Photo: Shopify
Why Is Shopify Abandoning In-House Fulfillment?
Shopify last week announced plans to sell the majority of its logistics business, including Deliverr, to Flexport, the freight forwarding startup.
The e-commerce platform launched in-house logistics in 2019 to make “the fulfillment systems and technology that used to be reserved for the largest companies in the world accessible and affordable to every merchant, even those just starting to take off.” The push was supported by the acquisitions of autonomous mobile robot maker 6 River Systems in 2019 and last-mile delivery startup Deliverr last July.
The Wall Street Journal reported that Shopify has struggled to gain traction with the physical delivery business.
CEO Tobi Lütke discussed “main quests,” or a company’s “mission,” versus “side quests,” (with the latter offering the potential to make main quests more successful but also distractions) in a blog post.
“It’s often said that larger companies are more sluggish but this is not because of their size,” said Mr. Lütke. “It’s because of all the side quests and distractions they accumulate along the way.”
He said Shopify needs to prioritize its core business to capitalize on emerging tech. “We are at the dawn of the AI era and the new capabilities that are unlocked by that are unprecedented,” Mr. Lütke said.
Flexport’s ownership, he said, “allows everything about Shopify Logistics to be more ambitious and global in nature.”
Flexport, which becomes Shopify’s official logistics partner, gains over 50 warehouses and package-sorting centers nationwide and adds home-delivery services to compete better with Amazon.com.
Dave Clark, Flexport’s CEO and formerly Amazon’s retail boss, said, “This acquisition enables our vision for a full digital transformation of the global supply chain that we will bring to all customers.”
Shopify will receive a 13 percent equity stake in Flexport and a seat on its board as part of the transaction. Ocado Group is acquiring 6 River Systems. Shopify’s shares jumped 24 percent last Thursday on the news.
Discussion Questions
DISCUSSION QUESTIONS: What will Shopify gain from selling its logistics business to Flexport? Does Shopify’s logistics operations have a better chance to prosper under Flexport’s ownership?
Poll
Loading …BrainTrust
Dion Kenney
COO, Mondofora
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Shopify will lose control of the future direction of its logistics business, but it will also lose all the cost associated with it–and that’s a gain for Shopify. I think Lütke’s argument is a strong one — eliminating the side projects and focusing on their core business makes more sense at this time. Cost control, simplification and focus are recurring themes that I believe that we will be hearing a lot of over the coming quarters as retailers and the businesses that serve them continue to re-calibrate for profitability.
I don’t think investors ever loved the investment in logistics anyway, so there was definitely pressure coming from that direction. And this kind of investment is exactly what makes e-commerce unprofitable. You can be as fast and flexible as you like online, but at the end of the day a physical item has to make it, in real life, into a human’s waiting arms. And that’s expensive, and the margins aren’t so great. You either have to go big — where it is your exclusive focus, or where you are Amazon or Walmart — or go home. I’m not surprised that Shopify had to go home.
Despite the seeming obviousness and inevitability, disrupting an entrenched ecosystem is difficult and expensive. On paper Shopify’s plans to democratize fulfillment might have looked good, but the reality is that this is an enormous change at the societal, industry, and individual level. Flexport may have a better chance at success, as they are only trying to transform a single ecosystem, but it is still fighting a well-entrenched and deep-pocketed group of successful special interests.
Many companies assert that integrating vertically all the business functions gives them absolute control over their business and, thus, they do not outsource these so-called “mission-critical business processes.” Others believe that owning what they call “none-core business processes,” such as fulfillment in the case of Shopify, is little more than a distraction from what these businesses want their distinguishing offering to be. Specialists that are dedicated to these peripheral functions can do it better, they believe. One can argue either case. What counts is the execution of either philosophy.
Tobi loves the word “subtract” and that’s exactly what he’s doing: subtracting non-core offerings. Shopify is brilliant at tech, yet success in logistics demands different core competencies.
Flexport’s functional expertise makes a better fit for Shopify’s logistics operations. This move frees Shopify up to focus on tech mastery vs. offering end-to-end solutions to sellers.
Shopify has learned that being in the supply chain logistics and fulfillment space is very challenging, costly, and complex. They are now selling their entire logistics division. Shopify strayed from its core business, digital and e-commerce operating model and strengths to take on a formidable competitor. While they are very successful with their e-commerce platform and serving an underserved independent retailer market, running a logistics capability is a different animal.
The move ends Shopify’s year-long effort to build its own logistics business. Lütke called that effort a “worthwhile side quest” that could be an independent company in the future but said Shopify is refocusing its priorities on e-commerce software and newer initiatives such as artificial intelligence.
As many companies have learned, supply chain logistics businesses are incredibly challenging and require a focused and scalable operating model. Companies must be resilient enough to mitigate unforeseen macroeconomic and supply chain disruptions.
Shopify’s move is the latest example of the great migration between buy, build, and bridge. In this case, Shopify is shifting away from building and maintaining a logistics operation and bridging capabilities through partnership. It’s a more agile model that will free up resources to invest in emerging technologies. Logistics is an all-or-nothing proposition and Shopify was smart to acknowledge its limitations.
Logistics are very complicated and it requires extensive expertise and agility to be successful with them. Logistics is not a core competency for Shopify so the decision to sell its logistics business makes sense. Focusing on what they do best – making it easier to start, run, and grow a business – is more important than being a logistics provider. Leave logistics to the pros!
More than 90 percent of Fortune 500 companies use third-party logistics (3PL) operators. Those companies understand what their business is and what it isn’t. If an online merchant is not Amazon or Walmart, not only are the logistics expensive, but are not very good at them.
If you are uncomfortable with the Amazon or Walmart Marketplace, an independent 3PL is your answer. I predict this will be the biggest growth area in online marketing. The opportunity for technological advancement and cost minimization by companies that depend on their ability to handle logistics efficiently will increase dramatically.
For Shopify this is a strategic decision. They don’t want to become a Shipify but more of a ShopAI. Gains: the sales of a business unit no longer tied to the key strategic goals of the company. Flexport will do just fine and Shopify can maintain relevant relations with the firm assuming amicable contract agreements and their seat on the board. The fact that Shopify seeks to drive more towards AI and technology is telling. The company seeks to stay smack dab in the middle of commerce and remain a tech-focused firm.
Focusing on specific strengths requires divesting from other capabilities. It’s impossible to provide absolutely everything in-house, so brands that recognize that and outsource where needed are playing it smart.
Shopify strayed from its core competencies to come with the industry giant(s), so I’m not surprised they did not succeed in delivering in-house fulfillment capabilities.
While there can be advantages to being vertically integrated, those advantages often come with a large price tag that makes them unsustainable. Once Shopify pursued logistics as another area to serve their merchants, they were also bringing on a significant cost to do the job well. Unfortunately, this sale indicates the costs were likely too high for not enough return on that investment. There’s a reason why the majority of organizations use 3PLs for logistics. As others here have said, when you’re not Amazon or Walmart, you lack the scale and volume needed to make logistics cost-effective. Add an additional layer of complexity from having to coordinate logistics not for one organization but for a very l large collection of them all at different sizes and complexities, the situation becomes that much more daunting and the costs go even higher. The logistics operation will run just fine under Flexport as they are specializing in this space, and Shopify is likely to move on to do great things for their merchants focusing on the commerce aspects minus the logistics!
Well, this change is like so many changes that occur when a business sells part of itself to another business: they want to achieve focus on the things they believe they do well. Selling this to Flexport extends its reach in an area they have competency in, and on paper it looks good. As any reader or braintrust member knows, there are many many many things that can “go wrong” post acquisition so we just need to wait and see how this works out for both firms!!
No everyone can be amazon.com that controls both customer experience and logistics. Given limited resources you have to compete on what you are good at and is differentiated. Not sure Shopify can invest in both competencies right now and the key is to fight the battle you can win.
A good point, but they were well on their way. This retreat is surprising. Walmart, Target and others have shown you can do it well. Perhaps their lack of grounding in the physical world is the issue.
Another case study in how Cost of Consumer Aq and logistics are the margin eaters that make eCommerce a tough business. That said, companies like Alibaba, JD, Rakuten, have been successful vertically integrating. I was betting on Shopify tp do the same. That said I also thiink it’s a reflection on their understanding of how fast the ecommerce game is being disrupted and that their core services need a major refresh to keep up and stay relevant.
Shopify will become more focused, more agile, gain the ability to embrace emerging technologies for their core operations, instead of being distracted by the side demands of logistics.This will increase their available resources, while decreasing their logistic encumbrances as they hand these over to Flexport. Best yet, there will be fewer human resources to manage, and more financial resources that are gained because of this move. This is nothing but great for Shopify, and the stock market keeps echoing its’ approval every day (gaining over 38% in just a few days!!).
For large corporations, implementing vertical expansion strategies represents the most practical approach to business growth. It is an inherent characteristic of managing a company that certain strategies yield favorable outcomes, while others do not. Shopify attempted to seize control of its supply chain, however, it did not work out. By handing over the logistics aspect to Flexport, Shopify will now have additional capital available for investment in other ventures and can concentrate on enhancing its core business activities.
In my opinion, a prominent company like Shopify to comprehend all of the variables and quickly opt to sell major portions of its logistics assets reflects how “agile” they are as an entity. Usually, in a large company like Shopify, the thought process becomes quite difficult that eventually slows down the decision-making process. Therefore, this move by Shopify is commendable. Also, at the end of the day, Shopify is gaining enough interest in Flexport’s ownership that will allow them to sustain their business expansion in the long run.
A win-win scenario for everyone, right?