One in particular is the continued battle against net profit margin erosion for those in the B2C etail product space. In the early 2000’s an e-commerce business selling electronics could easily squeak out net profit margins in the low double digits while others outside of the electronics space saw even greater net profit margin percentages. Today, those numbers are unique feats to achieve. With the rare exception, when reviewing the P&Ls for product (vs service) based e-commerce businesses we see a continuous slow decline in the net profit margin percentages. Some of these businesses maybe going gangbusters with excellent year over year growth in both gross sales and EBITDA (earnings before interest, taxes, depreciation and amortization).
Why would e-commerce business valuation multiples decline for these businesses?
Even though the gross sales and net profits for our example are increasing each year the net profit margin percentage is eroding. In addition, the gross profit margin is likely eroding as well. An ecommerce business owner maybe getting better pricing from vendors as volume increases but the economy and price competition forces him/her to keep prices low. Just this week JC Penney announced they would permanently lower all product prices by 40%. Also, do not forget competition from free shipping, even for returns in some cases.
Speaking of competition etail businesses are getting it from both sides. On one side low entry barriers enable a constant barrage of competitors. On the other side are the behemoths such as Amazon, who coincidentally is also experiencing erosion in its net margin percentages. The Amazon model is being or will be adopted by others such as Walmart, Sears, JC Penney. BestBuy will allow others to sell electronics, in exchange for an affiliate fee, on their website. In the brick and mortar world as Walmart did to Main Street, Amazon, Wayfair (formerly CSN Stores) and others are doing to “Cyber Street”. Take a walk down this virtual Cyber Street and you will see all the major chains on both sides with their SEO ranked signs pitching products in the windows. The only way the little guy will be able to survive is to sell products from within these major chains at much smaller profit margins.
In a battle to survive the economic throes of the Great Recession, ecomm business owners cut costs in all the same areas. Those with excessive amounts of debt are no longer with us. The remaining others are battling it out on a relatively flat playing field trying to find the edge in SEO, improved conversions, continued expense reduction, better inventory management and technology enhancements.With this bleak blog post what is an ecommerce business owner to do? One thing not to do is to increase spending which would seem obvious but many ramp up advertising to increase sales and thereby profits. This comes at the expense of further eroding net margins. The game has become about moving a series of levers with fine tune adjustments. Give one of our m&a advisors a call and we would be happy to provide complimentary insight based on our inside look of hundreds of e-commerce businesses.
Mergers and Acquisitions Increase To Get Closer To The Manufacturer
In the continued pursuit to gain any edge, iMerge expects to see a growing trend in the acquisition of specific distributors by those who are experts in owning and operating ecommerce businesses. By acquiring distributorships who carry products that are or would sell well online, these buyers can use their expertise to blow out the often weak internet sales channel while taking advantage of higher margins. In addition they can provide a value added service to all of its B2B online customers to improve their own sales. Distributorships concern of their online B2B customers leaving because they become a competitor is long diminished. In the fog of the Internet, online B2C business owners predominantly focus internally on what he/she can control to gain some level of expected profit on each sale. The fact his/her distributors are competitors is not relevant. That is until its realized it might be advantageous to own them.
To learn more about iMerge please do not hesitate to contact us.