Dive Brief:
- E-commerce platform Shopify on Wednesday reported a second quarter net loss of $1.2 billion. Revenue grew 16% year over year to $1.3 billion and operating loss was $190.2 million compared to income of $139.4 million last year.
- Shopify announced on Tuesday that it would lay off 10% of its workforce by the end of the day, according to a company post from CEO Tobi Lütke. The layoffs stem from its decision to expand rapidly based on COVID-19 pandemic predictions about the growth of e-commerce. “It’s now clear that bet didn’t pay off,” said Lütke.
- The company warned that operating loss in the third quarter will increase “materially” due to the streamlining of its operations and its finalized acquisition of Deliverr, adding that 2022 will be “more of a transition year, in which e-commerce has largely reset to the pre-COVID trend line and is now pressured by persistent high inflation.”
Dive Insight:
Shopify’s layoffs and second-quarter earnings demonstrate that while e-commerce isn’t going anywhere, neither is the power of physical retail.
“We bet that the channel mix — the share of dollars that travel through e-commerce rather than physical retail — would permanently leap ahead by 5 or even 10 years,” Lütke wrote in a note addressed to employees. “Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust.”
Recruiting, support and sales positions are most impacted by the layoffs, along with “over-specialized and duplicate roles,” per the post.
Lütke isn’t the only one who saw the bet on e-commerce's growth potential as an error.
“Put bluntly, this was a huge strategic mistake that was driven by an insufficient understanding of customer behavior, a lack of rigor in analyzing the market, and a bit of hubris,” GlobalData Managing Director Neil Saunders said in emailed comments.
The e-commerce sector is experiencing losses all around. A recent survey conducted by Ipsos for Publicis Sapient and Salesforce showed that e-retailers were twice as likely as brick-and-mortar retailers to report they were unprofitable. Of the global retail leaders surveyed, 70% said that the decisions made to ramp up e-commerce during the pandemic were conducted in “less-than-optimal ways.”
Retail’s powerhouse companies are also experiencing the effects of inflation. Walmart lowered its operating profit estimates this week, noting that fuel and food inflation are impacting how consumers spend. Target has experienced a similar impact from inflation, causing its Q1 profits to take a major hit and impacting its guidance for Q2.
