One billion dollars. This glittering figure has been recently circling around the news in Pakistan and is associated with the potential and trajectory of the e-commerce industry in Pakistan. Look past the hype and self-praise and a sobering picture emerges.
Anyone telling you about the billion dollar figure about ecommerce industry is either clueless or they lie about it on purpose. Why? Keep reading to get an idea.
Competitive Advantage for Ecommerce Stores
If you look at developed markets, the edge that ecommerce companies get is usually in the form of reduced prices which they are able to offer when compared to physical stores — we will tell you how they offer reduced prices — and that’s how they outperform physical stores.
So imagine if Bata Shoes goes online and offers their shoes on the internet only, this will mean that they won’t require any sales and distribution network, outlets, franchises, staff, salaries and all sorts of expenses they have for the physical stores.
Essentially speaking, online stores are better placed to offer lesser prices for products as compared to physical outlets and that’s one of their biggest advantages.
Imagine if ecommerce companies, that reduce overall price of a product by 6-10%, transfer this discount to consumers and start offering prices that physical retail outlets will never be able to match?
This is only how Amazon or Best Buy are able to offer matchless prices and offer consumers lot better prices, experience and value than they get on physical stores.
This is the only way how ecommerce stores can create a difference — but unfortunately, it can not happen in Pakistan.
Below are the reasons:
Problem at the Core
Ecommerce companies won’t deal directly with manufacturers and maintain in-house inventory — like Amazon — because they just can’t take the credit risk. Dealing with manufacturer directly will mean that ecommerce stores will have to spend huge sums on buying goods and will have to come in direct competition with deep-pocketed distributors.
Just in case if you don’t know, distributors (in Pakistan and elsewhere) book products and goods in advance from manufacturer or importers against a margin of 6-10 percent. Then they sell the stock in few months and regain the investment with profits.
This involves tons of cash, distribution expertise and countless other factors that are known to traders only.
Ecommerce companies, to compete with distributor network of Pakistan, will have to invest a lot of money and attain all the man-power and expertise that’s required in sales and after-sales network.
But then there lies another problem, even if ecommerce companies invest billions in advance booking of goods, they will have to compete with distributors who don’t pay taxes — we don’t have to tell here why — this would make ecommerce stores an uncompetitive and non-viable business case.
Technically speaking, ecommerce companies will have to pay a few percent in taxes — that distributors don’t pay — and it would reduce their profit margins enough to instantly make them an unsustainable business proposition.
This is only why ecommerce stores only buy products when they are ordered, or they ask sellers to ship them directly to buyers and avoid the credit risk and any taxes.
For now, ecommerce stores in Pakistan are acting like marketplaces and not how Amazon or other giants operate in the West.
Tale of COD and Canceled Shipments
As we discussed, the initial advantage — through which ecommerce companies offer reduced prices — is gone as they buy goods from distributors and not the manufacturers directly.
This essentially means that ecommerce stores are left to make up their margins through other means, such as by reducing shipment costs etc.
However, in Pakistan, thanks to lower number of credit/debit cards and dirt low trust factor, customers tend to prefer COD (Cash on Delivery), which causes additional issues, such as:
- Courier companies hold cash for at least three weeks
- Increased number of order cancellation
Courier companies, after picking up cash from buyers, hold the funds for few weeks until they clear payments. This causes a cash-flow challenge. Then there’s another more disturbing challenge; since buyers haven’t paid for the order, the risk of order cancellation increases notably.
For every missed order or canceled shipment, ecommerce companies are bound to bear shipment charges (around Rs. 150) and wrapping costs (from Rs. 10 to Rs. 50) as an undue expense.
This overall situation indicates that there’s some serious design flaw that we must address to beat the challenges our ecommerce companies currently face.
You can share your thoughts in comments section to discuss the solutions.