The share price of Canadian tech giant Shopify Inc. fell more than 14 percent on Tuesday after revealing it would cut 10 percent of its workforce because the company had miscalculated the growth of the e-commerce sector.
Shares of the Ottawa e-commerce company closed at $40.69 after Chief Executive Officer Toby Luetke said in a blog post that most of the staff affected by the layoffs work in recruiting, support and sales.
Shopify will also eliminate “hyper-specialized and duplicated” roles, as well as groups, which Lütke said are “convenient to deploy but too far from building products.”
Shopify did not share the total number of workers affected by the layoffs, but its latest information circular showed it ended 2021 with 10,000 employees and contractors, including 3,000 added last year alone. Ten percent of this total will cover 1,000 workers.
The company is making the cuts as the COVID-19 pandemic has created a spike in demand for Shopify’s software as consumers have shifted to making more purchases online, Lüttke said.
Shopify is betting that the amount of shopping people have done online instead of at brick-and-mortar retailers will jump five or 10 years from pre-pandemic projections.
“We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to grow the company to match,” Lüttke said.
“Now it’s clear that the bet didn’t pay off.”
Shopify has recently seen people return to pre-pandemic shopping habits. While e-commerce is still growing steadily, Lütke said that doesn’t mean a five-year leap forward, forcing Shopify to make layoffs.
“At the end of the day, placing that bet was my decision and I was wrong. Now we have to adjust,” said Lüttke.
“As a result, we have to say goodbye to some of you today, and I deeply regret that.”
Incorrect assumptions are largely to blame for Shopify’s folly, said Neil Saunders, managing director of GlobalData, in a note to investors.
“To put it bluntly, it was a huge strategic mistake that was due to a lack of understanding of customer behavior, a lack of rigor in analyzing the market and a bit of hubris,” he said.
Yet Shopify isn’t alone in laying off workers. In the past few months, Wealthsimple, Klarna, Twitter and Netflix have laid off employees as investor exuberance around tech stocks has waned, inflation has jumped to a near 40-year high and rumors of a recession have emerged.
Data aggregator Layoffs.fyi has counted 401 global startups that have laid off a total of 57,552 employees so far this year.
Amid a broad market selloff that weighed heavily on the technology sector, Shopify’s share price has fallen more than 78 percent from its late-2021 peak of $222.87. The company completed a 10-for-1 stock split earlier this year.
The cuts, combined with Shopify’s recent performance, make it more likely that the company will cut its outlook when it reports its latest earnings on Wednesday.
RBC Capital Markets analyst Paul Treiber told investors he expects Shopify to revise up its full-year expectations. The company previously projected that the number of merchants using Shopify’s software would be comparable to that in 2021, and that revenue growth from merchant solutions would be more than twice the rate of revenue growth from subscription solutions on an annual basis.
Those affected by Tuesday’s layoffs will receive 16 weeks of severance pay, plus an additional week for each year they have been with Shopify. The company will also remove any equity ladder – a minimum amount of employees must remain with the company before they can start receiving equity.
Laid-off workers will get access to career coaching, interview support, resume-building services, and Shopify will cover a portion of their internet costs during the layoff period.
Workers will also be able to keep their home office furniture, which the company gave them a stipend for earlier during the pandemic, and give a “start-up allowance” that can be used to buy new laptops.
But Shopify needs to do more than lay off workers, Saunders argued.
He wrote: “As Amazon ramps up merchant services and opens up its solutions to businesses that aren’t part of its platform, Shopify needs to work harder to appeal to new businesses and retain those existing customers.” using its services.’
This report by The Canadian Press was first published on July 26, 2022.
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