Caitlin Fitzsimmons Online editor

Caitlin covers social media, marketing and technology and is BRW's social media editor. She has worked as a journalist in Sydney, London and San Francisco, writing for titles including The Guardian and The Australian Financial Review.

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Clearing out the CRAP players: Online retail ripe for a shakeup

Published 15 May 2013 09:56, Updated 16 May 2013 00:46

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Clearing out the CRAP players:  Online retail ripe for a shakeup

Catch of the Day co-founder Gabby Leibovich says the large number of unprofitable online retailers makes the sector ripe for consolidation. Photo:Josh Robenstone

Everything is for sale on the internet – including the online retailers themselves.

The sector is entering a wave of furious merger and acquisition activity and dozens of entrepreneurs are likely to cash out over the next 12 months.

The tastiest takeover targets will be online retailers with a certain scale in a specialist niche – either because it’s a profitable business at a fair price or because it’s an unprofitable one at a bargain.

The consolidation has already started. A few weeks ago GraysOnline bought online store OO.com.au and in the past year Catch of the Day has bought wine retailer Vinomofo and maternity retail site Mumgo.

Last year Pearson, the parent company of Penguin Books, launched Bookworld, which it created after buying the online businesses of Borders and Angus & Robertson from the REDgroup Retail administrators the year before.

Industry insiders expect further consolidation driven by economic recovery and increased competition in an already crowded market.

Bricks-and-mortar retailers have ended years of dithering over digital strategy and are now aggressively pursuing a multichannel approach, but few expect them to make up for lost time by buying a pureplay online retailer.

For the most part, the traditional players such as Myer, David Jones or Harvey Norman are trying to do it themselves, building e-commerce capability and spending up big on Google Adwords and email acquisition.

The senior research and consulting manager at technology research firm Telsyte, Sam Yip, says traditional players remain cautious about cannibalising their existing business or damaging their brand by buying a site known for discounting.

“The cultural differences between traditional retailers and pureplay online retails is very wide,” Yip says. “Pureplays are quick and nimble and can react very fast. On a casual note, the people that work at pureplays are very different to those who work at traditional – the most successful pureplays are all mavericks such as Kogan, Catch Of The Day and so on.”

Instead, most consolidation is likely to come from bigger online retailers buying out smaller ones, or from the injection of private equity funds.

The low barriers to entry mean there are hundreds of small online retailers in Australia, many of them run by a couple of founders on a tight budget, but not all of them are profitable.

Who is a target?

Catch of the Day co-founder and chief executive Gabby Leibovich says he and his brother Hezi are not looking for acquisitions to complement Catch of the Day, Scoopon or Grocery Run.

“In saying that, we are entrepreneurial and if an opportunity [presents] itself and we see something interesting on the market, then I don’t see reasons why that would not happen. I don't want to give any ideas to my competitors as to what spaces we may or may not get into but it’s really all about niches – a niche could be furniture, it could be carpets, it could be toys,” Leibovich says.

Leibovich says the sector is ripe for consolidation because of the number of marginal businesses struggling to make money – a group he calls CRAP, an acronym for ‘cannot realise any profit’. He says many are likely to give up in the near future, creating a flurry of merger activity over the next year.

An acquisition sounds good on paper and it’s a way of saving face but in reality in a lot of cases it’s about giving up and selling stock and the email database.

“If you ask me OO.com.au realised they couldn’t compete. They are in the space of being a department store and that means competing with Kmart, Target, Big W, Myer, David Jones and the rest of those department stores with much bigger reputations and buying power. So if you ask me, this is a company throwing in the towel rather than a real acquisition and there are lots of players out there in the same scenario and smaller than OO.

“An acquisition sounds good on paper and it’s a way of saving face but in reality in a lot of cases it’s about giving up and selling stock and the email database.”

Leibovich declined to comment on whether this applied to any of his own acquisitions.

GraysOnline chief executive Cameron Poolman rejects Leibovich’s comments, saying that OO.com.au made money and the purpose of the acquisition was to achieve economies of scale.

“OO is a business that has been going for seven years and has good growth in that period and has always been profitable during that time,” Poolman says. “It’s a fixed price department store, it’s not a flash site, it’s not a group buying site, it’s a business model we’re very comfortable with.”

Poolman says GraysOnline, which is an online auction house, will run OO store as a separate business but integrate at the back end.

Competition from new entrants

In the last six months traditional retailers, notably David Jones, Myer and Harvey Norman, have moved aggressively into online retailing to complement their bricks-and-mortar stores.

David Jones chief executive Paul Zahra has previously said he expects the traditional retailers will come to dominate online, as is the case in the US and UK.

Telsyte’s Yip is sceptical, arguing that the big retailers were too slow.

“The pureplay players have actually captured the audience locally here,” Yip says. “I’m not saying there’s no opportunity for traditional retailers but we’ve seen a push to capture email addresses to market to consumers and that’s where the pureplay retailers have already won.”

However, GraysOnline’s Poolman says online retailers need to assume that the traditional retailers will make inroads into the market.

“I think some of the major retailers will be successful because they’re already good at supply chain and they’ve already got scale,” Poolman says.

Smaller players are already feeling the pinch. KitchenwareDirect founder and sole owner, Peter Macaulay, says his company has been “profitable since day one” but the competition has increased the cost of doing business.

“In our segment there’s certainly been increased competition for [Google Adwords] in the last six to nine months,” Macaulay says. “It’s increased our customer acquisition costs by about 50 per cent.”

Foreign retailers like ASOS have seized opportunity in the Australian market too and the potential entry of Amazon looms large.

While Catch of the Day’s Leibovich says Amazon would grow the online retail market overall, there is no doubt that it would have an adverse effect on some competitors.

Booktopia chief executive and co-founder Tony Nash says a lot of business owners would “simply shut up shop” though he is not one of them.

“They’re perhaps on the brink already and would see Amazon and think they better get out before they lose even more money,” Nash says.

Booktopia CEO Tony Nash says the arrival of Amazon in Australia presents an opportunity for some, but says many online retailers will respond by simply pulling the shutters.Photo: Louie Douvis

“For us it will be opportunistic because a large percentage of Australian book buyers would rather go with an Australian alternative.”

Moving beyond discounting

Telsyte’s Yip says the main growth in the sector is in the bargain sector, with online stores revamping with discounts on the home page, such as Dick Smith’s ‘Dick Does Deals’.

“In Australia it’s all about discounting and without the discount online revolution of the past 24 months, the ­­e-commerce space in Australia would be flat,” Yip says. “Over in the USA, they are much more mature and it’s not just all about discounting for them but everything in the US is cheap, online and offline. The discrepancy in price is not as great as in Australia so that’s why their online and offline channels can work in harmony.”

However, GoToddler managing director and co-founder Francesco Percopo says his own business, which sells everything from nappies to big-ticket items in the baby and toddler space, competes on range and service rather than price.

“Nappies are a segment where you’d expect that the only way to go would be to be price leaders but we’ve never believed that is a way to compete with big players like Woolies and Coles and you expose your weakness if you try,” Percopo says. “We believe the way to win in the online space is by offering a better range and service. When you walk into a supermarket or large retailer you find logistically a limit in what you can offer but online you don’t have that limit so you can offer a broader variety of goods.”

For example, a supermarket would generally offer the market leader and the homebrand in nappies and wipes, but GoToddler has at least half a dozen brands of nappies and 20 varieties of wipes.

Catch of the Day’s Leibovich says there is room for different models.

“We’ve always been about the best price to the consumer with or without shipping but on the other hand a lot of other players in the online retail market are based on the recommended retail price model and variety,” he says.

One that comes to mind is [fashion retailer] TheIconic.com.au where the items are quite expensive, but they might offer free shipping or three-hours delivery.”

Everyone is for sale

Booktopia’s Nash says the sector is ripe for consolidation because the online retail model has proven itself, big retail chains or private equity funds may be looking for opportunities, and the market is relatively liquid right now.

“It’s a very changing market and who is to know what is around the corner - whether Amazon is going to set up in Australia or if there is going to be another global financial crisis – so it’s an opportunity to exit for those who have built their businesses up and want to pocket the cash,” Nash says. “I’m sure everybody is up for sale and everybody is ready to have money invested in them so they can go on a buying spree.”

Booktopia, which has made the BRW Fast 100 the past four years in a row, has focused on growing the business by expanding into new product lines such as e-books and DVDs, rather than making acquisitions.

As to whether the business is in the market to sell, Nash says someone could always step in and offer “a crazy price”.

Similarly KitchenwareDirect’s Macaulay says he expects businesses with revenue of $10-50 million to be the prime targets for takeover – and his company does about $20 million per year.

“If someone knocks on the door with the right-size cheque then we’d certainly be open to offers but it needs to make sense,” he says.

He is not alone.

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