Shopify's Powerful Expansion Beyond E-Commerce

Shopify (NYSE:SHOP) has grown to become a titan in the D2C e-commerce industry, helping merchants go from ‘first sale to full scale’. Though over the years, the e-commerce giant has expanded into new territories to solidify its moat, particularly into offline retail. Alongside its digital services, Shopify also offers Point of Sale [POS] solutions to support commerce activities in physical retail stores. The POS solutions have played an important role in sustaining growth post-Covid, and enhancing the appeal of the Shopify platform across the merchant community.

In partnership with Stripe, Shopify has been offering POS hardware devices and software solutions since 2013. The company has two revenue segments, subscription solutions revenue and merchant solutions revenue. The sale of POS hardware devices (e.g. card readers) contribute to Shopify’s merchant solutions revenue, while recurring subscription fees to its POS software solutions contribute to subscription solutions revenue. Note that the POS software solution, namely the Shopify POS app, is bundled into each of Shopify’s e-commerce plans, and the company strives to upsell successful merchants towards its higher-end POS Pro subscription service, for $89/month per retail location.

In May 2020, Shopify had introduced an all-new, advanced POS solution. Bundling the Shopify POS app within its broader e-commerce plans is a wise strategy that positioned the company well for the post-COVID reopening. Merchants that opened online stores through Shopify during the pandemic would be inclined to also use Shopify’s POS solutions as they expanded operations into offline channels following the economic re-opening, given that it is already part of their subscription plans. Furthermore, the tech giant also strived to replace well-established merchants’ legacy POS providers following the economic re-opening, as Shopify Vice President Harley Finkelstein proclaimed on the Q4 2022 earnings call:

We also simultaneously during COVID went to work on building the greatest point-of-sale product because we knew at some point, post-COVID stores are going to reopen. And once stores did reopen, we went hard in replacing all of those legacy systems with ours.

Shopify does not granularly disclose POS sales revenue, but it has indeed been aggressive in encouraging merchants to adopt Shopify POS solutions post-COVID, allowing for Gross Merchandise Value [GMV] growth through the offline channel. In 2022, offline GMV grew 40%.

Shopify POS solutions allow for the seamless unification of online and offline retail operations, enabling smoother omnichannel commerce. “Omnichannel… is an ecommerce sales strategy that provides a seamless shopping experience for customers between channels. Omnichannel allows merchants to sell through multiple channels like, desktops, mobile devices, and in-person stores”. Deeply integrating Shopify’s e-commerce solutions into a merchant’s online operations is conducive to merchants also adopting Shopify’s POS solutions for offline channels, in order to harmoniously synchronize business operations for more effective management.

Apple’s ‘Tap to Pay on iPhone’

Shopify is becoming a prominent player in the POS industry. In fact, last year Apple (AAPL) launched ‘Tap to Pay on iPhone’, and chose Stripe & Shopify as launch partners, as opposed to other industry giants like Block’s Square (SQ). This is testament to just how important a player Shopify has become in this space. Stalwart corporations like Apple deciding to partner with Shopify to launch their own new ventures further augments the value of the Shopify brand and the Shopify platform, as it can grant the company first-mover leverage to attract more merchants.

‘Tap to Pay on iPhone’ essentially allows people to accept card payments using their iPhones as terminals, through various POS apps like Shopify POS app and Square POS app. Consequently, Apple’s move is expected to reduce the need for merchants to buy POS hardware devices from their e-commerce and fintech partners. That being said, ‘Tap to Pay on iPhone’ is more likely to be embraced by nascent merchants just starting out on their entrepreneurial journeys, as opposed to larger, well-established businesses with deeply integrated commerce/ fintech solutions. Despite the onset of ‘Tap to Pay on iPhone’, Shopify is witnessing early signs of success with its latest POS hardware device, Shopify POS Go.

Shopify POS Go

Shopify POS Go is a mobile POS terminal that allows retail personnel to facilitate commerce transactions on-the-go, through a built-in card reader and barcode scanner, as well as customize shoppers’ experiences and manage operations.

The e-commerce giant launched Shopify POS Go in September 2022, and is already seeing strong demand, as Harley Finkelstein shared on the last earnings call:

At $399 per device, Point-of-Sale Go brings incredible value to larger, more complex retailers who are buying these devices in multiples. The initial response to this cornerstone product has been exceptionally strong, and we are excited to drive even greater adoption in 2023.

The high demand from large merchants is reflective of Shopify’s ability to innovate relevant POS solutions with valuable features that truly enhance merchants’ ability to conduct commerce. Moreover, Shopify POS Go offers great flexibility to both merchants and shoppers when it comes to closing sales. “For instance, if an item is out of stock in-store, staff can close the sale, take payment, and have the item shipped directly to the customer from another store location or warehouse with available inventory”. This helps merchants avoid losing out on a sale to a competitor, and optimize sales conversion.

Furthermore, “not all customers are ready to buy on the spot...When that happens, staff can email order details to shoppers from POS Go so they can complete the purchase on their own time.” Shoppers like to compare different products before making a purchase. This feature helps keep Shopify merchants’ products top of mind, and subdues the risk of losing sales to competitors. It positions merchants well for optimum sales conversion and leverages Shopify’s omnichannel capabilities.

Shopify’s growing POS ambitions

Shopify has indeed introduced valuable POS solutions that help the tech giant effectively penetrate the offline retail market, as well as solidify its e-commerce moat by extending omnichannel capabilities. Given Shopify’s appointment of the new COO last year, the tech giant is likely only getting started with its POS ambitions.

In September 2022, VP of Product Kaz Nejatian was promoted to COO of Shopify. Nejatian holds extensive experience in the fintech world. Earlier on in his career, he had co-founded a payment technology company called ‘Kash’, which was eventually acquired by an undisclosed, large fintech giant. "Kash was one of the early players in giving small businesses access to mobile payments technology for brick-and-mortar stores". His proven determination to make fintech solutions increasingly accessible to small business owners fits in perfectly with Shopify’s endeavor to make commerce solutions available to businesses of all sizes. More specifically, his solid background in mobile payments technology is already evident in the company’s latest POS offering, Shopify POS Go, and will continue to be an asset to the tech giant as it expands further into offering in-store commerce solutions.

In fact, while Shopify initially gained traction as an e-commerce enabler, the company is also developing a reputation as a formidable POS solutions provider, as Harley Finkelstein proclaimed on the call:

We have now merchants coming to us primarily for point-of-sale, I mean, now that point-of-sale can now power 1,000 retail stores, our merchants that come first and foremost for point-of-sale and then expand to online store as well.

This is testament to how successfully Shopify has built its POS business in partnership with Stripe, to the point where it could indeed become a serious challenger to Square at its own game.

Counteractive factors

Apple’s own enterprise ambitions: Shopify partnering with Apple on the ‘Tap to Pay on iPhone’ venture is certainly a positive for the e-commerce giant as it could help the company better attract new, nascent entrepreneurs to the platform, through making it easier to accept payments via the Shopify POS app on iPhones.

Nevertheless, despite the partnership, Shopify must beware of Apple’s own enterprise ambitions. ‘Tap to Pay on iPhone’ can indeed be perceived as an extension of Apple’s own commercial ambitions, as the tech giant is striving to augment enterprise use of Apple’s hardware and software solutions. This could just be a first step, as Apple could roll out more business-oriented products and services, whereby it may directly compete with Shopify in the future in certain commercial segments.

If the use of iPhones for commercial purposes takes off among smaller merchants, and Apple keeps them entangled in its ecosystem through offering more business-oriented solutions, Shopify could potentially face hurdles in effectively monetizing its merchant base.

Nevertheless, Shopify is well-positioned to fight back against such competitive threats. Shopify’s commercial solutions are well-ingrained into merchants’ core operations, and Shopify can indeed leverage the stickiness of its platform to induce merchants to use Shopify’s own solutions over Apple’s potential offerings, promoting its omnichannel integration benefits for more synchronized business management.

That being said, Apple is unlikely to become an e-commerce platform like Shopify, but the Ottawa -based giant will need to stay ahead of the curve and get creative in how it sustains the prominence of its own merchant solutions to fend off potential competitive threats.

Square’s prowess in the POS industry: While Shopify has made great progress in encouraging adoption of its POS solutions, we must not underestimate the competitors in this market, particularly Block’s Square.

A key selling point of Square POS is that it offers targeted POS solutions striving to better facilitate industry-specific needs, including Square for Retail, Square Appointments, and Square for Restaurants (alongside its standard POS solution that is generally applicable to all types of industries). These targeted vertical solutions are a key competitive differentiator, as it enhances Square's ability to acquire merchants in these particular industries. It positions Square well to capitalize on merchants’ inclination for services that are specifically-oriented towards serving their industry-specific needs, as opposed to more generic business solutions. Square plans to expand into even more verticals to continue attracting merchants from various industries.

Competition is tight in the POS industry, and Shopify will need to step up its merchant acquisition strategies to more effectively compete neck-to-neck with giants like Square. Square’s targeted vertical solutions are indeed a force to be reckoned with, though Shopify does have strengths of its own to leverage.

Firstly, Shopify’s suite of e-commerce solutions are more extensive than those of Square. Hence, merchants seeking high-quality commerce solutions to facilitate both online and offline commerce will find great value in Shopify. Secondly, it can leverage the power of the Shopify App store, through which developers are encouraged to offer niche solutions. For instance, the Shopify App store offers various solutions specifically targeted towards restaurant operations. As the availability of industry-specific solutions continues to widen on the App store, Shopify becomes increasingly better positioned to counter competitors’ merchant acquisition strategies.

All in all, the recent appointment of Kaz Nejatian as COO definitely emboldens Shopify’s POS endeavors, and will likely become a force to be reckoned with.

Summary

Over the years, the e-commerce giant has expanded into new territories to solidify its moat, particularly through its Point of Sale [POS] solutions to support commerce activities in physical retail stores. Bundling the Shopify POS app within its broader e-commerce plans is a wise strategy that positioned the company well for the post-COVID reopening. Deeply integrating Shopify’s e-commerce solutions into a merchant’s online operations is conducive to merchants adopting Shopify’s POS solutions for offline channels, in order to harmoniously synchronize business operations.

The fact that Apple decided to partner with Stripe/Shopify first, as opposed to other key POS players, is testament to just how successfully Shopify has built its brand image and lucrative merchant base. The high demand for POS Go from large merchants is reflective of Shopify’s ability to innovate relevant POS solutions with valuable features that truly enhance merchants’ ability to conduct commerce. Given Shopify’s appointment of the new COO last year, the tech giant is likely only getting started with its POS ambitions.

Any investment decisions in Shopify stock should take into consideration all its business divisions. Given that this article specifically focuses on its POS solutions, a neutral ‘hold’ rating will be assigned to the stock.