The Shift Towards Profitability in eCommerce

After 10 years of rocket growth within the eCommerce space, businesses are asking how they can become more profitable. Across the board in Southeast Asia, we are seeing an industry that is transitioning from a phase of fast expansion to a period where sustainable growth and integration with traditional retail strategies may be more important than ever.

To look at what is happening now and next in Southeast Asia, we spoke to Simon Torring, the Co-Founder of Cube Asia, a market intelligence company focused on Southeast Asia’s digital economy. Simon joined us on our brand-new season of The Forward Podcast.

Simon Torring: In a sense, what we were hoping for when we started the business was that we were coming out of ten years of rocket growth in eCommerce, but also a bit of unbridled growth—nascent organizations where merchants, brands, and retailers didn’t necessarily have a lot of profit expectations for their eCommerce. It was more about, “Wow, this is this cool new channel. Let’s go there and grow as fast as we can.”

In the last year since we started the business, we have been watching for indicators that companies would start to expect more of their eCommerce businesses—that they need to become profitable, they need to become integrated with marketing, pricing, and assortment strategies that are ongoing for the offline channels. They need to become more mature. And of course, this was a compelling story when we were raising seed funding, because when that moment arrives, companies will need a lot more data about their competitors and landscapes.

I would actually say that this is starting to play out. It’s something that we will be addressing this year. In the meetings I have with eCommerce leaders, it’s a lot of questions about, “My CEO, my chief digital officer, whoever it is, is expecting that I can both grow and be profitable this year. How the heck am I going to do that?” We don’t have all the answers for that by any means, but we can at least help develop our services to get as close as we can and be that trusted voice they can rely on along the way.

I think the biggest macro trend playing out is this search for profitability in eCommerce. It’s the brands, but also the eCommerce platforms at the same time trying to get profitable. So it’s everybody. Indeed, enablers like logistics companies that serve eCommerce are also looking to get profitable. It’s a little bit like, you know, I wouldn’t say the party is over, but it does feel like it’s 5 a.m. in the nightclub, and the lights are coming on. Now we all have to face reality and get real.

Aziza: Why do you think this shift is happening? What can businesses focus on as they move forward to make that possible?

Simon: I think the reason why it’s happening is due to two big reasons and a lot of smaller ones. The two big reasons are:

First, eCommerce was very small and then it had to grow into its natural equilibrium percentage of total retail. There are some types of purchases that are nice to make online, right? Like when you’re replenishing something or there are certain kinds of discovery for beauty products or fashion that are nicer to do in the comfort of your own home. Then there are quests where you’re searching for the lowest price of an expensive item, and you can buy it online.

All these things—there was a bit of a coil that was unleashed over the last 10 years, getting eCommerce to the size it is now. But we can’t extrapolate that this growth should continue because there are also lots of purchases that we want to make in stores. Yes, we expect that eCommerce will grow two or three times faster than the general retail landscape in these markets over the next couple of years. But even that is much slower than what the eCommerce channel has been used to.

Second, the interest rates really impact this shift. The platforms providing eCommerce were growth-funded startups trying to get big and were valued on very high multiples of their gross merchandise value. They have been unprofitable so far, investing so much in subsidies and marketing. Those dollars have been redistributed from investors down into the pockets of consumers. Now, that party is coming to a halt because investors in these businesses are now expecting them to become profitable.

Honestly, it’s fine. We had that ten-year ride, and it was awesome. The total dollar growth of the next ten years will be several times higher because the market is now more mature. The percentages will be lower, but the dollar signs are very, very large now.

So, what can businesses do? It entirely depends on where you are in the value chain. The life of an eCommerce platform is very different from that of a shipper, which is again different from that of a consumer brand. We work most closely with the consumer brands, and there are some things that I see the ones who are really ahead of the game doing.

For example, they are trying to sell on more different eCommerce channels to lessen their reliance on anyone who can raise prices on them too much. You have negotiation leverage. A lot of the smart ones are using more data—whether it’s from us or somebody else—to scrutinize what’s selling and make more data-driven assortment and pricing decisions.

Another interesting trend is getting really clear strategically about which jobs in eCommerce you want to insure and which ones you want to outsource. Brands have been relying on enablers to do a lot of their shipping and shop management, typically on a percentage of their sales. It’s an attractive proposition to get started—I would equate it a little bit to choosing a WeWork instead of building out an office. But once you’ve reached a certain scale, maybe there are benefits to thinking about a long-term home with no middleman and finding efficiencies that are fit for purpose. These are some of the trends, and there are many levers to adjust. We will see a new kind of eCommerce leader emerge in these brands who is a total P&L leader instead of being mostly a growth leader.