Glynn Davis is one of the UK’s most knowledgeable and experienced retail journalists, founder of Retail Insider, and Ecommerce Age’s monthly columnist.
For a brief period in the early 2000s the supermarket group Iceland changed the signage on its stores to Iceland.co.uk to reflect the fact it had joined the dotcom frenzy. Such moves to embrace online selling not only reflected well on a retailers’ perceptions with customers but it also did wonders for their share prices.
Mere mention that a retailer was to launch an online store would send its share price soaring. This was not only because there was the opportunity that such a move could generate extra revenues but there was another indirect reason; it would potentially prompt a higher valuation for the business if it was regarded by the investment community as a glitzy technology company rather than a staid old retailer.
We have all long since recognised that for a retailer to simply operate a website does not make them anything other than a bog standard retailer. This is partly down to the fact the tech involved is very simple but also because we know that the fundamentals of the business do not really change with an online store because it is still all about buying and selling goods and shifting physical products around.
But the idea still remains firmly in place for companies, including those in the ecommerce space, to try and convince investors that they are at heart a technology business rather than one pinned to the old world dynamics of flogging goods. And that they should be valued accordingly.
THG is one such business. It was sold to investors as a technology company on a high valuation – based largely on its burgeoning end-to-end online solution Ingenuity. But the slim revenues from this division persist and the vast bulk of its turnover still comes from its straightforward online selling of vitamins and health & beauty products. The realisation that it has less than racy dynamics has brought the THG share price crashing down to earth.
Another retailer that attained an incredible valuation based on its tech credentials was Cazoo. Its management built a swanky brand and an online DTC platform for used cars. The valuation has dramatically retreated from its high point as the business has been recognised as fundamentally about selling hunks of metal – albeit direct to the consumer via the web rather than through dealers on forecourts. It’s not really a technology company whichever way you look at it.
Probably the most high profile and questionable attempt to rebadge an old school business as a technology firm was WeWork. Its charismatic founder managed to convince the investment community that the company was not simply renting out real estate from landlords and then parcelling it off into short-term sublets to small business owners. Having attained a valuation of $47 billion it was found to be very much a tech-free real estate firm and crashed to earth, with a value today of a much more modest $3.8 billion.
The financial providers to online retailers of Buy Now Pay Later credit products have also been on this journey of unjustifiably accruing technology valuations. US-based Affirm was swept along during the low interest rate environment when tech stocks were riding high but now that rates have risen markedly the hybrid financial-technology company is no longer seen as a slick disruptor but instead a stodgy lender that is struggling to make the financials stack up. The value of Affirm has fallen from $47 billion to a current $5 billion. Klarna is in the same boat and its next funding round could be at the $30 billion level versus the previous $46 billion.
Although valuations of technology firms have fallen dramatically over recent months this will not deter companies of all descriptions, including those in ecommerce, from still seeking to align themselves with the sector because it still enjoys a premium rating compared with anything that has a whiff of old school about it including retail and associated industries like payments and property. Ultimately they will be found out for what they really are and like Iceland drop the pretence and instead focus on being a quality retailer of goods and services.
