Online shopping looks hot – but 80% of e-tailers are in the red

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ONLINE retail may now seem like a sure bet for aspiring retailers, with more consumers buying online amid the coronavirus pandemic, but industry players warn that this segment of retail has more risks than meets the eye, some of which may even be heightened by the pandemic.

Interest in the online retail sub-sector has been growing in recent years, but appears to have surged amid the pandemic. According to data analysis firm Handshakes, studying data from the Accounting and Corporate Regulatory Authority (Acra), there were 8,275 active entities that retail via the Internet as at June this year, a 28 per cent rise year on year.

This is a big jump from the 13.2 per cent increase from June 2018 to June 2019 (5,690 entities to 6,443 in the sub-sector).

Meanwhile, other retail sub-sectors have seen little change to their active entity numbers over the past two years.

The draw of online retail seems obvious with its low barriers to entry and the absence of costs that have typically weighed on brick-and-mortar retailers, such as rent and labour.

Alicia Tsi, founder of Singaporean womenswear label Esse, added that e-commerce platforms now allow entrepreneurs to set up an online shop and sell products within minutes. There are also “affordable”, DIY-friendly platforms like Shopify that allow entrepreneurs to get their products to market “quickly and easily”.

Andrew Tan, who owns Japanese lifestyle store atomi and manages retail consultancy atomi x consultancy, noted that the ease of transacting and making payments digitally today reflects another barrier that has been broken down for aspiring retailers.

Yet, the low barriers to entry also make for intense competition – not just from local players, but online stores globally as well. And the competition is set to increase as the pandemic pushes incumbent retail brands and department stores into the online sphere. Particularly, secondary resellers, which many home-based retailers are, may find themselves out of business, said Mr Tan. “Everyone has to work harder now to serve a particular market.”

Already, about four in five online retailers were loss making in 2018 and 2019 – 78.4 per cent and 80.5 per cent respectively, according to Handshakes’ study of corporate filings for those financial years. (However, the 2019 figure may be incomplete, as Acra has given companies a 60-day extension for the filing of returns due between May 1 and Aug 31.)

A closer look at companies that filed returns for both financial years further showed that the average profitability for the online retail sub-segment fell year on year, by 24.5 per cent. It means that online retailers on average saw their profit or loss before tax worsen by 24.5 per cent year on year.

One reason is that online retailers often engage in price competition in a bid to gain visibility or market share. Some, typically those in China, are even willing to sell at a loss as they can make up for it with volume, said Mr Tan.

Online retailers that compete by cutting prices now will only suffer in the end, said Trixie Khong, founder of local jewellery retailer By Invite Only. “You won’t have the margins to do discounts and marketing in future when you need to expand the business.”

Such retailers may also fail to account for other “hidden costs” of operating an online business. “Some people go online and try to undercut everybody else, thinking they have no rent to pay. But they forget about the cost of logistics,” said Elim Chew, managing partner of logistics firm IM Holdings and founder of the now-defunct 77th Street retail brand.

Industry players flagged logistics as one of the biggest costs they contend with. This is especially as they have to deal with returned, missing or defective goods. Supply chain disruptions arising from the pandemic may also exacerbate the risks – such as delayed shipping and missing goods – for aspiring online retailers, they added.

Esse’s Ms Tsi said that shipping expenses usually make up 15 to 20 per cent of total expenses, but that proportion has risen to 25 to 30 per cent in past months, particularly when there were lockdowns in China and Vietnam, which disrupted the company’s usual shipping routes.

With returned products, there is now also the added cost of sanitising them due to fears of contracting Covid-19, atomi’s Mr Tan added.

Another major cost for online retailers is that of customer acquisition, which includes marketing to consumers and data analytics to understand buying habits.

Gervor Quek, founder of the Ooh brand of mala-flavoured chips, said his company typically spends S$1,000 to S$2,000 a month on initiatives such as price promotions, advertising and engaging influencers, and is now doubling that spend to retain its market share against newcomers during the pandemic.

“For people to search for your product, they must have heard of you. Without brand building, simply listing your product is not going to help. Even though Shopee has millions of visitors, for example, they may not be able to come across your product because it’s such a crowded space,” said Mr Quek, who started Ooh SG in 2018 as a sideline while working in marketing.

To Ms Khong, acquiring customers and optimising the online retail experience could even cost as much as it does to run a small, brick-and-mortar store. This is especially so for online retailers looking to expand. For instance, By Invite Only now forks out US$2,000 a month to maintain its online shop front on Shopify. It used to operate on a cheaper plan, but the site would freeze up during peak seasons like Black Friday.

Overall, Handshakes’ analysis points to an underlying pressure on online retailers. Based on companies that filed returns for both 2018 and 2019, those in the online retail segment on average saw current liabilities double year on year, outpacing the increase in current assets.

Costs aside, managing an online operation is also more demanding than outsiders think. James Sim, senior lecturer at Nanyang Polytechnic’s School of Business Management, noted that customers who don’t receive the real-time responses they expect will now easily purchase from another online retailer.

In addition, the tasks required for physical store retailing – like inventory management, promotional management, administration and negotiation with suppliers – still need to be done for online retail, except at a quicker pace, Mr Sim added.

But factors like government support and low interest rates could still make it favourable for aspiring online retailers to enter the sector now, said Ms Khong.

Talent is also more abundant now, with people more willing to take on roles that they previously wouldn’t have, she added, noting that her company has managed to hire employees that have done stints with major fashion brands.

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