Cracks begin to emerge in Iconic model, the Australian online retailer model by the German Samwer brothers

Cracks begin to emerge in Iconic model

June 28, 2013 – 3:59PM

Elizabeth Knight

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 both the bricks and mortar retailers and even its 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. It’s a fast and furious business, that takes no prisoners and litters the industry with casualties.

But questions are now starting to emerge about whether cracks are starting to form in its operations. According to the company’s financial statements, it is bleeding cash amid reports that its ultimate owner and co-founder, the German Oliver Samwer, jetted to Australia last week for crisis talks with local management.

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Stories have emerged that 10 per cent of the 300-strong workforce have been sacked over the past two weeks, but unconfirmed reports say the number was 20 per cent. The public relations and offline marketing team were iced.

Expensive multimillion advertising campaigns have been ditched as the company scours the budgets to find ways to rein in costs.

The accounts that cover the period from August 2011 to December 2012 show Iconic (the Australian registered company is called Internet Services Australia 1 Pty Ltd) shows revenue for the period of $30.6 million but a loss of more than $44.7 million.

Sales and marketing expenses during the period were a massive $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 currently liabilities and a net liability position of $7.1 million, because of the ongoing support of its German shareholder.

While it is not unusual for start-up businesses to sustain heavy losses, the question over The Iconic 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 including in Germany, India, Singapore, Poland and the Philippines through their head company, Rocket Internet.

The model has several aspects, the most important being a massive attack on new markets in specific retail categories with an unrelenting objective to become the online market leader.

Exerts from emails from Oliver Samwer from October 2011, copies of which Fairfax Media has received, lay the plan out clearly.

The recipients were the 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.’’

In September last year investment bank JPMorgan took the bait. It invested $US20 million in Iconic in a cash for equity swap. The announcement did not detail the size of JP Morgan’s stake, which would have provided us with what the investment bank considered as a valuation on The Iconic.

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 with this ominous message. ‘‘I am the most aggressive guy on the internet planet. I will die to win and I expect the same from you!’’

This clarion call from Germany makes no mention of profit measures, only of revenues and market share.

But the suggestion is clear: that wiping out the competition is central to the process, and one presumes that once this is achieved the focus must return to some form of sustainable profitable business.

Other investors in Rocket-based internet companies around the world include Silvio Berlusconi and Russian venture capitalist Len Blavatnik.

The Samwer brothers have already made hundreds of millions and 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  like Amazon, eBay and Groupon.

The snags they appear to have hit in the Australian operations are interesting but not conclusive.

The accounts show a cost base that it unsustainably high for the revenue The Iconic and its Australian smaller 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 appeared to be an innovative collaborative deal with Australia Post is now 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 going on over at The Iconic.

Some of the Australian original managing directors have left, including Ryan Touhy and Cameron Votan.

The real test for this Australian online business will be sustaining extremely high rates of sales growth. This is needed to feed the high cost base.