Shopify has sold its logistics business, therefore reducing its staff by 20 percent. The announcement came on May 4, 2023, with Shopify CEO Tobi Lutke addressing the employees in a memo. Lutke said the change was necessary to pay unshared attention to their core offering.
Shopify offloaded Deliverr and 6 River Systems to freight services provider Flexport and U.K.-based grocery delivery company Ocado Group respectively. Shopify acquired both these logistics startups in a quest to build its own fulfillment network. However, after an experiment of four-year, Shopify decided to put a full stop to its “side quest”.
This is extremely important, because we are heading into a decade of high velocity and massive change. We will require speed, agility, and a great deal of innovation.
Tobi Lutke, CEO, Shopify
Shopify’s Main Quest
Describing the main quest, Shopify’s founder wrote, “Shopify’s main quest is to make commerce simpler, easier, more democratized, more participatory, and more common. I think that we have built the best commerce platform in the world for that. Technological progress always arcs towards simplicity, and entrepreneurs succeed more when we simplify.”
“But now we are at the dawn of the AI era and the new capabilities that are unlocked by that are unprecedented. Shopify has the privilege of being amongst the companies with the best chances of using AI to help our customers. A copilot for entrepreneurship is now possible. Our main quest demands from us to build the best thing that is now possible, and that has just changed entirely,” he added.
Lutke added that for the past year, Shopify has been “subtracting everything that’s in the way of making the best possible product”. “This is extremely important, because we are heading into a decade of high velocity and massive change. We will require speed, agility, and a great deal of innovation,” he wrote in the memo.
Struggle With Logistics
Lutke, in the press release, hinted that managing logistics was a demanding task for Shopify. “To run logistics, you will use pen, paper, and phone calls a lot. And most of the time your service providers don’t talk to each other. Coordinating them to act together is your burden,” he wrote.
“Logistics was clearly a worthwhile side quest for us, and started to create the conditions for our main quest to succeed. From the beginning, we worked with lots of partners on all aspects of this same problem: warehouses, robotics, transportation, crossdock, freight. We iteratively built a solution, step by step, through software, leases, and M&A deals, that could be an independent company one day,” he added.
I think that what Shopify was trying to do in building a small business-focused network was really great. But what I found in my own experience, is that the approach of an asset light network makes it very difficult to make the consistent quality of logistics delivery across an effort, because of having different partners with different processes and things like that.
Jay B. Sauceda, Former CEO, 3PL Sauceda Industries
How The Problem Stemmed
According to a report published on Modern Retail, logistics experts stated that Shopify’s difficulty started from its pursuit to of an asset-light 4PL (fourth-party logistics) model. In this case, the company acted as a broker to get warehouse space for brands at third-party logistics. As Shopify had to act as a middleman between several parties, this was not only arduous to implement but can also possibly affect the margins.
Shopify’s main aim behind offering quick and low-cost delivery through its fulfillment services was to take on rivals, especially Amazon. The Canadian tech giant started with a tech-driven approach. and launched Shopify Fulfillment network in 2019. The same year, it acquired 6 River Systems, a warehouse automation tech provider and went on to acquire fulfillment startup Deliverr in 2022.
Matthew Hertz, the founder of logistics consulting firm Second Marathon, said his firm saw an increase in a “substantial share” of clients from Shopify logistics, upset and complaining about suboptimal technology. Instead of offering seamless operations, the 4PL approach of Shopify created more chaos. Hertz said, “The physical world of logistics is really difficult and it’s challenging for technologists to understand what exactly is happening.”
Redefining Logistics: From Time to Time
Since the launch of the fulfillment network, Shopify has switched its logistics strategy a number of times. In an investor note, William Blair analyst Matt Pfau pointed out, at the time of its launch in 2019, Shopify publicized its technical expertise, claiming that its AI technology “predicts the closest fulfillment centers and optimal inventory quantities per location to ensure fast, low-cost delivery.”
The company also announced to invest $1 billion over five years on this initiative. However, in 2022, Shopify began discontinuing contracts with some of the warehouses, according to a Business Insider report. This possibly suggested that Shopify was reducing its logistics mission but to everyone’s surprise, it made the announcement to acquire Deliverr just a few months later.
“Shopify’s logistics efforts have been a point of contention with investors since the company announced its intention to enter the market in 2019. Investors have been concerned about the capital requirements of building a logistics network as well as the potential impact to margins,” Plau wrote.
Challenges of the 4PL Model
Rick Watson, an e-commerce strategy consultant and CEO of RMW Commerce Consulting believes that logistics was not at all suitable for a tech company like Shopify. “I think it’s just a misunderstanding of the type of business they were getting into. Logistics is a very low-margin, efficient volume business. And Shopify is supposed to be a high-margin software business, so the fit was never there,” said Watson.
Shopify’s decision to provide fulfillment services to small businesses also likely added to the margin problem. “It’s harder to find the right third-party logistics provider for smaller merchants because most good 3PLs are looking for volume customers. And as Shopify started its business, most of its customers were smaller customers. So there is a legitimate problem that they saw. But it’s more they made a big mistake with how they wanted to solve the problem,” added Watson.
Jay B. Sauceda, the former CEO of 3PL Sauceda Industries reiterated Watson’s opinion saying low margins in the logistics business get minimized in a four-party logistics model. “In a fulfillment relationship, you only have — let’s call it — $2 to spend on the fulfillment fees. Those $2 go a lot further with one partner than they do when you’re splitting them between a middle management layer, i.e. Shopify, and the fulfillment partner itself,” he said.
“It’s already difficult to onboard merchants and take care of logistics when you’re the 3PL, it requires a really strong understanding deep understanding of account servicing,” said Sauceda, echoing the challenges faced in the 4PL model. Sauceda’s third-party logistics was an initial partner of the Shopify Fulfillment network in 2019. The company was sold to Cart.com in 2021.
Sauceda added, “I think that what Shopify was trying to do in building a small business-focused network was really great. But what I found in my own experience, is that the approach of an asset light network makes it very difficult to make the consistent quality of logistics delivery across an effort, because of having different partners with different processes and things like that.”
About Deliverr And 6 River Systems
Shopify Fulfillment Network, 6 River Systems, and Deliverr together formed a broader logistics unit within Shopify that was led by Aaron Brown, CEO of Shopify’s logistics group.
Shopify acquired Deliverr on May 5, 2022, for $2.1B. The acquisition was completed in the first week of July. As per the agreement, Shopify paid approximately 80 percent ($1.68 billion) of the price in cash and the rest (($420 million) in Shopify Class A shares. Deliverr was co-founded in 2017 by Harish Abbott and Michael Krakaris, ex-colleagues of Symphony Commerce. The company had raised $490.9 million in capital before being acquired by Shopify.
Shopify Fulfillment Network (SFN) with the help of Deliverr’s talent, data, scale and software promised to offer a one-stop shop for all logistics requirements of merchants. Thus, helping merchants to have better control of their inventory across all the sales channels. From initial receipt of inventory to efficient distribution, quick delivery and smooth returns, Shopify offered to manage all aspects, so that merchants can focus on their business.
Shopify announced to acquisition of 6 River Systems on September 9, 2019, for USD$450 million. Shopify paid 60 percent in cash and the remaining 40 percent in Shopify Class A Subordinate Voting Shares. Headquartered in Waltham, Massachusetts, 6 River Systems was founded by Jerome Dubois, Rylan Hamilton and Chris Cacioppo in 2015. Dubois and Hamilton earlier worked as executives at Kiva Systems (Amazon Robotics).
“Adding 6 River Systems’ cloud-based software and collaborative mobile robots called “Chuck” to the Shopify Fulfillment Network will increase the speed and reliability of warehouse operations, by empowering on-site associates with daily tasks, including inventory replenishment, picking, sorting and packing,” Shopify stated in its press release.
“With 6 River Systems, we will bring technology and operational efficiencies to companies of all sizes around the world,” said Lutke at the time of acquisition.
