Shopify to reduce workforce by 20% as it narrows focus to core e-commerce business
TORONTO — Shopify Inc. says it will reduce its head count by about 20 per cent and sell its logistics business as it aims to reduce distracting "side quests" in the latest big change by the Canadian tech company.
The changes come despite Shopify president Harley Finkelstein saying in February that there were no more cuts in the works.
Finkelstein told The Canadian Press on Thursday that the company has no further plans to cut more workers.
"We think on the other side of this, we're going to be in really, really good shape," he said.
The Ottawa-based e-commerce giant is selling its logistics business to Flexport, a supply chain management company. It announced the moves as a way to help it focus on its main goal: making commerce easier.
Achieving that feat means reducing "side quests" which chief executive Tobi Lutke described as "always distracting because the company has to split focus."
"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," he said, in an open letter announcing the changes.
"Our main quest demands from us to build the best thing that is now possible, and that has just changed entirely."
Shopify's share price closed up $14.60, or about 23 per cent, at $77.65 on the Toronto Stock Exchange.
The company refused to give the number of staff that would be departing the company, but it reported in a regulatory filing that it had 11,600 employees at the end of 2022. Twenty per cent of that amounts to about 2,300 people.
"I recognize the crushing impact this decision has on some of you, and did not make this decision lightly," Lutke wrote.
Lutke promised departing staff at least 16 weeks of severance plus a week for every year of tenure at Shopify. Medical benefits and an employee assistance program will cover departing staff over the same period.
Those leaving will also be able to keep their office furniture and though they'll have turn in their company laptops, Lutke said Shopify will help pay for new ones.
"It's a hard day. This is not anything you want to do as a leader or as a company ever," Finkelstein said.
"But sometimes the easy thing and the right thing are not the same thing and in this case, the hard thing happens to be the right thing."
The changes will leave Shopify with "incredible talent density" and the ability to execute on its goals at a "much, much better speed, better pace and with better results," he added.
In recent months, Shopify reduced the number of meetings staff have, split workers into two career tracks — managers and crafters — with equivalent compensation levels and gave employees a “total rewards wallet” last year that allows them to choose between cash and stock options for their compensation.
In addition to the staff departures, Lutke's note announced the sale of Shopify Logistics, which it had marketed as a way for merchants to get products "from port to porch."
Shopify did not announce the value of the deal, but said it will receive stock representing a 13 per cent stake in Flexport and the ability to name a director to Flexport’s board. When added to its previous stake in the company, Finkelstein said Shopify's stake in Flexport is now in "the high teens."
Some of Shopify's logistics workers will move to Flexport, while others will be part of the layoff, chief financial officer Jeff Hoffmeister said on a conference call with financial analysts Thursday.
Flexport will become the official logistics partner for Shopify.
The transaction is expected to close in the second quarter of 2023, but is subject to certain conditions and regulatory approval.
Rick Watson, founder of RMW Commerce Consulting, saw the deal as Shopify "correcting a huge mistake that they made in getting into the fulfilment business to begin with."
Shopify's prime product — software — generates high margins, whereas logistics is low-margin and often volume-oriented, and required Shopify to purchase other companies in order to compete, Watson said.
He thinks the layoffs and Flexport deal were aimed at boosting the stock because "that's what Wall Street is rewarding right now" and that Shopify had enough cash to carry its workforce "more or less indefinitely." He said he'd be shocked if there was another Shopify layoff soon.
The company reported Thursday that it made US$68 million in the first quarter of the year. That compared with a net loss of US$1.4 billion in the same period a year earlier.
Net income for the company, which reports in U.S. dollars, amounted to earnings of five cents per share compared with a loss of US$1.17 cents per share a year ago.
Revenue for the period ended March 31 was up 25 per cent from the year before to US$1.5 billion.
On the conference call with analysts to discuss the results, Finkelstein maintained that "Shopify is staying at the cutting edge of commerce," in part because of it's use of an AI in a shopping assistant it launched in March.
Shoppers tell the assistant what they are looking for, and the technology serves up relevant product recommendations from Shopify merchants.
"It's like having your own shopping concierge powered by ChatGPT, one of the most advanced technologies that we have seen in decades," he said,
"We believe that we are in the early innings of unlocking the true power of AI."
Watson said AI, which has dominated tech industry chatter, is "a shiny object that they're trying to wave," but said it's unlikely to be "some kind of critical linchpin for their future business."
He felt Shopify's strength lies instead in the "pretty incredible momentum" in its primary business Shop Pay, which offers accelerated checkout, and Shopify Plus, its commerce platform.
"I don't see anyone that's in the lower middle market of e-commerce that is able to challenge Shopify at its strength."
This report by The Canadian Press was first published May 4, 2023.
Companies in this story: (TSX:SHOP)
Tara Deschamps, The Canadian Press