How did the disintegration after the coronavirus pandemic affect the situation on the e-commerce market?
After the covid, when e-shops grew up, they drew a lot of money and were profitable. This was reflected in future plans. The loosening brought a significant slowdown in growth, of course, confidence in e-commerce increased, but a lot of people returned to offline. In general, the growth ambitions that e-commerce companies had set failed to be defended in the first quarter of this year. E-shops bought a lot of inventory, strengthened internal teams and expanded warehouses. That is now happening in the budgets. Turnover has decreased, but costs have not, it must be addressed. It turns out that even the biggest players are forced to lay off. Therefore, this year’s ambitions are declining and a lot is beginning to look at profitability. People are more hesitant, in some fields they are pre-supplied, we now deal with a lot in SportObchod with bicycles or roof racks.
Bicycles are an example of goods that people do not buy new every year. Why were stores unable to estimate demand?
Yes, they can be an example, but a bigger problem for SportShop is the lower demand for media. They are also linked to new car sales and travel. Manufacturers and suppliers who are unable to guarantee volumes at a certain price have also brought chaos to this. E-shops pre-stocked for the winter because they expected inflation, so they bought at the old prices so that they could maintain their margins. Therefore, they now have a lot of capital tied to stocks.
How has the pandemic changed e-commerce in the Czech Republic? • VIDEO Videohub
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You mentioned huge frontloading and capacity building. These are things that cannot be easily cut. How to solve it?
That’s right, and there’s a significant increase in the price of advertising. Since September, advertising at the auction has been growing by ten to fifteen percent every month. It continues to this day, although it’s not as exposed as it was before Christmas, but it’s a result of the covid, which has brought a lot of advertisers into the online environment. As companies struggled to turn around at the end of the year, they managed to save a lot on the price of advertising. These three influences lead to cuts. You can reach for margin. Before the summer, which is traditionally weaker, you have to decide whether to lay off people, because you will need people at the end of the year so that not everyone “shuts up”. Comparing the efficiency of internal teams with outsourcing is also much addressed. We are on the path of building our own teams. It’s alchemy.
So will any e-shops grow?
Today, growth is very expensive, growth eats money. Medium and small businesses are just seeing it live. They need robust solutions, other tools, automation. At the same time, medium and large players have no problem paying seniors, but there are few specialists in the labor market and dragging also costs a lot of money. Today, we lure seniors from other areas into e-commerce; it doesn’t have to be purely people who specialize in online.
So you’re expecting crashes because of the problems you’ve described?
Expect.
Big crashes?
The best known case is probably Dedoles, which describes all the problems I mentioned. In general, companies that have grown by one hundred percent will have a problem. But the growth was driven by the covid, now they will have trouble stopping. It didn’t go the natural way. They either caught up with the shortfall or, on the contrary, they burned the company and it fell for them.
When I spoke to Mr. Chrapek, it looked like they should be able to do it when they got an investor.
I wish it to him, but it won’t be easy. They have been looking for an investor since the beginning of the year, but this is not an easy case to grasp. It is important for the e-shop to have healthy traction, to be able to predict further developments, to have barriers. Dedoles is an example that has managed to find a hole in the market and grow quickly. He has an erudite founder and boss, he’s such a heartbreaker. What he believes, he goes for. On the other hand, the founders are not aware of the edge on which they are moving. So, for example, what can be the impact of a cash outage on the viability of a company.
When we talk about Dedoles and you invest in e-commerce, wouldn’t you be interested in such a project?
We are a specialized fund for e-commerce projects, we are looking for highly specialized e-shops that play a key role in a certain category, have their own brand and even a product such as Grizly, Ovečkárna or Vuch. We mainly look at medium-sized e-shops, our added value is that we enter companies with our know-how, we get involved in their management. Our intention is to help transform the e-shop into a larger company and prepare it for the entry of a strategic investor in the medium term of three to five years.
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Is there a better opportunity for investors now that they have problems with e-shops? So a bigger share for less money?
It depends on how you rate the company. Many players in the market rely on valuation results. On the other hand, in the last year and a half, the founders are more inclined to enter the investor into their company. When we started four years ago, we had a problem because “e-shoppers” didn’t quite understand our role. They grew up and managed it. But when they turned to larger turnovers, the first problems began. Today, they are beginning to understand our added value as to why we are going there. We are their guides, we always buy a minority, we want the founder to always be the bearer of the idea, on the other hand, we help him overcome obstacles and we try not to enter dead ends. Our greatest added value is the whole process exit strategy. We solve that, we don’t have to hire companies for it.
So do you expect e-shops to look for investors on a large scale?
They are already looking, in the last year we have seen an increase in interest in investors, today almost all “e-shoppers” are open to investor entry.
Is the current situation an opportunity for large e-shops to devour smaller ones?
Certainly. The big e-shops we follow go two ways. The first is the expansion of offers, such as Notino, which throws itself into a healthy diet, or with Alza and others. The second big trend is online marketplaces, a place where you can buy everything. The customer does not remember twenty different brands, but knows that he will buy everything at Alza.
But online marketplaces in the Czech Republic are not very widespread, are they?
They are not, but a lot of shops invest in it, ie Alza, Mall, Pilulka, Heureka… Another marketplace comes to the Czech Republic, such as Kaufland. I think Zoot will tip over too. So it’s more a matter of time. In the future, only special e-shops will have a firm position. On the other hand, the biggest problem will be small to medium-sized e-shops, which are on the verge of cash flow, are dependent on consumer behavior and are therefore in the throes of events.
So will the trend that large e-shops like Alza are responsible for most of the turnover in e-commerce and that only a small share remain for small ones will deepen?
The marketing data that the Czechia is a superpower of e-shops is true, we have the most e-shops per capita, ie fifty thousand, but if you look at the data, only fifteen thousand are active, of which only seven thousand have a budget of at least a million crowns per year. About 150 to 200 of the largest e-shops have about 80 percent of the e-commerce market. The biggest players set the trend, smaller trades are picking up. And that will deepen. That is why we are looking for companies that have their own product and no other stores. Therefore, we do not prefer offers to enter stores that are dependent on the decisions of brands or suppliers such as Nike. He can easily decide to cut off all partners and sell the goods only through Sportisimo. There’s nothing you can do about it. We record in several e-shops that suppliers are tightening conditions. For many e-shops that only resell branded goods, this can be a risk.
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Are you planning to make an investment in the near future?
We have a lot on the table. We completed four transactions last year. By starting the covid the year before, the debates and negotiations were interrupted. In 2021, on the other hand, e-shops became more active. We finished Grizly, Ovečkárna, partially left Sportobchod, integrated Fitness4You into it, and we made the investment in Vuch. We are a small fund, we invest from our own resources, so we thought that this year would be a phase of stabilization. Yes, we are considering some additional investments, but we have certain categories that we want to go and in which we want to strengthen. For example, the online grocery store around Grizly offers to connect with other companies that are also producers. We are trying to find leverage in order to strengthen our market position and involve our new e-shops more in the existing ones.
You say that you are a small fund, you have made three investments Astratex, Ovečkárna and Sportobchod in cooperation with Hartenberg Capital, which is controlled by Andrej Babiš. Why?
It is a partnership of reason. This arose at a time when Astratex owner Petr Vít decided to sell the company in 2016. The people behind eRockets met at the Acomware marketing agency. After we sold Acomware to Mafra, we talked to them about whether it makes sense to invest more in e-commerce. We have found that Mafra works in a completely different world. But there was Hartenberg, who was working on an investment strategy. At that time, Petr Vít from Astratex said that he was thinking about selling and that he was looking for a large investor. The common journey began there, we are not connected by property. We managed to set up cooperation, Astatex went through a crisis at that time, because half of the management left, the company had to build a new organizational structure. We take it pragmatically, we know how Hartenberg Capital works, what to expect from them and it makes sense to us. They have a competence we don’t have in the financial and investment world. That synergy works, even if we run into fund owners. Although it is completely cut off, in some respects it has limited us.
Will you do other projects together?
We don’t have it clearly lined up, they have their own activities. But I must say that foreign funds are interested in our companies. There are active Polish funds here, for example at Sportobchod we had a great interest from Poland. Hartenberg relies on the owners to be part of the vision and strategy. There are projects where cooperation makes sense. The long-term strategy is to create an e-commerce group that could come to the stock market in the long run.
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You mentioned the activity of Polish funds. Do you expect their raid on Czech companies?
I think he’s already trying to get some acquisitions. It is trying to do something similar to Allegro, it is a harbinger of strengthening Polish investment in Czech e-commerce projects.
What is the mood of investing among investors?
There is still a surplus of capital. Capable investors have enough capital and the desire to invest, they just think about it more and consider it. They pay more attention to synergistic effects so that it fits together or creates an ecosystem. I feel like they used to do it the way they liked it.
Before covid, it was not sexy to invest in e-commerce compared to technology startups. There were startups that have different margins and different valuations. Today, e-commerce is associated with retail, and investors look at it more as retail, where the margin is small when compared to the startup, which is reflected in the company’s valuation. But in general, I perceive that the market has the desire and capital to invest. At least in the Czech Basin.
Ondrej Klega (39)
He studied business economics and management at the University of Economics. He started his career at Acomware, where he worked as a consultant for companies in the e-commerce sector. He gradually moved to the position of an investor in eRockets, whose most significant investments include the Ovečkárna, Grizly and Astratex e-shops.
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