Australian online retailer Kogan has seen e-commerce growth slow, indicating a drop in gross profit by 9.3% to $184.4 million for FY22 (vs FY21), reflecting a CAGR of 20.7% since FY20.
The deceleration comes despite substantial growth in its sellers by 49.1%, with the company dealing with excess inventory.
“For more than 10 years, e-commerce grew in Australia at a consistent and stable rate,” said Kogan founder and CEO, Ruslan Kogan. “This enabled Kogan.com to plan for growth in a measured and precise way.”
The consistent growth was buoyed by the pandemic, where sales doubled “almost overnight”, with the company betting that the growth would continue.
Due to this, the company increased its range and inventory volume, as well as its logistics footprint to match the expected level of growth.
“We were wrong,” Kogan admitted. “As the true volatility of the situation settled in — caused by stay-at-home orders and lockdown ambiguity — eCommerce did not continue to grow as anticipated.
“This led to us holding excess inventory, and an associated increase in variable costs and marketing costs to sell through the inventory.
“As we’ve discussed at length through regular updates this past year, profitability in FY22 was impacted.”
According to its recently released financial report, Kogan has shifted its focus to operational efficiency by lowering costs and shifting product ranges which led to a return to adjusted EBITDA profitability in 4QFY22. EBITDA was $(21.8) million in FY22.
Variable costs, comprising warehousing and selling costs, have reduced year-on-year by 27.6%. The reduction has largely been driven by savings in warehousing costs following the continued unwinding of excess inventory.
The suspension of Kogan Delivery Services due to rising transportation and delivery partner costs also contributed to this reduction.
However, the company reports an increase in marketing costs, mostly brought on by a 209.7% growth in its Kogan First Subscribers and increase in promotional activity to reduce its inventory levels.
Kogan’s FY22 financial report does note that it has “progressively reduced” marketing costs during 2HFY22, where the company expects them to continue decreasing “as a proportion of gross sales in 1HFY23.”
As noted, Kogan is focusing on promotional activity to reduce excess inventory levels and its sequential storage costs. This has impacted gross profit and gross margin across both its exclusive and third-party brands in FY22.
As a result of these initiatives, total inventories were at $159.9 million on June 30, 2022, with $137.9 million in warehouse and $22.0 million in transit. On June 30, 2021, total inventories were at $227.9 million.
Exclusive and third-party brands saw a decline in revenue of 17.6% and 35.0% respectively. However, exclusive brands revenue of $311.6 million in FY22 had a CAGR of 15.7% since FY20, reflecting a long-term growth trajectory of the division.
Future: expansions and subscriptions
During FY23, Kogan is looking to continue expanding its Kogan Marketplace with a medium-term goal to reach 1,000,000 subscribers for its Kogan First loyalty program.
The expansion of the Kogan Marketplace includes launching an advertising platform, a roll-out of enhancements across Kogan Verticals, and further growth of Mighty Ape, its NZ sister company.
Kogan is aiming to return to positive operating leverage.
“When I started Kogan.com 16 years ago, I made a bet that online shopping would define the future of retail,” Kogan said. “My certainty of that is even stronger today than it’s ever been.
“More Aussies and Kiwis will be online shoppers tomorrow than today.
“Millions of customers are discovering the benefits of shopping from the comfort of their homes and having a huge range of products delivered to their door at great prices.”
The Kogan First loyalty program grew to over 372,000 subscribers as at June 30, 2022, with Revenue increasing to $15.5 million – an increase of 73.4% on the prior year. Kogan First subscribers had access to more than $20.5 million in benefits in FY22.
Growth of the program was buoyed by increasing renewal rates, which was 84.7% in FY22 (FY21: 78.2%).
With the ongoing increase of subscriber benefits, as well as inflation impacts in delivery costs, the price of Kogan First will be increasing. Monthly subscriptions will increase to $8.99/ month and the annual subscription will increase to $79.00/year.
“In order to continue to deliver this outstanding service, we need to increase the cost of access to Kogan First going forward," Kogan said.
“We will continue to enhance the benefits our Kogan First members get with ongoing investment in the program.
“We’ve right-sized our business, optimised for efficiency, and we’re pleased to see eCommerce adoption start to normalise and return to its steady and continued growth.”