What It Means
Globally, eCommerce companies are facing challenges in sustainable profitable growth as the era of growth-at-all-costs with funding on tap has ended. Improving (or becoming) profitable means two things: how to grow revenues (and therefore gross margin) and how to keep costs under control. Revenue increase comes from both sales growth from existing customers and via new customers. Among the costs, one of the biggest heads is typically marketing spends – acquisition of new customers via digital platforms. So, the most important levers for profitable growth come down to getting more from existing customers and reducing CAC (customer acquisition cost). In this series, I will discuss how B2C/D2C brands can do both and thus transform their P&L from low/no profits to high and sustainable profits.
I am going to take the financials of two public ecommerce companies as examples so we get a sense of the opportunity. They are among the top-ranked public eCommerce companies.
This is from Chewy, whose mission is “to be the most trusted and convenient destination for pet parents and partners everywhere.” Q4 below refers to the Oct-Dec 2022 quarter (13 weeks ending Jan 29, 2023).
This is from Nykaa, India’s leading beauty products and fashion brand. Q3 below refers to the Oct-Dec 2022 quarter.
Here is a comparison of the numbers for both companies.
The few important numbers to focus on:
- YoY revenue growth (Nykaa doing quite well)
- Advertising and Marketing as % of Gross Margin (mid-20% range for both)
Now imagine if the companies could grow revenue even faster by reducing marketing costs: the EBIDTA on impact could be significant. The actions needed to accelerate growth AND reduce marketing spends are the key to transforming the P&L.
If a company can grow revenue (and therefore gross margin) 10% faster (normalised GM growth from 100 to 110), and halve the marketing spend, the EBIDTA impact is significant. In the case of Chewy, EBIDTA will increase by $76 million + $91 million = $167 million (a 1000% increase). In the case of Nykaa, EBIDTA will increase by Rs 634 million + Rs 822 million = Rs 1456 million (a 200% increase).
Consider a typical eCommerce company.
- Revenues: 100
- Gross Margin: 40
- SG&A: 25
- Marketing: 10
- EBIDTA: 5
Now, what happens if we grow revenues (and GM by 10%) and reduce marketing spends by 50%?
- Revenues: 110
- Gross Margin: 44
- SG&A: 25
- Marketing: 5
- EBIDTA: 14
EBIDTA almost trebles!
This is what I mean by “transforming the P&L.” So, how can ecommerce companies do it?
I will call the new set of ideas: PxL – transforming the P&L. They build on the Building High-Growth Profitable D2C Businesses and the ProfitXL idea. [PxL could also mean supersizing Profits: Profit + XL; making Profits extra large.]