The Current Shopify and the promise of delivery

It’s official: Shopify is acquiring Deliverr.

Two weeks after Bloomberg reported the deal was in the works, ecommerce infrastructure company Shopify formally announced the $2.1 billion acquisition of the San Francisco-based fulfillment startup on Thursday as it shared earnings for the first quarter of 2022.

The cash and stock deal is the largest acquisition in Shopify’s 16-year history. It supercharges the company's previously-shared plans to expand logistics capabilities for merchants on the heels of increased pandemic-era demand for ecommerce and supply chain snags that have made delivery increasingly complex.

“Our goal is to not only level the playing field for independent businesses but tilt it in their favor — turning their size and agility into a superpower,” Shopify CEO Tobi Lütke said in a statement. “Together with Deliverr, Shopify Fulfillment Network will give millions of growing businesses access to a simple, powerful logistics platform that will allow them to make their customers happy over and over again.”

Founded in 2017 by Harish Abbott, San Francisco-based Deliverr has a software and logistics platform used by merchants that already delivers more than one million orders per month for thousands of merchants around the US.

With the combined offering, the companies will offer the following capabilities:

Inventory management that offers a single space for merchants to ship orders from across different channels, ranging from in-store to ecommerce platforms like Amazon and Etsy to social channels like Facebook and TikTok.
Inventory placement that predicts the geographic areas where orders are most likely to be concentrated, and positions products in warehouses for faster delivery.
Two-day and next-day delivery, via a network of warehouses and delivery partners.
New logistics services for storage, freight, inventory preparation, and returns that will be available to merchants whether or not they use Shopify Fulfillment Network.

Shopify executives said the addition of Deliverr’s 400 employees will double its existing fulfillment team. Combining with the company’s existing teams at Shopify Fulfillment Network and the previously acquired fulfillment tech company 6 River Systems, it will also speed up the planned buildout of the operations that will allow Shopify to provide logistics and delivery capabilities for the merchants who use its software.

“We want to get our merchants highly reliable, fast affordable delivery and we think we can do that much faster with Deliverr,” Shopify President Harley Finkelstein said on a call with analysts following the announcement.

While Shopify has long powered the websites where online selling of goods takes place, this effort to offer an additional service that moves the goods ramped up significantly in the first quarter of the year. Following the termination of warehouse contracts that raised alarm bells about the company moving away from providing its own fulfillment services, Shopify doubled down in this area. It shared plans in February to spend $1 billion over two years to expand its fulfillment network, with the end goal of offering two-day delivery to 90% of the population. Executives on Thursday said the acquisition will accelerate its efforts on this front.

Finkelstein said the deal to bring on Deliverr was attractive because the company is software-centered and “asset-light,” which aligns with Shopify’s approach. It also means Shopify will be able to manage capital expenditures and fit it alongside its existing product, Finkelstein said. The subtext of this appeared to be that Shopfiy wouldn’t be building out a vast network of fulfillment centers, and Finkelstein further confirmed this to Reuters, telling the wire service in an interview that the company would only build a few distribution hubs.

While this deal covers fulfillment and delivery operations that mostly take place out of view for customers, there will be a very visible sign coming to merchant websites soon.

Alongside the deal, Shopify announced the creation of Shop Promise. Now in early access, this is a service that allows merchants to offer two-day and next-day delivery and returns services to customers. This promise can be displayed on a merchant's website, as well as channels such as Google, Facebook, Instagram, and the Shop app, as well, the company said.

“Being able to offer a delivery promise and fast fulfillment across all these channels boosts conversion,” Shopify CFO Amy Shapero said in a statement. “We are confident Deliverr’s ability to simplify the process, and arm merchants with visibility and control from the display of a delivery promise across multiple channels through its completion, will be a huge benefit to our merchants.”

The release of this feature comes on the heels of Amazon’s announcement that it will introduce a new badge of its own to guarantee shipping and returns. Called Buy with Prime, it will allow merchants to embed Amazon Prime’s checkout, two-day delivery and free returns into their own websites for members of the ecommerce platform’s subscription service. Giving merchants access to Amazon’s vast logistics network, this effectively offers an option that decouples Amazon’s services from Amazon.com.

The timing here naturally heightens speculation about competition between Amazon and Shopify. The Deliverr acquisition sets up Shopify to offer DTC merchants similar services to what Fulfillment by Amazon (FBA) provides to third-party Amazon sellers. Buy with Prime, which will initially be offered to FBA merchants, debuted the day after news broke about the potential Deliverr acquisition, and it was immediately viewed as a “Shopify killer.”

With Shop Promise, Shopify appears to have an answer – or at least its side of a call and response. Its blog post announcing the service added that Shop Promise allowed merchants to maintain “full ownership of their brand, business intelligence, and customer data.” That could easily be read as a swipe at Amazon, as one of the tradeoffs quickly presented in analysis of Buy with Prime was that companies would have to give up customer data to Amazon.

Lütke was asked about Amazon’s Buy with Prime during the earnings call, and agreed to address it. His conclusion: It’s good news. In remarks, he said Shopify was a mission-driven company, centered around providing tools for entrepreneurs.

“What we get excited about is if infrastructure is shared with small businesses,” he said. Digital infrastructure developed over the last couple of years benefited players that were already big, he said. So, he said he was “thrilled” about Amazon making a move to open up its tools and logistics network to small merchants.

“This fits perfectly into our worldview and it’s not nearly as zero-sum as some people make it out to be,” he said. “Whatever is good for merchants will cause more entrepreneurship, which is exactly the vision of the company.”

And from Shopify’s perspective more tools mean Shopify’s platform is more useful. He said Shopfiy could integrate Buy with Prime into its offerings, alongside tools from many of the other big tech companies.

“This is actually really good news from our perspective,” he said.

(Update: After Lütke's remarks raised speculation that Shopify had decided to integrate Buy With Prime, a spokesperson told The Information that the company was still weighing this decision. 5/6/22, 4:58 p.m.)

Amazon and Shopify started out with different kinds of offerings.

Amazon had a single marketplace where brands could opt in to sell alongside others. The company offered access to the scale of the audience and a massive fulfillment network, but in turn merchants gave up some control of their stores and bowed to the price requirements of Amazon. It said it now has excess capacity in its warehouses following a big buildout post-pandemic, making rollout of a program that could entice more merchants to use its services a logical next step.

Shopify, in turn, built tools that helped merchants power their own websites. While it meant these companies had to work harder to attract audiences to individual websites, the entrepreneurs had independence, the ability to control their brand and how they reached customers. Now it is strengthening a logistics network of its own. Seeking to expand the services it offers for brands to solve key problems, the company said it is now seeking to provide an "end-to-end" platform that can manage products' journey from "port to porch."

To be sure, a difference in scale remains. Amazon sales make up roughly 40% of US ecommerce, while Shopify accounts for roughly 10%. Both want to offer merchants the ability to get orders out the door quickly and seamlessly. They’re making long-term bets based on the continued growth of ecommerce. Lütke said the Deliverr acquisition will impact profitability this year, but deemed the move worth it given the strategic imperative of building out fulfillment.

Yet they’re also both facing the same macro dynamics, as the current ecommerce trajectory is "normalizing" to its more steady pre-pandemic growth pace, as Shopify's own chart put it, and inflation brings new challenges. Shapero added shoppers' return to physical stores and labor shortages as additional challenges. Ecommerce sales for April were down 1.8%, even as overall retail sales were up 7.2% year-over-year, according to MasterCard SpendingPulse.

This has led to short-term pressure on platforms. Amazon reported its first quarterly loss since 2015 in its earnings call last week. As Shopify reported revenue growth of 22% and gross merchandise value of 16% year-over-year on Thursday, its profits were deemed a miss by Wall Street, and its stock price has declined 70% over the last year, Yahoo! Finance said. They're not alone, as Etsy, Wayfair and Poshmark also saw stocks drop.

Now, both Amazon and Shopify will be looking to add merchants to new logistics-based services. Even if they aren’t on a collision course, they appear to at least be moving toward parallel tracks. It remains to be seen whether merchants will have to choose sides.

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