• Shopify terminated contracts with several small e-commerce fulfillment companies this week.
  • The move marks a strategic shift for the company’s two-year-old Shopify Fulfillment Network.
  • Once the changes are implemented, the network is set to have about half of its previous capacity.

Shopify has terminated or reduced the scope of its work with several warehouse and fulfillment partners, a move that could vastly reduce its capacity to pack and ship orders for merchants in the near term, Insider has learned.

Executives at four fulfillment companies in Shopify’s network confirmed the changes with Insider. 

Once Shopify implements these changes, its network is expected to have roughly half of its previous capacity to pack and ship e-commerce orders for merchants, two fulfillment partners told Insider. The changes mark a shift in strategy for the company’s two-year-old effort to launch an e-commerce fulfillment service to rival Amazon’s. 

The changes also put many of Shopify’s fulfillment and warehouse partners in a bind. Some partners said they offered below-market prices or made other concessions with the belief that Shopify’s services would be a success.

“They were going to make a fortune on fulfillment. It was going to be all these things that fulfillment has never been,” one partner said about Shopify’s pitch to independent fulfillment businesses.

But these moves do not mean Shopify is out of the fulfillment game.

Analysts and other industry insiders speculated that Shopify could be making more aggressive moves in fulfillment soon, whether that means acquiring third-party logistics companies or moving to operate warehouses on its own. 

Deutsche Bank analysts wrote in a research note on Wednesday that moving to insource its fulfillment operations would require “a period of intense investment” from Shopify.

The ‘product-market fit’ phase

Shopify announced the launch of Shopify Fulfillment Network in June 2019. The company said in an earnings call that year that it would invest $1 billion over the following five years to build out the network. SFN was framed as another way Shopify could help merchants compete by promising quick delivery speeds and low cost. 

Wall Street analysts largely agreed, saying it would lead to the company competing more significantly with Amazon, which has a vast fulfillment and logistics operation across the US. 

In September 2019, the company announced it had acquired the fulfillment-automation startup 6 River Systems for $450 million. Over the next two years, 6 River Systems built fulfillment-management software to complement its robotics, which it has rolled out in a few facilities, two partners said. 

Shopify made a series of updates to the network in 2021, adding features such as enhanced inventory management, product bundling, and inbound-inventory transfer tracking, a spokesperson said. 

Since SFN’s launch, company leaders have repeatedly said that the system was still in the “product-market fit” phase. The length of the testing period has been a source of frustration for some analysts. 

Last year, several original architects of the network left the company. Mat Paciga, the head of sales for shipping services, left in May. Thomas Epting, a director on the program since 2018, left in September. Maia Benson, the global head of shipping and fulfillment, left in March. Gary Mirsky, the global commercial lead for Shopify Fulfillment since June 2019, left in December to join ShipHero, a software and fulfillment partner for SFN.

“Things haven’t inflected upwards — which, for a company of Shopify’s stature and the expectations that come along with it, is viewed as a disappointment,” said Ken Wong, an analyst at Guggenheim Securities. 

In August, Bisnow reported that Shopify had signed a lease for a 563,000-square-foot warehouse under construction near Atlanta. 

‘Stripped down’ services

An email sent by a Shopify representative to a merchant shipping with SFN, which Insider obtained, said the company would “no longer support special requests after March 21, 2022.” 

Special requests include adding a marketing postcard to an order, shipping a wholesale order to a physical retail shop, or using a shipping box printed with the merchant’s logo. One former fulfillment partner described the new service as “stripped down.” 

The email also listed “key benefits” such as two-day shipping without express costs and “simple returns.”

A Shopify spokesperson said the company would share more details on its plans for SFN during its fourth-quarter earnings call in February. 

“Our fulfillment and warehouse partners are a key part of how we’re building our coast-to-coast network,” the spokesperson said. “We will continue to optimize our network and services as needed, allowing us to provide our merchants and their customers the best possible delivery experiences.”

‘Shopify wanted the best of both worlds’

Shopify’s warehousing partners who spoke with Insider said they endured a great deal to get in on the ground floor of what they saw as a rocket-ship opportunity. 

Shopify demanded steep discounts in the beginning, some partners said. The company wanted to make fulfillment, which is a complex business where pricing is usually determined by the specifications of each package, into something simple. One partner described it as “throwing a software approach at a logistics problem.” 

Because the tech company did the sales but not the operations, it sometimes signed on complex clients the partners would struggle to service, some partners said. Meanwhile, at least one partner was asked to keep adding capacity — at its own expense, but with heavy Shopify supervision. 

“Shopify wanted the best of both worlds,” one partner said. It wanted oversight and dedicated capacity, but none of the upfront expense or risk associated with building out a warehouse. Shopify even had staff on-site at each location to monitor performance metrics. 

“Shopify prides itself as being ‘the entrepreneurship company,’ and with this decision, the entrepreneurs and small businesses lost today,” one partner said. “With that said, we will find a way because we are entrepreneurs.” 

Got a tip? Contact these reporters at [email protected] or [email protected], or on the secure messaging app Signal at (646) 889-2143 using a nonwork phone. 

Source News