COMMENT: The move by Kogan Technologies to solicit consumers to pay upfront before one of his products is manufactured in China smells more like cash flow issues than offering a consumer a big discount benefit.
This week Ruslan Kogan, founder of online retailer Kogan Technologies, launched ‘LivePrice’ an incremental pricing scheme, which he says allows customers to purchase a product for a lower price earlier in its production cycle.
But I supect the issue is more about cash flow than consumers having to wait months to get a product.
As Gerry Harvey, CEO of Harvey Norman and arch enemy of Ruslan Kogan, was calling on the Federal Government to introduce a 10 percent GST on all online transactions under $1,000, Ruslan Kogan would have been sweating on how much business overseas web sites are sucking out of the Australian economy.
In reality overseas web sites are more of a threat to Australian online sites than they are to branded retail stores in Australia because a consumer who is prepared to shop online is most likely shopping for the cheapest price.
Having owned Digital Home, which was an online trading site that we sold to JB Hi fi to become what is today, JB Hi Fi’s online operation, I know firsthand the difficulties of running a local online trading operation.
By majority, local online operators are running web sites that are nothing more than a marketing front. Once an order is placed the operator who often takes the money up front for a product, then places an order on his supplier, which in a lot of cases is a distributor like Ingram Micro, or Synnex, or the hundreds of other distributors who are now selling products such as Smartphones, Apple accessories, TVs or PCs to online operators.
This mode of operation means that the cash is in the bank before the online operator has had to place an order on his distributor.
In the case of the Kogan Technologies’ web site he is primarily selling “Made in China” products such as TVs appliances, Tablets, Set Top Boxes.
Another issue for Kogan is that Australia is known for short runs, when it comes to manufacturing products for this market and the fact that Kogan is a very small operator further impacts his ability to get the cheapest price from a manufacturer who is more interested in large runs than short runs. On the up side Kogan can very easily identify a no brand product made in China and then have the manufacturer slap a Kogan logo on the device.
For Kogan the issue is cash flow and I suspect that this is why he has started offering consumers an upfront deal that if they pay for a product before it is manufactured they get a discount.
The Kogan model operates in almost reverse as to how most online operators trade for the simple reason that he has to mostly, pay for a product up front, then wait for it to be manufactured and shipped from China to Australia. There are also handling and distribution costs which have to be paid for upfront.
In some cases Kogan is advertising a product for sale using pictures and words, taking an order and then having the consumer wait for delivery. Ben Knapinski is a disgruntled Kogan customer who had to wait two months to get delivery of a Kogan 46″ LED TV which Kogan claimed was superior to what Gerry Harvey was selling in his stores.
When Knapinski finally got his Made in China TV he described it as “absolute rubbish”.
“I don’t even want to put it in the kids play room as I am worried the flickering and jitter will hurt their eyes it’s that bad” he said.
In any online operation cash flow is king and margins are thin. I also suspect that Australian independent online operators that are not aligned with a major consumer electronics or IT brand are going to come under pressure next year as more consumers move online, Kogan among them.