SQ - Shopify As An Operating System For E-Commerce

2023-12-03 03:32:32 ET

Summary

• Shopify is expanding its tax services to take on incumbents like Avalara.
• Shopify's expansion into Bill Pay expands its addressable market with more software tools for merchants.
• Shopify's POS offering rivals (and exceeds) Square's in many ways.
• Shopify has the potential to become the de facto operating system for omnichannel merchants.

Just a month ago I wrote about how financial discipline is taking hold at Shopify ( SHOP ). A week later I wrote about how Shopify blew earnings estimates out of the water . Shopify has turned out to be a bonanza for fellow shareholders over the past month. And honestly, I think the good times have only just begun.

I spoke briefly about Shopify's intentions of becoming the operating system for e-commerce. Actually, the company's goal is to be the operating system for unified commerce (i.e., e-commerce and offline commerce (think Shop GO retail POS systems). Recent moves into taxes , bill payments and more shows that SHOP has ambitions to grow its foothold within each business and capture more and more of the total spend on software tools that make these businesses more efficient.

In this article, I want to delve deeper into SHOP's intentions in the tax, bill payments, and POS spaces and how they have the potential to be a real threat to legacy players like Avalara, which was acquired by Visa Equity Partners for roughly $8.4 Billion , BILL (BILL), and incumbent POS systems like those from Square ( SQ ).

I hope this article will give readers some insights into the long term potential for Shopify to become something akin to the Microsoft ( MSFT ) of omnichannel merchants.

Shopify's Tax Moves

Shopify is actively enhancing its tax services to support its customers in navigating the evolving tax landscape in e-commerce. In 2023, Shopify has introduced key updates to address changes in sales tax regulations, value-added tax (VAT), and goods and services tax ((GST)). These updates are crucial for store owners to accurately calculate taxes during transactions, particularly given the varying tax rates and rules in different jurisdictions. Additionally, adjustments in VAT/GST rates can impact pricing structures for both domestic and international sales.

To facilitate efficient management of these tax changes, Shopify offers built-in features that leverage technology solutions. These include tax automation tools that assist in streamlining calculations, ensuring compliance with updated regulations, and simplifying tasks like calculating taxes at checkout or generating reports required for filing returns. Such tools are integral for Shopify store owners to adapt quickly and efficiently to the changing taxation requirements, allowing them to focus more on growing their business rather than dealing with complex tax matters??.

1. Shopify Tax: Launched to address the challenges of managing sales tax in the U.S., Shopify Tax offers solutions particularly beneficial for new and emerging businesses operating within the country. This service is designed to manage the complexity of tax compliance across various states, keeping up-to-date with the rules and requirements of each jurisdiction??.

2. Shopify Tax Platform: Aimed at larger or enterprise retailers, the Shopify Tax Platform offers a more flexible and comprehensive solution. It integrates enterprise-grade tax services directly into Shopify's infrastructure, enabling businesses to manage end-to-end compliance effectively. Store owners can rapidly activate existing tax rules within Shopify or customize new workflows as per their needs??.

3. Integration with Vertex: Shopify has partnered with Vertex, a leading provider of indirect tax software and solutions. This partnership enables businesses to use a unified solution to streamline global tax management . Vertex is known for its capability to meet compliance and customization requirements of finance and accounting teams, regardless of the channel, location, or scale of operation. This integration addresses the complexities of selling across multiple global tax jurisdictions and niche categories??.

4. Seamless Checkout Integration: Shopify's tax platform allows the integration of preferred tax calculation engines directly with Shopify's checkout. This feature ensures that the tax calculations, exemptions, and adjustments configured by the business are automatically applied during the checkout process, providing a high-quality user experience without compromising compliance??.

These initiatives by Shopify demonstrate its commitment to providing robust and adaptable tax management solutions, helping merchants navigate the intricacies of tax compliance efficiently.

Here is a screen shot of the initial setup in the admin section of a Shopify store to give you a visual of what it looks like.

Initial Setup of Taxes in Shopify Admin:

• Access the Shopify admin panel and navigate to Settings > Taxes and duties.
• In the "Manage sales tax collection" section, click on the United States (or your respective country/region).
• Under "Regions you're collecting in," select "Collect sales tax."
• Choose the state or region where you are registered for tax collection.
• Enter your sales tax ID in the "Sales tax ID" field. If you have applied for one but haven't received it yet, leave the field blank until you get your ID.
• Optionally, you can choose whether to charge tax on shipping in states where tax laws regarding shipping vary. This is done through the "Advanced options" under "Shipping tax."
• Click "Collect sales tax" to finalize the setup.
• Add more regions and account numbers as needed by clicking "Collect sales tax" again??.

Shopify Tax Platform Integration:

• The Shopify Tax Platform, launched in 2023, allows the integration of preferred tax services directly into Shopify.
• It is designed to seamlessly integrate tax services, such as Vertex, into Shopify's infrastructure, enabling end-to-end tax compliance management.
• After a tax partner like Vertex is approved and integrated, merchants receive comprehensive support to ensure their needs are met before and after going live.
• Once a tax service like Vertex is activated within the tax settings, it becomes the default tax service for the business, with all configured rates, rules, and processes transferring into Shopify without disruption??.

Setting Up Tax Regions:

• Once registered with tax authorities and in possession of a tax number, merchants can set up their taxes in Shopify.
• This involves selecting the country or region in the "Manage sales tax collection" section and entering the tax number.
• The system allows for the management of tax settings, including registrations, tax overrides, exemptions, and calculations??.

All a merchant has to do is categorize their products, and select the regions it should start collecting sales tax in and Shopify automatically handles any tax changes and notifies the merchant of said changes.

Customers love it.

This is 100 times better. Previously, to sort through all the data, I had created a custom spreadsheet and formulas to spit out the data that the state of Illinois needs. With this report, that's no longer necessary. I just pull up the Illinois Department of Revenue site in a new browser tab and copy the numbers. Takes 15 minutes max.Connect Roasters

Caleb Benoit - Founder, Connect Roasters

How Big Can Taxes Get for Shopify?

Consider the fact that Intuit ( INTU ) is a $160 Billion company and Avalara, a much smaller company, was acquired for $8.4 Billion, the potential in just taxes (and accounting) alone is enormous. Adjacent fields like taxes and eventually a full suite of accounting tools make a lot of sense for Shopify as it is the enabler of multi-channel commerce for merchants. Their platform acts as the hosting provider, enabler, and records keeper of every revenue transaction.

I hope this article gives you more of an insight into the long term potential for Shopify to grow its tentacles into a variety of tools that merchants already spend their money on. While merchants currently utilize a variety of tools not all managed under one single tech stack, Shopify has that potential to bring them all together under one roof.

Shopify's Bill Payment Moves

Another Shopify offering is a bill payment tool called Shopify Bill Pay, which is designed to compete with services like Bill.com by providing a range of features tailored to the needs of businesses, particularly those operating in the ecommerce space.

Here's a breakdown of the key features and capabilities of Shopify Bill Pay:

1. Integrated Payment Management : Shopify Bill Pay was launched in 2023 allows merchants to manage and pay vendors directly from the Shopify admin dashboard. This integration means that business owners can handle their payments without having to switch between different platforms or services????????.

2. Multiple Payment Options : Merchants can choose to pay their bills using various methods, including checks, bank transfers, credit or debit cards, or from their Shopify Balance account. This flexibility ensures that businesses can select the payment method that best suits their needs and preferences??????????.

3. Vendor Flexibility : Regardless of the payment method chosen by the merchant, vendors have the option to receive payments in the way they prefer, such as bank transfer or paper check. This feature adds convenience for both the paying business and the receiving vendor??????.

4. Time and Cost Efficiency : Shopify Bill Pay is designed to be a time-saving tool, helping small business owners save significant time each month on business bill payments. It's promoted as being twice as fast as other B2B expense solutions. Additionally, there are no subscription fees for using Shopify Bill Pay, although other transaction fees may apply??????.

5. QuickBooks Integration : The tool allows for the synchronization with QuickBooks Online, enabling businesses to keep their accounts and financial records up to date seamlessly. This feature is particularly useful for maintaining accurate financial records and simplifying accounting processes????.

6. Dedicated Bill Pay Dashboard : Shopify Bill Pay provides a dedicated dashboard where businesses can manage their bills, filter, sort, and schedule payments for current or future dates. This centralized management system is designed to streamline the bill payment process and enhance overall financial management????.

7. International Payments : Shopify Bill Pay also supports international payments, providing businesses with the ability to pay any business anywhere, even if the vendor does not accept the merchant's chosen form of payment. This global reach is an essential feature for businesses that operate internationally??.

In comparison to Bill.com, Shopify Bill Pay seems to offer a more integrated solution for Shopify users, particularly those who merchants who want their financial management tools embedded within their ecommerce platform.

Shopify Bill Pay is currently a no-subscription-fee model and offers flexibility in payment methods and the ability to make international payments, both of which are advantages for Shopify merchants. Bill Pay is currently only available to US merchants.

Installing Bill Pay is simple for merchants:

1. From your Shopify admin, click Finances > Bill Pay .
2. Click Add Bill Pay .
3. Review the app permissions, and then click Install app .

Bill.com's addressable market is about 70 million small and mid-sized businesses globally. BILL has a customer base of 471,200 across all of its platforms and it is worth $7.3 Billion. SHOP has the ability to disrupt BILL by offering it as an add-on solution already integrated into its platform.

Shopify POS Offering

Shopify began offering its Point of Sale ((POS)) system in 2013. This launch marked a significant expansion of Shopify's services, moving beyond just e-commerce solutions to providing a comprehensive retail and payment processing system for both online and offline sales.

The introduction of the POS system allowed Shopify to cater to a broader range of retail and business needs, integrating physical sales with their existing online store platform.

Shopify made significant updates to its POS system as part of the Winter '23 Edition, focusing on enhancing the functionality and usability for businesses of various sizes. These updates include:

1. Shopify POS Go : This is an all-in-one POS device that enables businesses to accept payments, close sales, and manage their business activities from anywhere (see picture below). It's equipped with Retail OS, Shopify's POS software, allowing for inventory lookup, accessing customer profiles, and offering personalized shopping experiences. It also includes an integrated barcode scanner and card reader for on-the-floor payment processing??.

2. Support for Multiple Store Locations : Shopify POS now supports up to 1,000 physical store locations in addition to e-commerce sites, all from a unified platform. This expansion is designed to streamline operations for brands with a large network of retail stores, eliminating the need for third-party POS system integrations and reducing data fragmentation??.

3. Enhanced Inventory Management : The POS system now includes more detailed inventory states (like On-hand, Available, Committed, Unavailable, Incoming) for better tracking and management of stock across multiple store locations. This feature helps in understanding product availability and reduces the risk of overselling??. See picture below of a screen shot of what it looks like.

4. Gift Card Management : The system has improved functionalities for handling gift cards, allowing businesses to search, accept, manage, and sell both digital and physical gift cards more easily. This includes viewing card balances, reissuing lost or forgotten cards, and choosing between digital or physical cards for refunds or store credits??.

5. International Store Operations : Shopify POS, along with Shopify hardware and Shopify Payments, is now available in 14 markets, including new additions like Finland and Singapore. This global expansion helps brands operate stores internationally with a consistent POS system, avoiding the complexities of maintaining multiple systems and vendors??.

Shopify POS Go

Inventory Management

The major player in the POS space has been Square. SQ is worth nearly $40 Billion and roughly half of its gross profit comes from the sale of its POS systems and related software.

To get a sense of how big Shopify POS can get, lets look at how it competes with Square right now.

Shopify vs Square

Shopify's Point of Sale ((POS)) system competes strongly with Square now. Here are some key areas in which it competes:

1. Integration with E-commerce : Shopify POS is deeply integrated with Shopify's e-commerce platform. This integration allows for seamless management of online and offline sales, inventory, and customer data. For businesses that already use Shopify for e-commerce, this provides a significant advantage. Since SHOP is becoming the de facto platform for e-commerce, having a POS system that is deeply integrated with its e-commerce platform makes it more likely that a merchant will go with both options.

2. Hardware and Cost : Both Shopify and Square offer a range of hardware options for their POS systems. The cost of these systems can vary, with Shopify offering options tailored to Shopify users, while Square provides a more generalized solution that can be used with various platforms.

3. Market Focus : While both serve a broad market, Shopify POS might be more attractive to businesses that are already invested in the Shopify ecosystem, whereas Square can be a go-to choice for businesses looking for a versatile, stand-alone POS solution. As time progresses and the Shopify platform gets used by more and more merchants, I foresee SHOP capturing more market share within the POS space.

Conclusion

I hope this gives you a sense of the size of the addressable markets for the operating system tools that Shopify has been rolling out. While I didn't cover offerings like E-mail marketing (think competitors like Klaviyo ( KVYO ) and Constant Contact, logistics software like Stamps.com, etc., the combined addressable market of these operating tools is well north of $100 Billion.

The core Shopify offering has an enormous addressable market as it is, but with these tools it makes me really bullish on the potential for Shopify in the long run. I believe Shopify has the opportunity to become the Microsoft of omnichannel merchants and one day reach the 13 figure club (i.e., $1 Trillion market cap or more).

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