columnist opinion

When Will Ecommerce Firms Make Money?

RARZACK OLAEGBE

To make money is not easy. To run business profitably is hard. Businesses are set up to make profit and better people’s lives. However, when that is not happening, what can you do? Can you tell why local e-commerce firms are not profitable even with the granting of pioneer status? Are retailers not buying? On the other hand, are they buying on credit? Are the e-commerce firms operating wrong business model? These are concerns.

The e-commerce subsector is reportedly worth over $10billion. However, reports of job cut, dwindling profit margin, and unpalatable news items are what we get. Recently Jumia’s revenue has fallen by 56 per cent within the first half of 2017. Its net revenue was EUR33.0 million compared to 2016 when it recorded EUR75.8 million for the first half of 2015. Rocket Internet’s Chief Financial Officer, Peter Kimpel, said Jumia would break even by 2019. That is after three years of sweats!

On its part, Konga has garnered 184,000 active customers. Between 2015 and 2017, the e-commerce firms have cut 800 jobs. There is 40 per cent reduction in website traffic even during promotional period. Konga, Jumia, Gloo, and Yudala are affected. They are running at a loss. When will they start making profit?

Well, writing in Your Story, K. Vaitheeswaran said India is experiencing similar issue. According to him, major Indian e-commerce firms have not made profits in 2014-2015. Their losses have mounted. Sales have dropped. Reports have that the founder and CEO of a leading Indian e-commerce firm has said his company would become profitable in three years from now. The same CEO made the same announcement two years ago. Things are bad for e-commerce.

There is a parallel between the e-commerce sites in Nigeria and India. All leading horizontal Indian e-commerce sites sell the same stuff, buy from the same merchants, and sell to the same customers at the same prices. There is no differentiation. Unless e-commerce firms start to differentiate their offerings significantly from each other, things may not improve.

An internet pioneer, retail entrepreneur and business advisor, Vaitheeswaran said if category differentiation is impossible, e-commerce sites must offer customers a great experience through high levels of operational efficiency and earn their loyalty. They must become boringly reliable.

He added that high number of refunds indicates poor operational efficiency. Customers want to get the ordered items delivered perfectly on time but no shopper anywhere in the world ever went online so that they can get refunds quickly. As the music slows down for e-commerce firms and the party starts winding up, it looks like the easy way is going to become harder and the hard way may be the only way out. E-commerce firms can still take some specific steps towards profitability.

Vaitheeswaran enumerates that e-commerce should push up gross margins. He says e-commerce company that uses other method to calculate gross margins is fooling itself. Smart category teams must extract every single percent in the supply chain to meet this goal of improving gross margins. As a follow-through, cut discounts. No item should sell at negative gross margins except specific traffic drivers or loss leaders to drive retail buzz.

He equally advises the reduction or stoppage of cash on delivery. It is not only a pain to manage but also expensive for merchants. It knocks out the convenience factor for customers from online shopping. Slash headcount. He says a simple rule when you decide to let go of people is to cut deep. Small cuts do not help. If you cut workforce by 10 per cent, the 90 per cent is insecure, worried, and unproductive.

Stop advertising. It makes no sense to hire Hollywood celebrities to peddle deeply discounted, me-too, low-margin items through front-page print ads and TV commercials. Instead, invest significantly in digital advertising. Stop wastage. Invest significantly in things the customers see or experience. If the customers cannot feel the impact immediately, stop it.

According to Vaitheeswaran, e-commerce companies will continue to do more of the same, which is to keep raising more money and keep offering deep discounts to lure customers. For sure, with so much money already ploughed in, it will not be easy for investors to pull the plug. However, neither can they continue to invest without end in unsustainable enterprises.

This is like holding a tiger by the tail. This is what the e-commerce firms are doing. It is not sustainable. It is like not making money but going out to spend money. When will the e-commerce firms start making money?

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