Is Kogan stretching itself too thin?

Ruslan Kogan is the CEO and Founder of Kogan.com Limited.

They put out a quarterly update on Thursday, 18 April 2019, reporting a big increase in customer growth and sales and revenue. They had a huge quarter and the share price responded accordingly.

I thought it'd be good to just catch up with Ruslan and see what their strategy is, because the thing that strikes me about them is, that they're doing so many different verticals that they must be just all over the place. 

How does it hang together? What exactly is the business plan, and are they stretching themselves with so many different businesses? 

Here's Ruslan Kogan, the CEO and Founder of Kogan.com Limited. 

Well Ruslan, you put out an excellent trading update this morning, fantastic growth.  Before we get into exactly that, you're announcing so many things.  You've already got Kogan Mobile and Insurance, and everything.  And, Kogan Credit Cards, Kogan Super, and now you're announcing Kogan Energy Compare and Kogan Cars.  Is there a danger that you're doing too much?

Well, we don't think so.  We've got a very clear strategy in the business, and that is, to make the most in-demand products and services more affordable for all Australians.  As long as an industry is a mass-market industry, and it's something lots of people want and lots of people interact with, it's our duty and our job to leverage our business to make it cheaper for consumers.  What we do in these verticals is, we have a huge customer base, we've got a huge stream of traffic to our website and we're partnering with industry leaders in each one.  We're leveraging the audience that we have, and the huge stream of traffic, to be able to deliver that value.  We've got a very clear strategy, and consumers love it, and that's ultimately what drives us.  That when we see that they're interacting with it and they're transacting with it and they're getting better deals, it says to us, "Well, you're doing the right thing", so we don't think we're overstretching. 

Because you're partnering with other companies, does that mean that you don't need to develop expertise in each of these verticals?

To a degree, certainly.  We're not experts at running a telecommunications network, that's why we've partnered with Vodafone, who are experts at doing that and are one of the biggest telcos in the world.  That same formula applies to these new verticals, where our job is to be able to negotiate great deals for Aussies, to be able to leverage our digital expertise, our marketing expertise, our branding expertise, and our execution expertise in bringing these things to market.  And, it is the actual partner who runs the underlying service.  So, it's a business model that we've been pioneering and developing, and I think we're doing a pretty good job at it.

Essentially, the business model then, is to as you say, leverage your customer base, which you've built on selling products online, and then, to use that customer base to sell other things.  How do you manage the margins on each of them, and does it mean that because you're a distributor of these other products that you're partnering on, does it mean that your overall margin declines?

Well, it's actually the opposite of what happens and, we get commission payments from these new verticals, which don't have many expenses against them.  So, it pretty much comes through as pure margin.  The verticals actually increase the margin for the overall business.  It's a great contributor to what we do financially and from a service perspective. 

Obviously, a lot of these new verticals still represent a very small part of your business, and your main business still is selling products online.  I think it's 80% of your revenue or gross profit still, isn't it?

Yeah, so Kogan Mobile is a huge contributor, but that one's been around for a while.  Our goal in the business is to try and emulate what we've done in Kogan Mobile in some of these new verticals.  We know that that's going to be challenging, but we've managed to secure well over 1% market share in our Retail Division.  We've managed to secure well over 1% market share in Kogan Mobile, which has been around for a few years, and the goal internally, is that we want to do that in a few more of these new verticals.  Now, like you say, they are fairly new and some of them aren't material contributors yet.  But the goal is obviously, to build them out over time. 

The competitiveness of each of these verticals, is an interesting dynamic as well.  Because, like I mentioned, we're targeting industries that have a lot of competition, and that means that the cost of acquisition of a new customer in these industries is often very significant.  Now, we can partner with the likes of a Vodafone, and Hollard for insurance and so on, by saying, "Look, well, we've got all these customers, you guys are spending a lot on customer acquisition in your businesses.  Why don't we partner and pass on what otherwise would've been spent on customer acquisition in the price point of the service?" And that's what enables that position in the market, where we're able to have a very competitive offering and people know that if it's a Kogan branded service, that they're getting a really good deal. 

What sort of discount does that typically enable?

Well, have a look at Kogan Mobile for instance, you can get 13 gigs of data, unlimited calls, unlimited texts, for around $20 a month.  Now, it's not uncommon for people to be paying multiples of that with other providers.  It differs from vertical to vertical, but the success of the overall strategy in each Business Division, speaks about the offer.  If you look at our NBN offering, we're well ahead of the market.  It's a business model that creates and win-win-win for everyone.  It's a win for our customers, because they're getting an incredible deal.  It's a win for our business, and it's a win for our partner, it's a win for our shareholders. 

If we could just focus now on the core business.  You've also launched Kogan Marketplace, which I presume is bit of a copy of Amazon Marketplace, where you're bringing in other products.  Can you explain the difference between your core business of Exclusive Brands, which represents about half of your gross profit, and what you call partner brands, which is about a quarter of your profit, and this new thing, Kogan Marketplace?  What's the difference between those three things?

Yeah, so we've got Exclusive Brands, which is us working directly with manufacturing partners, to develop our own ranges of products and we've got several brands under our Exclusive Brands Division.  That is, Kogan is the most well-known one in TV's, appliances, white goods, microwaves, and so on.  Then, we've got about 15 other brands that sit under Exclusive Brands, and we've got our own brands in everything from power tools, with our Certa brand, all the way through to sporting equipment with the Fortis brand, and so on, so that's our Exclusive Brands Division. 

Our Partner Brands Division, is where we work directly with third-party brands.  The brands that fall under that is brands like Dyson, where we are one of their official authorised distributors in Australia, and you can see the Dyson range on our website.  We've got hundreds of brands that we work with in that manner, and those sort of brands love working with us because we've got the very fast dispatch, we've got a nationwide logistics network.  We're the only e-commerce player that's got distribution facilities in Melbourne, Sydney, Brisbane, and Perth, so it means that their customers can quickly find the products on the Kogan site, click a few buttons, and get them delivered very quickly. 

We've recently launched Marketplace as well, which enables, which is like an eBay or an Amazon in the sense that, it enables other retailers or sellers, to be able to sell their products through the Kogan platform.  We get hundreds of thousands of visitors to our site every day, millions every month.  We've got over 10 million subscribers who receive our promotions, and so it provides huge reach for any seller that wants to reach an additional customer base.

And then, Kogan Marketplace, that's different to Partner Brands?

Yeah, it is.  In the Marketplace, it's like eBay and Amazon, where you're transacting with a seller.  There's other retailers who will list their product range on the Kogan website, and like I was saying, get access to our huge stream of traffic and customer base.

You've also got a subscription.  I mean, you've got your free subscription to 10 million free subscribers.

Yes.

But you're going to start charging, is that right?

There is a paid subscription option, which enables customers to subscribe and get free shipping for a year and various other benefits, like priority service and things like that.  So, any question you have always goes to the top of the queue. 

Yeah, so that's called Kogan First and, I mean again, Amazon Prime has been a massive revenue earner for Amazon obviously, is that what you're trying to emulate?

It is very similar to that, it is a subscription model to be able to get all you can eat free shipping, essentially.  We've got a huge cohort of customers that are very loyal and buy a lot of things from us, and it'll be a very valuable thing to those customers.

They've obviously got TV streaming, video content, are you going to look at that as well?

Well, it's not on the agenda at the moment.  You know, it's a buyers’ market out there, you've got all these companies competing very heavily, especially in that streaming space, and developing a lot of great content.  It's never been a better time to be a consumer.  But, in our Retail Division, we're focused on being the most efficient way to get a product from point of manufacture in to the consumer's hands.

Do you think you've tapped out all the verticals you can?  I mean, you've got so many now, do you think there's more to do?

Well, yeah.  We're always busy, there's always industries where people are spending a lot of money and would love to get a better deal.  But, like I said, they have to be mass market propositions.  You're not going to see Kogan Shoe Repairs open up, but there are lots of opportunities for us, and we are focused on not only just finding new verticals, but like I said before, we want to gain scale in our current ones because, there's great trajectory that's happening in some of them, and it's all about building up that momentum, and we've launched lots and lots of things in the last year, so we're very focused on consolidating that. 

What's the deal with Kogan Cars, how's that going to work?

That's a partnership whereby we've partnered with one of the largest car buyers in Australia.

Eclipx?

Yeah.  They have a lot of clout and transactional power with the car brands and dealerships.  A customer can go on and say, "Here's the model of car that I'm looking to buy." And they put in the details of it, then somebody goes out to all of the various sellers of that car, and negotiates on their behalf and comes back to the customer and says, "Hey, here's what I can do that car for."  And the customer can then decide whether they want to continue to buy it or not.  But, at a minimum, it's worth giving it a try to anyone who's looking to buy a new car, because a lot of car dealerships know that a car customer comes along and then you don't see them for a while.  Whereas, when you're backed by a group that buys a lot of cars, they can leverage their negotiating power to get you a better deal.

Yeah, so you're not becoming a car dealer, you're sort of facilitating or becoming a middle man?

Correct, correct.

Yeah.

We are partnering with them and providing a customer base, which in turn provides the benefit of scale and ability to negotiate deals.  So, across all of our verticals, we don't take on the risk and we don't run the underlying service.  We know what we're good at, and we know what we're not good at.  And, we're good at running an online digital business, making things really easy for the consumer online, and leveraging our customer base to deliver Aussies better value.  When it comes to the actual underlying service of each of these, that's for the experts in each industry to focus on.

Tell us a bit about your cash flow.  Your EBITDA, which I guess is equivalent to cash flow, increased 96.4%.  This is before your prior period positive impact, I don't quite understand what that means.  But, you're saying that the nine months, it's up 15%.  You seem to be becoming a bit of a cash machine?

Well, we're very happy with how the business is going, and we were, we're an e-commerce company or an online retailer that has been paying dividends as well.  We're very happy with our position in business.  We're constantly looking at consolidating what we've already got, but also looking for new opportunities.  It's tough out there, it's very competitive.  Like I was saying, it's a customers’ market out there.  You've got some great retailers, you've got lots of competition, everyone's fighting very hard for every dollar from any customer, and we know that there's heaps of transparency out there as well.  We've got to keep doing right by our customers, we've got to keep delivering value, we've got to keep fulfilling our promises and doing what we do better and better.  And, as a result of that, you get to keep customers, and then you get to keep growing your business and that's exactly what we're doing. 

I spoke to you when Amazon launched in Australia, and you said that that wouldn't be a problem for you, a lot of people thought it would be and it's turned out it hasn't been a problem at all.  That wasn't a surprise to you, but are you a bit surprised at how soft and slow they're going?

Yeah look, you can never write off a company like Amazon.  I think it was more a case of, it was overhyped prior to their launch.  Like, starting a new business in a new country, and expecting it to be a juggernaut on day one is never going to happen.  But, they're a great company, they do a lot of very innovative things, and I'm sure they're not working off a one or two or three-year business plan.  They've got a proposition to the consumer that's quite unique in various elements, and I'm sure they'll win some loyal customers.  But, yeah we're doing what we're good at and we're focused on our business, and like you were saying, we don't have certain elements like the video streaming and things like that, but we're focused on people who want a product like an LED TV, and they want to get it quickly, and they want to get a good price for it.

What do you think is the main challenge, the main problem you've got?  Is it inventory?

Every business has lots of problems, so there's lots and lots of challenges across everything.  We are constantly working really, really hard to make sure that we have the best brands on our site, and there's still lots of brands that haven't, we haven't been able to crack.  Like, we'd love to have Samsung TVs listed on our site.  We're working with some great ones like Dyson and so on, but yeah, getting more and more brands onto our platform, getting more and more of the most in-demand products, making sure that customers are happy, finding ways to increase efficiency with which we deliver to customers, and making it that every little bit, that little bit quicker, and setting up new distribution facilities, making sure that we're reaching all the necessary customers with our marketing and how we talk to them.

There's challenges or problems, or whatever you want to call them, across the whole field.  We're in some of the most competitive industries out there.  We're in retail, we're in telecommunications, we're in consumer electronics with our private label brand.  It is extremely challenging, but that's what makes us jump out of bed in the morning. 

Good on you, Ruslan, thanks very much.

Great to chat, thank you. 

That was Ruslan Kogan, the CEO and founder of Kogan.com Limited.