CDON: Sweden’s Everything Store
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Note: All currency is in Swedish Krona
Based in Sweden, CDON is an online marketplace, or e-commerce platform, primarily serving its home country as well as the rest of the Nordic region. Over the last several years the company has been hit with the kitchen sink. Its CEO retired due to illness, it had a series of fraudulent merchants, and spent big on a marketing firm that was in over their heads, to say the least. The cherry on top? It’s under this backdrop that the company has been undergoing a major business model transition from a first party (1P) to a third party (3P) marketplace. I think it goes without saying that this has been a tumultuous time for the company, and its stock price. In February of this year its fortunes began to turn when the company announced it was buying Fyndiq, another Swedish e-commerce platform, with Fyndiq’s CEO Fredrik Norberg taking over as CEO of the combined company. In just one full quarter as CEO, Norberg has been able to make almost miraculous progress. Despite a decrease in gross merchandise volume (GMV) the company was still able to go from an EBITDA loss to gain, in what is a weak e-commerce environment in Sweden, and before various new initiatives within the company have come to fruition. With the company seemingly back on the right track, it offers an opportunity to buy a business with the potential to become extremely high-quality, at prices that are low enough you can find them in the company’s deals section.
Marketplaces are a concept that have been around for hundreds of years. They provide an important service by connecting supply and demand for a product or service. Historically, this means vendors and consumers alike aggregating at a physical location in order to, hopefully, match the supply and demand for a wide variety of products and services. Since the advent of the internet, this concept has been taken to another level. Online marketplaces remove the barrier of physical constraints, allowing for aggregation of products and services that can be bought and sold practically anywhere, at any time, simply with the touch of a few buttons. This makes the modern marketplace a powerful business for those who find themselves at the center of one. These marketplaces come in many forms and iterations, though on the whole they tend to skew towards being top-quality businesses as they scale, with immense operating leverage and two-sided network effects, backed up by extremely strong economics.
Before comparing CDON and Fyndiq (going forward I’ll simply use CDON, as the businesses operate very similarly) to the gold standard of marketplaces, let’s establish what these marketplaces do at a high-level. CDON is a low-cost, (nearly) all 3P, exchange of goods, e-commerce marketplace. In plain English this means the company connects consumers to vendors online, who are selling their own products at low prices, and taking fees for facilitating this connection. This results in CDON operating a capital light model, with a strong flywheel, and stickiness around both the vendor and consumer sides of its business. In terms of product selection, CDON offers a wide ranging assortment of goods, carrying everything from daily toiletry needs, to a litany of electronics, and everything in between.
Now let’s dig into the flywheel - something that many businesses claim to have, though in very few instances does it show itself as prominently as in a marketplace. While you can start with any part of the flywheel, we’ll begin with the vendors. As CDON adds more vendors the marketplace has better product selection, better product selection improves the customer experience, improved customer experience increases traffic to the website, increased traffic to the website leads to more vendors, and the flywheel keeps on spinning. On top of all of this, CDON is constantly taking in more data from both sides of the network and using it to develop better tools and, therefore experiences, for all parties involved.
The other key piece to the CDON puzzle is stickiness of both the vendors and consumers. On the supply side, vendors are building their businesses on CDON and, ideally, adding more CDON services over time. As these vendors become more and more ingrained into the CDON ecosystem it becomes progressively less likely they will leave the platform, as doing so will cause a decrease in sales and simultaneously come with various switching costs in the form of both money and time. There’s also stickiness to the marketplace on the consumer side. CDON combines a membership model with product offerings that include high-frequency purchases, leading to it quickly becoming a part of its customers' everyday lives. Before brushing off the power of this behavior change, just think about all those Amazon purchases you make and forget about until they arrive at your door. This change in behavior becomes habitual to consumers, leading to increased usage and stickiness, setting up the other side of the flywheel.
If the name drop didn’t give it away, the aforementioned gold standard of e-commerce is of course Amazon. With some context around the flywheel concept and the stickiness of vendors, I believe this is a good point to compare and contrast a few more key points about the company’s marketplaces. Let’s start with a similarity, which is owning the customer relationship. By having the customer come directly onto their platform to make a purchase, both CDON and Amazon own the customer relationship, bringing loyalty to their respective brands. Compare this to a company like Shopify. Shopify has no brand affinity amongst consumers as their services are white labeled to their vendors. Owning this relationship allows CDON and Amazon to best take advantage of the high-touch platforms they have created, which in itself is an important feature. A good example of the importance of being high-touch is eBay, whose low-touch nature, with mostly sparse consumer utilization has greatly hurt its business over time. Now to the key differences. These largely stem from the 1P marketplace, as well as the logistics and infrastructure that Amazon has built with it. CDON itself was formerly a mix of both a 1P and a 3P marketplace, but has opted to go strictly 3P. While you can pick which model you prefer better, each naturally has its trade-offs. On the positive side, a pure 3P marketplace is extremely capital light. Since the company does not manage any inventory or logistics, it simply has to operate its websites, as well as pay for marketing, and customer service teams. This leads to very strong margins and large operating leverage. The second positive is that vendors do not have to fear that they’ll be undercut by the platform itself - something that can certainly not be said of Amazon. By being strictly 3P, CDON vendors have no concerns that as they become more successful and deeply ingrained into the ecosystem that the marketplace operator will be their downfall. This better aligns incentives with the vendors, and is a comforting factor when trying to recruit vendors onto the platform. It can’t all be positive, and as mentioned there are, of course, trade-offs. While its capital light nature does lead to CDON having better margins than Amazon, it also creates a less defensible business. By having the massive amount of logistics and infrastructure muscles that it does, Amazon has made it extremely hard to upend the behemoth of a business they have built. This same dynamic has given Amazon an unmatched level of control over the customer experience for an online business, or maybe any business for that matter. Though it does come at a loss of a certain degree of defensibility, I believe that the improvement in margins and vendor relationships should prove the better business model, as the real moat of these marketplace businesses come from the flywheel and network effects rather than physical infrastructure.
Simply put, there is a lot of low-hanging fruit for new CEO Fredrik Norberg, and he seems to be taking it. Between cost redundancies after the Fyndiq merger, finishing the transition from 1P to 3P, and getting rid of money-losing vendors, Norberg should be able to make massive strides in turning the company around before even driving increases in GMV. This already seems to be the case. With just one full quarter under his belt, Norberg took the company from being EBITDA negative to positive, on negative GMV numbers, before any of the merger synergies. This is no small feat for a three month period. It is also worth noting that Swedish e-commerce sales overall have detracted, and I expect that when the sector returns to growth CDON will more than likely grow faster than the rest of the industry. That said, to illustrate how undervalued the company is, let’s assume no growth in GMV. We also won’t include the higher monetization that will come with the addition of more value added services to vendors and a bigger push into advertising on the platform, though over time both factors should play a big role in the company’s growth. Just on the basis of going for the easy wins, I believe CDON should be able to get to around $200M in EBITDA, though I’ll use $140M as this is my most conservative figure. Even using this overly conservative set of assumptions, a (very reasonable for a business of this quality) 20x EV/EBITDA multiple would give you ~65% upside from current levels in a year and a half, ending after next year’s holiday season (often referred to as the high season in Sweden). While this is a pretty good result for an eighteen month period, the real gains will come as time goes on and the combination of improved operations and increased monetization at the company, as well as a recovery in the Swedish e-commerce market as a whole, lead CDON back to a trajectory of growth and allow its true economics to shine through.
While it is easier said than done, investing in a successful turnaround story often leads to spectacular results as an investor - and the turnaround at CDON seems to be well underway. Despite being in what looked like quite a precarious position less than a year ago, the Fyndiq acquisition and subsequent hiring of Fredrik Norberg as CEO has steered the company back in the right direction in a shockingly quick period of time. This has created an opportunity with large upside on the low hanging fruit alone, plus the potential for much larger gains should the company show any signs of a return to growth. With one of the best business models in the world, marketplaces have immense economic characteristics and competitive advantages, making CDON an opportunity to own an asset of the highest quality at a bargain of a price.