E-commerce businesses begin to feel the heat of recession in Pakistan
In the last couple of years, the e-commerce sector in Pakistan has witnessed tremendous growth with the market size reaching $6.4 billion in 2023. The growth is expected to continue in coming years based on a number of factors such as internet penetration, expanding mobile connectivity, a rising population of tech-savvy customers and a growing number of e-commerce businesses due to low barriers to entry (1,180 companies registered during 2022). This, coupled with investments made in the sectors by giants like Daraz, Khaadi and Gul Ahmed, has led to higher adoption of online shopping which is very much in line with the trend set during a pandemic. Although there have been brief spells of cyclicality owing to macroeconomic deterioration, still e-commerce sector has a lot of potential in Pakistan if one looks at the big picture.
The seasonality in the last quarter of 2023 could be attributed to the eroding purchasing power due to inflation and economic slowdown. Another reason could be the highly fluctuating sales volumes for electronics and home appliances (having 34% market share) which peaks in summer when consumers buy air conditioners and refrigerators etc. While players like Homeshopping, Symbios, PriceOye, Daraz, J. (Jay Dot) and PostEx dominate the market, a few companies were not able to meet the targets due to rising cost of operations thanks to rupee devaluation and import/supply chain restrictions. This is evident through SBP numbers as well which show a drop in the number of transactions and ticket size.
Over the past four years almost, the Pakistani economy has been reeling from one crisis after another, starting from the deteriorating rupee in 2018. However, the intensity of the crisis has particularly been amplified since early 2022, which has seen rapid devaluation, record inflation, and even rumors of default. This has affected purchasing power negatively and made consumers more price cautious. Meanwhile, the cost of operations — already under pressure from a commodity super cycle — for businesses including e-commerce stores, has gone up substantially. This was made even worse by government-imposed restrictions on imports. Add to it the slowdown in VC funding, which fell 86.65% YoY in Q1-2023, thus choking the key source of funds to subsidize customer acquisition and growth. All of these factors have put a serious strain on e-commerce companies as they struggle to maintain their existing levels, let alone grow.
Pakistan has traditionally been a consumption-ridden society but given the global squeeze, if one observes the workers’ remittances, it is clear that the e-commerce sector has to undergo this phase with a pinch of salt. But like every cloud has a silver lining, this effect could be offset if banks which are currently awash with liquidity due to high-interest rates step up to support the e-commerce sector. Traditionally, the preferred lending avenues for banks were automobiles and mortgage financing but with unprecedentedly high policy rates resulting in a decline in consumer financing, even they need to venture into unchartered waters through financing innovative products focusing on solar panels, mobility (EV scooters and bikes) and battery swapping options. A lot of banks have already started working on this dimension and those joining the bandwagon will have an early mover advantage while others have to step up their efforts. This needs to be done if Pakistan is to compete with regional players in Indonesia, Bangladesh, Philippines and Egypt to improve its ranking which is presently 47th in the world.
Consumer confidence, to a large extent, also rests on the smooth transition of power. With an election looming just around the corner, people have put their finances on hold. Presently, consumer confidence is marred by macroeconomic woes, political instability, rising interest rates and inflation. Once the new government is formed, retail and commercial activities are expected to pick up and it is expected that consumer pulse will remain upbeat for the second half of CY 2024.