Price hikes
Coles and Woolworths last week posted bumper results for their ecom arms. But Carla Penn-Kahn says they’re the outliers.
“There’s a big disparity a big disparity between how the institutional ecommerce arms of businesses like Woolworths and Coles are performing, and the next tier down, the medium sized enterprises [like] Adore Beauty, Temple and Webster and Kogan. Then there’s a further step down, which is the majority of DTC brands in Australia, who aren’t seeing profitability. They are definitely not seeing record profits coming out of their channel.”
Penn-Kahn exited her kitchenware ecom business last year. At that point she says it was turning over circa $30 million, down from its $40m Covid peak. Growth through ads, she says, was no longer viable.
“Ad platforms became increasingly more expensive. We saw the cost to advertise – cost per acquisition – double between 2019 and 2023. It used to cost us anywhere between $20 and $25 to acquire a customer. We were pushing $40 to $50 to acquire a customer by the time we sold out.
“The minute I started seeing that, I realised our AOV – average order value, around $150 per order – [versus] the margin profile … the unit economics didn’t work.”
Meta, Google and Amazon are all posting bumper ad revenues, despite volumes declining from their Covid peaks.
“If you ask the advertising platforms themselves, they say it’s competition bidding pricing up. I personally don’t believe that’s the case … if clicks and impressions are down, they still need to ultimately drive enough revenue to continue to perform for their shareholders. So they’ve got no other choice but to put their prices up.”
Some might argue that is not how biddable media works. The counterargument is that the platforms have some control over floor prices. Either way, Penn-Kahn thinks TikTok will ultimately take the same inflationary route.
“Of course [TikTok will hike prices], every business does it. You start at a really reasonable price point, you get in there, you get embedded in a business’s workflows, you become a crucial part of their advertising, and then you lift prices so you can start moving towards profitability.”
Moats bridged
The upshot – as evidenced locally by Mi3’s Marketing & Customer Benchmarks FY25 report – is that ecom businesses are refocusing on customer lifetime value (CLV) over acquisition, per Penn-Kahn.
“In terms of customer acquisition, not a lot of businesses are making money out of that initial purchase, but they’re doing a lot on the back end to do things like reviews, retention, also loyalty programs, to try and drive customers to come back to the store without using advertising platforms – because that’s how they’re ultimately getting that customer profitable.”
Even so, Penn-Kahn thinks many ecom pureplays will continue to struggle. She cites The Iconic as an example. A couple of years ago, it had “the widest range for fashion” and same or next day delivery with 30-day free returns. “So there was no reason not to shop with them. But today, you can get the same products from Myer or David Jones or a number of other stores, and you can also still get it same day, next day, pick up in store … [so] The Iconic no longer has a competitive edge and a moat around their business for their convenience.”
Likewise Booktopia, hence its demise.
“Booktopia’s moat was the convenience of having every single book title that any customer ever wanted. But ultimately, Amazon’s entered the Australian market. They also have every single book every customer could ever want, and they delivered it quicker and that led to Booktopias downfall. In my opinion, that was the start. I also think the fine that they received from the ACCC was disproportionate to the size business that they are, and that definitely hurt cash flow. I also think they invested recklessly, unfortunately, assuming that Covid demand … was going to be the future growth rate for their business.”
Penn-Kahn thinks the likes of Temple and Webster and Adore Beauty must likewise get their next set of decisions right.
“One of my major observations around Temple and Webster’s results is that they had to spend 66 per cent more this year to drive 26 per cent more revenue. That’s an incredibly inefficient way of looking at how you’re going to grow your business. Ultimately, no matter what economies of scales you get, you can’t sustain 26 per cent growth on 66 per cent rising advertising costs. So it’ll be interesting to see what Temple and Webster does over the next 12 months.”
(The retailer increased revenues from $393.5m in FY23 to $497.8m, an increase of 26 per cent. Advertising and marketing costs increased 62 per cent from $48.1m to $77.9m. Net profit after tax dropped 78 per cent from $8.3m to $1.8m.)
Retail media
“For Adore I think their strategy is going to be to go heavily into retail media, and I think they have no other choice,” says Penn-Kahn.
“They’re sitting on a 33 per cent gross margin. They’re selling the same products as a lot of other people. It’s highly competitive. Customers are shopping around for the best price in Google feeds, Google shopping, Pmax campaigns, and so retail media is going to flow straight to their bottom line. Ultimately that’s going to be how that they can really drive some profitability into that business.”
Retail media, she suggests, “is definitely going to be the future for businesses like Adore. It may even mean Temple and Webster consider introducing branded product, because then retail media can become a revenue stream for them.”
With the numbers coming out of Chemist Warehouse and Woolworths in particular “I’m very bullish on retail media,” says Penn-Kahn. “But DTC brands don’t have that option unless they’re selling other product. And [even] then I don’t think competing products will want to pay to be featured high up on a DTC brand’s website.”
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