Ruslan Kogan reflects on the long-term growth of online retail

Ruslan Kogan is not fazed by the decline in online retail sales in the e-commerce sector in the aftermath of the COVID lockdown era.

The Australian online retail pioneer, whose eponymous website kogan.com has been up and running since 2006, says the market is right where it should be right now.

Kogan, CEO and founder of Kogan.com (ASX:KGN), describes the “massive COVID bump” in online sales worldwide in 2020 and 2021 as an “aberration”. It’s certainly the one that led Kogan.com to post a 52.7% rise in gross sales to top $1 billion for the first time in FY21.

“From our perspective, we had the biggest half that any e-commerce player in Australia ever had when the pandemic started,” Kogan said. Australia Business News.

“We delivered record profitability with over $50 million in EBITDA during the half – the most profitable half anyone has ever had in Australia. We did this while being able to be there for customers when they needed us most.

The general decline in online sales was reflected in Kogan.com’s latest half-year earnings released earlier this week. FY23 interim gross sales decreased 32.5% to $471 million from a year earlier, resulting in a 34.3% decline in revenue to $275.55 million.

Kogan.com wasn’t alone among its e-commerce peers over the past reporting season. A drop in sales was reported by online furniture retailer Temple & Webster (ASX:TPW), as well as brick-and-mortar retailers such as Super Retail Group (ASX:SUL) which saw online sales drop 39% over the past half year and Myer Holdings (ASX: MYR) which in January disclosed a expects a 9% drop in online sales.

Kogan says the falls haven’t changed 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 exactly where it should have been if COVID hadn’t happened,” he says. “It’s just a long-term continuous and gradual uptrend.”

manage the pain

But there was pain along the way. Kogan.com has been working on some of that over the past year, selling excess inventory, some below cost, after overestimating the magnitude of the surge in demand from online shoppers during the pandemic.

“We sold so many product lines that we made the decision (to) mass order,” Kogan says.

“We ordered a bunch of inventory and obviously the vaccine came out, the lockdowns ended and by the time the inventory arrived the demand was massively subdued.

“We made the wrong decision and now it looks like many companies around the world have made a very similar incorrect decision, but from some perspective we called it early.”

While customers have enjoyed great deals over the past year, Kogan said that ultimately “no one wins” in this scenario.

“It’s not a good deal, that’s why we’re done with it and moving on.”

Although Kogan concedes that a month is not a trend, he was encouraged by Kogan.com’s return to profitability in January, 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 down 9.1% and 7.9% respectively over the past half year. This was offset by higher margins.

“Mighty Ape was a really solid acquisition,” says Kogan. “They never saw the really huge highs that we saw in Australia, but they never saw the lows either. It was a regular 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 are a lot of things that Mighty Ape is brilliant at that we don’t have a lot of ability at Kogan, and vice versa,” Kogan says.

“In terms of verticals and launching a mobile offering, and warehousing expertise, there’s definitely a lot the teams could work on together.”

Kogan sees digital efficiency as the company’s “bread and butter” in terms of lowering prices for consumers.

One of the company’s key strategies in this regard is Kogan First, a subscription-based membership that over the past six months has provided customers with approximately $14 million in benefits in the form of free shipping and discounts. Kogan.com plans to increase annual subscriptions from $79 to $99, a move that Kogan says will not meet with any setbacks.

The Kogan First program grew to more than 404,000 subscribers at the end of December and brought its revenue to $10.8 million, up 83.1% year-on-year.

“Our data shows the program is so valuable that customers love it and any small price increase won’t impact customer sentiment,” Kogan says.

“We have had several price increases over the history of the program. The data shows us that customers understand the inflationary pressures, that everything has increased, including freight, and that they are getting so much value from the program that the small price increase is almost irrelevant.

The marketing advantage

Kogan says that the sustainability of Kogan.com’s business is based on “creating value day in and day out.”

“We’ve been doing this since 2006 and it’s driven by the efficiency of our business model.

“Thanks to Kogan First, our marketing has become more effective over the semester. 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 come back and start their shopping experience on your site, you don’t need to spend all that money on marketing.

Looking ahead, Kogan also sees cost-of-living pressures as key to Kogan.com gaining market share.

“You never want to see the economy do things harshly and you also never want to see consumers do things harshly, but the fact is that the macro environment throws us into a situation where interest rates go up, energy prices are rising; there are pressures on the cost of living left and right.

“Because we are on the value side of the market, more and more people will compare prices and read reviews. Historically, we have gained market share under these conditions. Although you do not want these conditions exist, from a commercial point of view, we are well prepared to manage them.

Online retail has come a long way since Kogan established its online website in 2006 to sell China-made LCD TVs, later expanding its offering to include a wider range of brands and electronics.

Kogan is not afraid of competition. Recalling the difficulty he had convincing buyers to go online at the time, he says the more mainstream it becomes, the better for everyone.

“We used to shout from the rooftops about the benefits of online retailing and trying to convince people that shopping online is safe, offers better value for money and ‘they are more efficient,’ he says.

“Our business leaders said no one would buy online and it was a fad. At least now, some of the nation’s biggest retailers are running TV ads urging people to shop online.

“As a business, we love this because more people are starting their buying experience by opening up their laptop, loading a few tabs, doing their research, comparing prices, reviews, and specs. , the more market share we will gain.”

Kogan says after closing out a difficult 2022, he is confident for the year ahead.

“We are quite enthusiastic about the situation of the company. It’s good to have those inventory issues behind us and focus on efficiency as we have for almost 17 years.