How Catch went from an e-commerce success to a loss on Wesfarmers’ financial report

I’ve recently returned for my first international holiday since COVID-19 — a hiking trip in the Canadian Rockies with the family.

For the first time since I can remember, I intentionally switched off from work. I turned on my ‘OOO’. Deleted all work apps from my phone. “Lost” my passwords. I couldn’t even login to Xero to check the finances…!

In between hikes and chugging maple syrup, I caught up on some reading.

One of the books was Catch of the Decade, the story of Gabby and Hezi Leibovich. They’re the brothers who founded e-commerce businesses Catch of the Day, Scoopon and EatNow/Menulog.

The story of the Leibovich brothers (‘the bros’, if you will) is nothing short of awesome. The book isn’t that long and you should read it, but here’s the TL;DR summary.

The story starts in 2004, with the bros independently operating their own eBay businesses. They were making money by buying random products from stores like Bunnings, then flipping them on eBay.

This was early internet commerce, when selling stuff on the WWW was a foreign concept. Even the idea of providing your credit card to a website was unheard of.

This had pros and cons. The main pro was that competition was low/non-existent. The con was there wasn’t a large pool of customers, as online shopping was in its infancy.

As it happened, neither bro knew what the other was doing. When they stumbled across each other’s endeavours and realised they were operating similar eBay stores, they joined forces, pooling their resources, websites and chutzpah.

It started with DailyDeals.com.au. DailyDeals was an online department store. It sold general household crap — blenders, televisions, etc.

Whilst the business was growing, they found it hard to get cut through. Their main competitor was another online store called DealsDirect, Australia’s first true online department store, founded by Aussie retail legend Paul Greenberg — yeah, that guy that’s always popping up on Linkedin.

At the time, DealsDirect had 5000 products on offer. The Leibovich brothers only had 100.

How could David compete with Goliath?

Steal like an artist

Across the pond, there was a fast growing e-commerce business called Woot. Woot was a startup pioneering a new retail concept known as ‘daily deals’. The business model was simple — they sold one product every day at midnight. The deal lasted 24 hours and then the sale was over.

FOMO, combined with steep discounts, drove virality.

Instead of reinventing the wheel, the bros simply, ah, ‘replicated’ the Woot business model. They copied the website layout, the brazen copywriting, the lot. The only thing they didn’t copy was the name. After exchanging a few text messages, they landed on Catchoftheday.

It was an instant hit in the Aussie market.

I love the Catchoftheday business model for a few reasons:

It’s simple. The business only sold one SKU at a time, making logistics super straightforward. Picking and packing was a breeze compared to multi-SKU retailers.

It taps into FOMO. If you don’t buy another SMEG coffee machine today, who knows when there will be another one for sale! The beauty of the daily deal model is it keeps customer acquisition costs low, with deals dropping via an exclusive email database.

But the thing I most loved was the BIG problem they solved for suppliers.

Catch fixed F-ups.

If you’re a merchant, you know how hard inventory management is. I see you nodding your head right now.

The most costly mistake a merchant can make is over-ordering stock. Having too much stock is a BIG problem. Picture hundreds of thousands of dollar bills sitting in your warehouse, doing nothing but taking up space and collecting dust. That’s your inventory that isn’t selling.

It’s not always your fault. Merchants get can caught out with excess stock for all sorts of reasons:

• Unpredictable supply chain;
• Inaccurate demand forecasting;
• Last minute order cancellation from a big retailer; or
• Broken SKUs.

Catch was able to get great prices on products by capitalising on its supplier’s buying mistakes. It would buy this excess stock at a steep discount to help them move it.

This was a win for the suppliers for a few reasons:

• Merchants could move excess stock quickly to help their Cash Conversion Cycle; and
• Merchants protected their brand value by selling excess product via a discount retailer, instead of posting red pen discount banners all over their store.

The hardest part of this model is that you have to bake the cake. Every. Single. Day.

Buy a good product at a great price. Negotiate great terms with the supplier. Buy a tonne of it. Warehouse it. Promote the heck out of it. Hope it sells out. And then do it again the next day.

Not easy — but hey, what business is?

Catch me if you can

By 2010, Catch was gaining serious momentum and began attracting interest from investors.

The bros were being courted by VCs, family offices and listed companies, including Insight Venture Partners, Sequoia, Yahoo7, Bessemer and Intel, among others.

But after a fateful encounter on a holiday in Bali, the bros got connected with Tiger Global. It was ultimately Tiger that partnered with Catch by investing $80 million for a 40% share in the business at a $200 million pre-money valuation.

A fresh capital injection added fuel to the fire and exploded Catch’s growth. Check out the revenue growth chart below — revenue basically 4x’d from 2010 to 2012!

After managing growing pains and a few ‘come to Jesus’ moments in the business, Catch expanded the business into a marketplace business model. It was gearing up for an IPO ( more on this soon), but eventually sold to Wesfarmers in 2019 for a cool $230 million.

Side note: this article is solely about the journey of Catch, but here’s a timeline of everything the bros did along the way:

• 2006 — Launched Catchoftheday;
• 2010 — Launched Scoopon (applying the Catchoftheday business model to services);
• 2011 — Launched EatNow, which in four short years merged with Menulog and was eventually acquired by UK company JustEat for $855 million in 2015;
• 2012 — Acquired controlling stake in Vinomofo;
• 2016 — Bought back their 40% stake in Catch from Tiger Global (presumably using JustEat sales proceeds);
• 2017 — Sold Scoopon to Lux Group and merged Bon Voyage and Scoopon Travel with Luxury Escapes. To this day, the bros retain ~20% ownership in Luxury Escapes, which to my best estimate is a nine-figure business. Oh yeah, they also bought a few other brands like Pumpkin Patch, Brands Exclusive and The Home; and
• 2019 — Sold Catch to Wesfarmers for $230 million.

There’s probably some stuff I missed (Gabby, feel free to let me know in the comments), but yeah, these guys created a lot of financial value in a relatively short space of time.

The financial teardown

After reading Catch of the Decade, I was interested to check out the financials. Wesfarmers is a publicly listed company, so I started digging through their annual reports for some data.

Unsurprisingly, there wasn’t much detail. Catch is a small slither of their broader portfolio which includes huge brands like Bunnings and Kmart.

So I did some further digging on the interwebs and found the treasure trove.

This data is for the period up to FY19 — a bit dated, but you’ll get the gist.

In this tear-down, we’ll be looking at:

• Revenue growth and profit margins
• Free cash flow

Revenue and profitability

Below is a snapshot of Catch’s financials from F19 to FY19 Forecast.

Revenue

Catch earns its revenue from two channels:

• Sale of products, termed as in-stock revenue; and
• Marketplace commission income.

In-stock revenue is the sale or product bought, warehoused and sold by Catch.

Marketplace commission income, still in its infancy at the time, is the commission charged to sellers via the marketplace. Catch charges between 10-25% commission, depending on the item category.

Gross profit

Gross profit on in-stock revenue is 27% — a pretty decent margin given Catch has no private label brands (it just buys and resells other people’s stuff).

The best part about marketplace commission revenue is that there’s no COGS — income trickles straight down to the bottom line.

As Gabby says: “You make the money when you buy the goods, not when you sell the goods.” Learn more about gross margins for e-commerce brands here.

EBITDA

EBITDA margins are pretty standard at 3.5% to 6% over the analysis period. It’s worth noting that the bros’ intention was to reinvest future cashflows to further grow the business, not necessarily optimise it for profitability.

Marketing efficiency

Of all the financial metrics, there was one that really caught my attention. It’s Catch’s Marketing Efficiency Ratio (MER).

• Marketing expenses, comprising mainly of Search Engine Marketing (SEM), represented 4.3% and 3.8% of revenue in FY18 and FY19;
• This is an impressive MER as a result of the brand loyalty and email database that Catch built over the years, which is the key to marketplace business models;
• Then again… this was back in the pre iOS-14 days when performance marketing was soooo much easier. Ahh, nostalgia;

• Free cash flow closely aligns with EBITDA, which is a rare thing to see in retail businesses that are typically working capital intensive (inventory); and
• Inventory days hovered around 90 days, which was surprisingly higher than what I would have expected. But I guess that comes with the territory when you’re housing 35,000 SKUs.

Overall, Catch was a solid business.

Until now.

Wesfarmers’ failed purchase of the decade

With the benefit of hindsight, let’s fast forward a few years and assess how Wesfarmers’ investment has been performing.

Deal breakdown

Based on the FY19 forecasts, Wesfarmers paid a 13x EBITDA for Catch — $230 million EV / $17.8 million FY19 EBITDA.

The Wesfamers board pride themselves on being prudent capital allocators, and 13x seems like a fairly hefty price. However, it is common to pay a hefty price for ‘strategic acquisitions’.

In the same way that Amazon regularly buy smaller businesses to gain valuable intellectual property and kill competition, Wesfarmers bought Catch for ‘strategic purposes’.

Wesfarmers, whose retail darlings include Bunnings, Kmart, Target and Officeworks, are predominantly bricks and mortar. There’s nothing wrong with that — they all do fantastic trade.

But the future is e-commerce, and Wesfarmers needed to get into the game.

So, how has that investment been doing? Let’s fast forward a few years…

Under Wesfarmers ownership, Catch reported the following EBITDA:

• FY20: $20 million;
• FY21: ($24 million); and
• FY22: ($88 million).

(For the uninitiated, the brackets represent a negative figure.)

Yeah, pretty savage results. Particularly poor performance in FY21, which was the COVID-induced boom year for online retail.

If Wesfarmers couldn’t make money from Catch during the biggest boom of all time, what chance will it have in the future?

Wesfarmers have also had leadership problems with the Catch business. In 2020, a large chunk of their tech team departed, with some joining competitors. Most recently, ex-Amazon executive and Catch CEO Pete Sauerborn departed the business in June. The business is currently without a Managing Director.

Time will tell if Wesfarmers will invest to turn the Catch business around, or just let it fade away.

To be honest, Catch is just a rounding error on Wesfarmer’s $54 billion market cap.

Who knows — perhaps the Leibovich brothers may be getting itchy feet in retirement, and they’ll decide to give their baby another run. I can bet they’ve debated the idea over a few piña coladas.

Catch of the Decade is one of the best business books I’ve read this year. It’s no bullshit and full of practical insights and wisdom for entrepreneurs. Grab a copy here.

This is an edited version of an article that first appeared on SBO’s blog.