'That bet didn't pay off': Shopify lays off 10% of workforce

After steady gains over the last decade, ecommerce's share of retail rose from about 11% at the end of 2021 to 16% in the second quarter of 2022. But in 2021, it started moderating, data from the US Census Bureau showed. On an adjusted basis, the share has hovered between 14 and 15 percent since the first quarter of 2021. A more moderate decline in Q1 suggests it may still end up on a slightly steeper growth trajectory than pre-pandemic. But overall, the growth in share is unlikely to return to the early pandemic path.

To be sure, ecommerce remains on a growth trajectory when it comes to the proportion of overall retail it makes up. Over time, the growth is expected to continue. But the early days of the pandemic looked a lot different than the fast growth suggested. In early 2020, observers were fond of pointing out that ecommerce’s share of retail jumped ahead by a decade in the first three months of that year. IBM predicted that the leap ahead was five years. This was in line with acceleration of digital adoption that was on view across sectors. As home became the place where people worked, shopped, ate “out” and entertained, the tools and businesses that provided these services saw explosive usage. Capital was easier to come by than ever with interest rates low, and investors sought to back those who were showing growth. Shopify decided to go big, adding team members in spades from all over both to meet demand among entrepreneurs for ecommerce offerings at a time when shops were closed, and build for a future trajectory that pointed along the same trend line. But the acceleration of growth didn’t sustain with the arrival of relaxed lockdown policies and vaccinations. The many Shopify brands who attracted customers through digital advertising were also faced with rising customer acquisition costs and changes from Apple in iOS 14.5 that made attribution more difficult.

Now, the trajectory is expected to get back to a more gradual pace. There’s still growth and even sales milestones in sight for ecommerce. But for companies that invested based on the steeper curve, the flattening out has real effects. While lots of focus is placed on the stock market share prices, businesses are making operational changes. In another case of getting the forecast wrong, Amazon said it built too many warehouse as it grew a logistics network, and ended up with excess space this year. Shopify's layoffs, in turn, show how these missed projections affect people.

“We have to say goodbye to some of you today and I’m deeply sorry for that,” Lütke wrote.

For those who are laid off, the company is offering 16 weeks of severance pay, plus an additional week for every year of tenure at Shopify, as well as removing an equity cliff and extending medical benefits. Employees will also be offered coaching services. Shopify will also cover internet for the period of severance pay and allow employees to keep the home office furniture provided by the company. A free Shopify subscription is available to those who want to start a business.

Those who remain will be building for a different era. A series of new products released recently signaled deeper investment in providing software for brands expanding in B2B, wholesale, loyalty, social commerce and physical stores. The company is also make a big bet on standing up its own fulfillment network for brands.

“Our opportunity is massive and it’s still early days for Shopify,” Lütke wrote. “Every team here is now either focused on building products or directly supporting those who do.”

Meanwhile, the economy is in a very different macro period from mid-2020 that is not as favorable for brands and retailers. It’s an open question as to whether a recession can be avoided, 40-year-high inflation is beginning to show effects on consumer behavior as prices rise, and in doing so challenging entrepreneurs who make products that aren’t deemed essential as discretionary spending tightens.

Just as in 2020, Shopify is setting out to build and provide support for businesses facing change as a result of bigger forces once again. But it will be doing so with a smaller team, and won’t have the wind at its back.

“Our customers are merchants, entrepreneurs, and small business owners – the bedrock of our economy and precisely those that are typically hit hardest during recessions,” Lütke wrote. “Most are already feeling it. We again have a clear objective in these challenging macro economic times, and we will use everything we’ve got to help them succeed and come out stronger.”

Shopify is scheduled to hold its second quarter earnings call on Wednesday, July 27.