Meesho: Inside Meesho’s reset: to cut cash burn, brace for slower growth

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Until early in 2022, ecommerce startup Meesho was burning around $40 million a month in cash as it took on bigger rivals Amazon India and Walmart-owned Flipkart. That burn rate was halved over the rest of 2022 and has now been reined in to a relatively modest $5 million.

Vidit Aatrey, cofounder and CEO of Meesho, told ET that the company is looking to pare that spend further by the July-September period. Doing so, however, will involve paying a price. There are no surprises in Meesho’s efforts to conserve cash given that the company last raised funds in 2021, when it received an infusion of $570 million from Fidelity and others.

The heady fundraising days of 2021 are now a thing of the past with the focus only on surviving the current downturn and somehow turning profitable, which not even older players like Flipkart have been able to do.

But how long will Meesho be able to sustain itself with moderate growth and a low cash burn rate.

A trade-off

Bengaluru-based Meesho took its first steps to rein in spiralling costs last year, as ET had reported. But a declining cash burn has also left it staring at slower growth which many heavily funded tech startups are facing today.

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This comes at a time when Meesho’s India unit was hitting its stride. The company had revenues of about $400 million (Rs 3,247 crore) in FY22 on a smaller customer and seller base but has since then recorded steady growth. Between April and December of 2022, for instance, Meesho’s monthly revenue was around $50-60 million. Indeed, even for calendar year 2023, on an annualised extrapolation of its January and February figures, it is eyeing $750 million in revenue.

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By cutting costs on customer acquisition, promotions and discounts, the company is certain to lose much of this ground and take a hit on its topline. Meesho does not collect any commission from its sellers, something that it says sets it apart from ecommerce platforms such as Amazon and Flipkart. Instead it earns revenue from sellers by offering them ad space on its app/site, and also by offering fulfilment services (help with shipping through a third-party logistics provider).

Aatrey, sounding sanguine, said the etailer is ready to settle for a lower rate of growth in the ongoing calendar year after doubling gross sales in previous years. “We have been reducing cash burn and we still have been growing. Last year we grew 100% and I think this year as well we will grow close to 50% (revenue). And this is a time when we are investing less and less in marketing,” said the IIT-Delhi alumnus.

Thirty percent growth in GMV, Aatrey told ET, would still be higher than other players. To be sure, Amazon India and Flipkart are operating on a higher GMV base. ET had reported in 2021 that Flipkart was at a $23 billion annualised GMV run rate while the same for Amazon was at $15 billion.

Also read | How startups are cutting cloud costs, renegotiating deals with service providers

Meesho specialises in selling low-priced long-tail items such as clothes, home and kitchen products, bags and footwear. Longtail items are difficult-to-find products unlike commonplace items such as electronics. On an annualised basis, Meesho’s gross merchandise value (GMV) is at around $4.7 billion, according to its internal financials and business metrics, which have been reviewed by ET.

These estimates are based on monthly financials from July-December 2022 as well as its February 2023 financials. They include RTO (return to origin), cancellations and returns. Net merchandise value (NMV) — actual sales registered by Meesho — is at around $3 billion, the numbers seen by ET indicated.

Scepticism abounds

Satish Meena, a senior ecommerce analyst, said a key challenge for Meesho to continue growing while reducing burn will arise from its customer profile, noting that they are not wealthy enough to increase wallet share. “Meesho’s customers are in the low and middle income bracket. Their spending growth will be slow. They will need time and they can’t shop 36 times a year,” he said.

“A lot of the sales have come through aggressive promotions. They have reduced all these things, and new customer additions won’t be there. Now, they have to make sure existing users spend more,” he added. Meena also believes the limitation of segments such as fashion and home decor is why Meesho is looking to scale up its grocery business.

Amidst all this, competition remains intense from Flipkart and Amazon. While Flipkart has launched Shopsy, a social commerce rival to Meesho, Amazon has acquired social commerce firm Glowroad.

“Flipkart will not let an untapped market go to the competitor without a fight. Flipkart has always been of the view that ‘if there is a market and there is a competitor that is doing well, we will give them a run for their money’. That is how Shopsy came up,” said Abhishek Maity, director at 1Lattice (earlier PGA Labs), a market research firm.

Beyond GMV

Aatrey told ET that an initial public offering (IPO) is very much on the cards for Meesho, and that he has set a timeline of about 18 months for the startup to be IPO-ready. Though Meesho hasn’t raised a dime since September 2021, he insisted that the company may not seek private funding anymore.

It bears noting here that last year, the SoftBank-backed firm was looking to raise a new round at a valuation of around $10 billion before lowering that figure to about $8 billion. But those talks didn’t lead to a new round and soon the markets turned cautious, with big-ticket funding thinning to a trickle.

Be that as it may, is an IPO a realistic fundraising avenue for Meesho in this environment? Perhaps not. Public markets are no longer valuing businesses on metrics such as GMV and are instead looking at profit and revenue growth.

“No one looks at GMV alone anymore. While it is an important metric to analyse growth, the quality of the GMV and the cost at which it is coming is very important,” an ecommerce investor said.

Moreover, primary market investors have become wary after the big bang IPOs of ecommerce focused entities such as Nyka, Delhivery, Zomato and others fell below their listing price in less than a year.

Rajat Tuli, partner at consulting firm Kearney, said that if a firm wants to list and do well, it is not going to be only through GMV or growth. “You will have to have a healthier business model, a positive contribution margin, and very good visibility on breaking even at a company EBITDA level,” he said. The focus is no longer just on the topline but on costs, as well, he added.

Meesho, which was last valued at $5 billion, could see this shift in sentiment have a direct impact on its valuation. It also remains to be seen if the startup is able to achieve operating profitability by the September quarter as it hopes to, and achieve its projected annualised GMV over the rest of the year.

GMV and NMV

The numbers reviewed by ET show that on an average, the gap between the firm’s GMV and Net Merchandise Value is over 40% (NMV = GMV minus returns and cancellations, meaning for every Rs 100 of GMV, Rs 40 is lost in returns). For example, Meesho’s GMV was $383 million in both April and July 2022, while NMV stood at $214 million and $211 million, respectively, in those two months, indicating a large-scale erosion in returns. These numbers had also spiked in September during the festive season sale. The broader trend remains the same even now.

Aatrey agreed but said this is due to the nature of the segment Meesho operates in. He insisted that platforms such as Flipkart-owned Myntra, and Nykaa, among others, have a similar gap between their gross sales and net sales. “We have large fashion exposure on our platform. If you compare us with all the fashion-heavy platforms we will be much better. And this includes everything: 40% is just not returns; 10% is returns, 15% is RTOs (return to origin), and 15% is user cancellations,” Aatrey said, explaining the metric and its importance at Meesho. He said this gap would not change very significantly.

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While horizontal ecommerce platforms, selling a wide range of goods, including electronics, fashion and large appliances, see returns of anywhere between 15-25%, the same is traditionally higher in the fashion business. However, a 40% gap is still amongst higher ones in the industry, according to Tuli and multiple other industry executives and analysts.

“Meesho has humongous returns because of the nature of its category mix and the bulk of its products are apparel,” said Maity of 1Lattice.

According to Maity, Flipkart and Amazon India have such a large scale that they are able to have their own captive network of logistics. “That is how they control logistics costs,” he said. Meesho’s logistics are handled by third-party providers such as Ecom Express, Delhivery and Xpressbees. The company, however, said it does not pay for RTOs (return to origin: products that never reach a customer for various reasons and are returned unopened to the seller, who bears the logistics cost).

“Even if Meesho is not paying, the seller is paying. For sellers, it becomes unattractive — they will compare it with Myntra and Amazon where they get better options. Many brands just work with Amazon and Flipkart because they also have better buyers (bigger wallets) and there are low returns,” Meena added.

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Revenue in focus

Of Meesho’s current annualised revenue run rate, around 90% comes from offering fulfilment services, while the rest is from advertising. For example, of the $53 million in April revenue, more than $46 million came from fulfilment services, while the rest was from advertising. However, the margins are much higher in advertising for Meesho, and it is becoming a key focus area. In September, it had nearly $65 million in fulfilment revenue, while ad revenue was at $9.5 million. In its annual projections, $640 million of revenue is from fulfilment services and $100 million from advertising.

“Advertisements have a much higher gross margin. With ads there is no cost. They add to the bottomline,” Aatrey said, adding that the focus is to scale the ad business further. Meesho is very close to generating 5% of revenue from ad sales, he added.

Globally Amazon and Walmart have larger advertising business on their platforms today. Flipkart’s ad revenue stood at around $300 million at the end of FY22, while Amazon’s was close to $500 million, the companies’ respective regulatory filings show.

Whether it’s dealing with the funding freeze, challenges from bigger rivals or realising his aspiration to go public, Vidit Aatrey will have his hands full in 2023. As he charts Meesho’s future, how well he juggles those tasks will determine how well the company does.

(Graphics by Geetanjali Kapoor)



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