Online retailer Kogan breathes new life into Dick Smith

Kogan has built a unique supplier-bidding algorithm that it bets will make Dick Smith more efficient and profitable.

Ruslan Kogan, CEO of Kogan, which has bought the Dick Smith online store. Picture: Britta Campion

I bought a set of sheets from Ruslan Kogan yesterday: 1000 thread-count Queen bed for $49 — about a third of the price at Bed, Bath & Table. Purely for research purposes, you understand.

It’s been a while since I looked at Kogan’s website, but it seems to have become bottomless (I couldn’t find the bottom anyway) and he now sells everything — from sheets, groceries, shoes and clothes, to travel, as well as the TVs he started selling from his bedroom exactly 10 years ago.

Yesterday, Kogan bought the Dick Smith online store and brand. He was able to outbid a keen group of others, including a Chinese bidder, because over a decade he has made his business an extraordinarily efficient retailer.

He and his developers have built a unique supplier-bidding algorithm and all dispatch is handled by algorithms as well, along with fraud detection. All of this development was done in-house — no consultants — and all the algorithms and programs are patented.

He told me yesterday that when a customer makes an order, no human is involved in any part of the process of fulfilling it. “Then we realised that what we had built could apply across every retail category, not just electronic consumer goods.”

And now it will apply across another retail brand.

In fact, the margins for the other Kogan categories are “a multiple” of the margins in TVs because there is less competition — that is to say there are simply fewer online players in those categories.

So every time Kogan has extended his brand, his gross margin expanded.

For inspiration he looked at Aldi and Costco, but decided that the Aldi model was better. That involves having a different house brand for each product category; Costco applies its Kirkland brand across the board.

“No one wants the same brand of chocolate as their toilet paper,” says Kogan. “So every one of my house products has a different brand.”

His other insight has been to use social media only for communicating with customers and solving their problems, rather than for marketing.

“Marketing needs to capture intent,” he told me.

“If you advertise on Facebook you’re just hoping someone sitting on a train accidentally sees your ad, or your post, and happens to want to buy something at that moment.

“Google is still the only way to capture buying intent: if someone searches for a product, you know they want to buy it.”

In fact, Kogan reckons that Facebook has pulled off “the greatest bait and switch in the history of the universe”.

“They used to talk about building your community of fans, and everyone assiduously worked on doing that. Then they changed their algorithms and now you have to pay to play — interactions are expensive.”

So he just monitors Facebook for complaints now, or rather his algorithm does.

Dick Smith is his first non-Kogan branded channel. The reason for the acquisition is pretty simple: to have more clout with suppliers and further reduce costs.

Applying the Kogan fulfilment algorithms will immediately make the Dick Smith online store more efficient and profitable, and its numbers will increase Kogan’s buying power.

Ruslan Kogan still owns 80 per cent of the business and his partner David Shafer, the other 20 per cent. They’re working on an IPO.