5 Things Investors Need to Know About Shopify’s $1 Billion Fulfillment Network

Management says fulfillment is a huge pain point for its merchants. Are they right?

| More on:
question marks written reminders tickets

Image source: Getty Images

Even with its recent pullback, Shopify (NYSE: SHOP) investors who have held the stock for more than a year have been seen their shares almost double. When Chief Product Officer Craig Miller announced this e-commerce platform’s game-changing fulfillment network on the main stage at the company’s conference called Shopify Unite 2019, there was a lot of investor excitement and Shopify’s shares rallied.

But shareholders may have missed the smaller session at that same event where Chief Financial Officer Amy Shapero delivered her investor day presentation in which she covered important details about the Shopify Fulfillment Network, from project execution to its corresponding financials and merchant benefits. Here are the five key takeaways for investors and how merchants are responding.

1. It’s still under construction

At the end of his announcement, Miller said “we have now completed our beta and are now starting to provide early access [to the network].” The early access program will allow management to hand-select merchants to add demand in a controlled manner. Even though it’s “open for business,” it’s important to understand it’s not yet ready to move to full-scale volume.

Image Source: Getty Images

Shapero explained the current state of the project in the “product-market fit” phase with a timeline of 2019 to 2020, “and possibly into 2021.” This involves “building the brain” and “3PL [third party logistics providers] partnerships.” The partnerships will help build warehouse management systems and provide physical warehouse locations.

Rome wasn’t built in a day, and neither is a high-volume multi-warehouse scalable fulfillment architecture. Nor is it built without significant investment.

2. It will cost $1 billion and won’t be profitable until 2023

The CFO laid out the costs of building this capability.

  • $1 billion in cash over five years
  • Incremental revenue will “largely offset costs”
  • Costs are back-end loaded, meaning most of the expenses occur later when the fulfillment volume (and revenue) ramps up
  • The “bulk of net return [profits] expected beyond 2023”

Shapero said the spending on the scale-up will be “success-based.” The network will have to achieve functionality and demonstrate the ability to maintain high-performance expectations before more money will be released to add capacity. This is a really smart way to control the growth and ensure a great merchant experience.

3. It’s merchant focused

Shopify has always been a merchant-first platform, striving to make the e-commerce entrepreneur’s job simpler in every way.

The executive leading this effort, Thomas Epting, joined Shapero on stage and covered details about how this solution will address merchant pain points. He said the network has built-in integration to its platform, simple and competitive pricing, contracts that make sense, access to big-company shipping rates, and machine-learning informed inventory strategies that keep storage rates low. The merchant gets all of those benefits along with fast and accurate shipping. Perhaps the biggest benefit is the end-customer won’t even know that Shopify is involved; the seller is able to keep its own branding on shipping labels, boxes, and paperwork.

When comparing to Amazon‘s (NASDAQ: AMZN) third-party seller process, Shopify’s merchant-first approach is an important distinction. Because Amazon is customer-obsessed, sellers on its platform need to follow strict rules in order to “fit in” to the e-commerce giant’s high-velocity fulfillment process. A merchant’s brand gets hidden through this process and sellers may even end up competing for sales against Amazon’s private label brand. That’s not the case with Shopify’s merchants.

4. It has no internal goals or measures of success

It seemed like an obvious question: How will you know if the program is successful? But CEO Tobias Lutke provided a surprising response; “I’ll know it when I see it… it’s got to be hard to quantify right now.”

He explained that while teams can be successful when trying to reach target goals, it can often have the unintended consequence of leaving “scorched earth all around the particular blast zone of a single metric.” Lutke is staying away from specific goals and relying on customers to let them know how it’s going — and historically they have. “When we do something [poorly] our customers tell us about it,” he said.

Existing merchants won’t make the effort to switch their fulfillment providers if the solution is not better and cheaper. The leaders of this e-commerce platform company know this and are already making improvements.

5. It’s inviting the robots to join the party

In September, Shopify announced the acquisition of 6 River Systems for $450 million, which provides an end-to-end collaborative robot solution for warehouses. This deal will help the network to scale up more efficiently and allow 6 River to continue selling its solutions to outside customers, providing incremental revenues along the way.

Buying a fulfillment-robot expert is a smart move for a number of reasons. It will allow tight collaboration between software developers and robot engineers for a more effective solution. It adds talented industry expertise to its staff and creates focus by standardizing on one robot operating system.

The bottom line: Are merchants signing up?

The Shopify Fulfillment Network seems to have hit on a big frustration-point for its customers. Fast-forward six weeks later to the most recent earnings call, Shapero shared that “thousands of merchants have expressed their desire to be a part of our early access program” and that it plans to “accelerate investing so we can move fast and execute on this opportunity for our merchants.”

It looks like this billion-dollar bet is likely to be another winner for Shopify and its merchants.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Withers owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.

More on Tech Stocks

woman retiree on computer
Tech Stocks

2 Top TSX Growth Stocks to Buy Today and Hold for 10 Years

Given their long-term growth prospects and discounted valuations, these two growth stocks could deliver multi-fold returns in the long run.

Read more »

hot air balloon in a blue sky
Dividend Stocks

3 Roaring Stocks to Hold for the Next 20 Years

Sure, there are stocks roaring upwards in the last year, but these three can claim doing it for decades.

Read more »

A chip in a circuit board says "AI"
Tech Stocks

How to Invest in C3.ai Stock in Canada

Are you looking for growth from our neighbours to the south? This tech stock has it, but how can Canadians…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

Better Buy in July: Passive-Income Plays or Growth Stocks?

Will July mark the beginning of an economic recovery? Should you consider investing in passive income or growth stocks ahead…

Read more »

A chip in a circuit board says "AI"
Tech Stocks

This is the Best AI Stock to Buy Right Now

When it comes to AI stocks, Nvidia stock should jump to mind. But don't forget about the absolute dominance of…

Read more »

Choose a path
Tech Stocks

BB Stock’s Dismal Earnings: I’ll Stay Away

BlackBerry Inc (TSX:BB) stock crashed after earnings. Here's why I'm still staying away.

Read more »

sad concerned deep in thought
Tech Stocks

Is the Worst Over for BlackBerry Stock?

BlackBerry stock has been burning investors' money for the last four years. Is the worst over for this stock? Here…

Read more »

Person uses a tablet in a blurred warehouse as background
Tech Stocks

1 Super Tech Stock (Besides NVIDIA) to Buy Hand Over Fist in 2024

A TSX super tech stock could deliver comparable or far better returns than the AI king across the border.

Read more »