SEA’s Digital Economy: The Sustainability of Cash-Burn Business Model in E-Commerce
The pandemic has propelled the digital economy and e-commerce growth as consumers turn to the online shopping experience. During the pandemic, more than 70 million people became digital consumers in Southeast Asia (SEA). However, as the pandemic winds to an end and consumers start to return to in-person shopping, relying on past acceleration and the current cash-burning practice may not be sustainable in the long run for the e-commerce industry.
SEA’s digital economy, which includes e-commerce, food delivery, and travel, is predicted to reach approximately $200B in gross merchandise value (GMV) in 2022. Digital adoption continues to rise, but at a slower pace than the pre-pandemic levels. Zooming into the e-commerce industry, retail e-commerce sales continue to grow at an increasingly slower speed from 29.6% in 2022 to 9.0% in 2026. The slowing speed of digital adoption and digital economy growth poses a significant challenge for players in the digital economy to continue to perform amidst an increasingly unfavorable market environment.
Most business models of e-commerce players have focused on cash burn, or negative free cash flow, to cater to both sellers and buyers and gain the most market share. They attract sellers by helping sellers build their businesses and subsidizing their products to bring down the products’ costs. They attract buyers by offering cheaper products and mass discounts. Their strategy was to focus on growing the most revenue and GMV without focusing on the profits. In favorable market conditions, this strategy worked and the e-commerce businesses expanded. However, as market conditions worsened, the cash burn strategy seems less plausible in the long term and the e-commerce industry competition becomes a race of who can burn cash the most.
Moreover, with high inflation and interest rates, it becomes more expensive for the e-commerce players to refinance their existing borrowings or raise debt. This makes it more difficult for cash burners to avoid a cash crunch. Rising interest rates also negatively affect customer demand and spending, especially in the discretionary sector, which is key to the performance of these businesses. The question of creating sustainable growth leads to e-commerce’s growing emphasis on profits, not only just GMV. With an increasing focus on profits, many e-commerce players are streamlining their businesses to cut costs. For example, Shopee, a Singapore-headquartered e-commerce platform, laid off staff because the size of the company no longer suits the current growth trajectory. Not only do e-commerce players face challenges due to the cash-burning nature of business, but they are also facing rising costs of customer acquisition and harder ways to differentiate themselves from each other. An important key driver of profits now shifts to how much the e-commerce players can increase customers’ engagement on their platforms.
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