Meesho’s New Strategy Is To Cut Cash Burn, And Brace For Slower Growth.

Meesho, an online retailer, was losing cash at around $40 million every month because it fought with Amazon India and Walmart-owned Flipkart until the beginning of 2022. For the remaining 2022, the rate of cash burn was slashed in half, and it is now capped at $5 million.

Meesho’s co-founder and CEO, Vidit Aatrey, stated that the company intends to cut costs even more during July and September. Nevertheless, doing so will come at a cost. Meesho’s efforts to save cash are of no new thinking that the firm last sought capital in 2021 when it received a $570 million investment from Fidelity and others. The frothy fundraising days of 2021 are now a thing of the past, with the focus being only on surviving the current slump and getting profitable, something that even veteran players like Flipkart have failed to accomplish.

But how long can Meesho survive with good and justified growth and a minimal cash burn rate?

Bengaluru-based Meesho took the first attempts to reign in spiralling expenditures last year. Yet, decreased cash burn has resulted in slower growth, which many lavishly financed tech businesses are experiencing today.

This comes at a critical juncture for Meesho’s India unit. On a smaller client and vendor basis, the firm earned revenues of around $400 million (Rs 3,247 crore) in FY22 but has since grown steadily. Meesho’s monthly revenue, for example, was roughly $50-60 million between April and December of 2022. Indeed, based on an annualized extrapolation of its January and February results, it targets $750 million in sales for 2023.

By reducing spending for client acquisition, promotions, and discounts, the firm is bound to lose ground and suffer damage to its bottom line. Meesho does not charge commissions from its merchants, which it claims distinguishes it from other e-commerce platforms like Amazon and Flipkart. Instead, it makes money from sellers by selling ad space on its app/site and providing fulfilment services that include help with shipping through a third-party logistics provider.

The CEO said that the store is willing to accept a slower pace of growth in 2023 after tripling gross sales in earlier years. They have reduced the cash burn because the company continued to develop. They increased by 100% last year and will do so again this year. They will nearly double in size (revenue). Yet this is at a time when companies are investing less and less in marketing, according to the IIT-Delhi alumni.

Mr Aatrey told that a 30% increase in GMV would still be higher than other players. To be certain, Amazon India and Flipkart have a larger GMV base. In 2021, it was stated that Flipkart had a $23 billion annualized GMV run rate. On the other hand, the giant Amazon had a $15 billion run rate.

What does Meesho do?

Meesho specializes in selling low-cost long-tail goods like clothing, footwear, housewares, and bags. Longtail things, contrary to everyday goods like electronics, are difficult to find. According to its internal financials and business KPIs, Meesho’s GMV is roughly $4.7 billion on an annualized basis.

These projections are based on monthly financials from July to December 2022, and financials from February 2023. RTO (return to origin), cancellations, and returns are some of the parameters among them. According to the data, Meesho’s NMV — or real sales — is over $3 billion.

Are there some obstacles in the upward path of Meesho?

There is a lot of scepticism.

A crucial obstacle for Meesho to continue to expand while decreasing burn, according to Satish Meena, a senior e-commerce critic, would be its client profile, adding that they are not rich enough to increase wallet share. Meesho’s consumers include poor and moderate-income earners. Their spending will expand slowly. They will need time, and they cannot shop 36 times a year, he stated.

The major portion of the sales has come from strong marketing. All of these things have been decreased, and new customer additions will not be available. Now, he says, they must ensure that existing customers spend more. Meena feels that Meesho is trying to expand its food business due to the limitations of areas like fashion and home décor.

Despite this, competition from Amazon and Flipkart remains competitive and fierce. Although Flipkart has established Shopsy, a social commerce competitor to Meesho, Amazon has bought Glowroad.

Flipkart will not surrender an unexplored market without a fight. Flipkart has long maintained that “if there is a market and a competition that is doing well, they would give them a run for their money.” According to Abhishek Maity, director of 1Lattice (formerly PGA Labs), a market research firm, this is how Shopsy came about.

Far beyond GMV.

Mr Aatrey stated that an IPO is quite likely for Meesho and that he has set a timeframe of around 18 months for the business to be IPO-ready. Even though Meesho hasn’t raised a cent since September 2021, he insists that the business may no longer seek private finance.

It’s worth remembering that the SoftBank-backed startup was planning to raise a fresh round at a valuation of roughly $10 billion last year before decreasing that amount to around $8 billion. Nevertheless, those discussions did not result in a fresh round, and the markets soon became wary, with big-ticket capital dwindling to a trickle.

Nonetheless, is an IPO a viable fundraising option for Meesho in the current environment? Maybe not. Public markets are no longer valuing enterprises based on criteria like GMV, but rather on profit and sales growth.

Nobody looks at GMV by itself anymore. While it is an important indicator for analyzing growth, the quality of the GMV and the cost at which it is generated are equally crucial, according to one e-commerce investor.

Furthermore, investors have been apprehensive following the big bang IPOs of e-commerce-focused organizations like Nykaa, Delhivery, Zomato, and others, which plummeted below their listing price in less than a year.

According to Rajat Tuli, a partner at consulting firm Kearney, if a company wants to list and do well, it will not do it just through GMV or growth. He stated that you will need a healthy business model, a positive contribution margin, and a very excellent sight of breaking even at the company’s EBITDA level. He emphasized that the emphasis is no longer just on revenue but also on costs.

Meesho, which was recently valued at $5 billion, may suffer a direct impact from this shift in perception. It’s also hazy if the firm will be able to achieve operating profitability by the quarter in September, as it intends, and reach its predicted annualized GMV for the balance of the year.

The emphasis is on revenue.

Meesho’s current annualized revenue run rate is made up of around 90% fulfilment services and 10% advertising. For example, more than $46 million of the $53 million in April income came from fulfilment services, while the remainder came from advertising. Yet, Meesho’s advertising margins are substantially more, and it is quickly becoming a critical emphasis area. In September, it earned approximately $65 million in fulfilment revenue and $9.5 million in ad income. According to the yearly forecasts, fulfilment services generate $640 million in income, while advertising generates $100 million.

Advertisements have a significantly higher profit margin. There are zero expenses with the advertisements. They contribute to the bottom line, according to Mr Aatrey, who added that the purpose is to expand the ad business. He stated that Meesho is quite close to producing 5% of income from ad sales.

Amazon and Walmart now have a larger advertising business on their platforms globally. According to the firms’ respective regulatory filings, Flipkart’s ad income was over $300 million at the end of FY22, while Amazon’s was close to $500 million.

Conclusion.

Vidit Aatrey will have his hands full in 2023, be it coping with the financing freeze, competition from larger rivals, or realizing his dream of going public. How successfully he juggles those duties while at the time of plotting Meesho‘s future will determine how easily the firm fares.

edited and proofread by nikita sharma