Slovak e-commerce jumper Dedoles, who entered this year with ambitions to raise €180m, is struggling. Company boss Jaroslav Chrapko admitted that his company’s extremely rapid growth had eluded him and that he was currently having to restructure and lay off up to a quarter of his employees.
Dedoles’ problems are to some extent a reflection of the current situation of the whole industry, which is often described as one of the winners of the pandemic. This has opened up a number of opportunities for e-commerce and many online stores have grown by hundreds of percent over the past year. “However, growth has been a Danish gift to many,” says one of the leading figures in Czech e-commerce, Martin Rozhoň..
In many segments, customers are gradually returning to their buying habits. Most online stores face an annual decline of tens of percent after the pandemic ends. “Valuations of e-shops have sometimes doubled during a pandemic, now the situation is gradually stabilizing and it will be seen who survived the jumps up and down in good condition and who was killed and will lose market share”, warns Rozhoň .
Over the past two decades, he has established his own e-commerce group, Vivantis, which has generated $1 billion in revenue and successful sales at the hands of Mall Group. For four years, as an angel investor, he has helped develop other projects. In an interview with Forbes, he summed up his vision for how to resist rapid growth so that owners’ ambitions don’t outstrip real business possibilities.
What are the main challenges that a fast-growing e-commerce business should be prepared for?
The first limit that a rapidly growing company encounters is staff. Whether it’s the quality of management, HR processes, or corporate culture and the entire internal ecosystem. Of course, this applies to all businesses, but in e-commerce the problem is all the more obvious as these businesses have often been founded by people who are technically savvy, but lack the skills to lead others.
Another challenge is the IT structure: from the information system that manages the whole company to the web platform that resolves the front end towards the client. With growth, these technologies must be upgraded or completely abandoned and rebuilt. At the same time, it is a demanding investment in the order of millions with an implementation horizon of up to two years. For example, when Mall implemented SAP years ago, it completely crippled the business for a few weeks – they couldn’t get such a robust and expensive system up and running or make full use of it.
Another major challenge is logistics. With growth, the complexity of the warehouse system increases significantly, both in terms of space and in terms of technology implementation. If the company can’t catch it in time and can’t ship fast and fast enough, they have to catch up. The associated costs then considerably deteriorate its effectiveness.
The response time of logistics is relatively long, whether in software or hardware. Other parts can be inflated or deflated much more flexibly, depending on business activity.
So, for most companies, is it a problem to fine-tune such a complex activity?
Every doubling or tripling of revenue requires rethinking business processes and systems, and people have to adapt. It is difficult for founders to keep all the functional complexity during rapid growth. It’s a delicate balance, where you simultaneously solve advanced IT, advanced logistics, marketing… If you don’t take certain measures in time, it will reduce your efficiency and the company will not be profitable.
There is huge competition in e-commerce in the Czech Republic, which is associated with low margins. How do you keep it profitable at a breakneck pace?
The price war in the Czech Republic, where there are 50,000 e-shops, is huge at all levels, including acquisition channels for customers, and it is really difficult to make a profit. Especially in the mainstream, it’s a terrible mess. Alza is profitable because it’s huge, Mall stays around zero, then follows a platoon of companies that survive anyway.
The way out of this is with your own brand. Thanks to it, you are able to achieve two to three times the margins than the goods offered by many other e-shops. Investors like to invest in such companies, many investments do not go to others. Banks are generally unable to finance rapid growth because they do not pass their coefficients. So that leaves venture capital, angel investors, venture capital funds…
As an investor, are you interested in rapid expansion or more organic growth?
I’m specific because my main investment goal is no longer to make money, but to do something I love and do. This is why I choose projects that resonate with me, which are generally businesses with overlaps in the field of health, ecology or personal development.
Yet, of course, it cannot be a loss-making business. So I see if the product is capable of working in business and if the management team is capable of developing the business. For me too, it is confirmed that the key tools for success include a quality clean product with a high margin, which can be used to finance the development of the company.
Both apply to D2C brandies, which I’ve invested in, whether it’s Fabina cookware or Snuggs period panties – they went from five million to a hundred in the first year and from one hundred to two hundred million this year. But even so, there is more investor money flowing in for future expansion.
Hedepy, a company that offers online psychotherapy, is experiencing phenomenal growth – we provide thousands of consultations in seven countries, and we have just closed another big round of investment, which will be announced this week.
Is there a contrary example in your portfolio where, on the contrary, you are going through difficult times?
The missing own brand catches up with us in the case of the eco-friendly online store Econea, where we are under severe operating cost pressure with increasing competition and slightly declining margins. The company was lulled by the fact that it was carried by the trend of ecological consumption and therefore did not seek efficiency enough.
We are currently going through a relatively difficult period, where we are trying to restructure the company, we are laying off a few people, we are reducing some costs and at the same time we are trying to establish our own brand. We used to be very blown away by growth not happening as expected, so we have to blow it a bit. Although it’s not as dramatic as Dedoles.
We are also launching our own brand on the Puravia online store with nutritional supplements, where we have more than doubled year on year, and thanks to this, the need has arisen to set up a new online store and an ERP.
In almost two decades of building Vivantis, have you experienced the moment when you realized that your visions were beyond you?
In the first few years, we had significant growth at Vivantis and at the same time we were very profitable thanks to low costs, which was great. But then I also found myself in a situation where the business really needed to be built – I had to hire new people, implement technologies and invest globally to manage future growth, so we lost money for two or three years.
Our loans to finance stocks increased to 150 million, and due to the loss, we became risky for the bank, we even threatened to repay the loans at one point. Luckily, we managed to weather it without having to lay off significantly. The truth is, if we had grown faster, this wouldn’t have happened.
Personally, I had a hard time crossing my shadow and not directly managing everything in the company. It took maybe five years to build a functional management. And since it coincided with a period when the company was economically failing, I was extremely exhausted and burnt out many times. This is one of the reasons why I decided to sell Vivantis after eighteen years.
What do you think, after this personal experience, is the key to running an e-commerce company destined to grow at high speed?
You need to prepare well for this growth. Make a business plan of varying quality so I can see what the investment will take when I’m fifty, eighty, or one hundred percent. How long will I be looking for a new room, how long will it take me to hire new people? Turn the strategy into numbers, consult someone who has experienced similar growth before, and have a large enough financial reserve for growth so that I don’t go for blood. It is not necessary to have the entire investment, but to be able to call on additional capital if necessary.
At what level should it be optimal?
True, tens of percent of the investment budget, the higher the growth rate and the higher the risk, the greater the reserve. Before they start scaling like this, I would really like to have management that I can rely on and delegate to the different scaling areas. Even at the cost of recruiting people older than the current phase of the business. If I look for people after the sprint, it brutally irritates my legs.
Do you rate Czech e-commerce? Do you think the market is oversaturated and therefore overseas expansion is a necessity?
If a company wants to reach billions in turnover, expansion is definitely necessary. Defining efficiency and profitability in foreign markets is usually a longer process than you initially think, and everywhere it is influenced by other factors, so the complexity increases again.
At Vivantis we failed to be profitable in new markets for a long time, for example in Romania it took five years to lose millions per year. It is ideal to have a local country manager, to assess everything down to the smallest detail. And maybe even at the right time to have the courage to cancel the investment, leave the market and try elsewhere.
To what extent do you yourself actively participate in the projects invested in?
I really enjoy actively participating in strategic processes, helping them build the system and making the right decisions, even if it’s not on an operational basis.
Jif it currently resembles your investment portfolio, are you considering a new investment or, on the contrary, is there a short-term exit?
With a total of eighteen investments in startups, about half should be released in four or five years. We’re now selling one of the startups to a company that’s a billion-dollar unicorn, but I can’t talk more about that yet.