What you need to know:

• The snap return of bricks and mortar store sales is crimping ecom growth rates and hurting online pure-play retailers, says Richard Facioni, chair of two retail groups with upwards of 1000 stores combined - Alquemie targets the younger end with stores like General Pants, Pumpkin Patch and Lego, while Mosaic Brands is more hitched to boomers with Noni B, Millers and Rivers.
• Alquemie also owns ecom pureplay SurfStitch, where sales have dropped to 2019 levels. He says online retail pureplays like Adore Beauty and The Iconic will be under pressure and are better with a retail presence - sales growth is hard to find and fund as customer acquisition and performance media costs spike.  
• Per Facioni: “The consumer is multichannel. We often see them doing their research online, and then going into store and buying it. In Ginger & Smart last week, our number one selling gown – quite an expensive dress – there were a number of click-throughs to that particular product. But nobody bought it online, only in-store."
• Click Frenzy and Black Friday promotional events meant November has "become the new Christmas" in volume terms but at lower margins.
• It is also partly impacting performance marketing "which is becoming less effective", says Facioni.  
• He is also leading an overhaul of the group tech stacks, Alquemie particularly, by unifying ecommerce, loyalty and ultimately a central customer data platform across all its retail brands.
•  “All of our customer data sits in the brand," he says. "So the Lego guys know who their 400,000 loyal customers are, and they look after them. General Pants has 2.1 million VIP customers, and Surf Stitch has a 2 million database. But they all sit in the brands – and often it is sitting in different systems [within those brands].”
• Listen to the "Chairman's view" on the Richard Facioni podcast here.

High street applies the heat 

The heat has come out of ecom sales artificially buoyed by Covid as Australian shoppers head back to stores. That could spell trouble for pure-plays without physical retail, according to Richard Facioni, founder and CEO of private equity firm ACTA Capital and chair of retail groups Alquemie and Mosaic Brands.

He says digital-only players face twin threats of rising performance marketing prices – driving up acquisition costs, with sales tanking as soon as marketers turn off the taps – while retention is also getting harder as loyalty costs increase.

“We're definitely seeing a pullback in online from last year,” says Facioni. While some brands are seeing single digit ecom declines, others are down as much as 30 per cent on last year.

“It varies dramatically between sectors and brands,” says Facioni, though overall “online is still up” on 2019 levels across both the retail conglomerates he overseas as chair.

Boomers still booming

Alquemie holds mainly younger-focused brands – General Pants, SurfStitch, Lego Stores, Ginger & Smart and Pumpkin Patch.

ASX-listed Mosaic Brands skews older, housing Millers, Rockmans, Noni B, Rivers, Katies, Autograph, W. Lane, Crossroads and Beme.

Across the two customer segments, ecom fortunes have contrasted as older people stick to new habits acquired during covid while younger people head back to the high street.

“Mosaic is up year on year from last year. Growth is definitely moderated, but it's still growing. Compare that with a [younger-skewing Alquemie] brand like General Pants, which is probably further along their online journey – that has seen a slight pullback from last year, but still well up on 2019,” says Facioni.

“Contrast that with SurfStitch, a pure-play online business and it is probably flat-ish to 2019 maybe slightly down – which is consistent with other online retailers – and well down on last year. So, while it’s still up on historical levels, you've definitely seen a shift from online from a year ago back to bricks and mortar. And the shift seems to be more accentuated for pure online retail.”

Facioni thinks the pendulum swings cited by other Australian clothing retailers – such as $3bn Geelong-based Cotton On Group – are starting to settle, with the covid bump replaced by the new “stabilised baseline” between physical and digital sales. Hence he’s working on a plan to bring a physical presence to online pure-play SurfStitch while both Alquemie and Mosaic are ‘re-platforming’ commerce and ERP systems in a bid to cross-sell across group brands and channels.

Near-term: November the new December?

Next year looks choppy, but the next few weeks should be “strong” for retailers, as discounting events Click Frenzy and Black Friday lead into a festive season where many, particularly younger shoppers, are looking to party in new glad rags for the first time in three years. For some retailers, that means November has become the new December.

“You definitely see lower margin … but November has become the new Christmas” in volume terms. “November used to be a full margin month. You'd save your promotions until getting closer to Christmas and into Boxing Day. November has now become a promotional month.”

The upshot is a noticeable lull in October although Facioni questions whether the discounting days now crammed into November will eat each other: “Each of those events are probably having less and less cut through year-on-year as the customer becomes more and more conditioned.”

But Christmas sales remain the key annual event for most retailers. 

“December is always bigger because no matter what you do in November in terms of promotion, people leave - I leave – my Christmas shop until the week before.” Blokes, he says, are half the population after all.

Next year: Storm clouds

There’s fear across the economy about first quarter slump as consumers keep a wary eye on the cost of living. But Facioni isn’t panicking.

“Next year we're going to see headwinds, definitely we're going to see a slowdown. Interest rates are will start to bite. Inflation is high – it will start to unwind, I think, through the course of next year – but it's still going to have an impact.”

He thinks younger people will be most affected.

“They spend a disproportionate amount of their money not only on fashion, food and beverage, but also on things like transport and petrol – and that's going to hurt them. So next year I think we're going to see a little bit of a slowdown there … Whether we are going to see comparative sales decline, we’re not sure. But we’re definitely going to see a softening.”

But Facioni believes the younger-skewing Alquemie is well prepared.

“What we've got in that business is a lot of internal growth through more stores that we're rolling out, new businesses that we're licensing, new brands that we're launching – so [Alquemie] in an absolute sense will grow regardless of the comp [comparable same-store] sales. We're pretty confident we've got enough years of absolute growth to offset any comp sales decline that we might suffer in the next.”

Older-skewing Mosaic customers may yield some upside, as they tend not to have mortgages to pay – with cash in the bank that benefits from interest rate rises.

“Mosaic should be relatively well positioned for next year compared to other discretionary retailers. I think we're going to see modest like-for-like sale growth in that business,” says Facioni.

“If there's a full blown recession, that's different, because the consumer is also very sentiment-driven. If things are bad, she just feels bad and she'll stop shopping. That sentiment will come into play if it gets really bad. But barring that, we expect to see some comp sales growth.”

Who’s panicking?

Facioni doesn’t seem too nervous for someone steering two retail empires along with running specialist retail private equity firm, ACTA Capital.

“I'm a retail investor … The guys in the weeds are probably a bit more nervous than I am, and they're sweating their sales every day. It doesn't help me getting all worked up about that,” says Facioni.

“I see through that, and I can see the growth that I've got in both those businesses over the next twelve to 24 months in a relative sense, compared to a lot of our peers. So I won't say I'm relaxed. I always wake up in the middle of the night worrying about things, that's my nature. But I think we're as well positioned as we can be,” he adds.

“Mosaic is operationally in the best shape it's ever been. We've got the cost structure and the operating model in that business set” – the firm shuttered circa 400 stores during covid – “so that the operating leverage in that business is huge. We're very comfortable with where that business is,” he adds.

Does Facioni think competitors will be equally cool in the face of an incoming crunch?

“I never underestimate the competition, but I also don't focus too much on them. We can only control what we can control. When I look at Mosaic and its peer set, I think that business is in better operating shape than its peers. From what we hear in the market, our cost structures, our inventory position, we're just in really good shape. And I think we'll probably fare better than our competitor set.”

Stock options: Good call?

Retailers – on and offline – may struggle to weather an incoming squall, particularly those that horded stock in the face of covid-induced supply chain crunches.

“I know a few retailers a few months ago made the decision to load up on stock to offset any supply chain issues that they might face. We took a different approach.  We didn't increase our stock. We just built into our critical path, 'okay, it might take an extra two weeks or an extra four weeks to get here’. So we've come into this Christmas not overstocked. I think we're in a comfortable stock position,” says Facioni.

“That was a deliberate decision and I think it's played out well for us. Whereas I'm aware of some other retailers who have got a lot of working capital tied up in excess stock that they're going to have to deal with. If we're going to a slowdown, and they're carrying that excess stock into next year, it'll be interesting to see how that plays out.”

It could be a brisk start to the year for barter players.

Digital ad hikes forcing rethink?

Some online pure-plays are also challenged by rising customer acquisition and retention costs in tandem with the swing back to physical retail.

“The consumer is multichannel. We often see them doing their research online, and then going into store and buying it. In Ginger & Smart last week, our number one selling gown – quite an expensive dress – there were a number of click-throughs that particular product. But nobody bought it online, only in-store. So people were looking at it, but because of the price point, they wanted to feel the fabric, try it, make sure it looks good and buy it in store,” says Facioni.

“Within pure-play online, you don't have that ability. What's happening with pure-play online is customer acquisition costs are just going through the roof, and the changes to Apple's iOS have made life harder. Cookies are going to be phased out. And so what else have you got? Where do you go to acquire your customers as it is getting harder and more expensive?” he adds.

“Your ROAS [return on ad spend] continues to fall and you're spending more for less in paid search. So you redirect more to social and paid social, but that's going to go the same way. If you think of a bricks and mortar and online retailer – ‘omnichannel’, I hate the word but nobody’s come up with a better one yet – each of your stores is effectively a billboard for your brand. So that effective out of home marketing is then feeding back into your online sales,” says Facioni.

“If you don't have that, you've got to spend more as an online retailer. That marketing spend is very significant for online retailers – and as soon as they wind it back, sales follow [south].”

Adore, Iconic under pressure?

It’s put to Facioni that those challenges are likely being felt by the likes of Adore Beauty and The Iconic.

“Have a look at [Adore’s] prospectus – before they went to IPO, their marketing spend went up very significantly, their active customers went up very significantly and their revenue did as well. But you also know as soon as they wind that back, it's all going to come back again. So it’s very hard to have a profitable business when you're running that sort of model.”

Asked for any view on the Iconic, Facioni suggests the retailer may “not [be] as profitable as they would have you believe”.

Why not?

“For that very reason. They've got to spend so much on customer acquisition, customer retention, gaining that share of wallet, staying front of mind because customers are not walking past the store and doing an impulse buy. So they've got to spend so much to get their sales. Then there’s freight logistics costs – it’s not getting cheaper getting the product to the customer. Again, you can't offer click and collect. You've actually got to get it to their front door. There's a whole lot of factors there.”

Performance marketing: “Becoming less effective”

Brands within the Alquemie-Mosaic stables usually spend a single digit percentage of revenue on marketing.

“It varies from brand to brand. Business like SurfStitch has to spend a lot more as a percentage of revenue because it's pure-play online. It has historically been very dependent on performance marketing. Performance marketing is a bit of a drug, people love it, because you spend a dollar, you get a ROAS [return on ad spend] of six. Great, the CFO loves it – sign off the budget because we know we're going to get a return on that,” says Facioni.

“Above the line, you can't measure it as easily, so it's harder to win that argument. But what we're seeing is performance marketing is becoming less effective. We do need to invest above the line in brand marketing, so what we do is we test and learn … Our overall budget doesn’t change, but the mix is shifting structurally,” he says.

“I think performance is going to become structurally less effective and so we'll have to find other places to put that marketing dollar to work.”

Growth drivers: social commerce, click and collect

Click and collect has become a major growth driver for multichannel retailers.

“What we're seeing is when people are ordering online and then picking up in store, about 15 per cent of those customers then buy something else in store,” says Facioni. “When you start to understand these behaviours, you can start to leverage them and to start to adjust your business model accordingly.”

Facioni thinks the rise of social commerce will increase growth both digitally and physically in the same manner, and plans to invest more heavily as a result.

“We know that online research informs about a third of all in store purchases. So we know that the two work very, very closely together. That's a trend that we have continued to see and it's probably going to continue to grow.”

Tech stack overhaul

One of the reasons Facioni was in San Francisco (and subsequently stuck on a plane next to Mi3’s Paul McIntyre) is because he’s a self-confessed “tech-geek – you can’t keep me away from it”.  Both Mosaic and Alquemie are going through a tech overhaul in a bid to streamline disparate systems and start to better understand what customers are doing, sell them more stuff and attract new ones.

“Retailing is hard and always has been, for what I always say is fundamentally a very simple business: You buy stuff, you sell stuff. But it is hard and it's not getting easier – so how do we become better? To me, technology is a big part of that.

It’s difficult to run a retail group when everybody’s working off different numbers and disparate systems, as has been the case. Covid, he says, “was a big wake-up call” while the deal for General Pants in May this year took Alquemie from “a collection of brands … to a retail conglomerate”. That served as a “trigger,” says Facioni. “Now we have the critical mass and the scale, so let's start to invest in [the tech] because we're only going to keep growing, it is only going to become more important, and we can afford it.”

Alquemie is currently running "four different finance systems, four different ecommerce platforms and then we had different POS systems. So we’re migrating everyone onto a common ERP and a common ecom platform – we’ve gone with Salesforce Commerce Cloud to replace Shopify, Shopify Plus and Hybris, so that project is underway”, says Facioni.

“As great as Shopify is, you have to rebuild it each time [for a different brand],” whereas Facioni wants to do the legwork once, across brands and jurisdictions, “so then it becomes a bit of a cut and paste and a re-skin.”

He says a recent coffee with a Salesforce exec sums up where he thinks retail is at – and where Alquemie and Mosaic need to end up.

“She said, ‘I actually shop all of your brands. I shop Surf Stitch, General Pants, Ginger and Smart and Lego’. I said, ‘well, if you haven't told me, I'd never have known that’. Because we don't know that yet, so how do we get to that point? How do we really start to understand those customers? And that starts to lead to personalisation, hyper-personalisation, real-time analytics of what the customers are doing. That, to me, is where we're heading,” says Facioni.

“So when I look at Dreamforce, when you take all the Salesforce propaganda out for a moment, what's going on in a technology sense and where the market is heading … that's where it's going.”

CDP next?

While underlining that both Mosaic and Alquemie are building out the basics before mapping out a full stack – prudent given the number of martech Ferraris sitting gathering dust – Facioni says the groups will “definitely need” a customer data platform, or CDP.

“You get that single view of customer, single source of truth. You get to know everything about that customer across their customer journey, across all your brands. I think that's critical for us, especially as we start to bring on more brands, more licenses, acquire more businesses – how do we now leverage those high value customers across those new brands as well?”

The firm is launching stores for National Geographic next May and “doing some more work with Disney in the background”, with Facioni hopeful of building out that relationship. He’s also putting together a deal to “acquire a small childrenswear brand which we will incubate and grow”, ultimately creating a “kidswear unit” within Alquemie. Meanwhile, it plans to relaunch Insight, currently sold via General Pants, as a standalone brand.

“So there's a lot going on. Having that insight into those customers [via a CDP] is going to be critical for the success of all those brands.”

Twenty per cent growth push

Right now, Alquemie has none of that visibility across the group. To drive growth, that needs to change.

“All of our customer data sits in the brand. So the Lego guys know who their 400,000 loyal customers are, and they look after them. General Pants has 2.1 million VIP customers, and Surf Stitch has a 2 million database. But they all sit in the brands – and often it is sitting in different systems [within those brands]” says Facioni.

“Some of the data might sit in your martech system, some might sit in your POS, some might sit in your ERP. So when you need to drill down into that data, you're drilling into multiple systems across different brands. It's a huge exercise.”

He’s out to prove the new commerce kit works but ultimately with all pieces in place, hopes to drive more frequent visits, both online and off.

“Can we get frequency from 2 to 2.2 or 2.5 – so a 10-20 per cent lift in frequency? Because that's a ten to 20 per cent lift in revenue … Then how do we get more out of them? Increase their basket size by giving them offers or showing them product that is more relevant to them at that point in time,” says Facioni. “This is all stuff that you could do manually, but it would take hundreds of people in hundreds of hours to do it. The technology allows you to do it in real time.”

The other side of that equation is the people and skillsets to work the tech.

“That’s a whole other discussion,” says Facioni. “But we have to keep investing in this stuff [both people and martech] because otherwise you stand still, or you go backwards. And that is not my mindset.”