In the six months to June, sales and profits for omnichannel retailers with physical and online stores rebounded, while sales growth for pure e-commerce retailers slowed sharply or, in the case of Kogan , retreated, decimating earnings as operating leverage unwound.
The only e-tailer to admit he was being too optimistic was Kogan co-founder Ruslan Kogan, a man not previously known for his humility.
“Holding back is a beautiful thing and [it] turns out we were wrong,” Kogan told investors after the company posted a net loss of $35.5 million and a 69% drop in underlying profit to $18.9 million. Revenue fell 8%, despite the acquisition of New Zealand e-tailer Mighty Ape.
“Left With Too Much Inventory”
“Based on the data at the time, we predicted the trend would not stop or slow down,” he said. “When the pandemic took hold, e-commerce did not grow as expected, we ended up with too much inventory and warehousing costs.”
Pure-players are now prioritizing profits over sales by cutting staff and reducing capital expenditure – moves that could affect customer acquisition and sales.
Kogan, for example, is cutting marketing expenses, reducing its workforce, eliminating excess and underperforming inventory to reduce warehouse costs, and raising the price of its loyalty program, Kogan First.
Kogan hopes to return to profitable growth this year, but the damage for shareholders is done. The stock price has fallen 86% from pandemic-fueled highs, falling to $3.40 this week from a high of $24.76 in September 2020.
Ruslan Kogan and co-founder David Shafer personally count the cost – 6 million options that were worth more than $100 million when shareholders approved the grant in November 2020 are now out of the money, with a price tag of $5.29 exercise.
Shareholders of online book retailer Booktopia are also licking their wounds, with shares having fallen 90% to 28¢ since August last year.
Booktopia sales increased 7.5% to $240 million, nearly double 2019, books shipped increased 4%, and average order value and average customer spend increased by 6%.
However, heavy investments in marketing and fulfillment center staff resulted in higher unit costs. Underlying profit fell 55% to $6.2 million and the group recorded a net loss of $15.1 million.
Former CFO Geoff Stalley, who is interim CEO after founder Tony Nash was “fired”, is cutting staff and cutting costs “to better align the cost base with the future growth trajectory.”
Stalley says while online shopping has been widely accepted, consumer expectations have changed and it’s becoming increasingly expensive to acquire customers through digital channels, making physical footprints more important.
Customer acquisition costs for online retailers have skyrocketed, driven primarily by soaring digital advertising costs, including paid search, as e-tailers battle to attract customers in an increasingly crowded market. The cost per click has increased by around 45% and is expected to increase further.
As a result, e-tailers like Adore Beauty are stepping up their investments in proprietary content, including blogs, podcasts and online tutorials, and loyalty programs to encourage existing customers to spend more often.
Unlike Kogan and Booktopia, Adore posted stronger earnings in 2022: net profit increased 181%, sales increased 11% to nearly $200 million, driving growth over past two years at 65%, active customers increased by 7% and returning customers increased by 31 percent.
However, sales in the first seven weeks of 2023 fell 28% as Adore suffered a lockdown-fueled sales spree in the same period a year ago. Outgoing CEO Tennealle O’Shannessy warned that rising costs and investments will squeeze margins this year.
Shares of Adore fell more than 15% after the result at $1.52, bringing losses since the peak of the pandemic in October 2020 to 78%.
Investors in online fashion retailer Cettire are also nursing the bruises, with shares plunging 85% to 70¢ since peaking in November 2021 at $4.80.
Cettire sales increased 127% to $210 million, 10 times sales two years ago. However, net losses widened to $19 million (from a loss of $251,000 a year ago) as higher returned orders and fulfillment costs squeezed margins. Marketing spend nearly quadrupled, and paying customer acquisition costs hit 14.9% of sales, up from 10.8% in 2021.
Cettire stopped offering free returns – a move that could hurt conversion rates, and therefore sales – cut marketing, postponed expansion into beauty and China, and renegotiated key contracts for logistics and payment processing with the aim of returning to profitability this year.
“In an uncertain financial market environment, we believe it is appropriate to be more cautious in our investments,” said founder Dean Mintz, who pocketed $47 million when he sold part of his stake. majority earlier this year.
Investors are now wondering if the reduction in investment will reduce addressable markets and wonder if some pure online retailers will ever reach their size.
I think there will always be a role for pure-players, but I suspect they will focus more on niches or specialized areas.
— Rob Scott, CEO of Wesfarmers
Multiples for pure games fell to around 0.7x revenue after hitting more than twice revenue at the height of the pandemic.
“I think there will always be a role for pure players, but I suspect they will focus more on niches or specialist areas,” Wesfarmers CEO Rob Scott told Window Shopping.
“It’s one thing to grow from a very low base to a niche e-commerce specialist retailer, but it’s a very, very different proposition to grow a business from a few hundred million in sales to a few billion. of sales,” says Scott, who is investing heavily in online retailer Catch, expanding its marketplace and fulfillment capacity, and strengthening ties with Wesfarmers’ omnichannel retail chains.
“The opportunity for scale that we see is one that has both stores and online capability. But there may well be smaller niche players that can exist at a much smaller level in as pure-players,” says Scott.
While pure play retailers are struggling to grow, industry consolidation looks increasingly likely in Australia after a series of overseas deals.
Westfarmers has taken over Catch and Woolworths is set to take over MyDeal.com. Further consolidation is to be expected as large omnichannel retailers roll out smaller pure games to grow their product line and addressable markets.