Slovak e-commerce jumper Dedoles, who entered this year with the ambition to raise 180 million euros, is struggling with problems. The head of the company, Jaroslav Chrapko, admitted that the extremely fast growth of his company has slipped out of his hands and he currently has 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 entire industry, which is often described as one of the business winners of the pandemic. It opened up a number of opportunities for e-commerce, and many online stores grew by hundreds of percent last year. “However, growth was a Danish gift for many,” says one of the leading figures in Czech e-commerce, Martin Rozhoň..
In many segments, customers are now gradually returning to their normal shopping habits. Most e-shops are facing a year-on-year decline of tens of percent after the pandemic subsides. “Valuations of e-shops have sometimes doubled during a pandemic, now the situation is gradually stabilizing and it will be seen who survived the up and down jumps in good condition, and who was killed and will lose market share,” Rozhoň warns.
Over the past two decades, he has built his own e-commerce group, Vivantis, which has led to a billion-dollar turnover and successful sales in the hands of Mall Group. For the last four years, as an angel investor, he has been helping to develop other projects. In an interview with Forbes, he summarized his insight on how to withstand rapid growth so that the ambitions of the owners do not exceed the real possibilities of companies.
What are the main challenges a fast-growing company in the e-commerce business needs to be prepared for?
The first limit that a rapidly growing company encounters is personnel. Whether it is the quality of management, HR processes, or corporate culture and the entire internal ecosystem. Of course, this applies to all companies, but in e-commerce the problem is all the more obvious because these companies were often founded by people who are technically proficient, but who lack the skills in leading others.
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Another challenge is the IT structure: from the information system that manages the entire company to the web platform that solves the frontend part towards the customer. With growth, these technologies need to be upgraded, or completely discarded and rebuilt. At the same time, it is a demanding investment in the order of millions with implementation in the horizon of up to two years. For example, when Mall implemented SAP years ago, it completely paralyzed the company for a few weeks – they could not put such a robust and expensive system into operation or make full use of it.
Another major challenge is logistics. With the growth, the complexity of the warehouse system increases significantly, both in terms of space and in terms of technology implementation. If the company is unable to catch it in time and cannot ship quickly and quickly enough, it must catch up. The associated costs then significantly worsen its efficiency.
The response time for logistics is relatively long, either in software or hardware. The other parts can be inflated or deflated much more flexibly, depending on how the company is doing.
So for most companies, is it a problem to fine-tune such a complex business?
Every doubling or tripling of turnover forces the redesign of processes and systems in the company, and people must adapt to this. It is difficult for founders to keep the whole complexity functional during rapid growth. It’s a fragile balance, where you simultaneously solve advanced IT, advanced logistics, marketing… If you do not take certain steps 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 to maintain profitability at a frantic growth rate?
The price war in the Czech Republic, where there are 50,000 e-shops, is huge at all levels, including acquisition channels for clients, and it is really difficult to make a profit. Especially in the mainstream, it’s a terrible mess. Alza is profitable because it is huge, Mall stays around zero and then follows a peloton of companies that somehow survive.
The way out of this is with your own brand. Thanks to it, you are able to reach 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 the others. Banks are usually unable to finance rapid growth because they do not succeed in their coefficients. So there remains venture capital, angel investors, VC funds…
As an investor, are you interested in rapid expansion or rather organic growth?
I am specific because my primary investment goal is no longer to make money, but to do something that I enjoy and fulfill. That’s why I choose projects that resonate with me, which are usually companies with some overlap in the field of health, ecology or personal development.
Still, of course, it can’t be a loss-making business. So I see if the product is able to work in business and if the team of leaders is able to develop the company. For me, too, it is confirmed that one of the key tools for success is a quality own product with a high margin, from which the company’s development can be financed.
Both apply to D2C brandies, in which I have invested, whether it is Fabina kitchen utensils or Snuggs menstrual panties – they jumped from five million to one hundred in the first year and from one hundred to two hundred million this year. But even so, there is more investor money flowing for further expansion.
Hedepy, a company that provides online psychotherapy, is growing tremendously – we provide thousands of consultations in seven countries, and we have just closed another big investment round, which will be announced this week.
Is there an opposite example in your portfolio, where, on the contrary, are you experiencing hard times?
The missing own brand catches up with us in the case of the ecological e-shop Econea, where we are experiencing great pressure on operating costs with increasing competition and margins are falling slightly. The company was lulled by the fact that it was driven by the trend of ecological consumption, and therefore did not pay enough attention to efficiency.
We are currently going through a relatively difficult period, when we are trying to restructure the company, we are laying off a few people, we are cutting some costs and at the same time we are trying to implement our own brand. We used to be very blown away by growth that didn’t come as expected, so we have to blow it off a bit. Although it’s not as dramatic as Dedoles.
We are also launching our own brand at the Puravia e-shop with nutritional supplements, where we have more than doubled year-on-year, and thanks to that the need has arisen to implement a new e-shop and ERP.
In almost two decades of building Vivantis, have you experienced the moment when you realized that your visions overtook you?
In the first years, we grew significantly at Vivantis and at the same time were highly profitable due to low costs, which was great. But then I also got into a situation where the company really needed to be built – I had to recruit new people and implement technologies and invest overall in order to manage further growth, so we got at a loss for two or three years.
Our loans to finance stocks grew to 150 million, and due to losses we became risky for the bank, we even threatened to repay the loans at one point. Fortunately, we managed to withstand it without having to lay off significantly. The truth is, if we grew faster, we might not have met.
it didn’t have to happen.
Personally, I had a problem crossing my shadow and not managing everything directly in the company. It took maybe five years before I managed to build a functional management. And since it coincided with a period when the company was failing economically, I was extremely exhausted and burned down several times. That was one of the reasons why I decided to sell Vivantis after eighteen years.
What, after this personal experience, is, in your view, key to the leader of an e-commerce company that is set to grow at high speed?
You need to prepare well for that growth. Make a quality variant business plan so I can see what the investment will be like when I’m down fifty, eighty or one hundred percent. How long will I be looking for a new hall, how long will it take me to hire new people? Turn the strategy into numbers, consult with someone who has already gone through similar growth, 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 drawn, but to be able to call in additional capital if necessary.
At what level should it be optimal?
Certainly tens of percent of the investment budget, the higher the growth rate and the greater the risk, the greater the reserve. Before they start brutally scaling like this, I would definitely like a management that I can rely on and delegate to the various scaling areas. Even at the cost of recruiting older people than the current phase of the company. If I’m looking for people after the sprint, it brutally irritates my legs.
Would you rate Czech e-commerce? In your opinion, is the market oversaturated and therefore foreign expansion a necessity?
If the company wants to grow to billions in turnover, then expansion is undoubtedly necessary. Setting efficiency and profitability in foreign markets is usually a longer course than you initially think, and it is influenced by other factors everywhere, so complexity increases again.
At Vivantis, we have not been successful in profitability in new markets for a long time, for example in Romania it took five years to lose millions a year. It is ideal to have a local country manager, to evaluate everything in great detail. And eventually have the courage to write off the investment at the right time, leave the market and try elsewhere.
To what extent do you actively participate in invested projects yourself?
I definitely 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.
What does your investment portfolio currently look like? Are you planning a new investment, or is there an exit in the short term?
With a total of eighteen investments in startups, about half should be exited within four to five years. We are now selling one of the startups to a company that is a unicorn worth over a billion dollars, but I can’t talk about it in more detail yet.
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