Start an E-commerce Company

An e-commerce company sells products over the internet via a website. Today I will look at starting this business retailing a physical product to consumers within the South African context.

High-level overview
Think of a website as a TV show or a radio program. The more popular: eyeballs/visitors you have the more money you can make. In the case of a website, this can be the same as a TV/Radio shows such as advertising alongside interesting content (like this website) but it can also be like an infomercial in which the whole program is about selling products. An e-commerce website is like the latter but instead of accepting orders via phone or mail or via a physical shop (like Verimark or Glomail). All the orders are made and paid for over the internet.

Anatomy of an Ecommerce business
An e-commerce website is essentially an online catalogue, virtual shopping cart and a payment processor. The products are browsed for in the catalogue and added to the cart and paid for using the processor which deducts the money from your debit or credit card.

There are two main types of websites that e-commerce companies use: self-hosted and hosted or software-as-a-service (SaaS). Shopify is probably the most well known SaaS platform for e-commerce as for self-hosted there are a myriad, WooCommerce on WordPress or a native e-commerce application like Magento being the most popular.

In WordPress we can see the three components come together, you have the CMS or content management system in WordPress, you have the shopping cart “plugin” in WooCommerce and you have the payment processor, in the case of local small business PayFast is probably the most popular.

So your WordPress based e-commerce “stack” will look like WordPress + WooCommerce + PayFast. Overall it will look like: Domain name + Website hosting + WordPress + WooCommerce + PayFast.

Now a SaaS platform like Shopify will handle the middle three, you will only need a domain name and a payment processor.

So let’s look at how you will line up with the various platforms:
Shopify + Domain Name + Payment Processor
WordPress + Shopping Cart + Payment Processor + Hosting + Domain Name
Magento + Payment Processor + Hosting + Domain Name

What to sell
Now we have an overview, now we are going back to the business plan. We know we want to start an e-commerce business selling a product. Now you have to go through the usual motions:
In this case, the business idea incorporates the actual product. You can’t just say I want to start an e-commerce business you need to say what it is you want to sell. Like: “I want to start an e-commerce business selling rain boots for pigs”.

As an idea, you need to specialise in a certain category. You can’t go broad as it is way too expensive.

Come up with the product
Supply value logistics chain analysis: Understand the local industry that makes that product category: manufacture, import, distribution, wholesale (you are the retailer like I said at the beginning). It is not necessary to go as far back as the supply of raw materials because we’ve already established that we want to be a retailer. It does help to know who manufacturers it or who the distributor is (if there is one) and you need to know the wholesaler. The manufacturer might very well distribute and wholesale their product but in larger industries, there will be at least a distributor and/or a wholesaler. Remember a lot of major manufacturers do not have a presence in SA, they are represented by local distributors (sometimes called “agents”), I prefer the term distributor as an agent it often gives people different connotations.

Now you test the idea internally
What does this mean? You first look at your abilities, connections, and resources putting yourself through the paces of running this business.
You know what the product is going to cost wholesale, and you know what the product sells for and you know how much money you have to start and how much you intend to sell the product for. You know the logistics chain: how the product is getting to you and how it is getting to your client.

Does your idea look viable provisionally? If so continue, if not start over.

Note: I don’t cover business names or logos that you must do yourself. But let’s call this business “Pig in Boots

Now you write the first part of the business plan:
The value proposition.
Pig in Boots sells Wellington boots for piglets to help them walk and run in the rain.

Now you start the external testing, or idea validation, this is to write up the
Market Need (The problem you are solving).
“Little piglets cannot outrun wolves in the rain on their little hooves which slip in the wet mud. Pig in Boots prevents this problem by making boots that allow the piglets to run faster in wet winters”.

Your Solution
Pig in Boots sells little rain boots for piglets. That is the product.

I’m not going to go through the whole business plan here, but I am going to spend a lot of time going through the competition part.

The Target Market is of course farmers who don’t want their piglets to get caught by the wolves. For the simple fact, piglets and their parents belong to the farmer (and don’t have the capacity to buy it themselves). And the farmer doesn’t want his stock getting eating by the wolf. In that sense, this is actually a B2B business as you are supplying an existing business value chain – pork production.

Now we get to the Ecommerce part – The Sales Channel. I covered this already. Your sales channel is your website consisting of the e-commerce platform (catalogue, cart, payment processor).

Marketing, Advertising & Sales
Marketing, Advertising & Sales is about getting your Target Market to your Sales Channel. Remember how I said “Think of a website as a TV show or a radio program” and “The more popular: eyeballs/visitors you have the more money you can make “. This is the most important part of this business (of any online business in fact). In this case, the question is “How are you going to get farmers (target market) to your e-commerce website (sales channel).

There are a few ways to get them there, some more effective than others. Search engine pay-per-click advertising, image ads on websites, social media advertising etc.

Search engine pay-per-click advertising
Most people use search engines as a portal or gateway, they don’t even care about domain names. They just type in “boots for pigs”.This is a big problem as one company (Google) holds a significant share of the market. Even if your website is right at the top of an “organic” Google search for “pig boots” your competitor Pig Boot Co. can advertise and show up above you. Most people just click the top link. If Pig Boot Co. is using Google Shopping which is made up of Google Merchant Center where you can upload your products and Google Ads (formerly Adwords) which will advertise products on the Google search engine it will show up as an image and people click on images above text links.

This means you may have to advertise, even if your link is at the top organically. Even if you and Pig Boot Co. are the main suppliers, you still need to advertise. Go look at the market leaders in the property portal space. A search for “property in {area}” Private Property and Property24 is usually at the top but they still advertise which brings us to a part of the business plan that I skipped: Competition. Just before your target market, you look at your competition. You’ve already analysed the industry right at the beginning. Now you analyse that competition. Why? If you came to find that Pig Boot Co. is the market leader in fancy pig boots for owners of pet piglets, then you are fine, because your boots are functional for the farm – aimed at farmers. But if Pig Boot Co. was has strong brand recognition amongst farmers how were you going to compete with them? Then you must go back to your business model: cheaper or better quality?

Search engine advertising allows you to capture a person’s intent, you can advertise that your ads are shown for very specific search terms such as “pig boots for the farm”. But Google’s dominance places a significant risk should you come to be reliant on this form of advertising. Should more suppliers start advertising for pig boots for the farm you will enter into a type of advertising auction where certain variables are considered as to how your adverts are ranked, one of these variables is the bid price – the maximum amount of money you are willing to pay to get a person to your website, this could significantly increase your marketing spend and may have a material effect on your business.

Obviously I am not going to analyse the competition in the Pig Boot industry because it doesn’t exist. But what I am going to do is analyse the competition in the local e-commerce retail space, in particular market leader Takealot.

Takealot is an e-commerce company with a warehousing and logistics arm and the largest in South Africa. They claim to be the largest in Africa but because they are private we cannot view their audited results. Their CEO claims that they make four times more revenue their nearest African rival the US-listed Nigeria-headquartered Jumia. But there is no way to validate this. But it’s not relevant here. This is just a broad overview of the competition.

Now based on what I previously said, Takealot is like Pig Boot Co. for almost every product category in SA, they advertise 24/7 for innumerable products.

I am going to say two things: I believe that South Africa’s future is many small businesses employing few people rather than a few large businesses employing many. And I stick to that belief in the e-commerce space.

I think the reason that Amazon or Alibaba’s marketplace does not have a local presence is that they took a long hard look at SA and passed. And I think they see Takealot as the canary in the coal mine and I don’t think they like what they see. In South Africa it is not as easy to scale a business like it is in the US or China, economies of scale work differently in Africa in the sense that your problems also increase while your cost does not decrease exponentially. I think Takealot is inefficient and cumbersome. But what has this got to do with us?

Often times when we as entrepreneurs look for opportunities and there is a large incumbent we use the cargo ship vs. speed boat analogy to justify entering. And this is a very apt example of that.

A cargo ship is large and unwieldy and if you have ever been to a port you will see how long it takes them to do something simple like turn and how many people is on board, something a speedboat with a single person does in a few seconds. Takealot is a large cargo ship you are a small speed boat. There are things Takealot can do that you can’t but there are also things that you can do that they can’t.

Everything about Takealot is big and so are their expenses (remember what I said about scaling, it doesn’t work the way in Africa as it does in MBA textbooks). Takealot is not set up to see a return on investment anytime soon, maybe one day they will, who knows? (nobody actually), they are seen by their owners as a bulwark against future competition in SA (it’s debatable if they are tilting at windmills or not as no major player seems interested in the local market). It costs Takealot a hell of a lot of money to run their “platform” and to deliver as well, the same way a cargo ship is more expensive to operate than a speed boat.

People like to say “why bother?” if Takelot is the Pig Boot Co. of every product category. The thing is they are not! There are many times in which Takealot is more expensive and takes longer to deliver than the Pig in Boots out there.

They look at what Amazon has done in the US and say Takealot has done the same here. That is not true. For the simple fact that:
Takealot is not Amazon
Kim Reid is not Jeff Bezos
SA is not the USA

Did you know that you can order a package from Amazon in the US and order the same package from Takealot and the package from the US will arrive here first? Takealot is no Amazon.

How to compete with Takealot
Like any other business remember, right at the beginning find a gap, look for a niche. It these situations find a category or part of a category. All Takealot is, is an online version of Game or Makro. There have been many successful stores with Game and Makro in the brick and mortar market and there will be successful e-commerce stores with Takealot around.

Because Takealot is so expensive to run, there are significant gaps in the market. And I say this both as Takealot being the seller and for third-party sellers on their website (which I will get into below).

I will look at a few examples:

Vape Business
Takealot sells (or via 3rd party) various e-juices and some vape devices from random sellers. Now you look at a firm like BLCK Vapour. BLCK Vapour is a speedboat, they have a big selection in DIY vaping stuff. They don’t own their own logistics network but their deliveries are still faster than Takealot. When the order comes in they pack it, notify the courier and it gets collected. I guarantee that they make more profit than Takealot and they didn’t cost billions of rand to setup (Takealot has never made a profit). Speaking about profit, in my opinion, I think it is more likely that Takealot (in their current configuration) collapses than Naspers ever seeing a return on their investment.

Remember what I said about advertising and getting people to your website. Here is where problems start. Common sense tells us that you have to spend less on advertising to get a person to your website than what you are making from that person. If you spend R1 to get a person to your website you need to make R1 from that person to break even. But if only 1 in 10 people make an action such as buy something then you need to make R10 from that one person just to break even.

Takealot is spending a HELL of a lot of money on advertising, which is why a lot of their prices are not very good. They’ll give you a good price on cheap mass imported crap. But if you look at industries with traditionally small margins, like computer hardware, then you see your prices are not that great. Simply because it costs them so much money to sell something. If Pig in Boots needs to make R10 per buyer to break even then Takealot needs to make R100 profit per buyer to break even (and that’s being conservative).

I am going to introduce a new company, even smaller than BLCK Vapour, most of you would not have heard about them before, the computer hardware reseller – Berghie Online. Berghie Online is a small operation they have a little dingy office in a nondescript building in an industrial area, there is nothing fancy about them. They work the same as Takealot but are both faster and cheaper on most things. Why? Because they are in an industry with razor-thin margins and that little dingy office is far cheaper to operate. When an order comes in, they probably don’t have it on hand but getting it from the supplier for them is a far simpler task than what it is for Takealot. If it costs Berghie Online one person and Rxx to collect a shipment from a supplier and deliver it to the buyer then it costs Takealot two or three people and Rxxx or even Rxxxx because cargo ships are slow and need a lot of personnel to operate.

What category should you operate in
There are a few category leaders in SA that you can learn from BLCK Vapour in DIY vaping accessories is a good example of good price and efficiency. But there are others likes BLCK, Faithful to Nature being a good example, they not the cheapest but they have a good range of “organic and natural” products. Then we have e-commerce category leaders in load-shedding solutions, lighting, electrical, etc.

Why can’t Takealot compete in all categories?
First and foremost, if you analysed Takealot, you will know that they operate both an e-commerce shop and a marketplace for third-party sellers. They can do your fulfilment, even warehousing. So you are competing against both Takealot and other sellers on their platform, in fact, Takealot themselves is competing with sellers on their platform. Both Takealot and their platform is so expensive to operate, I very much doubt that they could ever compete with speedboats. You will hear people say that they sell a lot of items on Takealot, but once Takealot has taken their cut, it will be most definitely cheaper to sell it on your website.  There are some things that cannot be sold on Takealot for a reasonable price, both for Takealot and third parties and if it is, the prices are so crazy that as a buyer you could just as well go to the mall and by it there – defeating the whole purpose of e-commerce.