Co-founder and chairman of Australian online retailer Deals Direct, Paul Greenberg, tells Business Spectator's Alan Kohler and Stephen Bartholomeusz:
Alan Kohler: OK Paul, well, thanks for joining us.
Paul Greenberg: Absolutely. Thanks for having me.
AK: Can I just at the start ask you whether you’re prepared to tell us any of your numbers? And what’s your turnover?
PG: Broadly speaking, it’s just a moving feast at the moment. I’ll give you some idea of range, but in terms of the actual specifics, probably best not at this stage.
AK: Right. Well, go ahead.
PG: Ok, so I think for July ’11 to June ’12 we should be nudging around that $150 million mark and I’m hoping for the calendar year, 2012, we might even hit the magic 200. That’s the kind of ballpark numbers that are being bounced around at the moment.
AK: Right. So, that would make you by far Australia’s largest department store. Is that correct?
PG: Well, I think online again, you know, lies, lies and damned statistics, a lot of numbers being thrown around at the moment. People are using their database size as a metric of strength and obviously revenue, top line revenue. To be frank I’m not really sure the majority of online department stores or retailers are privately owned, so numbers are, you know, perhaps patchy or understated or overstated.
AK: But how do you compare with a single Myer store?
PG: We are definitely giving them a good hammering. I think the Myer CEO Bernie Brooks has said that they’re hoping to do, I think, $5 million dollars online this year or something I think, you know, fairly unambitious. So, in terms of online well we would certainly dwarf Myer and then in terms of one of their stores, I’m not sure. I’d imagine we’d be larger than one of their stores. That’s for sure.
Stephen Bartholomeusz: Paul, you started this business almost from a standing start in 2004. What sort of compound annual growth rate are you looking at?
PG: You know, it would certainly be around the 30, 40 per cent, 50 per cent mark, and the most pleasing thing for us is that we’re managing to hold those off a much higher base, so those early years, it was really talking about hundreds of per cents. Well, 100 per cent of nothing's nothing, but anyway, we’re still seeing 30, 40, 50 per cent growth. We hope to keep that up for some time yet.
SB: So what’s the key to this? I mean, why is it that your sites work?
PG: Well that’s the million-dollar question. You know the "retail's detail" is the oldest mantra. In the sector and I think that’s true. So, we’d like to think that our investing very early on in supply chain and distribution was one of our competitive advantages. I think in the early days of e-commerce there was this rather idealistic view that you could be a virtual business and of course the 'eBays' of the world gave some sort of kind of credence to that, but what we’ve seen is that the dominant players online and of course the gorillas, Amazon, have all invested in supply chain distribution and by definition that end to end fulfilment is really where the secret source lies. So, we’ve got a large 40,000 square metre site out in Sydney’s west and I think the other big driver has been a focus on customer service. We’re a relatively new business and we haven’t always been very best practice, but we’re giving it a full go to try and keep customers happy because word of mouth is viral. It’s still the biggest driver of growth in the retail sector and it’s the focus on value. I think we’re in a value time in the economy where frugal is the new cool and we’re focusing on that – offering great value.
AK: Look, in that respect, can you tell us roughly what your margins are?
PG: The margin blend of a department store is always the beauty of a business like ours. Consumer electronics is a notoriously low margin business, but increasingly we’re finding some of our strongest categories in that hopes for family and lifestyle sweet spots are much higher. We wouldn’t give out our margin numbers, except to say that we’re pretty pleased to not only have maintained them in the increasingly competitive space, but across the business we’re inching the margin up, so that’s good news because the space is getting very competitive.
SB: But are they bigger or smaller than an offline retailer, Paul?
PG: I think the online model at its core is a more efficient model, there’s no question about that. We don’t pay retail rents, our shops never close, the tyranny of distance is overcome by the web. So, I would like to think that we need to work on a much lower GP than our offline cousins to show a better EBIT result.
AK: But I guess free delivery eats into your margins. Now, that’s the offsetting factor, isn’t it?
PG: Well, that’s right and it’s a very powerful point. I think delivery is very much the meat on the bone. For offline retailers, the delivery is done by their customers who pick it up and lug it to the motor car as I’ve done so many times with two kids in tow. But I’d like to think that we’re getting much more swish around our logistics and shipping and of course the convergence of favourable circumstances, particularly the moves by Australia Post’s new management. The company’s CEO Ahmed Fahour recently said that parcels are their new rivers of gold and they’ll give it as much love as they can, so we’re in a very sweet spot at the moment.
AK: So, you’re using Australia Post?
PG: Yes. We use Aussie Post for all our smalls. As for the big uglies, that’s the affectionate terms for bigger stuff, that’s not really Aussie Post’s sweet spot, but they’re looking at it. As I understand we’re one of their largest parcel customers, if not the largest.
AK: But tell us a bit about how your logistics work. Are you despatching everything from that big warehouse in Sydney’s west?
PG: Yes. For now, it’s centralised their distribution which we think is working for us. We’ve got to keep an open mind if the space evolves and decentralise facilities, but for now we’re shipping everything out of a DC. We’ve got a small and robust and growing third party programme, with which we’ve taken a very conservative view. We don’t aim to be a market place. We don’t aim to be another eBay, which although is a lovely business has its own challenges. So, we’re building a small third party programme, so all our rugs for example would come straight from the wholesaler and ship to the end user under our cover because why double handle something as sizeable as rugs. I think perfume is another good example. You have to carry, you know, a thousand lines to have a credible offer. Again, we think that’s best handled by a vetted, approved wholesale partner who can ship straight to the customer under our cover meeting on exceeding the KPIs that we set for our own despatch. So, that’s a growth opportunity within our business and something that we’re hastening slowly with.
AK: So, do you think in fact over time you might even need less warehousing space, not more?
PG: Well, I don’t think so. I mean that would be great, but I think the tide will rise for all boats, so I think our third party programme will get bigger and increasingly we’ll be needing more space. I mean we’ve got some pretty ambitious growth plans. I think Amazon is a great example to look at, thirty per cent of their revenue now is coming from their third party programmes, but they’re still voracious consumers of warehousing, up and around 25 million square metres undercover currently.
SB: Paul, can you tell us a little bit about your sourcing? I mean where do you source from? And as the online retail space gets more crowded, is it becoming harder to get stock?
PG: Well, good merchants are good merchants and again I think it’s another one of our underlying strengths. You know, Mike Rosenbaum is arguably the best in the game. We’ve got Harold Newman and Joel Bloom, who pioneered the discount variety business, particularly the Go Lo business, on our board and as investors. So, we love to trade and in terms of our sourcing strategy it’s quite simple. The world’s flat. It’s hyper connected. It’s global. We’ll go anywhere where there’s value. So, of course we source locally and increasingly we’re finding the brands are coming to us. We certainly don’t have a moral issue with parallel importing as long as it’s all kosher and, you know, it’s the right product. And then of course China continues to be the manufacturing centre of the world and we’ve got a very strong presence there with a house brand programme that’s growing. So yeah, we’re swingers. We’ll go anywhere where there’s good product at good prices and really it’s a customer centric journey.
AK: You’re obviously a department store in which you’ve got a very, very wide range of products. Another model for online is Ruslan Kogan’s electronics store, which is a niche operator. Do you think the future lies with niche verticals or department stores? Do you think that eventually you’ll need to specialise?
PG: I think we are already moving that way. Perhaps if I could just add, in the last twelve months we’ve morphed quite quickly from our anchor brand Deals Direct.com.au, which is really the key franchise. We run now a host of verticals and I in fact work for the DealsDirect Group, which is a subtle transition. So, under the DealsDirect Group umbrella you’ve got Deals Direct, as I said that’s our core business, and then we’ve got some very strong growing brands. Supermarket Deals.com.au is starting to hit the straps. We’re having a little play and tickle in the group buying space with a site called Deal Me.com.au. We recently acquired a loyalty business in Melbourne called Shoppers Advantage.com.au. And we launch a shoe site in a couple of days called Sole Trove.com.au. So, what you’re looking at is a cradle to grave I suppose retail group, which I suppose in an increasingly fragmented space will wrap around with some form of loyalty programme that will reward customers, our customers for shopping across all verticals.
AK: What’s that last thing you mentioned that you’re launching in a couple of days?
PG: It’s called Sole Trove. A bit of an interesting name, but anyway, we’re playing aggressively in the shoe space.
AK: Oh, that’s shoes.
PG: Yes. That’s the hot space at the moment. We’re obviously taking a bit of a cue from Zappa.com, which is doing very well and we think there’s a good local market. We’ve done our homework. We’ve partnered with a very competent wholesaler and distributor of shoe products in Australia and I think it’s going to be a good one.
AK: So, you’re launching that from scratch, but you acquired Shoppers Advantage. Do you think you’ll do more acquisition or start from scratch in the future?
PG: Well, I think a combination. I mean Shoppers Advantage was a terrific buy. I mean essentially Shoppers Advantage run a lot of member and loyalty sites and white label sites, so they run the BigPond Shopping Solution and they run a number of others, which would give us essentially the largest member base in Australia up and around six million members. Now, we wouldn’t own those customers. You know, our relationship at Shoppers Advantage is with a corporate client, but it would give us access. Our content could be funnelled in to this member base and we think this is going to, you know, really take the business to the next level. We don’t know how we’re going to feed six million hungry mouths, but we’ll think of a way. And obviously the guys at Shoppers Advantage could see the benefits because they were struggling with content, but it’s a great business. It’s been around a long time and it does some pretty healthy revenue, makes a bit of money and we were thrilled to pick that business up. But yes, we’re not averse to starting businesses from scratch because we’ve got a pretty sizeable database. The main impediment to launching a start up is where do you get the eyeballs? We don’t have a problem with that.
SB: Paul, you mentioned Shoppers Advantage. That was one of a small string of acquisitions you’d made since James Packer invested in the business. Is there a core acquisition strategy? I mean what are you looking at when you look at these sites?
PG: You know, the beauty of having Ellerston on board is that we can look at anything and everything and they bring some very experienced eyes to the table and they take a bit of pressure off me. They allow Mike and I to and Simon Kelly our CEO to run the shop and they look at these things. So, we’re being approached all the time at the moment. I think a lot of smaller players are recognising the kind of train has left the proverbial station. You know, the big guys are coming, so we’re being approached all the time and I don’t think we’ve got a hard and fast strategy on what that will look like. We’ve just got an open mind.
SB: You said the big guys are coming. And they are, aren’t they? Harvey Norman, Myer, DJs, all the Woolies brands are now putting big efforts in to their online presence.
SB: Is that a threat to you or does that just make the space more credible?
PG: Not at all. I’ve been on the record for years saying, you know, it’s lonely out here. When are you guys coming? And I think that one of the retardants to the growth in this space is the lack of credibility because the big guys have tried to avoid it rather than embrace it. So, they’re coming later than they should have in my view and I don’t think I’m the only one who has that. And I think they’re going to feel a little bit of the pain of e-commerce school as we felt and continue to feel. It’s not an easy business, but I’m delighted that the space is broadening. Ultimately, I think consumer habits are transitioning, I mean bring it on.
AK: Have any of them tried to buy you?
PG: Well, you know, I think we’ve certainly had a lot of chats with a lot of people. I mean, we were thrilled. We were looking for the right partnership and the Ellerston one is absolutely perfect. It brings some of the synergies we were looking for. A lot of the offline retail guys that we had spoken to I don’t think fully get our world and I think are getting it, but no doubt they will increasingly stay in touch and if we can hit the big numbers, 500 million, billion, wherever we think we’re headed, well I’m sure they’d like to chat to a business like us, particularly if we can diversify and continue building the customer base.
AK: And what about… I mean would you love to chat to Ruslan Kogan for example?
PG: Well, I’m a friend of Rus'. I mean I like to think of him... I’m a bit of a mentor. I mean we’re very different people. You know, he brings that brashness of the Gen Y, Gen X. I’m an older bloke. But I think he and I have got… I’ve got a lot of respect for him and I think kind of vice versa. You know he’s the young bull. I’m the old bull.
AK: You do electronics too, don’t you?
PG: Well, that’s right. I mean it’s a tough game. We don’t do it the way he does it. I mean he’s playing heavily into the two biggest changes in our lifetime: retail with China and this intermediation and the internet; you know, the three riders of the Apocalypse. I mean he’s right in the zone there and perhaps he brings younger eyes to the thing.
AK: But you are doing that too, aren’t you?
PG: Well, yeah. I mean I think we’ve always recognised that the China direct model will change the face of retail, so we’ve always had a strong footprint in China. From day one really we got on a plane to China. We always could see that the Internet was just going to disrupt traditional channels and that’s proved to be prophetic and yes I am a fan of this intermediation. I think that this capitalist system, I didn’t invent it, it’s pretty brutal and it requires efficiencies and I think a lot of people are starting to feel very uncomfortable with the cosy relationships that are just not working; they’re just not adding value to the chain. So I definitely appreciate that we have to keep our eyes on
AK: And how’s the supermarket vertical going?
PG: Well, I think that’s a terrific place to hold. It’s very early days for us. We recognise that in the scheme of things, you know, we’d be a proverbial pimple on a camel’s bum, you know, it’s very, very early, but our customers love it. You know, the media has gone crazy. A Current Affair segment has popped up every second week to see what we’re doing. I think that there’s a strong need or demand by consumers for a value home delivery proposition. So, very early days. We’re iterating the model. We’re learning by doing. Our customers seem to be enjoying it. It’s obviously growing. I think that just lovely to have a place hold or toe in the water in that space and I think in 2012 we'll really start unleashing the hounds there and ramping it up.
AK: But there have been lots of attempts at supermarket online retailing over 15 years and they’ve never really worked. And you get the sense that the time hasn’t been right. The question, I guess, is whether you think finally the time is coming for that switch to online.
PG: Well, I think that the trying has been, I mean I say this with respect: It’s been a grudge service. You know, pricing has often been higher. Woolworths have been known to price higher online than in their stores, which is very counter intuitive. And I think it's never been an easy business. I should add that I don’t envy the Coles and Woolies model where you have to deliver perishables. We’re not in that space nor do we ever plan to be. We’re very much in the FMCG model, you know, non-perishable goods and we’re certainly watching the growth of Costco. We can see customers don’t mind buying, fours and sixes, inners and outers as long as there’s a value offer there. So we’re quite happy to deal in bricks versus single units. And we will stay away from the perishable stuff, which is a different world altogether.
SB: Paul, apart from expanding into new categories, have you looked at expanding into new geographies?
PG: Well, funnily enough, I think that’s been one of those quizzical things, the ability to, in this flat, hyper connected world, keep talking about 'why are you're just tucking into Australia'? We just think there’s so much opportunity here. We’ve scoped out New Zealand I’d say three or four times in the last three years and we just don’t see enough compelling evidence to head there. You know, it’s a small population. It’s very well serviced by some pretty nimble e-commerce entrepreneurs over there. It’s still relatively expensive water, although it’s getting cheaper. We’ll have to keep an open mind. You know, New Zealand would be a logical next step and then of course, perhaps, into Singapore, Hong Kong. I don’t know, but you know I think the Ellerston guys were one of the few people who said well we’re glad you haven’t done it because, you know, don’t forget your own backyard, which is still very underserviced and rich with potential. So, I don’t think we should make any apology for the fact that we’re counter intuitively just thinking global, acting local.
SB: Has introducing a financial investor to the business had any negative consequences? And I suppose it means at some point they’re going to want an exit.
PG: Well, that’s right. I mean, you know, they’ve been very upfront. Let me first answer your question saying it’s been absolutely brilliant, so I mean we’ve all read the script and seen the movie where things don’t work out and, you know, entrepreneurs and founders find it troubling. Mike and I have absolutely, embraced these guys. We’re delighted to have Martin Dalgleish on our board. He’s a wonderful operator and we’re all learning from him. Simon Kelly, of course, comes in as our CEO, ex Goodman Fielder and Aristocrat Leisure. He’s obviously played in the big end of town, but a thoroughly nice bloke and a very, very competent operator, a terrific CEO, so culturally he’s been a great fit. And of course, you know, in terms of strategy and acquisitions we’ve got a brains trust that we could only have dreamed of. It’s absolutely brilliant. So,no. To be frank we’re sort of eight, nine months into it and it just gets better and better. In terms of the exit, well I’d imagine they’re more patient investors than most. I think a five year timeline would be a reasonable suggestion that they’d be looking for a return on investment.
SB: Last thing, Paul. Christmas is looming. It’s traditionally the season that retailers look forward to. The other guys seem to be struggling a bit. What’s your experience looking like?
PG: Well, I mean I’m not gloating, but it goes without saying that we’re absolutely killing it at the moment. I mean Deb Sharkey of eBay said it will be the largest e-commerce week in history this week and she’s right. It has been. So, you know, there’s definitely this is a consumer led transition. Consumers are shopping. They’re just choosing to shop smarter, a little wiser. I think there would be plenty of good offline retailers that are going okay, but certainly the channel of choice at the moment is the consumer-direct online model and we’re lucky to have been in the space for a good period of time, so we’re a very lucky and fortunate beneficiary, but we’re not sitting on our laurels. It’s going to be a busy year next year.
SB: Paul, we really appreciate your making yourself available.
PG: Absolutely my pleasure, Stephen and Alan.
SB: Thanks a lot.
PG: Thank you very much. Keep in touch.