The current financial outlook of ecommerce giants, amid intensifying competition and multi-billion-dollar projections, is bleak to say the least. With fledging sales figures, though revenues are on the up-tick, their losses are mounting through consecutive quarters. According to a recent filing, homegrown ecommerce behemoth Flipkart reported a substantial 750% increase in losses while Paytm reported a net increase of 150%.
Ecommerce firms are adopting the cash-burn strategy to offer discounts and aggressively acquire new customers. This situation is neither ideal nor sustainable as the bottom-line is an imperative for business continuity.The intent here is to create visibility for new customers in unexplored geographies and expand their target customer base beyond the loyal urban households.
In a quest to reach untapped markets and create indispensability for the customer, companies are spending heavily to extend their supply chain infrastructure while enticing new customers via discounts and advertisements. With an increase in internet and smartphone penetration, online sales are expected to touch US$ 32.70 billion in 2018. According to a recent, Consumer Propensity Study by SAP, digital goods and fashion are the biggest categories for Indian shoppers followed by travel bookings and groceries. Though the average online retail spending in India was US$ 224 per user in 2017, there was no indication on the profitability per user.
So, the question arises, if sales are growing; how do we generate profits at the same time? The answer is neither simple or straightforward but here are some variables which can help in reducing costs and ultimately impact the bottom line.
Supply Chain and Logistics
Along with providing contextual offers and discounts to entice sales, ecommerce firms need to recalibrate their supply chain infrastructure and streamline costs. Ekart and Amazon logistics, rivals and the largest players in the sector have invested heavily to expand their reach and reduce shipping durations.
More than half of all purchases are abandoned primarily due to high shipping costs and two-fifths due to stock issues. Ecommerce firms need to find the right balance between maintaining optimal service quality while managing costs and inventory. The return on investment cannot have an indefinite gestation period and increasing sales is the only option to offset the cost of investment.
While ecommerce firms are aware of changing customer priorities and mindsets, the on-ground implementation of quicker deliveries and affordable delivery costs is posing a huge challenge. Due to transportation bottlenecks and weak delivery infrastructure, firms are unable to deliver as per the expectations.
While services like Amazon Prime are conceptualised with the idea of providing a guaranteed service, many others still do not deliver in small towns across the country. There is also a challenge of ensuring return/exchange which can immensely impact the overall experience. Retailers need to be conscious of their supply chain and create innovative tools to remove barriers to purchasing.
Bringing Back Focus on Technology
The overall cost of customer acquisition is high primarily due to marketing channel costs. To improve profitability,ecommerce firms need to fundamentally recalibrate their business models and leverage on technology. The use of drones and robots for delivery is an innovative construct where costs can be drastically reduced. Though these innovations require substantial investments to scale up their implementation, these offer a long-term solution in staying relevant within the market.
While big ticket acquisitions among industry giants indicates the scope of this sector going forward, it is still unclear how firms are going to address these big challenges. Firms needs to choose between investing capital to increase competition or investing to create technological value.
The long-term outlook will only be favourable for those who can align technological innovation to improve the purchasing experience and thereby stay relevant and profitable.
By Krishnan Chatterjee, Chief Customer Officer and Head of Marketing, Indian Subcontinent, SAP