I think we can all agree that “Online”, "E-Business" and "Omni-Channel" are the new buzz words across all industries including retail. Anecdotally speaking when I look around Linkedin or take a walk around my local bar in Manly, it seems as though every second primary school friend is now an online entrepreneur working from home. Most of the start-ups I hear about have a nearly nonsensical business case, that I can hardly grasp and these companies are probably destined to fail. A few months ago I came across the founder of one exception, Herocondoms for every condom purchased in Australia, one is donated to Africa (link here). Another notable exception is Accenture alumni Ruslan Kogan who has exponentially grown his online start-up to compete with the big boys in town (link here). Except for a couple of notable exceptions, two of which are listed above, I wonder whether the global market place is robust enough to sustain all these micro start-ups. As you know, the Michael Porter theory argues that the more players in a market the less profitable that market will become. This begs the question as to whether Online is verging towards over supply and market failure or at least failure for the majority of its participants.
All the Talk About the Next Online Bubble:
I actually had a very pertinent conversation on Friday with an Economist specialising in digital markets that I’d like to share with you. According to him all the analysts are saying that the current landscape is saturated with existing local players, foreign players and the late entrant big retail companies such as Myer, David Jones and Harvey Norman. He forecasts that there’s another .com bubble emerging, similar to the one in the early 2000’s, when there were too many market players and simply not enough business to go around. The big retail players have deep pockets and the ability to sustain the hard times in retail, whereas many of the smaller less profitable players do not. I think the simple issue is that many online businesses are inefficient and simply unprofitable. Many of the players are running their operations at a loss and are cannibalising shareholder capital to merely sustain themselves. The issue is that inefficient companies are staying above water due to the unfaltering willingness of investors to keep pumping them full of “free” owners’ equity, powered by the false promises of massive capital growth and that they will be the next Google.
Investors continue to be bullish towards online, due in part to intense hype and speculation propagated in part by glossy company prospectuses and the media. Financial Analysts say that investors have a gold rush mentality towards the online retail market and label the market as a speculative bubble that must bust. There is a notable trend and inefficient belief amongst shareholders that all new entrant start-ups will experience massive success and capital growth like seen at Kogan. The Facebook IPO is probably the best example of investor speculative value (i.e. the amount that shares are subjectively valued at) versus the actual value (i.e. the amount that the shares are objectively valued at using financial analysis). In a nutshell, the Facebook public offer was hugely overvalued (as calculated by the size of the gap between the speculative value and actual value). Unfortunately speculative shareholders bought into a dodgy business case and glossy magazine rather than analysing objective financial indicators. Within hours of the Facebook IPO the market realised that shares were grossly overvalued and the share-price slumped and then the shareholders wheeled in the lawyers and the rest is ancient history ;-)
Perhaps Facebook marks an early warning sign that the market is not buoyant enough to carry all of these overvalued assets and hence goes towards proving that there is an opportunity to “cut the crap” out of the Online market. Perhaps it will mark the beginning of a long process of aggresive attrition and M&A activity. I say may the best company win the new online saga.
