Crucial decisions

Many e-retailers are profitable, but they should be reinvesting rather than profittaking for online shopping to really take off

E-commerce is at a crossroads in SA. This is one of the findings of the Online Retail in SA 2019 survey conducted by research group

World Wide Worx.

With online sales making up 1.4% or R14bn of total retail sales, and 4% of consumer shopping online, the sector is on a firm footing. Even so, for e-commerce to really take off, local online businesses need to start reinvesting their earnings.

This isn’t happening. “A significant impediment to the growth of e-commerce in SA is the unwillingness of business to reinvest. Only one in five companies surveyed invested more than 20% of their online turnover back into their online store. Over half invested less than 10% back,” the report says.

It notes that this is despite 71% of all online retailers surveyed saying they were profitable.

That’s the problem, says World Wide Worx MD Arthur Goldstuck. “A lot of e-retailers are profitable, but they have to make the choice between taking profit and reinvesting, and they are generally not choosing wisely.”

Goldstuck says these businesses have to reinvest to get to the next stage in their development. The danger of not doing so is that they would be unable to scale up their operations and take care of increased demand. “Young online retailers who do not reinvest in the underpinnings of their business may be sacrificing long-term survival for short-term financial gain,” says the report.

“Of those willing to reveal a rand amount, just under 7% were expecting to spend more than R1m on their online presence in 2018. A further 43% expected to invest between R100,000 and R1m.”

Not investing into the business could have a detrimental impact on customer service, seen as the most critical factor in the success of online retail activities. “No less than 75% of respondents regarded it as highly significant, with another 23% seeing it as somewhat important, giving it a 98% importance rating.”

Goldstuck points out that even large e-commerce companies like US retail giant Amazon are never really profitable. Locally, Naspersowned Kalahari.net, which was later swallowed by rival Takealot, never made a profit in the 15 years it was a separate entity.

Besides the lack of investment into operations, the sector is also being held back by South Africans’ tendency to do their shopping in shopping centres, Goldstuck says. South Africans love going to malls. The SA shopping centre market comes in at eighth position measured against 43 other countries, according to a study commissioned by the SA Council of Shopping Centres.

Though reinvestment and the predilections of consumers are issues, on the whole e-commerce is showing healthy growth, with online retail rising 25% for 2018. World Wide Worx expects the sector to maintain this rate and sees sales more than doubling from their 2016 level to almost R20bn over the next three years.

The sector’s solid footing can be seen in a third of those companies willing to divulge their turnover generating more than R10m each in turnover for 2017.

Another third reported turnover of between R1m and R10m.

About 38% of those who divulged figures expected revenue of more than R10m for 2018. The proportion of companies with turnover of more than R10m is expected to rise to 45% next year.

There are also signs of a “broader range of businesses in terms of category, size, turnover and employee numbers” engaging in e-commerce. This indicates that the sector is starting to mature.