Kogan – Durable Competitive Advantage (KGN)

Kogan.com is a unique Australian business.  Founded by Ruslan Kogan in his parents garage in 2006, Kogan is now a publicly-listed sales analytics machine, which may not be immediately obvious until you examine the attitude of the owners.


Someone who doesn’t see KGN’s potential might think it just undercuts the retail on grey-market Apple products and sells Chinese knockoffs.  But the sales analytics and private label businesses offer 2 durable competitive advantages which positions KGN for a huge amount of upside with little downside risk.  The company was listed a year ago at $1.80 and had sat at a lower price for most of that time, until recently when it climbed to $2.70 before falling back to $2.25 on Friday.


Starting with the prospectus, several points stand out:

  • A statistics business masquerading as a retailer
  • Referring to their business as having a huge “moat
  • Use of automation to lower transaction cost for the customer
  • Use of predictive analytics to better serve customers

Kogan’s focus on using automation and big data to lower costs and cross-sell better to their customers are going to position them well, even against behemoths like Amazon, who have spread their attention across e-retail, distribution, cloud, and bricks & mortar.
Turning to the HY17 presentation, KGN smashed their forecast numbers – revenue beat by 16.7%, and EBITDA was nearly doubled – $7.3m vs a forecast of 3.8m!  They gross margins, normally razor thin in this business, were a massive 18% vs a forecast of 15.2%.  At the time of my initial purchase at $1.65, the whole of Kogan was valued at $150m.  An unbelievable bargain.  Currently 50% of KGN’s profits come from the private label business, which started with TVs, but now covers furniture, power tools, and 10 other categories


But it gets better.


Kogan now has mobile, NBN, travel and insurance products, which it markets to its existing database of 6 million Australian customers (1/4 of the population), which all carry a very low capital cost (Kogan earn commissions on every sale) and have a very low customer acquisition cost.


The looming threat is Amazon’s entry to Australia – which in my opinion is over-blown.  Currently 40% of KGN’s gross profits come from 3rd party products, which is the only component facing a threat from Amazon.  The rest of the business is either growing off a low base thanks to lower customer acquisition cost (Mobile, NBN, Travel, Insurance) or easily defended as the sole supplier (private label).  It’s difficult to quantify how much business Kogan will lose to Amazon when they set up in Australia, but I think that business will still be bigger than it currently is in 3 years time.  It’s also difficult to quantify how much growth Kogan will see in the Mobile, NBN, Travel and Insurance businesses, but I expect this to hugely offset any revenue losses to Amazon.


I look forward to seeing the FY17 result, and continue to accumulate KGN shares.  Due to their competitive advantage and ability to widen their moat by investing in better analytics and automation, I intend to hold my shares forever.