How Shopify's CEO sees small business taking on Amazon

Recent business headlines have been dominated by impressive e-commerce growth for the likes of Walmart, Target, Best Buy, and Costco during the COVID-19 pandemic.

But the retail giants aren’t the only ones seeing a digital boom: Shopify chief executive Tobi Lütke says his company’s clients have experienced a surge in e-commerce orders from customers living within 15 miles of their stores, suggesting many local businesses are getting in on the online action.

In particular, Lütke says, some small clients like grocery stores and farmers—not constituents anyone typically associates with e-commerce prowess—have gone online during this crisis. He says Shopify’s latest slate of products have given them the digital firepower to sell food and either deliver it or have customers drive up to a curb to retrieve it, a capability they didn’t have before.

“There just wasn’t any supply online,” Lütke tells Fortune, wearing his trademark newsboy cap and hoodie during an exclusive interview via Google Meet. “All these kinds of things have been unknotted now.” In the six weeks between the start of lockdowns and April 24, the number of new stores using Shopify’s e-commerce platform rose 62% compared with the six prior weeks.

Unknotting e-commerce problems for companies, small and less small, by providing them with state-of-the-art tech to handle orders, logistics, and financial management challenges, has turned Shopify from a quiet tech company based in Ottawa into a major challenger of Amazon in the e-commerce wars.

In this case, Shopify had to “delete” its plans at the start of the COVID-19 crisis, as Lütke puts it, shifting its focus to products customers need quickly and accepting a bit less polish in order to get those services out the door so clients could jump on the digital surge. That was the case notably for its tech-facilitating curbside pickup.

So bullish is Wall Street on Shopify’s prospects to win much more business as more small companies go online and larger consumer brands look to sell more directly to customers, that shares have risen 150% since March 16, when lockdowns began in North America.

Shopify’s small-business roots

That has given Shopify a market cap of $95 billion—and, as of two weeks ago, made it the most valuable company in Canada. Not bad for a player with $1.7 billion in sales in the past year. Even before COVID-19, Shopify’s growth was red hot: In the first quarter of 2020, the value of items sold via the sites it supports rose 46% to $17.4 billion.

The German-born Lütke founded Shopify 16 years ago, in part because a snowboard store he founded was dealing with all sorts of problems going online, from clunky payment interfaces to an inability to find reliable technology to receive and manage orders. Those challenges ultimately led to the creation of Shopify. And Lütke says that that small-store perspective guides Shopify as it expands its services and software products over time.

“We work backwards from what makes it difficult to start these businesses,” he says. “It’s hard to run a small business and be responsible for payroll, for staff, et cetera, even at the best of times.”

It’s clear the company is onto something, especially as it lines up more small grocers. “These trends show the power of Shopify’s cloud-based software, which is far more advanced compared to legacy on-premise software products,” Bloomberg Intelligence analysts wrote in early May, noting that the company has a big opportunity in the food space.

Lütke recalled how it took him three months to get a payment gateway, which is a merchant service to help a business process credit card payments, for his snowboard shop. In that spirit, Shopify this week announced plans to launch a suite of financial products called Shopify Balance. The package will include tools that enable vendors to monitor cash flow, pay bills, and track expenses, and a bank card that enables entrepreneurs to access money more quickly and to avoid using their own personal credit cards.

Last year, Shopify launched Shopify Fulfillment Network, which uses machine learning to help with timely deliveries and to lower shipping costs as part of its effort to offer more logistics services to companies that don’t have the wherewithal to compete with Amazon, Walmart, or Target.

“It’s incredibly hard to have a logistics network that spans the globe,” says Lütke. “It’s far out of the reach of smaller businesses.”

Shopify is also one of a number of companies working with Facebook to help the social networking behemoth offer online storefronts under a new initiative called Facebook Shops. Rather than see Facebook and its apps as threat, Lütke takes a pragmatic view. “Facebook and Instagram are the communications channels of choice for many entrepreneurs,” he says.

Increasingly, major consumer brands are looking to sell directly to customers and reduce their reliance on retailers. PepsiCo, for one, launched two e-commerce sites last week aimed at helping it manage demand during this pandemic. While entrepreneurs are Shopify’s sweet spot, big businesses such as Unilever have long been a major part of its customer base, using its Shopify Plus service. Shopify last month added Heinz and Lindt chocolate as Shopify Plus clients.

Lütke says that until this crisis, consumer brands often tended to see e-commerce as something for big conglomerates to experiment with, rather than a business priority. But that is changing.

“These experiments are suddenly vital,” he says, adding jokingly, “COVID is leading the digital transformation of Fortune 500 companies more than CIOs are.”

What Canadian curse?

Earlier this month, Shopify leapfrogged the Royal Bank of Canada to become the largest Canadian company by market cap. But every previous company to have surpassed RBC by that metric went on to flame out spectacularly, notably tech companies Nortel and Blackberry. That has prompted the chattering classes up North to wonder whether Shopify can beat the “Canadian curse,” including some who point to Shopify’s net losses. To be fair, a lack of profit has not impeded the ascendance of e-commerce stars like Chewy or Wayfair or, until recently, Amazon.

The mere mention of the term elicits some eye-rolling from Lütke. “Honestly, this ‘Canadian curse’ is the most Canadian thing I’ve ever heard of,” he says, an allusion to Canadians’ occasional incredulity that one of their own can be so successful. At the same time, he says, he likes it when Shopify is underestimated and flies under the radar.

Another way COVID-19 is giving Shopify an opportunity to reinvent itself: On Thursday, the company announced its Digital by Default initiative that will see it keep all of its worldwide offices closed until at least year-end and, ultimately, redesign how it uses office space. But from now on, Lütke says, the vast majority of Shopify employees will work from home and collaborate remotely. “Talent is absolutely everywhere, and Shopify is proof of that,” he says. “One thing we’re not going to get back to, at least in the tech industry, is office-centricity.”

Another way he has looked to free up employees has been to challenge the glorification of overwork in the tech world’s culture. A few months ago, in a Twitter thread, he questioned the value of the endless work hours glorified by many other tech CEOs and the Silicon Valley venture capitalists who egg them on.

https://twitter.com/tobi/status/1210242205505462276?s=20

“That is bad advice—people just cannot work like this,” he says. “If I’m working on creative things, then there are five good hours in the day, max.” And if Shopify is to stay on its trajectory, it will need all the creative things it can come up with.