4 winners that cross online and offline worlds

Battle lines between Internet and traditional industry firms are too neatly drawn. The market differentiates between online companies and the bricks-and-mortar incumbents. But companies that blend offline and online offerings could be the big winners.

Witness the growth in retailers who are finally getting their act together online. It’s hard to buy a product now without being asked if you are a member of the company’s loyalty club, which is a way to get customers’ email addresses, analyse behaviour and provide targeted online offers.

And online furniture and homewares retailers, such as Temple And Webster, are opening stores to complement their digital presence. Even e-commerce godfather, Amazon Inc, is building a physical presence through its innovative Amazon Go grocery experiment.

A multi-channel offering makes sense. Customers want an integrated shopping experience that optimises physical and digital channels. Top-performing retailers must excel at both channels to attract and maintain a larger customer base and to use big-data analytics to better understand customer behaviour and wants.

Apple Corporation is a case in point. Its superstores, full of staff, provide much more than sales. Staff educate customers on products and provide valuable post-product support. Many customers experience Apple products instore and shop for the firm’s products online.

But too many Australian retailers have not had the skill or organisation culture to support a competitive online offering. Or had the capital to invest in a competitive digital platform that can compete with aggressive, nimble online rivals.

Australian department stores are exhibit A in this regard: they still have insufficient online offerings after years of trying. Stocks such as Myer Holdings are best avoided.

It’s hard to find Australian retailers that have a strong, integrated online/offline strategy that influences customers at each stage of their purchase journey: from research, to product comparisons, tailored sales offers, transactions, post-product support and so on. But they do exist and here are four that stand out across industry. Not surprisingly, their share prices have rallied as their integrated offerings boost earnings.

1. Flight Centre (FLT:ASX)

I included the blended travel agency in the Switzer Report takeover portfolio at $31.65 in December 2016 and have maintained a positive view. Flight Centre has rallied to $61.81 since that report, torturing short sellers and those who believe the company’s bricks-and-mortar network of agencies is ripe for greater online disruption.

Cynics missed the bigger picture: Flight Centre developing a clever, blended model that enables customers to complete different parts of the booking journey in different modes. For example, researching a holiday and comparing prices online, then getting advice from an instore travel agent that fulfils more complex aspects of the holiday booking.

Flight Centre’s latest interim profit result, ahead of market expectation, shows there is a large, growing market that wants instore advice blended with a compelling online service. Done well, Flight Centre’s integrated model can be an advantage over online competitors.

Chart 1: Flight Centre (FLT:ASX)

Source: nabtrade

2. Kathmandu Holdings (KMD:ASX)

The adventure-wear retailer looks an obvious candidate for online disruption; price-conscious younger consumers are likely to buy pricey outdoor wear online to save money. Yet Kathmandu shares have rallied this year and its latest profit result impressed.

I nominated Kathmandu as a retail turnaround idea for this report in May 2016 at $1.39 a share. The stock has rallied to $2.40 and has further to go, as its recovery unfolds under new management. A better product mix and tighter inventory management are driving gains.

Kathmandu exemplifies the benefits of multi-channel retailing. One can experience the retailer’s expensive jackets and other outdoor wear instore and get advice, before buying them online. Or return or exchange products bought online through the company’s store network.

Longer term, Kathmandu’s Summit Club, a loyalty program that has more than 1.7 million members, is the key to its online fortunes. As a Kathmandu customer, I seem to receive more pinpointed online offers based on my transaction history and preferences. It’s a powerful digital offering that is well suited to big-data analytics.

Share price gains might be slower from here on in 2018, but there is a lot to like about Kathmandu’s market position, management and blended online/offline offering.

Chart 2: Kathmandu Holdings (KMD:ASX)

Source: nabtrade

3. oOH! Media (OML:ASX)

The out-of-home advertising company seems an unusual choice for this column. But OML’s success in combining traditional billboard printed advertising with digital offerings, again shows the benefits of integrated online/offline channels.

Media companies, generally, are doing a better job in integrating online and offline products. Digital subscriptions at Fairfax and News Corp are rising as more consumers show they will pay for quality online information. Like retailing, many newspaper customers switch between online and offline modes: some news is read online, some through printed products.

Still, I cannot buy traditional media stocks as the migration towards online advertising continues apace. Out-of-home advertising is another story. This segment is growing faster than the overall advertising market, and digital billboards offered by OML and others are creating marketing opportunities and higher advertising yields.

I have written positively on OML for this report since 2015 and more recently on its smaller rival QMS. Both stocks drifted lower last year after strong earlier gains. OML has rallied lately after impressing with its full-year result.

Chart 3: oOH! Media (OML:ASX)

Source: nabtrade

4. Afterpay Touch Group (APT:ASX)

The financial technology (fintech) firm has been among the biggest beneficiaries of blended online/offline retail offerings. More retailers are embracing Afterpay’s clever lay-by concept to encourage customers to buy products instore or online and pay later.

It is part of the consumption trend of instant gratification. Young consumers want to buy products online now, pay for them later and pick them up instore. Life is too short to spend weeks or months saving for a product, buying it online, then waiting days to receive it.

Afterpay has excellent long-term prospects, but it’s valuation looks too full for now, even after recent share price falls that came from bad press over the firm’s internal controls and governance processes that allowed underage customers to buy alcohol (since resolved).

Fears of greater regulatory scrutiny have also weighed on Afterpay and other “buy now, pay later” providers that would have to provide customer credit checks and change their business model if regulators classify them as credit providers.

Moreover, some good judges I know are concerned about Afterpay’s relatively low bad-debt provisioning (taking the credit risk off retailers with purchases is one of Afterpay’s key selling points.) A target market that consists of young consumers who cannot get a credit card due to poor credit history, is obviously a higher risk.

One can imagine more retailers here and overseas embracing Afterpay’s service, which has identified the willingness of consumers to buy goods in instalments. The company has done a terrific job so far, has a valuable first-mover advantage and brand and good potential to grow in the United States (it launched in that market this week).

But the price has arguably run too far, too fast for now, given regulatory and other risks.

Chart 4: Afterpay Touch Group (APT:ASX)

Source: nabtrade