E-commerce: It’s time to focus on your bottom line, not the top line
We don’t need to tell you that the e-commerce business is a very different place than it was just six months ago. Back then aggregators were raising—and spending—lots of money, sellers of online retail companies were getting five to eight times EBITDA, sometimes higher, and growth prospects looked great. You could operate an e-commerce business as a hobby or sideline and do quite well at it.
Now it’s a very different story. Amazon lost $3.8 billion in the first quarter, down from the $8.8 billion profit it earned in the comparable quarter a year ago (full article here) while sales volume fell for the first time in six years. Thrasio, the biggest aggregator, has announced layoffs and replaced its CEO. Many aggregators find themselves unable to grow their brands as effectively as they used to and have either stopped new acquisitions altogether or gotten a lot choosier on what they will buy. As a result, company valuations have narrowed to four- or five-times EBITDA. But that assumes you have earnings. Many e-commerce businesses aren’t making money, even if their revenue is growing, although profits are what potential buyers demand in today’s market.
What’s changed? The most obvious difference is the post-Covid shift in consumer buying away from online shopping back to physical retail stores. But there’s also been a lot of negative macroeconomic fallout from the pandemic that is hurting e-commerce disproportionately, to wit:
- Online retailers are facing rising advertising and marketing costs. The Big Tech advertising companies like Google, Amazon, and Facebook, having seen their stock prices drop, are raising their advertising fees to boost their revenue and profits. At Amazon, if you’ve noticed, the site is filled with a lot more ads than it used to be, making it a lot more difficult—and expensive—for individual brands and products to stand out.
- Competition is only getting worse, as previously “unique” products find themselves easily replicated. To compete on Amazon, sellers have to have both innovative and premium products and low prices, often a difficult circle to square. And a growing number of e-commerce businesses are operating out of China, giving them supply chain, price, and language advantages that other firms don’t have.
- To circumvent supply chain issues, many e-commerce companies have had to buy and hold a lot more inventory to make sure they don’t run out, but that raises their storage costs and raises the risk of unsold inventory in the future.
- The rise in interest rates increases capital costs to buy and store that inventory.
- Inflation makes your own goods more expensive, but how much can you pass onto the consumer before they balk? If you can’t, that eats into your bottom line.
- The war in Ukraine and other potential crises only add to existing consumer unease.
Put on your CFO hat
So what should an e-commerce company do? You can still sell your business, but potential buyers want to see profits. But if you can’t grow revenues in this environment, how do you raise your EBITDA to make it attractive to a potential buyer? It’s a good time to put on your CFO hat and figure out how to change your business model to drive profitability. Here are some ideas on how to do that.
- Emphasize profits over revenue growth. Look carefully at your product mix and see which ones are the most profitable. You may find that your biggest sellers don’t make any money, while most of your profits come from just a few others. Focus your efforts on them. Some companies have found they can decrease their revenue by 50% yet still boost their EBITDA.
- Have a competitive advantage. Niche products are fine, but as we noted above, they can be easily copied by competitors—even by Amazon itself. But if they serve a big enough market, they can succeed. Patents, social media influence, and supply chain relationships are other competitive advantages that demonstrate strength and stability for a potential acquirer.
- Make yourself indispensable to your customers. A company we know sells over 100,000 types of wire and cable. Customers know where to go when they need that product, so there’s lots of repeat business. That kind of operation is difficult for competitors to replicate.
- Calculate your add-backs, which can boost the value of your company. Add-backs are one-time expenses—such as R&D, legal fees, patent applications, and trade show and marketing expenses—that can be extracted to boost your EBITDA and show your business in the best light. Add-backs are taken out of your P&L statement when you are going to market, then you receive a valuation multiple based on that value.
- Perform an internal audit on your recurring expenses. Consider hiring a cost recovery consultant that can help you ferret out financial leakage, which can lead to value creation. You’d be surprised how much money your accounts payable department lets seep out the door through overpayments and duplicate payments to vendors. Many cost recovery consultants work on a success-based commission basis, so you only pay them if they can save you money. It’s essentially found money. Likewise, audit your telecommunications and shipping and freight charges to see where you can save money. Additionally, see if there are potential cost savings in payroll or cost of goods that can boost your net income.
- Automate and standardize your operation as much as possible, especially when it involves repetitive tasks. The costs of automation technology, especially in the warehouse, have come down appreciably in recent years. E-commerce business owners are looking more and more to software for automation and virtual assistance for low-cost solutions to scale and reduce work.
There’s no question that the e-commerce world is a lot tougher than it was just a short time ago. Now is a good time to sell your company if you have a profit because macroeconomics may get worse. If you need to boost your bottom line, you can take steps to make your business more profitable and make it more attractive to buyers, who are still hungry to acquire profitable firms. Call us today if we can be of any assistance.