2006, somewhere around there. And so he wrote some basic e-commerce software, basically. turned that into a business. And so the company's been kind of slowly growing and has really, really taken off in the last few years, where it has, like, the core product is a sort of retail command center mostly for e-commerce. So you're paying a subscription fee for something that does or order management, inventory management, checkout and payment.

So like literally the software where if you're on a site and you put an item into a bag and then check out, that's what Shopify is giving you. Yeah, see, let me interrupt real quick because I think listeners might know this. In my other life, you know, I've been running e-commerce businesses for 20 years. And so I've always been vaguely aware of them because there's, you know, people don't know this, but there's this whole industry of like there's things like WooCommerce and, and Magento, and they're essentially, you know, a really blunt way of saying it is it's like shopping cart software and stuff like that.

Yes. And so, right, I was going to say, so I always thought, oh, Shopify is just another one of those, but then it's become so much way more than that. But the thing that I like to bring up when I'm trying to sort of explain this is like, were you aware that Shopify has an app store and like a thriving app store where they have sort of APIs for their e-commerce dashboard where you want someone to write a program that just deals with returns or deals with email campaigns or all sorts of little and silvery things. There is an app store where merchants are paying like monthly subscription prices, $5 here,

$10 there, for various other services that plug into them. So really the thing to understand about Shopify is it's about a million primarily e-commerce merchants that are using a tool set and sort of linking together different services to build a kind of cloud-based business. So it's sort of like it's sort of like a dashboard cloud thing, also a SaaS sort of thing. But also the other thing that I thought about them for years is like maybe it was sort of like, maybe it was sort of like, like what Stripe does? Because that was the other thing that put them on my radar is they, early on, like in the maybe 10 years ago, they suddenly allowed you to accept credit card payments without having a merchant account. And again, this is in the weed stuff, but for, that's a big deal for merchants. So tell me in what way they're different than say what Stripe does.

So I believe Shopify actually integrates Stripe. And if you're processing payments as a merchant, you can use them. But Shopify does have a competing, does have a Shopify payments product where they're just doing payment processing. I think actually the sort of easiest way to understand a comparison is square, where, like, they started as the little dongle

that you stick into an iPhone to, you know, do credit cards at farmers markets. But they are now also kind of small merchants, point of sale, payments, and enabling commerce and they're kind of moving more into the e-commerce world. And Shopify is moving more into the physical commerce world. That's one of the things that's really interesting to me about this company. In the last year or two, they've made a big push into bricks and mortar retail

with the whole idea being this, I don't love the term Omni Channel, but that is the buzzword, where you've got a business and you may have one or more physical stuff. you have an e-commerce presence, maybe you do events. And like, it doesn't matter where you make the sale, whether it's in the store or online. It's all sort of same products flowing through the same business. And that is somewhere that Shopify and a couple competitors are like ideally placed to play where they have the e-commerce shops, but they can also sell to traditional retailers who may straddle the physical and digital world.

Okay, so two more things that this plugs into in terms of my recent obsessions. So there's also this idea of, and I think this is the piece that you wrote this week, that this is also a fintech play in the sense that all of a sudden they're opening up this new line of business that is literally providing financing to merchants and things like that. Yeah, well, actually they've been doing this for a couple of years now. They call it Shopify Capital, and kind of the thing to understand about it is they hate it when you call them loans. Shopify, just in their mindset, it is very, very important that they are providing cash advances to the merchants on their platform. So the idea is they have all of the data.

they can see what your cash flow and, you know, how many sales you make and all of that. And they can analyze that and say, we can loan you $10,000 or, you know, $200 or half a million dollars depending. And with, and they will basically just take that out of future sales. And so, like, there's no interest rate on it. the like because it's just we're going to take a percentage of future sales and um but because they've got all of the data to sort of make the underwriting decisions they can give these very low risk loans and to date they've given out um something around 800 million dollars worth of these cash advances and they will pass a billion dollars by the end of the year one of the big

things they announced in the kind of pandemic response was making an extra $200 million available to merchants and expanding this program to Canada and the United Kingdom so that more of the shops on the platform have the liquidity to sort of manage through. So you mentioned the pandemic moment, the Corona moment, as I've been calling it. I think your piece also said that, well, I'd seen stories that they, In terms of the one side of it, they apparently are doing like Black Friday level of sales traffic every day over the last month or so. But then I think your story also said that they're seeing like an upswing in merchants signing on over the last month. So they might be one of these companies that is really well positioned for the current moment.

Yeah. So like I've got a lot of feelings about that whole situation. Just because, like, on one hand, it absolutely makes sense that there's, there are a lot of businesses that are trying to spin up in the e-commerce operation overnight. And just reaching for off-the-shelf software like Shopify makes perfect sense. And the other thing is sort of part of the founding mythology of the company is that they actually got a boost from the 2008 financial crisis. because, like, as the story goes, you had a whole bunch of people who lost their jobs, were sitting at home and started turning their hobby, their side hustle into a source of income. And so a lot of people basically lost their jobs and embraced entrepreneurship,

and Shopify sees the tailwinds of that. On the other hand, in this pandemic moment, Shopify has extended its free trial from normally 30 days to 90 days. So it's entirely possible there's a lot of people who are at home who are just playing around with something for free. And this is a bit of a quibby sugar high kind of situation. But I'm very curious to sort of see because at its current size, like in 2008, Shopify was a really small company. Now it's got more than a million merchants on the platform. If there's a big recession that's wiping out small businesses. It could be really, really bad for this company.

Interesting. Well, and it's funny, we've gone, you know, almost 10, 15 minutes into this, and we haven't even gotten to the really interesting part of the narrative here, which is, like, a lot of people are sort of pitching this as Shopify. It's a David and Goliath thing against Amazon, right? I keep seeing the analogy that people love to use is like, and I think Shopify even uses it. Like, it's, they're the Rebel Alliance against Amazon's Galactic Empire because correct me if I'm getting this wrong here, but the idea is, is that Shopify is going after

these smaller merchants, but maybe also the direct-to-consumer merchants. And they're like, do your thing, you own the customer, we're not going to disintermediate you from your customer like Amazon does. Yeah. And so it's this whole arming the rebel, thing is really, really funny to me because when I started covering Shopify really intensively about two years ago, I used to joke with people that Amazon was like Voldemort in Shopify world, where it's like it's big, it's scary, and we absolutely never say its name. And the reason why they had this complicated relationship with Amazon is because a lot of Shopify merchants sell through the Amazon marketplace.

If you're running an e-commerce business and you need that kind of dashboard, backend thing, but you're still doing a lot of your sales through Amazon and even fulfillment through Amazon, as Shopify, you don't want to turn Amazon into the enemy. So, wait, so on one hand, on the one hand, they very much have gotten where they are

by being like, we're arming all sides. It's a gold rush. We're just selling. the picks and the shovels. We don't care where you sell, we just want to help you sell. Well, it's actually more the other way where, like, for the longest time, you know, they were just happy sort of doing their own thing and just kind of wanted to pretend the Amazon didn't exist, but didn't want to antagonize them. But it became so obvious that there was this obvious competitive tension and the merchants themselves were using Amazon

but didn't love it. And so slowly over time, you sort of sort of saw this arming the rebels idea enter. And they've really embraced kind of a bit of a scrappy identity. I think to understand about Shopify is that it's not headquartered in Toronto or Vancouver or even Montreal. It's like headquartered in Ottawa, which is cold. It's like boring. It's out of the way.

It's the capital city. But nobody goes there unless you work for the government. And Shopify really has this kind of sense of identity that we're like, We're not in the valley. We're out here doing our own thing, and there is kind of this scrappy, you know, Rebel Alliance ethos to it. And you really are seeing that kind of coming to its own right now. But if I'm a merchant, is it cheaper to sell on Shopify, or do they just have better tools? Or is the appeal, has it just been that they're not Amazon?

I think it is kind of a combination of they have better tools. I actually haven't ever sort of sat down and done a cost comparison because it does get pretty complicated in terms of different subscription tiers. And then whether you're using their payment software, whether you're using, like they've got a fulfillment network in the United States or whether you're using that or fulfilled by Amazon. The pricing does get pretty complicated, but like a big, the big sell around Shopify is, we're only working for you. We're not mining your data. We're not going to do the Amazon thing where we copy your product and undercut you. We are just selling a tool and a subscription service for you to be a merchant.

We're on your side. And when, like they are tapping into something. where their market is entrepreneurs and that sort of like master of my own destiny, being able to be independent, not be under the thumb of Amazon or whoever, is kind of a powerful selling point. All right. Amazon or Walmart or whoever, again, that comes back to the idea that Shopify can empower direct to consumer.

And as a merchant, you can own your relationship with the customer better, maybe. Um, go ahead. Well, and like the thing to think about here is it is easy and I'm, I'm as guilty as anyone of falling into that Shopify versus Amazon, um, David and Goliath, the dynamic, but the analysts always remind me that like e-commerce is, you know, sort of 20-ish percent of of retail. And we're expecting that to change because of the pandemic. There's a lot of companies that are adopting some sort of e-commerce that are going to keep doing that after this is all over. But, like, there is, like, another 80% of the pie that e-commerce is going to be

eating more and more and more of. So, like, how that shapes, how that, like, larger secular shift develops is going to be a lot more important as to the future market dynamics as opposed to just how Shopify and Amazon look when they're scrapping over the 20% of the market. You know what I mean? So maybe the analogy is not, okay, David and Goliath or even Shopify as a strong competitor to Amazon. Maybe it's just that, again, as bizarre as it may be to realize this overall market is still so young, they're still 80% to go.

So if they're just another strong player, then there's still so much that they can grab in that market. Exactly. And that is, I mean, sort of circling back to the stock price where we kind of started, the trouble with valuing this company is it doesn't make money. Like it is, it doesn't really lose money, but it's basically a break-even proposition right now. But they are well positioned with a brand and a good tool and a million merchant customers in this enormous potential future market that is, you know, know, global and just worth trillions of dollars. Like, there's, there is a lot here. And the reason the stock is, like, at such crazy high numbers is because how do you put a

value on that opportunity? Or maybe they're getting the same sort of halo that Amazon got all those years, which is like, well, we don't care that you're not making money yet. So are they, they're not profitable necessarily, but are they throwing off enough cash that they can do that sort of reinvest for years and years and years that Amazon did? Yes. Yeah. No, they absolutely are. They're basically, it's in one of those situations where the last time the stock was pretty high, they sort of sold a bunch of shares and raised a bunch of money. They're not hurting. And it is the sort of thing where they can shift to profitability

at any point they want, but why in exactly the same way as Amazon, it's like, why would we try to be profitable when we can build a bigger, more robust business? So Shopify is building a fulfillment network of warehouses and shipping and all of that stuff so that they can do two-day shipping in the United States. They're doing a big international expansion, trying to basically make, the service available everywhere in the world, push into physical retail. It is the same thing as Amazon, where it's just like, instead of throwing off money, just keep building out. Well, then the multi-billion dollar, maybe trillion dollar question is, um, why can't or won't Amazon just, uh, turn the eye of Sauron to them and,

and crush what Shopify is doing? Um, there's, There is a very funny, you were actually the one who tipped me onto this. This was months and months ago. Toby, Luka, the chief executive, is like a Starcraft. Right, right, right, right. He used to stream for a while just on Twitch.

He's the only CEO I know who just streams himself playing video games. And there is this analysis that. he kind of validated. He tweeted that it was like a frighteningly accurate assessment of him as like a Zerg strategist where you've got this horde and you basically try to be nimble and respond to threats while growing the size of your base. And like as long as Shopify can keep adding merchants every year, they went from like 800,000 a year ago to more than a million now. If they can just keep growing and growing and growing that base of merchants, then Amazon is a company that is kind of one merchant, well, I mean, they've got the whole platform and everything else,

but like Amazon is playing for Amazon. They are knocking off other companies' products and like doing things to alienate potential partners. Shopify is just growing their customer base. and I don't, like, I don't fully know, like, Amazon could probably crush Shopify if they wanted to, but there is the argument out there that Shopify is more useful to Amazon intact because it's like a nice antitrust foil. I don't know. Yeah, do you have a sense of, because I haven't seen any reporting on this, like, do we have any sense of, do we have any sense of, like, do we have any sense of what Amazon, thinks of Shopify right now? Are they threatened? Have they been making any sort of moves that are like, oh, well, Amazon clearly just started this initiative because that's a response to Shopify or anything like

that? Not really. Honestly, it is kind of a bit of a one-way thing where I, like, there's a lot of people who sort of talk about how Shopify is strategizing around Amazon. I can't actually recall. It is an interesting question now that I think about it. I can't recall Amazon ever doing something that overtly felt like it was aware of Shopify, which I guess is just like the mark of ultimate success in business.

That's true. Yeah, but it's not like one of those, you know, it's not, the analogy would be, you know, Facebook and Instagram immediately copying stories and then copying this feature and copying that feature. We haven't seen any sort of response from Amazon like that yet. No, no. Or I guess another one would be like cutting fees to the bone, because that's the traditional Amazon play where it's like,

all right, fine, well, or any big oligarchs play is like, all right, we don't need to make money on this little thing that is your lifeblood or something like that. It is, it does, like, it is hard in the sense that like Amazon.com, the store of the marketplace is, of course, a big part of Amazon's business. But like when you start folding in AWS and Audible and Twitch and prime video and everything else,

you're sort of like, how big of an existential threat does Jeff Bezos think Shopify is? Like is it worth going all out on them? Going to the mattresses, as they would say, in The Godfather, yeah. It's a bit like, you know, is Sundar Pichai really worried about, Or not sooner, Chisatia Nadella, is Sachi Nadella really worried about the next PlayStation? Yes,

they make an Xbox that is a competitor to it. But, like, that's one part of the business. You know what I mean? Amazon is so big. That's a perfect analogy, actually. Let me, before I let you go,

as we were saying, like, Shopify is, was maybe briefly the number two most valuable company in Canada. it's been a while since the heyday of Nortel and even Blackberry at this point. So I'm just curious about what Shopify represents to the Canadian tech scene, the startup scene, or like, you know, just generally what you're all thinking of Shopify's success right now up there. Well, I mean, it definitely does sort of feel like there can only ever be one really successful Canadian tech companies.

company. Well, actually, let me interrupt because wasn't there Wave, too? Like, Wave was another, maybe that was more accounting or something, but it seems like maybe this is a space that, like, is there's something happening up there. Well, no, there are interesting things. I, I definitely don't ever advise anyone investing in the stock market under any circumstances, but if anybody who's buzzing about Shopify and takes a look at their stock price should next look at two companies called Lightspeed POS and Touch Bistro, which are also Canadian companies doing cloud-based, like point-of-sale, payments processing software. And there is a weird cluster up here of fintech things and exactly the kind of business that Shopify tends to play in.

Right now in Canada, they are definitely the standard bearer. They are kind of the, the government loves them. They are the sort of charming success story. But like in the same way as sort of Nortel and Black, especially Blackberry, there is this thing of like they have won Canada, but like now they've just got to compete on the global stage and, you know, then you're going up against the likes of Amazon and Salesforce and whoever. And so yeah, you hope they're success. successful and yeah, I just try to understand the business. Yeah, I guess, you know, they could be a takeover target at some point, except for the fact that if you're at $70 billion market cap, that would be hard for a lot of people to take

you out now. And Amazon couldn't do it for antitrust reasons. So maybe they're like weirdly threading the needle perfectly at this point. It does sort of feel like, and I was actually watching a lot of. live stream of Toby playing Starcraft, where it was literally me and like 35 people on Twitch just watching this guy play, play strategy games. But he was talking at quite some length about this and just sort of saying that like his line was startup time is over. Like he basically said Shopify could not have been born at another time. It was like the shift to mobile, the shift to

cloud and just like a bunch of macro technology trends. They were founded at the right time and they are now big enough that like they can probably survive on their own. But yeah, that was they are one of a whole bunch of companies from sort of a specific time in, in our economic and technology development. And it looks like they've gotten big enough that nobody can just knock them off. like an Instagram or a WhatsApp. But yeah, how the market sort of consolidates and develops in e-commerce. Well, you know, who knows everything going on.