A Deeper Look at Redbubble (RBL:ASX)
Summary
- Flywheel effects
- Structural advantage & ecosystem control
- Emerging competitive advantages
- Competitor analysis
- Risk analysis
- Valuation
Business Summary
RBL is a platform solution to the underutilised skillset of artists in the global economy. Platform businesses redefine the problem of inefficiencies affecting both supply and demand, improving the utilisation of existing resources. Uber and Airbnb are both case studies that serve as prime examples.
In the traditional model, if an artist wanted to monetise their artwork, they would typically have to set up their own website, bearing the financial, production and shipping risks. They would also be limited by audience exposure. When artists join RBL's marketplace, they can monetise their artwork without bearing financial, production or shipping risks. They also get exposure to a pool of ~6.8m customers growing 30% YoY. The major trade off that these artists often make in this transition can be time and money. Artists generally make less of margin on RBL but save more time.
The RBL business model is also serves as alternative to the traditional retailers that provide undifferentiated products, commoditised offerings, brand names and mass commerce. RBL instead offers consumers an alternative that is to buy items that represent self-expression and personalisation on demand.
The addressable market for e-commerce continues to increase with no ceiling. Structural changes in consumer behaviours show that the inertia of this trend will continue into long into the future. The total market of customers seeking creative expression on lifestyle products is currently estimated to be within the $300 - $400B range (and growing circa 10%). This estimate infers that RBL possesses an approximate market share 0.1%, providing a large and expanding runway potential for the company.
Flywheel Effects
Figure 2: RBL's flywheel effect
Unlike most 2-sided marketplaces, RBL operates a 3-sided marketplace. The flywheel effects of this marketplace can be simply be described with the following statements:
- The more artists are present on the marketplace, the more the content becomes abundant and relevant; this in turn attracting more customers.
- The more the customers, the more efficient the fulfillment network becomes. Not only this, the fulfillment network accelerates the flywheel by facilitating product scope expansion. These things in turn brings back more customers.
- With more customers coming back, the more artists are attracted to the marketplace.
Structural Advantage & Ecosystem Control
The business model has several advantages over traditional brick and mortar retail.
- Customers are increasely seeking more differentiated and personalised offerings. The platform allows for artists to upload relevant art that can be of specific sentimental value to a particular customer. The business model allows RBL to be dissociated with the next trend, theme or meme and only to be focused on the platform, customer experience and the distribution network. Only the artists have to worry about meeting the art related demand from customers.
- Customers who find an art work which resonates their personality or interests generally have a larger inclination to spend more on it than something that is mass produced. This increases the customer's willingness to pay and thus reduces the bargaining power to buyers.
- RBL operates an on-demand business model where all the products are made to order by a 3rd party fulfiller such as Printful and Printify. As a result, RBL assumes no capital expenses or inventory. This means they do not have problems with wastage and overstock often associated with traditional retailers. Traditional retailers assume greater inventory risk with bulky ordering requirements (to gain economies of scale) and long lead times.
- Gaining economies of scale at minute capital costs. Each new product added creates immediate value. However, the scale benefits to RBL occur over time as customers buy more of it and the production cost progressively decreases.
- The on-demand business model also provides RBL with an advantageous working capital cycle and form of ecosystem control. Although RBL collects cash upfront, RBL have a payment cycle where they pay out artists on 15th of every month, provided earnings have reached $20, €20, or £20. Contrast to most marketplaces, RBL does not collect a fee from artists but rather pays them. The total unit economics of working capital is displayed below.
Emerging Competitive Advantages
RBL possesses two emerging competitive advantages: cost and brand.
Cost Advantage
"As the artists have come, so too have customers, with 6.8 million customers last year, growing at 33% per annum over the last 5 years. The customer growth has come with very low customer acquisition costs. Marketing spend is 11.4% of marketplace revenue versus 11% to 26% for peers. The low spend reflects the dynamics of the marketplace, with customers being attracted to the differentiated content through unpaid search or social channels." - Martin Hosking
The low customer cost acqusition/marketing spend relative to peers can be attributed to several factors:
- Artists using other social media platforms such as Instagram to promote their own artwork. These artists are the voice for RBL. These artists have it in their best interest to generate as much traffic back to their collection of artwork on the RBL platform. They bring a lot of organic growth without the marketing cost.
- The content library and diverse product types also means that RBL is not trying to sell the same common products as everyone else. RBL feeds Google Shopping over 200 million SKUs.
Brand Advantage
Additionally, RBL appear to have an emerging brand advantage.
Growing brand loyalty for RBL has already manifested itself with 40% of total sales constituting repeat sales and an NPS score of ~68. Maintaining and growing brand loyalty is necessary in strengthening the network effects of the business and therefore the flywheel effects.
RBL have sustained GPMs ~30%, clocking in customer growth of 33% p.a. over the last 5 years with low customer acquistion costs relative to peers.
GPMs have varied with the onset of COVID-19 with these multiple factors at play:
- Promotional spend (such as free shipping and discount on multiple purchases). Management have advised they will not overspend to protect premium brand. Management have also emphasised that the promotional spend will be mainly used to increase loyalty not first purchase.
- Proportion of low-to-high margin products (i.e., masks have high margins).
- Increased order volumes at fulfillment centres over time (for buying larger quantities resulting in lower cost per unit).
Prior to retiring and becoming an executive director, co-founder and ex-CEO Martin Hosking, who owns ~20% of RBL, scaled the business with great focus on delighting the customers, implementing conscious decisions to trade margin for loyalty. This was taken out of Amazon's playbook to create long-term value for the business.
A continued focus in finding new ways to delight the customers is required to enhancing the brand image.
Competitor Analysis
RBL often compared to competitor Etsy (ETSY:NASDAQ) since both companies run similar business models. Slight variations:
- Operating a 2-sided market place, where the buyer and can buy unique, vintage and handmade items from seller.
- Seller is required to produce and ship the product.
- It's mission is focused the on maximising the human connection of the transaction in the face of industry automation.
- Etsy takes a listing, transaction and payment fee totalling ~ 8-9.5%.
- Customer service starts with the seller.
- No quality control on the seller side.
- Invitation-only system for onboarding artists that may take up to 6 months for aproval. This is a form of quality control on the artist side to protect Amazon from people who flood the marketplace with thousands of designs.
- Amazon has tiers for amount of listings depending on sales. The more you sell the more you can list. This is also another form of quality control on the artist side. After an artist reaches a particular tier, they may gain access to Amazon Marketing Service.
- Tigher controls around uploading artwork which may be subjected to copyright infringement. On the other hand, uploaded art are more susceptible to being infringed upon by copycats due to the Best-Seller Rank (BSR) system.
- Higher artists margin paid than RBL.
- World-renowned brand, ~30m monthly visits, +300m active users, vertically integrated and provides fast Amazon Prime shipping.
- Limited product range for print on demand, i.e. t-shirts and hoodies.
- No public profile system to build a 'e-commerce shop front', attract fans or followers.
- Business model therefore infers that Amazon is more focused on maximising revenue per artist as opposed to maximising number of artists on the platform. The latter is RBL's mission.
Risks
The key risks associated with RBL given consideration to its business model and competitive landscape include:
- Litigation brought against RBL for intellectual property infringement. RBL attempts to mitigate this risk by actively sending out take down notices, finding and removing content, facilitating licensing with certain partners, and increasing their litigation capabilities through software and machine learning algorithms.
- Attracting and retaining top talent in business-critical functions. RBL helmed the ex-CEO of Seek (SEK:ASX) Michael Ilczynski its CEO late 2020. Ilcynski is equiped with 13-years leading and scaling a global marketplace company. Ilczynski will be offered a generous $2 million package consisting of a 40% portion in a fixed base salary and a 60% portion in in zero-priced options and SARs. Generous packages with a significant portion tied to options and SAR may pose as a risk to shareholders that might invite reckless behaviour. To offset the risk of Ilczynski stepping down in the short-term, the board has has made part of the CEO agreement for Ilcyznski to buy in $2 million - of which $400k is his own capital and $1.6m non-recourse loan with RBL - after the release of the FY21 results.
- Fulfillment network capacity risk & risk of shared fulfillment partners. RBL has enabled new fulfillers to be onboarded significantly faster by improving the fulfillment API, systems and tooling. There is also a risk that smaller competitors may utilise the same 3rd party network in attempt to scale and play 'catch up'. This can be only mitigated by accelerating the flywheel effects of the business and strengthening the position of having a low cost advantage.
- Risk of competive activity, consolidation risk and technological disruption. As the world shifts from retail to e-tail, millions of individual shops and platforms on the internet will likely to consolidate over time. Similar to the phases of natural evolution, it will be a competition of survival of the fattest; those with a network effect, high switching costs and a form of social proofing will thrive. The question then becomes, can RBL compete with brand powerhouses such as Amazon? Will they get bought out, crushed by Amazon or can they compete concurrently? Even though the objectives of both companies are a little different, it appears as though Amazon is one of their biggest risks.
RBL has a healthy cash balance of $58m with no debt. Revenue CAGR has also been ~38% p.a. since IPO in 2016.
A couple of my assumptions for the my valuations are outlined below:
- Exit EV/FCF of 15-20x
- Normalised FCF margin of 20%
eBay = ~20%
Etsy = ~40%
REA Group = ~35%
Seek = ~20%
RBL's FCF margin is currently ~10% and has room expand by capitalizing on operating and financial leverage.
Most of RBL's growth is also heavily weighed on the organic side. Inorganically, RBL has only executed once on the acquisition of TeePublic. Estimates of the IRR constituents are presented in the reverse DCF calculation below:
Reverse DCF: 0% dividend yield, ~15-20% organic growth, ~0-5% inorganic growth, 0% multiple contraction. I therefore have IRR sitting at ~20%. However, considering predictability, ease of execution and geographic risk, I have adjusted the IRR to ~15%.
For now, RBL is one for the watchlist with a revisit price that meets the 26% hurdle.
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