Shopify ups its fulfillment capabilities

Shopify hopes to match Amazon Prime’s one-day delivery. But first, it must get to two-day delivery. Most analysts thinks it can do so and be a real alternative to Amazon.

When we last wrote about technology stock Shopify Inc. (TSX—SHOP; NYSE—SHOP) in our late June issue, we advised investors who thought it had gone up too far too fast to ignore the stock at their peril. It was then trading at $325; in late August it crashed the $500.00 barrier.

shopify

Shopify’s acquisition of 6 River Systems is a step toward achieving two-day delivery.

Though it has since fallen to $400+, the still-dramatic rise was triggered by Shopify’s acquisition of Waltham, Massachusetts-based 6 River Systems, a leading warehouse automation and management technology developer. 6 River makes robotic charts for order fulfillment centres that learn the warehouse layout and product locations in order to help workers more efficiently pick and sort items for e-commerce deliveries.

The $450 million deal will enhance Shopify’s fulfillment service, which the company inaugurated in late June with the establishment of the Shopify Fulfillment Network. According to The Wall Street Journal, the network and its so-far seven brick and mortar fulfillment centres enable customers (retailers) to store and ship consumer goods for online orders and speed up delivery as they compete with Amazon.

Acquisition brings Kiva Systems veterans

In the logistics domain, 6 Rivers is best known for its Chuck autonomous vehicles that can quickly move packages in warehouses. Shopify believes that “. . . adding 6 Rivers’ artificial- intelligence powered systems will increase the speed and reliability of warehouse operations by empowering on-site associates with daily tasks, including inventory replenishment, picking, sorting and packing.”

Shopify doesn’t expect the transaction to have any material impact on its revenue in 2019, but it will increase the company’s expenses for the year by $25 million, including $10 million in operating expenses, $8 million in the amortization of intangible assets and $7 million in stock-based compensation. The company expects 6 River to generate annual billings of approximately $30 million in 2020.

Another reason for the excitement is that the deal for 6 Rivers employees includes veterans from warehouse robotics company Kiva Systems, which was bought by Amazon in 2012 and became the foundation of the e-commerce behemoth’s push to automate its fulfillment operations.

Analysts supportive of acquisition

Analysts applauded the acquisition. Said a Goldman Sachs analyst: “Shopify expects its fulfillment service will allow merchants to deliver to 99 per cent of the continental United States within two days or less, making it more competitive with Amazon. We believe this is a significant development as long wait times for delivery, along with high shipping costs, often leads to lost sales and lower customer satisfaction.”

A Barclays spokesperson said: “Similar to how Amazon built its fulfillment centre network over the years to support Amazon Prime (one-day) shipping, we also expect this latest move to grow and improve the value proposition for merchants significantly.”

Shopify CEO Tobi Lütke said: “With 6 River Systems we will bring technology and operational efficiencies to companies of all sizes around the world.” The 6 River acquisition will accelerate Shopify’s goal of supporting merchants who ship between 10 and 10,000 packages per day to those who ship between 3 and 30,000 per day.

Shopify hopes to match Amazon Prime’s one-day delivery. But first, it must get to two-day delivery. Most analysts thinks it can do so and be a real alternative to Amazon.

This is an edited version of an article that was originally published for subscribers in the October 2019/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.