Wiggle Room

The tough road ahead for e-commerce pureplayers

Back in 2011 when Private Equity investor Bridgepoint bought Wiggle, the up and coming pureplay cycling retailer, it must have felt like everything was possible. Britain was hosting the Olympics the following year, British cycling was going from strength to strength (Bradley Wiggins was to win the Tour de France in 2012) and as a specialist retailer it must have felt like they were in the right sector at the right time - consumer trends towards healthier lifestyles and the rise of the MAMIL (Middle Aged Man in Lycra) all pointing to growth, growth, growth.

And to be far, it has indeed grown. The business crossed £100m in revenues in 2012 and had reached £360m by 2021 on the back of organic growth, acquisitions (with the Chain Reaction business now rolled in) and international expansion. Deal of the century, then?

Except what the business hasn’t really done in the intervening period is actually make much money. It has changed leadership every couple of years, has been very busy on the acquisition trail and with that international expansion, but the sum total of all the Operating Profit generated by the business from Bridgepoint’s acquisition in 2011 until it was sold to its current owners (Sigma Sports United) is just a fraction less than zero.

And as I write this, it is, very sadly, in real trouble. The acquisition by SSU (a German company with a US stock market listing) seemed like the beginning of a potentially exciting new chapter for Wiggle, but as that business has come under all kinds of funding challenges of its own, it has begun to talk about ‘winding down under performing assets’. On the back of that statement, and presumably of some discussion about there being no more financing available for the UK business, Wiggle put itself into administration, from which it is desperately seeking a buyer.

That is always a sad thing to see, and my heart goes out to everyone in the business impacted by the current challenges. Hopefully some or all of the business will indeed find a home and survive.

But what does this story tell the rest of us about retail business? What lessons can we learn and apply ourselves, or is this all just a local story specific to one business in one market segment?

It seems to me there are a number of aspects of the Wiggle story which are highly relevant to all of us in consumer businesses:

• International expansion is hard, expensive and often ends up being a lot less profitable than you think it will be. We don’t know from the outside how profitable Wiggle’s international operations were, but we can tell from the fact that they were the first thing shut down by the administrators that the answer is probably not that positive. I’ve seen some international expansions by retailers be phenomenally successful but those examples are probably outnumbered 3 to 1 by those that aren’t.

• Brexit has made all of that harder - one of the features of Wiggle’s recent results is the sheer pummelling their European sales took as new duties and administrative burdens meant that they became less price competitive.

• Debt can be a useful source of funding, but it can be very risky. At that peak point in 2021 Wiggle had £363m of net debt, which is simply far too much for a business which by that point had not really made much profit for years.

• Covid put such a skew in many retailer’s figures that it led to bad decision making. In the case of Wiggle, like many pure-players, lockdown actually saw a big upturn in business, and it is no accident that I quoted the 2021 revenue figure earlier in this piece - in that year the business saw a huge upturn in revenue from furloughed customers taking up the hobby, and made its only meaningful profit since 2014. But the end of lockdown saw all of that fall away again, and just like all those pure-players who opportunistically floated themselves on the basis of their pandemic-fuelled profitability, 2022 and 2023 have seen the illusion burst.

But above all those individual factors, there is a bigger truth in the Wiggle story which I see being played out in other retail sectors too - and that is that it is just extremely difficult to make a pureplay e-commerce retailer profitable.

Let’s consider why. Using Wiggle as an example, it has made in recent years very roughly 30% gross margin. So for every £100 from a customer (ex Vat) it costs the business about £70 to buy or make the goods being purchased, leaving £30 to cover the rest of its costs.

Not bad, you might think, but we haven’t done the difficult bit yet. Below that line in the P&L comes “Sales and Distribution Expenses” which for an e-commerce platform is likely to be where they put the cost of getting you to click on their website in the first place. That is where things have been really squeezed in recent years with strong competition from all sorts of entrants pushing up the costs of Google Ads, social media placements and other sources of traffic beyond all recognition.

In Wiggle’s case, this cost line has hit 15% of revenues - so half of the gross margin we achieved on our £100 sale was actually spent attracting the customer in the first place.

Still not bad, but there are loads of other things we haven’t yet paid for - running the business, producing the accounts, managing suppliers, dealing with customer queries and more. All of this together would be bundled as “Administration” and in Wiggle’s case it is, with some ups and downs, about another 15% of revenue.

In other words, all the work of generating hundreds of millions of pounds of sales amounts, once you’ve paid all the costs of servicing those sales, to no profit at all.

And that isn’t unusual - I recall sitting with another pureplay in a different sector who managed a much higher 50% gross margin, but were spending 30% of revenue on those digital sales costs, 20% of revenue delivering products and managing returns and another 20% on other admin. The mathematicians amongst you will have realised that means their net profit margin was negative 20%, and it won’t surprise you that that turned out not to be a particularly sustainable model.

What’s the solution? It is very challenging to see how you could make anything other than quite marginal changes to those cost percentages whilst being a pureplayer. The digital marketing channels you are using are all well-trodden paths for your competitors, and as a result they are all expensive.

There is an alternative, though. What if instead of paying Google zillions of pounds to send ‘clicks’ to your website who might or might not buy from you, you invested some of that money a different way.

Find a physical space, for example, perhaps in a location that potential customers walk past all the time. Fill that space with your products, attractively presented and staff the space with colleagues you have trained to be enthusiastic advocates of the things you sell.

As an alternative to the brutal, clinical, competitive world of e-commerce, that new model just might catch on. All we have to do now is come up with a name for it!