Odinian Beta

Booktopia (ASX: BKG) is Australia’s version of what Amazon used to be when it was first launched by Jeff Bezos in 1994. While Amazon has grown dramatically since then and diversified into a number of industries, Amazon was originally conceived by Bezos as an online bookseller that could benefit from the early days of the internet and as eyeballs progressively moved online.

After being founded in 2004, Booktopia floated on the ASX in December 2020 and continues to grow quickly, helped over the past year by people spending more time at home during the lockdowns and turning to buying books online to keep themselves occupied.

The company beat prospectus forecasts, with revenue growing 35% to $223.9m and 8.2m units shipped compared to 6.5m in 2020. Helped by operating leverage, underlying EBITDA grew 125% to $13.6m.

Booktopia has also started 2022 strongly, with sales in July and August above the same period last year.

Competitive advantage

Booktopia claims its competitive advantage is the data derived from its proprietary software and algorithms which help maximise traffic and conversion rates (ie the percentage of people who end up purchasing books after going to its website). With a database of 5m customers and 1.8m active customers, an increase of 19% on 2020, one can see how this rich trove of data i useful to the company in helping target customers with offers and compete against other booksellers.

One major competitor, Dymocks, also has significant data gathering and customer analysis capabilities via its Booklovers Rewards programme. Illustrating the value of such a programme, it may come as a surprise to readers to learn that Dymocks didn’t actually have a loyalty programme up until relatively recently. However, as competition from both online and bricks-and-mortar book stores increased starting in the late 1990s, over the past two decades Dymocks has invested heavily in its loyalty programme, with the result of not only revitalising the business but seeing off competitors such as Angus & Robinson.

Competitive threats

As co-founder Tony Nash readily admits, Booktopia was helped in its infancy by Amazon staying clear of Australia up until recently.

Of course, that is no longer the case. However, it is important to note that Amazon’s main competitive advantage in the United States and elsewhere is its logistics network, consisting of distribution centres and its delivery network that allows it to quickly deliver a book – or anything Amazon sells – to customers quickly and cheaply.

While this works in heavily populated countries with many large cities located in relatively close proximity to each other such as in the United States or the United Kingdom, I think this competitive advantage will be harder to replicate in Australia due to our country having only a few large cities separated by vast distances.

With Australia also being a much smaller market, this also makes it more difficult for Amazon to earn a reasonable return on the vast investment required to establish and maintain its logistics network.

Even so, perhaps Booktopia is trying to minimise the potential threat from Amazon through vertical integration by expanding into publishing and distribution via Booktopia Publisher Services and Booktopia Publishing. The latter uses the former to distribute its books to retailers and resellers across Australasia.

Vertical integration obviously allows Booktopia to earn more margin from publishing and selling books.

Yet Amazon is a ruthless competitor that often prices various services as loss leaders to destroy competition and gain market share. The company has an unbroken three decade history of pursuing this strategy.

So anyone considering purchasing Booktopia shares should probably consider the potential impact of Amazon trying to repeat this strategy to destroy Booktopia. Given the costs of doing so would be immaterial to the wider Amazon business, to me this remains the biggest question when looking at Booktopia shares.