Ruslan Kogan isn’t fazed by the pullback in online retail sales across the e-commerce sector in the aftermath of the COVID lockdown era.
The Australian online retail pioneer, whose eponymous website kogan.com has been operating since 2006, says the market right now is exactly where it should be.
Kogan, the CEO and founder of Kogan.com (ASX: KGN), describes the ‘massive COVID bump’ in online sales globally in 2020 and 2021 as an ‘aberration’. Certainly, it was one that led Kogan.com to post a 52.7 per cent spike in gross sales to surpass $1 billion for the first time in FY21.
“From our perspective, we had the biggest half that any e-commerce player in Australia has ever had when the pandemic started,” Kogan tells Business News Australia.
“We had record profitability with over $50 million EBITDA in the half - the most profitable half that anyone has ever had in Australia. We did that while being able to be there for customers when they needed us most.”
The general pullback in online sales was reflected in Kogan.com’s latest half-year result released earlier this week. Interim FY23 gross sales were down 32.5 per cent to $471 million compared to a year earlier, leading to a 34.3 per cent drop in revenue to $275.55 million.
Kogan.com was not alone among its e-commerce peers in the latest reporting season. Lower sales were reported by online furniture retailer Temple & Webster (ASX: TPW), along with traditional retailers such as Super Retail Group (ASX: SUL) which saw its online sales drop 39 per cent in the latest half-year and Myer Holdings (ASX: MYR) which revealed in January an expected 9 per cent drop in online sales.
Kogan says the falls haven’t altered the long-term trend that shows online sales continue to take a bigger slice of the retail pie.
“If you look at the trends, e-commerce is just where it should have been had COVID not happened,” he says. “It’s just a continual, gradual long-term upward trend.”
Managing the pain
But there has been pain along the way. Kogan.com has been working through some of that over the past year, selling down excessive inventory, some below cost, after overestimating the extent of the spike in online buyer demand during the pandemic.
“We sold out of so many product lines, so we made the decision (to) order up big time,” Kogan says.
“We ordered a heap of inventory and obviously the vaccine came out, lockdowns ended and by the time the inventory had arrived demand was massively subdued.
“We made the incorrect decision and now it looks like a lot of business around the world made a very similar incorrect decision, but from one perspective we called it early.”
While customers took advantage of below-cost bargains over the past year, Kogan says that ultimately ‘nobody wins’ in this scenario.
“It’s not good business, which is why we got it over and done with and we move on.”
Although Kogan concedes one month is not a trend, he has been encouraged by Kogan.com’s return to profitability in January as a sign that the worst is behind the company.
Interestingly, Kogan.com’s New Zealand operations, led by the Mighty Ape platform, have been relatively stable with gross sales and revenue falling 9.1 per cent and 7.9 per cent respectively in the latest half. This was offset by higher margins.
“Mighty Ape has been a really strong acquisition,” says Kogan. “They never saw the really huge highs that we saw in Australia, but they never saw the troughs either. It’s been a steady-as-she-goes operation.”
Kogan sees improved synergies between its Australian and New Zealand operations. The Kiwi arm is now led by Gracie MacKinlay after Mighty Ape founder Simon Barton stepped down as CEO last year.
“There’s a lot of stuff that Mighty Ape is brilliant at that we don’t have a lot of capability of at Kogan, and vice versa,” says Kogan.
“In terms of verticals and launching a mobile offering, and warehousing expertise, there’s definitely a lot that the teams could be working together on.”
Kogan sees digital efficiency as the ‘bread and butter’ of the business in terms of driving down prices for consumers.
One of the company’s key strategies in this regard is Kogan First, a subscription-based membership that in the last half delivered an estimated $14 million of benefits to customers in the form of free shipping and discounts. Kogan.com plans to increase annual subscriptions from $79 to $99, a move that Kogan is confident won’t meet with any pushback.
The Kogan First program grew to more than 404,000 subscribers by the end of December and lifted revenue to $10.8 million, up 83.1 per cent year on year.
“Our data shows there is so much value in the program that customers love it and any small price increase will not impact customer sentiment,” says Kogan.
“We’ve had several price rises over the history of the program. The data show us that customers understand inflationary pressures, that everything has gone up including freight, and they’re getting so much value out of the program that the small price increase is almost irrelevant.”
The marketing edge
Kogan says the sustainability of the Kogan.com business rests in ‘delivering value day in and day out’.
“That’s what we’ve been doing since 2006 and that’s driven by the efficiency in our business model.
“Through Kogan First, our marketing became more efficient in the half. Typically, online retailers have to spend a lot on marketing and Google to keep bringing customers back. If you have a loyalty program where customers keep coming back and start their shopping experience on your site, you don’t need to spend all that money on marketing.”
Looking ahead, Kogan equally sees cost of living pressures as key to Kogan.com gaining market share.
“You never want to see the economy doing it tough and you never want to see consumers doing it tough either, but the fact is that the macro environment is throwing at us a situation where interest rates are going up, energy prices are going up; there’s cost of living pressures left right and centre.
“Because we are at the value end of the market more and more people are going to compare prices and read reviews. Historically, we have won market share in those conditions. While you don’t want those conditions to exist, from a business perspective we’re well geared up to handle them.”
Online retail has come a long way since Kogan established his online website in 2006 to sell LCD televisions made in China, later expanding his offering to include a wider range of electronics brands and products.
Kogan is not afraid of competition. Recalling the difficulty he used to have convincing shoppers to go online back then, he says the more mainstream it becomes, the better for all.
“We used to have to shout from rooftops about the benefits of online retail and try and convince people that shopping online is safe, and its better value and more efficient,” he says.
“Our business leaders were out there saying nobody is going to shop online and that it’s a fad. At least now you have some of the biggest retailers in the country running TV ads telling people to go shop online.
“As a business, we love that because the more people that start their shopping experience by opening their laptop, loading a few tabs, doing their research comparing prices, reviews and specifications, the more market share we’re going to win.”
Kogan says after closing off a challenging 2022, he is confident of the year ahead.
“We’re pretty enthusiastic about where the business is at. It’s good to have those inventory issues behind us and focus on efficiency like we have been doing for close to 17 years.”
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