CDON AB (CDON) Earnings Call Transcript & Summary

Welcome back, everybody, to this session following the SEB Growth seminar. My name is Nicklas Fhärm, and I work as an equity analyst with SEB. It's a great pleasure to present the next speaker, which is the CEO of CDON, the Nordic leading marketplace business. And Kristoffer Väliharju, the floor is yours. About 20 minutes, please, and then Q&A.

Thank you very much, Nicklas. Thank you. All right. I hope you all can see my presentation. My name is Kristoffer Väliharju. I am the CEO of CDON. I've been with the company since 2017. And what we have done is that we have taken a vertical retail and then turned it into a leading Nordic online marketplace. So we decided to go for the marketplace opportunity because we saw that the marketplace penetration in the Nordics was extremely low compared to other markets around the globe. Comparing to Europe, comparing to U.S. and comparing to Asia, you can see that it's a very strong traction for marketplaces in pretty much every corner of our planet. The Nordics are still underpenetrated. So we believe that we will get up to speed as well here in the Nordics, and we want to go for this position with CDON. Secondly, I think it's important to note that we have worked on this for a few years, and we've done quite the rapid transformation from a retailer into a marketplace. And we now touch approximately 10% of the Nordic populations on the consumer side and have over 1,700 merchants that are active in selling in the platform. We also have a scalable platform, and it's developed in-house. And we believe that with your own technology platform, it is a requirement in order to get to this position over time. As I mentioned, marketplaces are really taking share of the global e-commerce volumes. Over 50% of the e-commerce market is composed on marketplaces. And looking at the European market, you can see many strong local leaders. In some of these regions, you have an Amazon in the market and in some of these, you don't. But if we look at CDON's in comparison with other local marketplaces, we take specific note on Bol.com in the Netherlands and Allegro in Poland, which share very similar business models as ours and share the kind of same history as us as well. If we take Bol.com in the Netherlands, they started very much like CDON with media. They quickly expanded in a retail, moving to electronics and then swapped to a marketplace business model and expanded into near home products. Looking at the Nordic economy, it's a very strong economy. We had an economy in the Nordics that is actually larger than both Russia, Australia, Brazil and Spain and not many people know this. And the GDP per capita is twice the European average. And when we look at marketplaces as a percentage of the total, we see that -- we see it at a very much lower level than we do in, for instance, Germany, Poland or Netherlands. So we believe that there is significant opportunity for growth in this area in the Nordics. We also have a lower online penetration compared to many other regions in Europe. So we also believe that we will see continued growth of online penetration in the region for the coming years. So I mentioned that CDON is well positioned to win, and it's been a rapid transformation. As I said, I joined the company in 2017. We started the transformation, the rapid transformation in 2018 and have grown significantly since. We touch 10% of the Nordic population of buying 82.3 million consumers. We have over 1,700 merchants in the platform selling online, which generates around 10 million, 11 million products. So that is by far the widest local Nordic assortment. We have over 100 million visits on the site every year and a very strong brand position for CDON. We were listed on the NASDAQ First North Growth Markets on the 6th of November. And I'd like to note that we have developed our own technical platform as well. We started that work also in 2018, and we released major functionality with that platform in October last year. So what are we trying to build here? Well, the marketplace business model isn't something we invented. It's been a playbook that is well known since 25 years back. And the brilliance of the platform model is that it creates value on both sides. You create value for the merchants, wanting them to join the platform and to reach and sell to more consumers, and you create value for the consumers because we aggregate the best shopping for the consumer in one place with a single checkout and a convenient delivery option. We have done a lot of work on the merchant side so far. We have worked on securing a smooth integration for the merchant, so it's easy to join the platform. We have made sure that we have competitive pricing when it comes to fees and other structures. And we work actively with supporting the merchants, both with automatic tools but also with account management to help them build their business through our platform. And not all marketplaces are the same. When I joined this company, I got 2 questions. Are you going to still going to be named CDON? And what's going to happen when Amazon comes? Those were the 2 questions I had to answer the most. And just -- there are similarities between us and Amazon. Yes, we're a marketplace. Yes, they are a marketplace. But there are also differences between us and Amazon. First of all, we have put a lot more focus than they have on being merchant friendly. We do everything we can for the merchants. As an example, we didn't believe that we could take this position by competing with the merchants in their segments. So we have actively moved out of the retail model to actively promote the marketplace and promote the merchants in the different categories where we have been operating. The only thing we have left now is media and simply because we haven't found merchants enough to cover the media. We are last man standing in the Nordics. We have also invested in personal merchant support, both when it comes to management of their business. We have account managers who will build business plans with our merchants. We will build campaign plans. We will give them insights to whether they're pricing or their content levels are adequate. And we have validated by being a retailer for over 21 years, what kind of fee levels we can operate in different categories? And one thing that we see that we really lead in, in the Nordics is the easy integration, as I mentioned before. It is possible for merchants to sign up with CDON on Thursday and start selling on Friday, and we're extremely proud about that. As we are not competing with the merchants, we believe that transparency is the way forward. And we want to share as much insights we can with the merchants as possible when we grow this business together with them. If we're looking at the marketplace growth, it's been quite journey. SEK 400 million in 2017, and now we have seen growth of 47% over the time period up until now. We've also seen a strong number of merchant growing. I can tell you that we had in 2017, 603 of them, which sounds like a lot already then, only doing SEK 400 million. But I can tell you that out of those 603, very few were selling that volume. So it's both an increase in number of merchants, but also a spread in number of merchants actively sell on the platform. And as you can see, we have constantly been declining the retail business in favor of the marketplace business during this period. I mentioned the brand and many people ask me, why do you want to -- do you still want to be named CDON? Well, first of all, my kids don't know what a CD is. So if you're in my age, I'm 46, you still cherish the moment where -- when you got your first CD. But over time, this problem will disappear. And I must admit that I hear less and less of this question in the later years. What is good is that we actually have a very well-known brand in all of our markets. And if you look at this slide, which is from PostNord in Sweden, you can see that CDON is very well positioned compared to many strong category leaders and some international marketplaces as well. And I believe that there is a strong value to build on this position and recharge it as a market base rather than having to build a brand from scratch. Growth is one thing, but you need to commercialize this business as well. Right now, our major income stream is actually transaction-based commission. So basically, the business model is built around we generate a sale for the merchant, they pay us a percentage for that sale. That is the major income stream that we have in the business model right now. And we are fairly undeveloped as a marketplace. What we have ahead of us is additional revenue streams that can be and will be explored. We initiated the merchant subscription fee, basically monthly fee in October of 2020. It's SEK 299 per month to all merchants. We are giving them access to tools and insights worth that money. So we will continue to build that revenue stream over time and maybe in the future, those SEK 299 will be SEK 499, SEK 699, SEK 999, depending on how much value we can generate for the merchants. We haven't gotten around to building a consumer membership fee yet. Everyone is talking about some kind of loyalty program. Our loyalty program is virtually unchanged since many years back. So this is ahead of us to go and build that. Advertising on this slide says it should be launched in Q2 2021. It has been launched. We have started the pilot already this week, so that is live and we're starting to ramp that up as we go. Payment service provider commission is something we have in the model today, but it's a small portion of the total income stream. And as you can see on this list, there are other services that we also can go and build. But I think it's worth noting that the ad income alone is a very promising opportunity for us going forward. And I look very much forward to see what kind of results we can build in this one. So as the slide says, building a marketplace is building a flywheel. And as I mentioned before, this is nothing new. But it's important to understand where to put your focus in the flywheel, and you need to kind of feed the different parts of the flywheel to accelerate the loop. And once the loop accelerates, it will start to generate pull, pull in terms of consumers and pull in terms of merchants that will feed this flywheel over time. So ultimately, if you reach the maturity and the scale of it, it gets less and less cumbersome to get there. And there are various companies who tried to build marketplaces in the Nordics and most have failed because it's very hard to get to the position where CDON is right now. Some of them have been trying with off-the-shelf platform solutions, which became too costly or simply because they didn't have the funds required in order to start the wheel and get it turning. If we then look at where we are right now, we have a fairly healthy consumer base. We're starting to continue -- we're starting to build our merchant base, and we will continue with that. We have already today the widest local assortment paired with relevant additional assortment in European merchants. But customer experience now given the platform change is a core area for us to go and focus on. We want to increase the customer lifetime value, and we want to ensure that we enable a cost of sale level that allows us to invest going forward into further growth of this company. And if you look at the GMV per active consumer, we're sitting at [ affixed ] of European peers. So we do have a massive upside in solving this puzzle. With that said, we have started in the right end of things. We have started with the architecture, the infrastructure. We have built the technical platform, and now we need to optimize this technical platform and work very focused on enabling the best consumer and best merchant journey there is. If we're looking at customer experience, I won't go through this slide in detail, but it's important that the customers can find what they need. No one wants to scroll through 10 millions of products. You need to put relevant assortment in front of the consumer. We need to make sure that the price points are adequate and competitive. We need to make sure that there's transparency around pricing to make sure that the customer feel informed and makes a trust when they buy with CDON. We are constantly focusing on merchant intake. We have added functionality like consumer reviews. We had ahead of us to improve the checkout. If you go to CDON today and you try to checkout, you will see standard delivery, 1 to 2 days. That is not because our merchants doesn't offer more advanced delivery like last mile. It's because the checkout needs to be updated, so it can show those available merchant delivery options. So we have a lot of development going on and ahead of us in terms of the CX on the platform, but also tremendous opportunity for improvements that will lead to better financials. And everyone asks me about delivery. Yes, at some point in time, delivery will be an important part of the customer experience, and we're looking into options for that right now. I don't see us buying -- making sure that we buy 200 lorries and start driving around with CDON trucks in the Nordics by owning this in-house. I rather believe that we should work on enforcing the highest possible delivery accuracy from our merchants, making sure that we display this clear to the consumer and then by collaborating with local partners, build a delivery solution that is adequate to optimize the customer experience for our consumers. And as I said, critical mass, scalable platform, optimization and then this model is built for growth. So once you see that the customer experience and the technology platform performs the way we want, we have the ability to increase spend on customer and merchant acquisition because we know we will do it at the right levels and it will be a good return on investment over time. This slide tries to illustrate how we validate the opportunity for this marketplace in terms of growth. Right now, we're doing SEK 2.4 billion in turnover in GMV, gross merchandise value, that is sell-through on the platform. And if we look at Bol.com, which operates in a similar market like us, they come from a similar history like us and they're operating a similar model to us. They have 20% of the total e-commerce market in the Netherlands. If we would take 20% for CDON, that would equate to SEK 55 billion. So there is quite a growth journey that we have ahead of us. And we haven't factored in the various other growth factors like e-commerce penetration and all of that. So basically, I will stop where I started. We do believe that there is a strong marketplace opportunity in the Nordics given the increased e-commerce penetration, given the lower marketplace penetration and given the CDON's position in order to go and take this one and win this one. And we think that we are well positioned, and we hope that you feel as excited as we are about this opportunity. So that was my presentation, and then maybe we should open up for Q&A. Thank you very much.

Yes. Thank you, Kristoffer. That was a great presentation. Obviously, the theme of this day is growth, and I admit you touched upon plenty of new products being launched and processes being launched. But let's kick this off and take a few questions still on this topic. So first of all, I wanted to ask you, you have about 2.4 million consumers or active customers on your marketplace today, which is not exactly, but close to 10% of the population in the Nordic region. So my first question would be, how do you actually see that metric growing going forward? In a sense, how many people is expected to actually shop with sort of on your platform in the future? 10% is quite many people.

Yes. It is quite many people. And I want more people. I want to be the leading destination for shopping in the Nordics. I want to offer a solution to the consumers in the Nordic that allows them to start their shopping journey on CDON. We can take that position, and we want to go for that position. With that said, do I think that the growth for CDON's GMV will come by doubling that and going to 20%? I actually think we have a much higher opportunity in just increasing the frequency of the purchases from those 10% that are already buying. That is in itself a very good lever to pull, in my opinion.

[Operator Instructions] Okay. So for now, let's continue on the growth theme, but from the other end of this marketplace business of yours, the merchants. I have to say, we've been covering sort of your company now for a limited amount of time, but I thought actually that it was quite impressive in terms of new merchant intake in Q1 most recently, adding over 200,000, I believe -- sorry, 200...

Just 200.

Yes, 200, sorry.

I wish it was 200,000.

Yes, that would be something. But along those lines, Kristoffer, what should we expect in sort of the medium term here over the coming next few years in terms of new merchant intake for CDON?

Well, I can't guide you on a specific number, percentage or anything like that. I think that would be very unwise on me. But I can tell you that we're constantly working on optimizing the availability of CDON in terms of reaching merchants. We are still underpenetrated. There are -- first of all, there's a high growth of new e-commerce companies in the Nordics popping up every year, right? And secondly, our penetration is extremely low. Thirdly, we haven't done a lot of marketing. We haven't done a lot. We have gotten increased awareness in the last years. Some of that is actually driven by Amazon's entry because all of a sudden 55,000 retailers in Sweden said, "Okay, we need to put marketplaces in our go-to-market strategy, where do they fit and how should we go?" And finally, we can do so much more in terms of working with aggregators. We started a partnership with a partner in Europe called ChannelEngine. They are an aggregator with several hundred merchants in their network and by creating one connection to them, we could have all those merchants give them the ability to sell through also CDON in Scandinavia. So I think we have a tremendous amount of opportunity in just developing further our -- how should I say, the ease of integration and also to be visible for more merchants.

A follow-up question. You had a very nice slide there outlining sort of current expansions and future projects, and advertising is obviously one of them. And my question to you, Kristoffer, is really, if we look at one of your peers like Allegro in Poland, I believe around 8% of their 3P GMV is actually derived from -- or the equivalent of -- in terms of advertising income. And that's...

I don't think it's as high as 8%. I think it's around 3%.

Okay. Okay. So that would propose a substantial opportunity, of course, if you could get to 3%. Could you give us some idea of what kind of advertising are we talking about? And what do you think is your potential in the Nordic region at your marketplace, please?

Thank you very much. First of all, the advertising solution is not kind of banners on the site. It's basically sponsored products where customers using the search on the platform will be exposed to products that are very relevant for the search, but some of them will be sponsored. So let's say that you go to cdon.com and you search for an iPhone, then they -- we allow the merchants to bid on the search word iPhone, and the highest bidder will have their product placed at the very top of the search result. The consumer will see this as a relevant search result and click on it, very high click-through rate, but it's actually an advertising income solution for CDON, helping the merchants to sell more, but also helping CDON to gain more of the available spend from the merchants. And when it comes to how fast this can and will grow? We are obviously blueprinting everything we can for more mature marketplaces. We have done this before. We have good discussions with Cdiscount in France, SEK 40 billion animal, second largest in France. We have an active collaboration going on with them where we exchange knowledge with each other. And so we have a pretty good playbook on how to grow this. With that said, the maturity around using sponsored products in the Nordics is still low. So we need to educate our merchants a bit to get them used to using the solution before we can see this ramp up. We will see faster ramp-up from European merchants because they're familiar with this from other marketplaces. But I think in Scandinavia, we have some education to do.

Thanks for that. [Operator Instructions] Okay. So another journey on -- which I think you also touched upon on, on this particular slide on future growth opportunities is, of course, let's call it, Marketplace-as-a-Service or something like along those lines. And as you mentioned, yourself, Kristoffer, you have Cdiscount now offering products at your marketplace. And I think you have considered the reverse opportunity to allow for Nordic merchants on your platform to also connect to other European marketplaces, for example. Could you outline that thought a bit more? And tell us a bit what that could imply in terms of potential for you going forward?

First of all, when we build and develop our solutions and our platform, we build it in collaboration and based on the needs from our retailers and the merchants on the platform. And we have during the journey seen that they need support in terms of integration, not only to CDON, but to other sources as well. I can't say exactly how we're going to play this out. But I think that there is a value to be found and there is a need in the market for help in getting easier integrations in front of these retailers, merchants. So let's assume that they have built an integration and really put the effort behind building an integration to CDON, it's fairly easy if you're small, it's harder if you're bigger, but still it's fairly easy. You build that integration. And then if we could offer additional sales channels for them, that could be European marketplaces, that could be additional channels, then I think it would be valuable for the merchants and it would be a way for us to also capitalize on sales not made on our platform. So that is an interesting opportunity for us. And we have built a pilot for a few merchants where we built an integration to another marketplace in Europe, Rakuten in France, that they can be utilizing. So I think it's an interesting area. But sizing that opportunity, I'm not ready to go there just yet, Nicklas, but I think it's an interesting opportunity.

Absolutely. So we have a few questions on your GMV performance in Q1 here on the Evitbe app. And if I combine them into 1 question, we would like to ask you if you could outline how did GMV growth perform by division, as in CDON Retail and CDON Marketplace and for the group as a whole in Q1? And where do you see the marketplace GMV growth once retail is actually phased out, when 100% of your business is marketplace?

Yes. I'll answer at a high level on this one. I think that there's enough information about -- the information regarding Q1 specifically is out there, so that can be read. But what I'd like to say is that I often get the question, will you completely phase out retail? And I'd say that we phase out retail either when we find the merchant that can take the business for us. We would let any merchant come in. We don't have any pride in maintaining the media section ourselves. It is a declining business. It's been declining 20% year-over-year for the many past years. It's a pretty steady decline. And ultimately, if you kind of pull out the number on that decline, you will see that at some point in time it doesn't make sense to maintain it because the costs outweigh the benefits. That is not the case right now. It's a profitable business for us. It doesn't hurt the company. And we will continue to manage that or migrate that to marketplace as we go further. When it comes to GMV growth, we saw slower than previous GMV growth in Q1. And I think it's down to the kind of the maturity we still have in the business model. We just launched the platform in October. We are still tweaking the platform. We had some issues related to the platform changes that are natural when you swap something that big and that has affected the GMV growth in Q1. But we're working very hard on those right now to fix them and optimize them and continue to deliver growth. But we will have quarters with higher growth, we will have quarters with lower growth until everything is settled and we can control it in the way that we want to.

Thanks, Kristoffer. While we're on the topic, may I just ask you for the record, if you could give us some more insight or details into what parts you find -- how can I put it? Most important to actually fix, if I can use that word, in order to get back to your sort of higher growth track? And also, did the the -- slightly lower or issues with the technical platform in Q1, did that also have any implications on your cost items in the quarter? And how do you see that going forward?

We are investing now in customer experience, as I mentioned. We put our investments and we're increasing our investments in terms of improving customer experience because we believe this is the smartest lever we can pull before the smartest lever was -- making sure we have the right technical platform. Now the smartest lever to pull is to improve the customer experience and really go for that, and we're going for that. So no, we're allocating cost against that. In terms of what we're trying to achieve now, it's a mapping of things. On-site experience is absolutely in priority. We need to make sure that we have the most relevant search, the most relevant navigation. We need to have proper categorization of our products in order to be relevant for the consumers. The checkout, super important for us. It pulls down our conversion rate. The reason for this is because if the customer cannot see the right delivery options, the right -- it's even the kind of flow in the checkout can be optimized. We know this. We have the data and we know exactly how we should look like. It's just a matter of getting it built. So that is the core focus area. And then I think we will get to kind of making sure that we put a little bit higher demands on the merchants in terms of delivery, quality and all that and looking at ways to optimize the delivery. Those are the things that I would like to mention right now. And of course, we have additional things we're working on. If you had asked me a month ago, I would say it's important to get the advertising solution in place, but that is in place now. So there is 1 less in the less [ thickened books ].

Yes. Excellent. [Operator Instructions]. So can I ask you, when it comes to Amazon, I think it's fair to say that you have -- I mean you have a fairly clear discounted sort of take rate versus Amazon, and you also provided a very clear slide, I think, with a number of arguments where you differ it from Amazon or why merchants choose CDON. But I also -- I think it's fair to say that Amazon is very competitive on price. I think they want to be a price leader even in many, many categories. And personally, I'm a bit concerned that their pricing strategies may actually impact the retailers and the brand owners margins and which, in turn, could potentially feed through to hurt your take rates, the entire sector perhaps. What's your thought on that? I mean right now, 10%, 11% take rates, I would estimate for you. Where do you see that going forward? And why would it not come down?

Well, I'm not saying that it shouldn't come down because take rate is comprised of many things. And I think we need to do 2 things. I think we need to continue to develop our commercial offer, including advertising and things like that to maintain in a higher take rate and aggregated level. But then we need to make sure that we are adequately aggressive when it comes to merchant fees. We should -- we need to provide value to the merchants. If they cannot make money by selling on CDON through the merchant -- through the platform and with the merchant fees that we operate, then we won't have a business with them. But with that said, we're 25% cheaper than Amazon on average already now, and you have additional fees on Amazon on top of that, which makes them a more expensive alternative than CDON. So if there's competitive pressure in the market, my best best guess is that they will go for a cheap and efficient solution, and then we are there for them.

Yes. Yes. Absolutely. So we have a question from the floor, Kristoffer. And it reads how much of your revenue will come from commission and other services within 5 years?

How much of revenue? Well, I mean -- I don't think -- it would be unwise of me to guide on that because I simply don't know. It's very hard for me to tell in 5 years. If you had asked me 3 years ago, will you be able to build the marketplace that have 1,700 merchants and reaches 10% of the Nordic population? I would say, I don't know, but we have done it. So where will we be in 5 years? That's hard to say. I can tell you, we are a fairly new baby on the marketplace arena. We have gotten very far, further than most in a very short amount of time. And I think we have a fantastic opportunity ahead of us.

But I guess you could say, I suppose that, as we speak, you have about 75%, 80% of your business is actually from non-retail and the retail part is shrinking by 20% every year going forward. So perhaps that could be a starting point at least.

That could definitely be a starting point.

Okay. Kristoffer. We're running out of time a little bit. There's 4, 5 minutes left. I've been analyzing the -- your sector peers fairly closely. And it seems like on top of things that marketplace, whether it's Adevinta or eBay's Classified businesses or whether it's Allegro or CDON Marketplaces, it seems like there's a natural willingness to have an oligopoly structure in the sense that all buyers want to find all sellers and all sellers want to find all buyers, right? That's the very idea to me, it seems. And why we also see that margin levels in the more mature markets are typically around 25-plus percent actually in the likes that I mentioned. Where do you -- I don't expect you to provide margin guidance. But if you lift your horizon a bit, could you walk us through a bit what you actually think the margin potential is from CDON having, let's say, 100% commission and services income?

We make the same analysis as you do, Nicklas. I mean we're looking at more and more mature marketplaces. And there are no real reasons why we shouldn't follow the same path as they had. I can't say what is different in the Nordics that would make it impossible for us to not follow the same kind of path like Allegro and other marketplaces. What is important is that you need the right foundation to build on, which I think we have. You need a strong technical platform to go over there. And the business model itself scales very well once you reach a matured state. It's not like retail where you only have to optimize kind of the cost pricing and the cost of sale. This has additional revenue streams that you can go and explore. You can build an ecosystem of services, which makes it very profitable for the platform. Ultimately, you build significant value on both sides, as I mentioned before. So as you said, I can't guide you on profitability, but I can tell you that I'm very positive towards what is left to be developed in this platform and this model.

Okay. We have 1 more question from the floor, and the question reads, what's the current return rates for your merchants from the lowest to the highest and the average?

That is not a number that we disclose, but I can tell you it's a low. It's a low number. We are fortunate in that perspective. We are not fashion, which operated what, 38%, 40%. We sit at a low number, a very low number. Let me say it like this. I don't lose sleep over it, which is good.

That's a very ensuring answer indeed. Okay. We're running out of time. It's -- perhaps if there's no further questions from the floor within the next, say, 15 seconds, I just like to round off by a final question to you, and that would probably be, would you also consider sort of M&A opportunities to sort of get around CDON Retail, if there are any opportunities to make another business combination or somehow change the way it looks right now?

I think that we need to look at build versus buy always. What is important for us is time to market. It's important for us to build the best value proposition to the merchants and the consumers. And if M&A is the better choice, then we should go for it. Absolutely. Yes.

Again, very clear, Kristoffer. So our time is up. Before we introduce -- before we take a brief break and then we introduce, [indiscernible], the financial technology company, the consumer bank, I would like to take this opportunity to first thank you all for listening in to SEB's Growth seminar and the presentation with CDON. And most importantly, a big thank you to you, Kristoffer, for taking your time and presenting CDON for our clients. Thank you very much.

Thanks.

Thank you.