Why Kogan lost its online retailing crown

An online-retailing distribution warehouse in Melbourne's southern outskirts. Picture: Stuart McEvoy

The ongoing pandemic lockdowns may have been a boon to online commerce, but don’t presume the unprecedented tide of spending on the part of captive shoppers has lifted all of the ASX-listed “boats”.

In reality, performance has been varied and it remains to be seen how the sector fares in the post pandemic era – when it eventually dawns after this year’s false start.

While online shopping has really “clicked” with Australian consumers, our e-commerce penetration rates lag those of the US and Britain.

According to Euromonitor, the overall Australian household goods market is worth $55bn, with online accounting for $6bn.

This 11 per cent penetration compares with more than 20 per cent in the US.

Key players in the game include Kogan.com, Temple & Webster, Redbubble and MyDeal.

In early May Temple & Webster said trading continued to “exceed expectations” despite more challenging conditions, with March quarter revenue up 112 per cent.

Trading for the month of April was also up 20 per cent, despite the previous April’s especially buoyant numbers.

“This trading suggests Covid-19 permanently accelerated online adoption in the Australian furniture and homewares market,” the company says.

Meanwhile Kogan this week confirmed adjusted ebitda – earnings before interest, tax, depreciation and amortisation – of $61.1m for the year to June 30, 2021, up 23 per cent. But the retailer has provided the sector’s strongest indication that life will get tougher from now on.

Kogan’s trouble is that management made the mistake of assuming June half demand would mirror that of the pandemic-charged first half, and the online retailer ended up with too much stock.

“Given the turbulent trading and social environment over the last year, forecasting consumer needs has been harder than ever,” the company protests.

Broker RBC believes that coupled with a June-quarter decline in active customers, Kogan’s swollen inventory will pose margin headwinds in the current half.

“Renewed lockdowns probably assist trading results around the edges in the near term with less discounting and better demand,” the firm says. “However, we note cost inflation and higher shipping costs are yet to play out to any material degree.”

Kogan used to be the biggest pure-play listed online retailer. But a 44 per cent selldown of Kogan shares over the last six months means Temple & Webster narrowly holds that honour (a $1.35bn market valuation versus Kogan’s $1.23bn).

Separately, the well performing Redbubble is worth just over $1bn. Under new CEO Michael Ilczynski, Redbubble aspires to grow its revenue (post the artists’ cut) to $1.25bn a year “in the mid-term”.

But it’s MyDeal which has struggled to gain investor acceptance despite building one of the best known names in cyberspace over the last decade.

The shares listed In October last year after a $40m capital raising at $1 and after a promising start they’re some 33 per cent underwater.

“It seems the market misunderstands the business and how we operate,” laments founder and CEO Sean Senvirtne.

“Similar businesses with similar ‘comps’ (financial comparisons) are trading on much higher multiples.”

In the third (March) quarter, MyDeal doubled sales to $44.7m: “There is a new wave of customers shopping online as result of the pandemic,” says Senvirtne.

We can only concur there’s a gaping valuation chasm between MyDeal and its nearest peers in what we’ll broadly define as the general household goods sector.

On Senvirtne’s “Granny Smith versus Granny Smith” basis, MyDeal trades on a much lower multiple to gross profits than Temple & Webster or Kogan.

One inconvenient fact is that MyDeal is unprofitable in the bottom-line sense, having reporting a net loss of $2.3m in the December half.

Senvirtne argues that if MyDeal chose to stop growing, it would become profitable overnight by virtue of not having the cost of acquiring all those new customers.

Another potential aspect weighing on the share price is that MyDeal makes a circa 15 per cent margin on the market place turnover, while “own” brands such as Kogan’s command margins of 35-40 per cent.

No wonder then that MyDeal is building its private-label business, which requires inventories but attracts much higher margins in the first place.

Currently, private label accounts for about 2-3 per cent of MyDeal’s sales, but Senvirtne expects this share to build to 25 per cent.

“There’s lots of room for everyone to grow,” says Senvirtne, who reckons his company should achieve $1bn of annual sales within three to five years.

Another dynamic driving the sector is that as consumers become more comfortable with buying online, they will be less fussy about the portal they click on.

Because of this, the online providers need to spend heavily on ensuring their customers stick with them by ensuring the keenest price in the first place.

It also helps if the goods actually arrive – and preferably not via Vladivostok.

Tim Boreham edits The New Criterion

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