'I got this wrong': Shopify lays off 10% of staff amid e-commerce slowdown

An employee works at Shopify's headquarters in Ottawa, Ontario, Canada, October 22, 2018. REUTERS/Chris Wattie
Shopify is laying off 10 per cent of its staff, the company announced on Tuesday. (REUTERS/Chris Wattie)

Shopify's stock (SHOP) (SHOP.TO) fell 14 per cent on Tuesday after the company announced it would be laying off 10 per cent of its staff, a move that comes as it grapples with a slowdown in e-commerce growth.

Chief executive officer Tobi Lütke said in a memo sent to employees on Tuesday that the company had expanded rapidly in the wake of the COVID-19 pandemic's e-commerce boom, betting that the share of online purchases in the retail space would permanently jump ahead by five to 10 years.

"It's now clear that bet didn't pay off. What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point. Still growing steadily, but it wasn't a meaningful 5-year leap ahead," Lütke wrote.

"Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust. As a consequence, we have to say goodbye to some of you today and I'm deeply sorry for that."

Shares of Shopify closed the trading day Tuesday on the Toronto Stock Exchange at $40.69, a decline of nearly 14 per cent. The e-commerce company's stock is down nearly 74 per cent so far this year.

The layoffs will impact approximately 1,000 workers across a range of roles, including recruiting, support and sales. Lütke says the company will also be eliminating "over-specialized and duplicate roles" and roles that were "convenient to have but too far removed from building products."

Shopify saw its business rapidly expand through the COVID-19 pandemic, with quarterly revenues surpassing the $1 billion mark for the first time in the company's history one year ago. As it continued to expand its list of merchants – from 1.7 million to more than two million in 2021 – it also added more than 3,000 employees by the end of last year, the company said in its management proxy circular released in April.

But the company has been struggling through the post-pandemic recovery amid a broader tech rout and as demand for online shopping moderates from COVID-19 highs.

Incorrect assumptions are largely to blame for Shopify's follies, said Neil Saunders, managing director of GlobalData, in a note to investors.

"Put bluntly, this was a huge strategic mistake that was driven by an insufficient understanding of customer behaviour, a lack of rigour in analyzing the market, and a bit of hubris," he said.

But Shopify is not alone in laying off workers. Over the last few months, Wealthsimple, Klarna, Twitter and Netflix have all shed staff as investor exuberance around tech stocks faded, inflation soared to an almost 40-year high and recession rumours loomed.

Shopify says laid-off employees will receive 16 weeks of severance pay, plus an additional week for every year worked at the company. It will also remove any equity cliffs – the minimum time required before an employee can receive benefits – and extend medical benefits. The company will also offer career coaching services, pay for internet costs during the severance period and offer a "kickstart allowance" to purchase new laptops.

Shopify will report its second-quarter results on Wednesday.

With files from The Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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