Business Bloopers
Kogan.com’s Business Crash: The Cost of Betting Wrong After COVID
Kogan.com became one of Australia’s biggest online retail winners during the COVID-19 pandemic as online shopping demand surged across the country. The company aggressively expanded inventory levels, expecting the boom to continue for years. But as lockdowns ended and consumer spending slowed, Kogan was left with massive unsold stock, rising warehousing costs, and declining sales. The business reported consecutive multi-million dollar losses between FY22 and FY23 while customer numbers also dropped sharply. This article explores how Kogan.com’s pandemic growth strategy turned into a major business failure before the company later stabilized operations.
During the COVID-19 pandemic, Kogan.com was one of the biggest online retail success stories in Australia. Its sales included electronics, furniture, home appliances and lifestyle products, saw record sales as millions of consumers stayed home during lockdowns that sent online shopping exploding across the country. Investors thought Kogan had literally cracked the code for the future of retail, and expanded at a furious pace to keep up with all the new demand flooding in.
However, within two years, the very growth strategy that had enabled their success resulted in a devastating financial crisis. The company then reported back-to-back multi-million dollar losses due to a massive inventory pile-up, slowing consumer demand, skyrocketing warehousing costs and declining sales, with one of Australia’s biggest pandemic winners now a major business failure in post-pandemic times.
About Kogan
Kogan store launched in 2006, modelled as a discount website selling products directly to Australians. E-commerce soon became the focus of the company, which started selling electronics, televisions, appliances, furniture and mobile phones for home products. The business gradually branched out into insurance, internet providers, travel deals and subscription memberships also.
On account of its business model, the corporation grew briskly. For Kogan, that meant avoiding lifestyle stores, much like it has been able to do with its heavily online-centric physical retail and directly importing products, the two things traditional retailers typically can’t compete with. This allowed the business to draw in price-sensitive shoppers right across Australia and turn Kogan into one of the largest online retailers in the country before the pandemic even started.
Founder Ruslan Kogan
Ruslan Kogan was from Belarus and he immigrated to Australia with his family. His parents immigrated from Europe to Australia for a better life, and they started their life in Melbourne. Kogan always had a keen eye for anything technology/electronics and business from an early age. Later, he studied business management at Monash University.
Prior to becoming an entrepreneur, Kogan came from a technology and business background where he sharpened his skills in sales and marketing as well as online retailing. He observed that most electronics products sold through specialty brick & mortar shops in Australia tend to be overpriced. This motivated him to create a business capable of selling products direct-to-consumer via the Internet at significantly lower prices than if they were offered through brick-and-mortar retail stores. In 2006, he launched Kogan.
Ruslan Kogan went on to become one of the best-known technology entrepreneurs in Australia. He established a nationally acclaimed online retail brand based on aggressive marketing, low prices and strong faith in e-commerce. As the business raced towards meteoric growth during the COVID-19 pandemic, Kogan’s public profile swelled with it, and he joined Australia’s largest online retail success stories. But after the pandemic boom came to an end, Kogan also got hammered by investors and analysts as massive inventory problems, sluggish sales and a string of financial losses weighed down on the company.
The Pandemic Shopping Boom
COVID-19 changed consumers' shopping habits across the country. Lockdowns had people stuck at home, whilst physical retail stores were faced with restrictions and temporary closures. This saw millions of Australians purchasing from online stores more often than ever before, resulting in demand throughout all corners of the e-commerce sector.
This change was massively beneficial for Kogan. Remote work-from-home concepts, home entertainment became part of our everyday life with consumers purchasing laptops, monitors, office furniture, gaming products, televisions, fitness equipment and home appliances. Many of Kogan’s core product categories saw strong demand through 2020 and into 2021.
The bullish sentiment is also seen in the online retail sector. Despite this, Kogan basked in an impressive pandemic share price charge as many thought consumer behaviour had changed for good. The business was seen as one of the biggest long-term beneficiaries of Australia’s accelerated move to e-commerce.
The Inventory Expansion Strategy
As demand continued to grow, Kogan made what would later prove to be a pivotal business decision that was at the heart of its financial troubles. During global supply chain disruptions, the firm ramped up purchases for inventory in many of its product categories, though to mitigate the risk of stock-outs.
Then, the coronavirus continued to spread globally, raising concerns that supply chain disruptions, such as shipping delays and factory closings, might lead to shortages of certain goods. The price of containers became high, and delivery schedules remain unpredictable, leaving a lot of retailers without stock. Kogan felt stockpiling large quantities would shield future sales growth and prevent the company from lagging behind competitors suffering shortages.
The acquisition of electronics, furniture, home appliances and household products was considerably elevated for the company. Kogan’s inventories had reportedly ballooned to around AUD $227.9 million by the end of FY21. The company was essentially betting that the high level of online shopping demand seen throughout the pandemic would not die down once lockdowns were lifted.
The Business Model Started Cracking
The shift in the marketplace was far faster than Kogan had expected. As restrictions lifted across much of Australia, consumers certainly returned to shopping centres, pubs and restaurants and cinemas; people again travelled further from their place of residence; families got outside on summer days. Consumers too returned to pre-pandemic purchasing patterns, moving away from the home-centric purchases of pandemic-era years.
Concurrently, inflation began to rise around the world. An increase in living prices, plus higher interest rates, weighed on consumer purchasing power, especially for non-essential items such as electronics and furniture. It was also found that, as traditional retail recovered, online shopping growth fell sharply.
Kogan soon found itself with a huge inventory pile, and spending was slowing. As sales growth no longer matched inventory growth, warehouse space remained filled with products from the line of peak pandemic boom-product purchases, still languishing on store decks. What had once seemed like a competitive disadvantage became, in short order, an overwhelming liability.
Rising Costs and Inventory Pressure
The stock build-up created an operational strain throughout the business. The cost of warehousing also got higher as products need to be held for longer periods before they are sold. Logistics costs increased, and inventory turnover deteriorated strongly as well.
The task was even tougher because electronics and tech products depreciate rapidly. However, older inventory was more difficult to sell at reasonable market prices as newer models made their way onto the market. To shift product, Kogan was forced to slash its prices to try to clear stock from warehouses.
Discounts did help clear the stock, but they hurt profitability. And then finally, products that were supposed to win big margins were now getting sold just to clear cheap stock. The large inventory position was then recognised by the company to induce significant inefficiency across its operations.
Kogan slashed its inventory by about 57% to AUD $68.2 million by the end of FY23. Unfortunately, the inventory crisis had already wreaked devastating financial damage.
The Financial Collapse
Kogan (ASX: KGN) finally started to show the inventory crisis in its books. The company posted a record operating income of AUD $10.7 million during FY21 at the peak of pandemic shopping activity. Yet soon after consumer demand fell, it plunged into losses.
Kogan had an FY22 operating loss of AUD $38.1 million. Losses kept on, and FY23 was hit with another operating loss of AUD $36.4 million. The company had gone from profit to consecutive years of loss of millions; within just two years.
There was a corresponding sharp drop-off in Revenue and sales during this time period, too. For Kogan, gross sales fell 28.4% year-on-year to AUD $844.8 million while revenue dropped 31.9% to AUD $489.5 million in FY23 financial results. In addition, gross profit fell 26% to AUD $136.6 million. The extent of the drop reflected just how severely reducing consumer demand, discounting pressures and rising operational costs driven by excess inventories were impacting the business.
| Financial Metric | Kogan.com Crisis Figures |
| Peak Inventory Level | AUD $227.9 million (FY21) |
| FY21 Operating Income | AUD $10.7 million profit |
| FY22 Operating Result | AUD $38.1 million loss |
| FY23 Operating Result | AUD $36.4 million loss |
| FY23 Gross Sales | AUD $844.8 million |
| FY23 Revenue | AUD $489.5 million |
| FY23 Gross Profit | AUD $136.6 million |
| Inventory Reduction by FY23 | Reduced to AUD $68.2 million |
| Active Customers After Decline | Around 2.95 million |
| Customer Loss During Slowdown | More than 1 million customers lost |
The Post-Pandemic Collapse of Kogan. com
The issues within Kogan by 2022 had grown too big to ignore. What had previously been foreshadowed with some fanfare as one of Australia’s pandemic success stories, found itself at once battling stagnating sales growth, contracting margins, increasing operating costs and a mountain of inventory.
This time around, investor confidence also weakened sharply within this period. Kogan, which had experienced a pandemic boom in share price but then continued down the financial performance slippery slope, faced particularly severe pressure. With online shopping booming, investors began to wonder if the company had expanded too quickly.
The number of customers that the company serves also fell quite starkly. During the post-pandemic period, Kogan’s active customers totalled about 2.95 million, including a record loss of more than one million clients on hand. Kogan lost many people who were fully on board, performing outlook winter performance at the beginning. What had once been a kind of poster child for the future of Australian e-commerce was one of the starkest illustrations of how growth strategies born out of pandemic madness later ravaged e-tailers’ bottom lines.
How it Recovered After the Failure
After the crisis, Kogan cut stock and operating expenses and moved more toward high-margin platform businesses such as membership, e-commerce, insurance, advertising services and cellular plans. The adjusted EBITA figure of AUD $28.3 million and the first positive gross profit of AUD $168.4 million were followed by a return to profitability by FY24 for the company. They also contributed to a decline in inventory from the pandemic peak of AUD $227.9 million down towards AUD $73.4mi, allowing the company's balance sheet recovery after much pressure on operations. To know how they did it read Kogan's success story here.
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