The pandemic made them look like superstars. With travel-loving Antipodean consumers locked up at home for months on end, and restrictions on how far they could move from their homes (for example, only 5 km in New South Wales and basically nowhere in Auckland!), consumers headed for the keyboard and engaged in an orgy of online spending.

While many bricks-and-mortar businesses were relying on government handouts just to keep their staff on the books, the eCommerce companies made out like bandits.

The question they needed to ask themselves was whether Covid had permanently altered spending habits and lifted the floor on eCommerce sales as a share of total revenue, or whether growth would simply revert to trend when consumers finally strapped the shoe leather back on and hit the high street again.

Australia

We now know the answer in Australia, courtesy of the most recent ASX reporting season.  

Being an optimistic tribe by nature, Aussie eCommerce retailers invested in infrastructure, inventory, automation and staff on the basis of the former and then ran headlong into the latter in the second half of 2022.

The reversal in eCommerce fortunes (both figuratively and literally) was broad and deep. Everyone got smashed everywhere, all at once, but the extent of the revenue reversals – and how they translated at the bottom line – varied by category.

Australia’s two largest grocers, Woolworths and Coles, both saw a reversal of around 7 per cent in their eCommerce revenues. Woolworths was a little higher, and Coles a little lower. Woolworths CEO Brad Banducci and Coles CEO Steven Cain both said shoppers have largely returned to pre-pandemic behaviours.

Banducci acknowledged the decline was faster and more dramatic than originally anticipated – although he also noted that by year end the situation had stabilised and it appeared that eCommerce growth had resumed.

Given that food is a little less of a discretionary purchase than another pair of blue satin Manolo Blahnik pumps, both the big grocers faired comparatively well compared to categories like furniture, homewares, books, beauty and electronics.

Take for example furniture retailer Brosa, which went into administration last year. Brosa’s sales tripled during the pandemic and it used all that loose cash to invest in accelerated customer acquisition along with the technology and infrastructure needed to fulfill its swelling order book.

But then this posterchild for online sales caught the post-Covid flu. The administrators, Korda Mentha, were clear about the problem: as customers went back to shopping in the real world, sales fell quickly and cashflow dried up.

There was more to this story of course – interest rates put additional pressure on discretionary spending, fuel prices added to distribution costs, and Brosa made its own situation worse by overcooking inventory and headcount. It was hardly alone, as a sweep of the latest financial results of ASX-listed eCommerce retailers reveals.

Booktopia (ASX:BKG):

The online book seller that out-Amazon’ed the mighty Amazon in Australia, saw its revenues drop by 15.3 per cent in the first half of FY 2023 versus the prior corresponding period (PCP), falling from $130mn to $110mn. That translated into a 68 per cent EBITDA decline from $4.1mn to $1.3mn, with the company's share price falling by ~80 per cent from peak to trough in 2022, then subsequently bouncing by 35 per cent. When briefing equity analysts, the company noted: “Operational environment returning to normal with management prioritising actions to improve profitability while balancing ongoing investment in people, technology and infrastructure to support future growth.”

Temple and Webster (ASX:TPW):

Profitability at the furniture and homewares business proved to be just as highly leveraged to fixed costs, with a 12 per cent decline in revenues translating into a 46.7 per cent fall in profits. “As foreshadowed in August, H1FY23 was going to be the most difficult period for revenue comparisons as a result of H1FY22 being impacted by Covid-19 lockdowns,” the company noted in its financial presentation to analysts. However, like Woolworths, by December eCommerce growth was back versus PCP. “Although the half was down 12 per cent year on year, importantly, revenue trended in a positive direction throughout the half as comparisons normalised with Dec-22 being positive in terms of year-on-year revenue growth”. The company’s share price has reflected the volatile environment, falling ~60 per cent from April through July 2022, rebounding by ~80 percent, then falling by~40%.

Adore Beauty (ASX:ABY):

eCommerce darling Adore Beauty lost some of its shine, with revenues falling 17 per cent versus PCP. In its investor update the company commented “Post lockdown environment, cycling periods of significant growth with revenue up 80 per cent on H1 FY20. Normalised environment has seen consumers returning to bricks and mortar, impacting online retail sales”. At the time of writing, the stock was near its 52 week low, a ~65 per cent fall from peak to trough.

Kogan (ASX:KGN):

Finally, the eponymously named electronics retailer’s revenues fell 34 per cent to $175.6mn versus PCP, and profitability was smashed with its $23.8mn loss for the half twice as bad as H1 2022. It told investors: “Prior to this period, the company had heavily invested in inventory and operational capacity to meet the significant growth in demand during the COVID-19 pandemic. As lockdown orders associated with the pandemic eased, the shift in online demand left the company with surplus inventory and elevated operational expenses. 1HFY23 represented a half in which the Company accelerated the correction of both issues”. In 2022 the company's share price fell by ~55 per cent from peak to trough, before bouncing by ~30% in early 2023.

New Zealand

The story across the Tasman is much the same. New Zealand online spending grew from $NZ4.6bn before the pandemic to a peak of $7.6bn in 2021. It went into reverse in 2022, when the final figure for the year was $6.07bn.

Parcel deliveries via New Zealand Post tell the story, with volumes returning to pre pandemic levels, according to the organisation’s latest financial results.

Greg Harford the CEO of Retail NZ, the peak industry body told the media, “We've definitely seen a shift away from some of those eCommerce orders and back into in-store purchasing. But at the same time, we've also seen an economic slowdown so people are spending less overall and perhaps eCommerce is one of the victims.”

As high street shoppers returned, ANZ’s eCommerce retailers, whether they were pure plays or clicks-and-mortar businesses, had to contend not only with the fall in revenues but also with elevated costs reflecting their investments in fulfilment centres, higher stock levels, automation, fuel, and of course staff. Add to that rising interest rates and it was almost a perfect storm.

But there may be a silver lining. Based on what many eCommerce companies told investors in their most recent sweep of earnings calls, the post-Covid fever (or cold sweat?) seemed to break in December. As new customer fulfillment centres come online, and as automation and headcount reductions start to drive down operating costs, those highly leveraged eCommerce profits should start to return. The question is when.

Marion Grasby has the last word.

It’s not all gloom and doom out there! Listen to this month’s minicast, in which North Ridge Partners’ Christin Burns interviews Marion about her audience led eCommerce business which proves that with the right business model, you can thrive in almost any environment.