Ahmad Hassan, the CFO of Daraz, Pakistan's leading e-commerce platform, is optimistic about Pakistan's economy. During an interview with Money Matters, he emphasized the importance of encouraging digitalization and supporting the youth to drive Pakistan forward growth.
Q. What were some of the biggest challenges and successes for Daraz Pakistan when looking back at 2022?
A. In 2022, e-commerce faced numerous challenges in Pakistan, as did many other industries. Despite these difficulties, Daraz persevered and achieved significant growth. The company experienced a robust increase in its customer base and order volumes year-over-year, due to its unwavering commitment to improving customer experience and retaining loyal customers. Additionally, Daraz invested substantially in physical infrastructure, including groundbreaking smart distribution centers in Lahore and Karachi, which bolstered its operational capabilities. These strategic investments, combined with a continued focus on customers and sellers, have strengthened the company's foundation and positioned it for future success, despite macroeconomic challenges in the past year.
Q. What is Daraz Pakistan's vision and plan for 2023? What are the key objectives for the company to accomplish this year?
A. Our long-term objective for Daraz is to build an organization that is here 100 years from now. This means all our business priorities and goals are decided to keep in view how we can build a sustainable business. Our core focus areas are:
a) Customer Satisfaction and Retention: Daraz is now the fourth largest platform in the country after Google, Facebook, and TikTok. Now the time is ripe to ensure we improve their experience when it comes to online shopping. As an organization, this is one of our key priorities for the upcoming year.
b) Seller Satisfaction: A marketplace is nothing without its sellers. We currently have approximately 100,000 sellers from all over Pakistan 40% of our sellers are outside of Karachi, Lahore, and Islamabad. One of the proudest moments for us over the past year was spent during our annual Seller Summits listening to their amazing success stories. We want to further focus on improving our seller experience, thereby attracting more and more high-quality sellers to the platform. This would also provide our huge customer base with more assortment to choose from thereby leading to increased growth for the business.
c) Continue to focus on becoming a sustainable business. We have improved our unit economics significantly over the last couple of years and we want to continue on that journey throughout the coming year.
Q. What changes in consumer behavior have you observed in light of ongoing inflation?
A. Consumer confidence in the country has taken a hit over the past year, with more people opting for cheaper alternatives in the market. It's difficult to determine whether this shift is solely due to demand-side factors or if it's also a result of supply-side economics, given the import restrictions that have limited the supply of higher-valued imported products.
Q. The importance of digital payments and the digitization of the economy is increasing in Pakistan. How digitized is the economy currently, and how can Daraz Pakistan contribute to advancing this trend? What is the vision for the future of the digital economy in Pakistan?
A. The economy, and the e-commerce industry by extension, is still in its infancy in Pakistan. Digital payment systems are believed to be the only solution to increase financial inclusion in the country. According to the State Bank of Pakistan's latest payment systems report, only nearly 6,000 e-commerce merchants are registered with financial institutions, which is negligible considering the population size of 230 million. Additionally, only about 4% of the almost 50 million payment cards issued in the country are credit cards. As of Q2 2023, only 1.5% of all e-banking transactions were on e-commerce platforms, with almost 40% being ATM-based transactions, indicating that the country is still largely a cash-based economy.
Daraz has been continuously working to promote digital payments and financial inclusion by partnering with major commercial banks and digital wallets like JazzCash and easypaisa to integrate with its platform. The company is also collaborating with the State Bank of Pakistan to integrate Raast, a solution that holds promising potential.
Q. What is Daraz's perspective on the current economic situation in Pakistan, and what opportunities do new-age companies and young talent have in the country?
A. Despite the challenges, I am optimistic about Pakistan's current economic situation and believe it could lead to significant growth momentum sooner or later. In this scenario, there are vast opportunities available for investors who have a long-term horizon. Currently, our e-commerce market represents only 2% of the overall retail industry, leaving ample room for growth, as compared to our neighbor India, where e-commerce represents nearly 10% of overall retail. Furthermore, Pakistan has a large tech-savvy youth population that desires to move forward in a digital age. If the government and private sector can incentivize the digitalization of the economy and nurture the youth, this could address some of our underlying structural problems. In the digital age, young talent with the right skillset can export their services with ease if provided the right framework and guidance, which presents a significant opportunity for the country
Q. The capital crunch has been a significant challenge for many startups in Pakistan lately, despite having a fantastic run in 2021. When do you see this trend changing?
A. The challenge of a capital crunch is not unique to Pakistan. To understand the situation, one needs to look back to the COVID-19 pandemic, when governments worldwide injected liquidity into markets and provided economic stimuli. This, coupled with supply-side shocks due to the Ukraine war, led to unchecked high inflation rates until central banks began increasing interest rates. The Federal Reserve has raised interest rates by almost 400 basis points in the past year or so, causing a shift from highly risky venture capital investments to risk-free T-bills. In 2022, global venture funding totaled approximately $445 billion, a 35% year-over-year decline from the $681 billion startups raised in 2021. This represents a steeper pullback than was experienced after the 2008 financial crisis or dot-com bubble. When considering Pakistan's economic situation over the same period, it is not difficult to imagine that foreign venture capital has become scarce in the country.
However, it is important to note that inflation rates in major global markets are beginning to ease up, and I predict that risk-free rates in Western economies will significantly decrease by mid to late 2024. This will likely lead to a resurgence in major venture capital investments. Hopefully, by that time, Pakistan's macroeconomic conditions will have also improved, and we can attract a significant portion of that investment. Therefore, I am optimistic that better times are on the horizon. We must ensure that when the tide turns, tech companies in the country have sustainable business models based on strong financial foundations that address significant market gaps to attract capital again.