Recent interactions with commerce companies operating in diverse segments (e-tailing and online services) led to some interesting observations: (1) focus has clearly shifted to unit profitability versus revenue/GMV growth earlier, (2) customer loyalty and engagement metrics are being tracked as a proxy to customer satisfaction, (3) companies are seeking to differentiate themselves by improving services offered to customers, and (4) technology is playing an increasingly important role to optimize costs (such as delivery costs) and better track customer preferences and seller performance.
Focus has shifted to unit economics
Companies are focusing on turning unit economics positive (if not already done so), as opposed to primary focus on GMV (Gross Merchandise Value) earlier. We believe this may be a function of limited availability of capital, leading companies to focus on cash generation. Post government regulations that curtailed discounts, companies seem to have done away with the same; most discounts being seen online are being offered by sellers/brands themselves. Most companies we spoke to are also evaluating other revenue streams such as advertising and online content to better leverage their platform.
Customer retention, and not GMV, is a key metric now
Customer recall, retention and loyalty are key metrics monitored by companies now, as opposed to an overwhelming focus on GMV earlier. While standard MAUs and app installs are also tracked, orders from repeat customers, and frequency of ordering are being used as metrics to gauge customer engagement. Companies are also focusing on improving customer satisfaction by shortening delivery times, offering wide product assortments and improved service, in a bid to keep customers engaged to their platforms.
Use of technology and infrastructure sharing to align demand with capacity creation
Delivery is a large cost component for most e-commerce companies, and hence its optimization is a key area of focus. Demand prediction, delivery-linked payments to delivery staff, as well as infrastructure sharing are various options evaluated by companies to rationalize delivery costs. Companies are using technology heavily to predict peak and non-peak delivery requirements, and optimizing resources accordingly.
Other trends: COD and Tier II/III remain large for e-tailers
COD (cash on delivery) constitutes a large chunk of payments for the e-commerce companies we interacted with, ranging from ~50-70% for online services and products. The proportion of COD, at least for products, has not declined meaningfully over the past couple of years. Tier II/III cities constitute a sizeable chunk of sales of e-tailers, and hence remain a key focus area. Companies also believe that Indian customers will not mind paying extra for on-demand services, though they may not have the same mindset for products, where immediate fulfillment is not a priority. Hence, with discounts being curtailed, e-tailers will need sustained focus on product assortment, delivery and service to distinguish themselves from competition.
By: Kotak Institutional Equities