The share price of Canadian tech giant Shopify Inc. fell more than 14 percent on Tuesday after revealing it will lay off 10 percent of its workforce because the company misjudged growth in the e-commerce sector.
Shares of the Ottawa e-commerce company closed at $40.69 after chief executive Tobi Lütke said in a blog post that most staff were affected by the job cut in recruitment, support and sales.
Shopify will also eliminate “over-specialized and duplicated” roles, as well as groups that Lütke said were “nice to have but too far removed from building products.”
Shopify did not share the total number of workers affected by the cuts, but its most recent management information circular shows it ended 2021 with 10,000 employees and contractors, including 3,000 added last year alone. Ten percent of this total would encompass 1,000 workers.
The company is making the cuts because the COVID-19 pandemic created an increase in demand for Shopify’s software as consumers shifted to making more purchases online, Lütke said.
Shopify bet that the amount of shopping people were doing online instead of at brick-and-mortar retailers would be five to 10 years ahead of pre-pandemic predictions.
“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 scale the company to match,” Lütke 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 continues to grow steadily, Lütke said it’s not a five-year leap forward, forcing Shopify to make cuts.
“Ultimately, making that bet was my call and I was wrong. Now, we have to adjust,” Lütke said.
“As a result, we have to say goodbye to some of you today and I’m very sorry.”
Incorrect assumptions are largely to blame for Shopify’s follies, GlobalData CEO Neil Saunders said in a note to investors.
“Honestly, this was a huge strategic mistake that was driven by an insufficient understanding of customer behavior, a lack of rigor in market analysis and a bit of hubris,” he said.
However, Shopify isn’t alone in laying off workers. In recent months, Wealthsimple, Klarna, Twitter and Netflix have shed staff as investor exuberance around tech stocks has faded, inflation has soared to a nearly 40-year high and the recession rumors have appeared.
Data aggregator Layoffs.fyi has counted 401 global startups that have laid off a collective of 57,552 employees so far this year.
Amid a broad market selloff that has weighed heavily on the tech sector in particular, Shopify’s share price has plunged more than 78 percent from its late-2021 high of $222.87. The company completed a 10-for-one stock split earlier this year.
The cuts along with Shopify’s recent performance increase the likelihood that the company will lower its outlook when it reports its latest earnings on Wednesday.
RBC Capital Markets analyst Paul Treiber told investors he expected Shopify to revise up its full-year expectations. The company previously suggested that the number of merchants using Shopify software would be comparable to 2021 and that revenue growth from merchant solutions would be more than double the growth rate of subscription solutions revenue on a year-over-year basis .
Those affected by Tuesday’s layoffs will receive 16 weeks of severance pay, plus an additional week for each year of tenure at Shopify. The company will also remove any equity cliff – a minimum amount of time workers must stay at a company before they can start receiving equity.
Laid-off workers will have access to career training, interview assistance, resume-building services, and Shopify will cover some of their Internet costs during the lay-off period.
Workers will also be able to keep the home office furniture the company gave them at the beginning of the pandemic and will be given a “start-up allowance” that can be used to buy new laptops.
But Shopify needs to do more than cut workers, Saunders argued.
He wrote: “With Amazon ramping up its merchant services and opening up its solutions to businesses outside of its platform, Shopify must work harder to attract new businesses and retain existing customers using its services.”
This report by The Canadian Press was first published on July 26, 2022.
Companies in this story: (TSX:SHOP)