Surging Online Sales Drive Growth for Shopify’s Fulfillment Service

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Shopify Inc.’s

recent expansion into physical distribution is looking prescient, as surging digital sales during the coronavirus pandemic boost demand for the e-commerce technology company’s fulfillment services.

The Shopify Fulfillment Network that handles the storing, packing and shipping of goods for online sellers “enrolled more merchants and increased our fulfillment volume…by two-and-a-half times over Q1” in the second quarter, Thomas Epting, director of the network, told The Wall Street Journal. “We’re seeing good in-year growth and certainly ample demand.”

The expanded business for handling physical goods is part of the growing demand Shopify has seen for its main business providing the digital tools for retailers to reach consumers online.

That capability has become critically important for many merchants as the coronavirus pandemic has upended American life and the U.S. economy, triggering a rush of e-commerce orders from homebound shoppers and a scramble by smaller sellers to scale up to compete with online heavyweights such as Inc.

Covid-19 has pushed e-commerce “forward by 10 years,” Mr. Epting said. “We’re building SFN with the goal of having our merchants be as ready for the future of commerce as they can be.”

Shopify’s second-quarter revenue nearly doubled to $714.3 million from the previous year, and the number of new stores created on its platform jumped 71% from the first quarter of 2020 to the second quarter.

Ottawa-based Shopify launched its fulfillment service in June 2019 through partnerships with operators of seven warehouses around the U.S., aiming to speed delivery for small and medium-size brands. Shopify also bought warehouse robot-maker 6 River Systems Inc. for $450 million and began deploying the company’s robots in some partner warehouses to help workers fulfill orders.

Shopify plans to spend $1 billion over five years building an asset-light network that uses the company’s software to connect merchants with warehouse operators. The service uses machine learning to advise customers where to place inventory, which items to restock and to route orders to the closest fulfillment center.

Mr. Epting declined to discuss specifics of Shopify’s expansion plans.

Shopify positions its network as an affordable alternative to fulfillment services such as those offered by Amazon, whose digital sales dominance has fostered a growing ecosystem of businesses pitched at retailers and brands seeking to keep up with the sector’s leader. Shopify’s network “lets you control your data, ships fast and keeps your brand the hero,” the company’s website says, an apparent nod to concerns such as Amazon’s potential use of sellers’ data to develop competing products.

The market for such services is substantial. U.S. logistics providers will generate an estimated $53.3 billion in e-commerce revenue this year, up 22.8% from 2019, according to research firm Armstrong & Associates Inc.

The multibillion-dollar e-commerce logistics business is drawing attention from investors.

Last month, e-commerce logistics and technology provider ShipBob Inc. raised $68 million to expand its fulfillment network and add additional services, in a funding round led by

SoftBank Group Corp.’s

Vision Fund 2. Whitebox Technologies Inc., a Baltimore-based fulfillment and e-commerce technology company, raised $18 million in September.

“There’s got to be a third party between Amazon and


that can do it all,” said Steve Sarracino, founder and a partner at Activant Capital, whose supply-chain investments include backing for e-commerce fulfillment platform Deliverr Inc.

“We need another big company that can take 10,000 SKUs [stock-keeping units, or items] and put it throughout the country. It’s going to require a lot of capital,” Mr. Sarracino said. “You would need probably 40 to 50 warehouses across the U.S., easily.”

Write to Jennifer Smith at [email protected]

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