Net blitzkrieg of Iconic encounters a Stalingrad
Mention the name The Iconic to Myer boss Bernie Brookes or David Jones chief Paul Zahra, or Gerry Harvey, and you won't elicit a pleasant response. The online retailer that competes on service and delivery rather than price has become the scourge of bricks-and-mortar retailers and online-only competitors.
In true entrepreneurial style, this business exploded into the Australian market in late 2011, heralding a new level of aggression in retail strategy. But are cracks starting to form in its operations? According to the company's financial statements, it is bleeding cash amid reports its ultimate owner and co-founder, the German Oliver Samwer, jetted to Australia last week for crisis talks.
It is believed 10 per cent of the 300-strong workforce has been sacked in the past two weeks (unconfirmed reports say 20 per cent). The public relations and offline marketing team was iced and multimillion-dollar advertising campaigns ditched.
The accounts for August 2011 to December 2012 show The Iconic (the Australian registered company is Internet Services Australia 1 Pty Ltd) had revenue of $30.6 million but a loss of more than $44.7 million. Sales and marketing expenses were a huge $19.1 million and distribution expenses were close to $10 million.
This would be considered a parlous financial situation for most companies but its auditor, Ernst & Young, ticked off the accounts, which include a deficiency of net current liabilities and a net liability position of $7.1 million, because of the continuing support of its German shareholder.
While it is not unusual for start-up businesses to sustain heavy losses, the question is whether its business model will enable it to turn a profit before its backers declare the Australian experiment dead.
The German founders - the Samwer brothers - are relatively young but have successfully used this model in other countries through their head company, Rocket Internet.
The model has several aspects, the most important being an attack on new markets in specific retail categories with the objective of becoming online market leader.
Excerpts from emails from Oliver Samwer from October 2011, copies of which Fairfax Media has received, lay out the plan clearly. Recipients were management teams in India, Australia, South Africa and south-east Asia.
"The only thing is that the time of the Blitzkrieg must be chosen wisely so that each country tells me with blood when it is time. I am ready - anytime!" one said.
"We must be number one latest in the last month of next season. Full month, not a discount sales month. Why? Because only number one can raise unbelievable money at unbelievable valuations. I cannot raise money for number 2 etc and I have seen it how easy [sic] it is for me in Brazil and how difficult in Russia because our team f-----d up."
Last September investment bank JPMorgan took the bait. It invested $US20 million in The Iconic in a cash-for-equity swap. The email goes on: "So to be clear I will provide you with the money for the most aggressive plan of history ... I only care for net revenues after returns to prove you are number one.
"Summary; I give you all the money to win, I give you all the trust but you come back with unmatched success. If I see you are wasting money, that you are not German detail oriented, that you are not fast, that you are not aggressive, that you are not data driven, that you are not doing logistics well, upload inventory fast, buying wrong inventory, then I get angry and do like in Russia where no people leading the company now and I lost a ton of money."
Samwer signs off: "I am the most aggressive guy on the internet planet. I will die to win and I expect the same from you!"
The Samwer brothers have made hundreds of millions, possibly billions, from investors willing to take investments in global online starts-ups, called incubators, that are essentially copycats of other first movers in the internet space, such as Amazon, eBay and Groupon.
The snags they seem to have hit in Australia are interesting but not conclusive.
The accounts show a cost base that is unsustainably high for the revenue The Iconic and its smaller Australian sibling Zanui generate. The Iconic is a high-cost model because of its quick delivery performance, but the guarantee of free overnight delivery has come at a cost.
What seemed an innovative collaborative deal with Australia Post is being questioned. There are accusations that increased charges by Australia Post are hurting all online retailers. But there appears to be more than postage problems at The Iconic.
The real test will be sustaining high rates of sales growth. This is needed to feed the high-cost base.