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A New Way to Finance eCommerce

In our many discussions with retailer and Consumer Packaged Goods (CPG) executives about developing eCommerce, we often hear the issue of capital availability being a key barrier. This is not surprising, since investments in facilities and equipment required to compete in the new world of online ordering are being estimated in terms of billions of dollars.

Amazon, as the leader in capital investments in infrastructure, has already expended up to $20 billion, in buildings, material handling equipment, information technology, and transportation. They are not yet completely built out.

Let’s first define the terms and their differences:

  • Capital Expenditures (CapEx) are business expenses incurred to create future benefit. The most common examples are in purchasing assets: buildings, machinery, and equipment or in expenditures for upgrading assets to increase their value. These are then amortized or depreciated over the useful life of the asset.
  • Operational Expenditures (OpEx) are business expenses required for the day-to-day processes or functioning of the business. The common examples include: all SG&A expenses (salaries/wages, and administrative charges) and COGS (costs of goods sold). These are expensed during the period when incurred.
  • Free Cash Flow (FCF) is the amount of cash that exists from revenues after the deductions for SG&A, COGS, Depreciation, and Taxes. This key financial metric plays an important role in company valuation, and it is impacted by CapEx vs. OpEx, as well as, by the timing of accounts payable and receivables.

Investments and expenditures in property provide us another clear example. CapEx is incurred when buying an income producing property; while OpEx are costs associated with the operation and maintenance of an income producing property.

Companies often evaluate investments for the option of booking as either CapEx or OpEx. While several factors are evaluated for this decision, it normally depends on: (1) the company’s availability and costs of capital, (2) its policy positions, based on shareowners preference, (3) whether or not private equity is influential, (4) its need for FCF in current periods, and (5) its tax position.

Now, let’s return to the issue of availability of capital for needed investments in eCommerce. The simple fact is that the vast majority of companies do not have unlimited capital for infrastructure. Yet, executives are increasingly realizing that in order to compete with Amazon, as well as, their peers, they must formulate and execute a development plan that enables them to maintain their best customers and provide an excellent customer experience (CX).

If a logistics infrastructure and technology existed that companies could join and finance via OpEx, it would provide business opportunities that are within the financial reach of any company selling online. The “pay-as-you-go” program would charge for set-up and transactions, and OpEx can finance the company’s omnichannel (or, One Channel) digital operations strategy. The operators of this program would be some of the best logistics service providers, who would have eCommerce facilities for lease and for transactions. A leading technology firm would power this infrastructure and charge on a “Software as a Service” (SaaS) basis.

Does this sound too good to be true? MonarchFx is such a program and is launching in early 2017. All member seller companies can participate on a shared basis (multi-client), thus building scale, lowering costs, and providing high levels of eCommerce services.

Sellers can use OpEx expenses to fund their eCommerce advantages. No longer will the non-availability of capital be the barrier to delighting eCommerce customers and enjoying business advantage. The future is now.