Shopify Moves Into the Fulfillment Business

Shopify (SHOP 4.59%) has given retailers the ability to offer tools on their websites that previously were only available to bigger players. Now, the Web platform is offering fulfillment solutions for retailers, including warehousing and helping them find the best shipping rates. That could make it easier for niche players to compete with Amazon.com (AMZN 0.85%) and other large retailers.

In this segment of Industry Focus: Energy, host Nick Sciple and Motley Fool contributor Dan Kline talk Shopify and more. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 20, 2019.

Nick Sciple: FedEx (FDX 0.91%) did not break up with Amazon without any other plans for what they might be able to move into. Clear opportunity there with the Dollar General stores. And, as well this week, and we don't know if there's a clear relationship here with FedEx, but we've seen Shopify -- you talk about Dollar General, Walmart, Target, they seem like these lazy, older businesses. Well, Shopify is moving into physical distribution and fulfillment, announcing yesterday at their investor day that they're going to offer customers access to a network of dedicated U.S. fulfillment centers to store and ship consumer goods for online orders. They're going to use machine learning to forecast demand and allocate inventory to route orders to the closest fulfillment centers. And they're going to be working with logistics providers to make that happen. Obviously, as you see Shopify, which is a company that aggregates a lot of small sellers together to offer logistic services, that's another opportunity for FedEx. Do you think that's going to be a bigger trend over time? Do you see all these small sellers uniting together through Shopify and other offerings to maybe bring down the cost of their logistics operations?

Dan Kline: I do see this as an opportunity for FedEx. But if you're on the Shopify platform, you have the ability to make shipping a service. And what Shopify does is, it matches what you're shipping with the best provider. Now, could FedEx go in and make a deal so it's the best provider more often? Could it have staffing at these warehouse distribution center locations? There's a huge opportunity here. Basically, any platform -- we saw this with Stamps.com at Shop Talk earlier this year -- any platform that businesses are using has to integrate shipping and logistics because you're competing with what was a two-day standard, that's becoming a one-day standard. If you and I have a regional company, let's say we sell, I don't know, model trains that we make ourselves. The standard for the consumer is going to be, "I get it in two days." They're not going to wait for two weeks because I could save $1.50 by shipping it in two weeks. Everything is going to have to get Amazon-level efficient, down to some pretty small companies, and a Shopify can do that. FedEx can certainly come in and help make that happen.

Sciple: Taking all this together more broadly, in the near term, this is probably going to hurt FedEx somewhat, because you've had this existing business from Amazon that's going to fall off. Some analysts have estimated that it could lower FedEx's earnings by as many as $0.40 a share. However, when you look at the opportunity moving forward, growth rates in e-commerce away from Amazon are actually growing faster. There are some opportunities to forge some relationships today that can be really significant going forward. Any last thoughts on FedEx?

Kline: To tie this up with a dating analogy, this is FedEx breaking up with his girlfriend, but it spent the last few years flirting all around. It knows that a lot of people are interested. Instead of having this monogamous relationship, FedEx is going to be dating a different supermodel every daypart. So, yeah, it'll hurt in the short term, simply because you can't build these massive relationships quickly. It takes time. But I see this as a quarter or two, and then FedEx is going to be in a much better position. And chances are, you're going to see Walmart, Target, Lowe's, Home Depot, all those other non-Amazon's, you're going to see that business ramp up very quickly.

Sciple: Yeah, Dan. For me, when I look, I think e-commerce is going to be a really significant trend going forward. Everybody believes that. But you see so many players getting into the selling part of that market. When you look at the logistics part of the industry, it appears it's consolidating into an oligopoly -- FedEx, UPS, maybe Amazon is pushing in there. With the growth in all those other parts of e-commerce outside of Amazon, this looks like it could be an interesting place to sniff around for an opportunity to play a trend in a market that may be less competitive going forward. We'll see. Obviously, it's hard to say things are less competitive when Amazon is lurking around. Interesting way to play the e-commerce trend.

Kline: Don't forget the U.S. Postal Service. The reality is, they're a big piece of the Amazon business. In fact, they're Amazon's biggest partner. You have Amazon-UPS-USPS on one side, FedEx on the other. It wouldn't shock me if you saw FedEx build out other services, like what Amazon is doing with last mile delivery. You're obviously going to see FedEx move into automation. We saw some tests with robots and other things. You might see drones. This is basically FedEx vs. the world, and I sort of like where that's going.