FOR A CLASS of businessman that has been out of fashion for hundreds of years, the word merchant still has a ring to it. It conjures up medieval Europe, with its mercers, skinners, haberdashers, guilds and gold-buttoned liveries. It brings to mind ambitious venturers, bankrolling crusades and conquests, opening up spice routes and making history—for good and ill. It runs through literature and art, from Chaucer to Shakespeare to Holbein. Then it practically vanishes, first under the iron wheels of industrialisation in the 19th century, then crushed by consumer culture in the 20th. Until recently, the few merchants left sold only grain—or doom. Then came the e-commerce era. At last, merchants are staging a comeback.
Many of today’s e-merchants sell in a digital marketplace, akin to a medieval town square. That mostly means Amazon, which handles almost half of American online sales on behalf of 1.9m suppliers. Its reputation for providing support to sellers is iffy. But it compensates by offering them an endless stream of customers, including 100m Prime subscribers who buy frequently and enjoy free, speedy delivery. That persuades sellers to put up with a lot.
Some online retailers, however, prefer to strike out on their own, like the craftsmen of old. They are developing “microbrands” they peddle themselves, handling payment, delivery and other customer relationships. But they can use assistance, of the sort that the guilds of yore offered their predecessors. Enter Shopify, a Canadian software firm whose value has rocketed by 180% in the past year, to $45bn, eclipsing eBay, a better-known veteran of e-commerce. It is a mite compared with Amazon, valued at $870bn. Nonetheless, the Seattle-based giant has reason to look over its shoulder at the upstart tearaway in Ottawa. For Amazon excels at making consumers cheerful. Shopify, by contrast, is focused squarely on its merchants.
The company came about by accident. Its boss, Tobi Lütke, epitomised the new breed of digital merchants when he set out, with friends, to build an online snowboard shop, Snowdevil, in 2004. At the time, selling online meant one of a few things. You could spend a small fortune, either on developing your own sales channel or paying someone like IBM to build one for you, which only deep-pocketed firms could afford. Alternatively, you could rely on Amazon, sacrifice part of your margins and, with your product being delivered in Amazon’s boxes, cede control over your relations with the customer. Worse still, you risked being elbowed out if it created its own version of your wares.
Instead, Mr Lütke built his own platform. Within two years he had switched from selling snowboards to software. In the process Shopify glided stealthily into the e-commerce big leagues without going head to head with Amazon, as Walmart, Target and other big retailers have done, sometimes with soul-sapping results. Its success has put further strain on bricks-and-mortar shops, which were already dying in droves.
Unlike Amazon, Shopify keeps out of the relationship between merchants and their customers. To the buyers, it is invisible. To the sellers, who flogged $41bn-worth of stuff on its platform last year, it can be indispensable. They range from fashionistas of the Kardashian clan, mattress sellers, gym-wear specialists and Canadian marijuana growers to venerable brands such as Lay’s potato chips (owned by PepsiCo). Some have grown with Shopify from scratch to selling billions of dollars of merchandise. No wonder Mr Lütke shares a Schumpetarian reverence for entrepreneurs.
Shopify’s “software as a service” business is cheap to scale up. It says it is America’s third-largest online retailer by volume of goods sold after Amazon and eBay. It generates high margins and recurring revenue from merchants, who pay a monthly fee for the software, based on their sales. On top of that, Shopify collects fees for helping run each stage of their e-commerce business, from designing an online store and advertising on social-media sites such as Instagram to processing payments and arranging logistics. This is the fastest-growing part of its business, though it is less profitable than selling software subscriptions.
As it expands, Shopify is using its clout to secure better terms for advertising on social media, financing and payments for its clients. It is also adapting as e-commerce rapidly changes. To reach more shoppers, e-merchants are building bricks-and-mortar stores. They are using e-commerce to buy from wholesalers. Shopify has used small acquisitions, like a recent purchase of Handshake, a platform for business-to-business e-commerce, to keep up with these trends. In June it said it would offer merchants warehousing and shipping in America using third-party firms that guarantee two-day delivery. This is partly in order to prevent customers from migrating to Amazon Prime. For the most part, it has wisely avoided throwing down the gauntlet directly to Amazon.
The Hanseatic e-League
A longer-term challenge is to overcome its focus on the English-speaking world, where about three-quarters of its clients are based. As with the merchants of old, the biggest opportunities lie in faraway lands, especially Asia. To get a toehold, Shopify has enabled 17 languages on its platform besides English, including several Asian ones. But it faces stiff competition. Asia’s biggest markets are already in the grip of giants such as Alibaba in China, Amazon and Walmart in India, and local firms in South-East Asia. In poorer countries trust in e-commerce remains fragile, making it hard to sell directly to consumers. Yet as Harley Finkelstein, Shopify’s chief operating officer, notes, in the early days of e-commerce, when people recoiled at handing over their credit-card details, trust was lacking in the West, too. In their heyday members of the merchant class were considered grubby hucksters—at least by Europe’s medieval nobility and clergy. That did not stop them then. And, if you take Mr Lütke’s word for it, it won’t stop them now. ■