Shopify and tariffs
Shopify’s stock has tumbled more than -20% since mid-February, largely due to fears over the impact of Trump’s tariffs on Canada.
The Bank of Canada estimated Canada’s GDP could drop by -2.5% in the first year and by -1.5% in the second year. Those numbers don’t include the impact of tariffs recently levied by China on Canadian farmers and other groups.
Other forecasts also suggest a sizable recession is coming. All together, that means higher unemployment. One study put the job losses at a million.
Yikes, that has to impact consumer purchases, even on Shopify’s platform, right?
Not as much as you might think. At the Morgan Stanley Technology, Media and Telecom conference on March 3, Shopify CFO Jeff Hoffmeister said the “significant majority” of their merchants’ sales occur within countries. Cross-border sales are just 14% of the total.
Moreover, the tariff war should not go on for a long time, says Phillip Cross, an economist with the Macdonald-Laurier Institute. That’s because it hurts a lot of people within all the countries, including the U.S. As the loss of their votes could end Republicans control of Congress in the 2026 mid-term elections, the party could pressure Trump to tone down his tariff stance.
Even if it does take a long time, Shopify has a history of not only shrugging off recessions and Black Swan events but benefiting from them.
Take the Great Financial Crisis of 2008 and 2009: the company became profitable for the first time because laid-off persons set up online businesses, and businesses switched their expensive e-commerce installations to Shopify’s less expensive offering.
As for COVID, Shopify experienced its fastest growth ever because consumers switched en masse to online shopping while businesses built up their online merchandising operations.
It is said history does not repeat, it only rhymes. Nonetheless, Shopify’s elevated R&D spending continues to pay off with the recent announcement that Shopify stores can be created by simply telling AI what kind of store is desired and it will be set up.
This could be big. No more of the tedium of doing it manually. Indeed, it could have the potential to partially or wholly offset any reductions in the number of Shopify merchants due to a recession.
Maintaining or increasing merchant subscribers has the benefit of supporting company profit margins because subscription margins are 80%, versus 40% for Shopify’s other main component of merchant services (e.g. payment processing).
Many Shopify merchants with cross-border sales may be able to pass on the cost of tariffs to their customers by raising prices. Products offered by Shopify merchants tend to have pricing power because they are differentiated, custom-like products.
There could be some lower sales when merchants are compelled to raise prices but it is likely to be a one-off event; sales could revive after customers become acclimatized to higher prices.
Another thing is that central banks in non-U.S. countries can lower domestic interest rates to guide their currencies downward vis a vis the dollar. This will lower the price of their country’s products to U.S. buyers and so offset the bite of tariffs to the degree desired.
Furthermore, Shopify merchants exporting to U.S. consumers, the de minimis rule means their shipments to a consumer will not be tariffed if the value is under US$800.
Lastly, since differentiated products with unique features usually have pretty healthy margins, some merchants may refrain from raising prices and accept lower margins as a way to maintain customer loyalty until the tariffs are rolled back.