It has been painful for Shopify (SHOP 0.19%) shareholders recently with shares down almost 70% year to date. Some of that slide is due to supply chain and inflation concerns. Investors have worried about high inflation on consumer staples weakening demand for nonessential goods like those sold by Shopify merchants.
However, Shopify remains a high-quality business. It is worth buying for many reasons, one being its continued efforts to innovate and create a better platform for its merchants. The company already offers a suite of tools for businesses of all sizes to build, manage, and scale their operations, but Shopify continues to innovate to create a better customer experience.
One of the best examples of this is the company's efforts to build the Shopify Fulfillment Network (SFN), a project with massive long-term potential. It could allow Shopify to boost its growth immensely, and although there are some risks to building out SFN, its long-term prospects are bright.
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Another tool in the toolbox
E-commerce delivery has quickly become a challenge for businesses, especially smaller ones with a lack of scale. Amazon standardized two-day delivery, and there are now meal and grocery services that can get orders to you on the same day. Consumers now expect these quick delivery times, which many Shopify merchants have struggled to match. With SFN, however, merchants can finally meet this demand.
SFN is still in the early stages, but it looks like a promising service addition to Shopify's repertory. It's an in-house fulfillment service the company provides to help merchants focus on running and growing their business, rather than logistics. SFN users will be able to rely on Shopify to streamline order fulfillment, returns, and storage.
Management believes it will eventually be able to offer two-day delivery to 90% of the U.S., and merchants will have professional customer support and a simple onboarding process to make it easy to start using SFN.
The company also noted that, over the next few years, it could even expand its capabilities to provide one-day delivery. This would make the SFN even more valuable to merchants on the platform.
Shopify has made various investments to aid its expansion. In 2019, it acquired 6 River Systems, a provider of warehouse fulfillment solutions. 6 River provided robots and software to make fulfillment more efficient for Shopify and its merchants.
The company is also in talks to buy Deliverr, a predictive-analytics platform that works with merchants on platforms like Amazon to reach their fulfillment goals. Both deals could help make SFN more efficient and reliable for Shopify merchants, which will be crucial as this service grows to a larger scale.
The long-term implications
In 2021, Shopify's merchants already represented over 10% of U.S. retail e-commerce sales, but this could be only the beginning of its dominance in the space if the company can help small businesses compete with larger enterprises that have the infrastructure to offer two-day delivery. Shopify and its merchants could end up claiming even more share.
This also reinforces one of Shopify's competitive advantages: its high switching costs. Once customers begin to rely on SFN, it will become increasingly harder to leave the platform. Many merchants will rely on the fulfillment network to offer their customers speedy deliveries. And to leave, merchants would either need their own fulfillment infrastructure or have to switch to another e-commerce competitor. That could prove to be very difficult, since Shopify's other support services like Shopify Capital, its point-of-sale systems, and its international expansion capabilities for merchants are nearly unrivaled by another all-in-one platform.
This investment needs to pay off
The company is expected to spend nearly $1 billion over 2023 and 2024 to build more warehouses around the country, a major step up in expenses for the company. In 2021, Shopify spent about $850 million on research and development, and the investment in SFN will boost that figure significantly. Therefore, investors should expect a hit to profitability over the coming years.
And it is crucial to remember that this is not a guaranteed success story. There is a risk of SFN not coming to fruition at the scale management hopes to see. That said, this is a major step in the right direction for Shopify. SFN can offer major long-term benefits for the company, merchants, and shareholders if successful. And this innovation is just part of management's push to create a better experience for its users, which is why Shopify should thrive over the long term.
