Why Did Shop.Ca Go Bankrupt? the Inside Story

  • By: mvadmin
  • Date: April 13, 2020
  • Time to read: 5 min.

SHOP.CA is a Canadian multi-merchant e-commerce website, and a Transformational Capital portfolio company. It was founded in 2011 and allowed its approved partners to list and sell products on its site.

According to ‘The inside story of Shop.ca’s failed e-commerce revolution’ in Canadian Business magazine, the company, which was once one of Canada’s hottest tech startups, went bankrupt after a series of strategic missteps and clashing visions.

When the company was bleeding cash last February, its board of directors was seeking a way to keep the company afloat, said the article. A group of investors brought in co-founder Drew Green and rewrote the shareholder agreement to limit the control Green would have on the company. However, the additional funding provided the company with a chance to stay afloat for a while longer.

Shop.ca’s brand name and bold nature attracted an enterprise crowd when it first started. It brought in more than $70 million in funding along with some well-known names like the businessman who Don Tapscott joined as an advisor, and Bill Gregson, the former CEO of The Brick who signed on to the board.

However, despite having glitzy names and funding, the company did not become the household name it had wanted to be and ended up filing for bankruptcy protection earlier this year. This was despite having raised $27.4 million ahead of its launch in July 2012, a round led by Torstar Corp. and including capital from Slaight Communications. The company had its office in a 1,600-square-foot loft downtown and was a business with extremely hard-working staff.

Shop.ca worked in its way. It dint own any warehouses or ship any of the products it sold. Instead, the company behaved solely as an intermediary between retailers, brands, and distributors and customers. It assisted whenever necessary and looked after customer service, receiving a cut for every sale made. It sold various products across as many as 4000 brands. The aim was to bring everything a customer required to one shopping site, something that Canadians dint have yet.

The format was one of the big box stores. This meant that the model was based on scale, the model used by the company reduced operating costs, but margins were very thin. The only way the company could churn a profit was if millions were generated in revenue each month and a loyal customer base was built.

The company used aggressive marketing techniques to bring in more customers to the site. For example, in 2013, it gave discount codes to spectators at an NBA game and even sponsored Toronto Maple Leafs left-winger Joffrey Lupul. Apart from this, almost everything had free shipping and returns were free for a year. The company reaped some gains from its aggressive marketing ploys and even announced a ‘million-dollar day’ where the company had earned $1 million in 24 hours.

But these were not sustainable tactics. The customers who came in from the million-dollar day sale or with the promotional codes did not return as often as the site hoped. Bad customer reviews poured in blaming the site of delaying products, lousy quality, out of stock products and more complaints.

There were various reasons for these complaints. Many sellers on the site did not have any online selling experience. They were not familiar with the complexities of the online world and the shipping and other costs involved.  While the site did have a large inventory, it became easy to include just about everything. However, the company later employed better and stricter standards for merchants who could sell their goods on shop.ca. It also raised $31 million from the venture capital arm of Shaw communications.

At the same time, the company was facing tension inside since there were concerns brought to the board that Green was using the company’s funds to pay for personal expenses. There were various strategic disagreements around the time as well with some investors insisting that the company should first focus on profitability before concentrating on scaling up. Soon Green left the company and said he was retiring to spend more time with family.

After Green departed the company, there was some emphasis put on profitability, however marketing expenditure remained as high as ever, and the company had to raise another $15 million in May 2015 from its existing investors just to stay afloat. By August that year, it was time to explore strategic alternatives that included either a sale or more funding.

The next month the company signed a deal with the Toronto-Dominion Bank that gave Aeroplan cardholders $50 to spend on Shop.ca along with 3,000 Aeroplan points, worth another $50. That meant Shop.ca was effectively paying customers more than $100 to shop on the site. The deal said that Shop.ca had to pull the plug early as it ran out of cash.

After some time there was a former Amazon executive Anthony Chvala who had been on Shop.ca’s board for three months which brought about some changes. He slashed marketing costs, which were surprisingly still high even when the company was in such a mess. Around half of the company’s staff, around 28 employees were laid off, and products on the site were evaluated to focus on categories which received customers. The company’s custom merchant-facing technology, which helped sellers more easily input product data to the site was later licensed under Chvala’s leadership.

However, despite all this, the story ends like we know it would- Inside a bankruptcy filing document.

The company, which had 40 employees at the time of the filing, held a going-out-of-business sale of sorts at its headquarters over the summer, according to the article in the Canadian Business.

The company’s bankruptcy filing was not the end for Shop.ca. In July, a newly formed private equity firm named Transformational Capital acquired the company’s assets for an undisclosed sum. The new company intends to focus on profit instead of revenue growth.

“We believe the new era of e-commerce is one that is grounded on sustainability,” says Ghassan Halazon, Transformational’s CEO, and the co-founder of daily deals site TeamBuy. To that end, the company is aiming to acquire troubled e-commerce companies and keep operating costs low by sharing resources.