Investor Dialogue: Redbubble | In Practise

Investor Dialogue: Redbubble

In Practise Investor Dialogues

Why is this article interesting?

Investor Dialogues is a new format at In Practise. We invite 3-5 professional investors from our audience to participate in a recorded discussion on a specific company. Each participant is anonymised and named analyst 1-X in the transcript.

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Redbubble

Why is this company interesting?

Redbubble is an Australian-listed three-sided marketplace connecting individual artists, fulfilment partners, and customers. Artists upload unique designs and Redbubble partners with fulfillers to produce 'print-on-demand' (POD) products and ship to consumers.

Redbubble's competitive advantage lies in the 60m long tail of unique designs that drive organic traffic via SEO to customers looking for customised products. The flywheel starts with artists uploading designs, this unique content driving organic traffic which drives sales through the fulfilment network. As the fulfilment network scales, delivery time and cost declines which drives sales and the flywheel again.

Redbubble reminds us of Etsy in 2016; a marketplace with a unique and sticky supply side and a new CEO to focus the company on driving sales for sellers. RBL's 5-year revenue CAGR is +35% with gross margins over 40% and an estimated ~15% long term EBIT margins.

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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

When I look at Redbubble, the big question I ask myself is, what are the real limitations to scaling that marketplace revenue? Does anyone have a view on what the reasons are that, firstly, Redbubble couldn’t hit the 1.5 billion GMV target they had for 2024? Beyond that, are there any reasons why they can’t scale to 10 billion GMV?

Analyst 1: This is my opinion, obviously, but I think it’s less of question of, what is the limitation to scale, and it’s more about when rather than if. Naturally, the business has tailwinds to it that they will enjoy for a long period of time. Mike has said, if we do nothing, naturally, the benefits of people wanting to express themselves, the gig economy, the constant flow of artwork and, maybe, even if they just passively add new products, there is a high single digit, low double digit growth rate embedded, probably for the foreseeable future, in the business.

It’s really a question as to what the growth curve looks like and how quickly they can execute to resolve some of the pain points that exist today, that will unlock the speed at which they get to that number. I think it’s more of a question about what that timeline looks like. The biggest question is execution. That’s how I see it.

Surely that relies on some kind of product expansion, as well? Or do you think they can grow double digit with the current range they have?

Analyst 1: Historically, I don’t know. Maybe you have a historical concept for what that organic growth rate looked like, over time, given your experience?

Analyst 2: It’s varied. Forget about the very early stages of the business. It has consistently varied between 30% through to around 70%, per annum. There are two fillips to it; there is an underlying growth rate, in each of the individual products. What has happened is, as categories expanded, that also added to growth, almost instantaneously, so there is a return to adding products. But it tends to be a little bit more refined than, add a new product and away you go. For the foreseeable future, I don’t think it requires, necessarily, on the adding of new products.

I think it could do with category filling out, because it’s got some fairly significant gaps in the range within its categories. I think I agree that this is a when not if process. It rounds to zero, in each of its major categories, in each of its major product lines, to market share, in its relevant markets. It’s not pushing out bounds of real limitation in any of its product ranges, that it can’t continue to penetrate. I think it is riding some very strong personalization and decoration waves that are showing no signs of abating. If anything, when you get into new markets, that wave is a growing trend; it hasn’t even peaked in the United States. I think that trend and those tailwinds are there for a while.

I think this is, how fast can you grow, as an execution issue; not in terms of, is there enough of a market opportunity out there.

Analyst 3: Thinking about it from the other side, I would not say that Redbubble is missing any major product categories. Do you see any product category where it might be a significant growth driver?

Analyst 1: One thing I would point you to, rather than telling you which categories is, there is another industry, called the promotional products industry, which has been around, in the US, for 50 plus years. It catered for businesses that wanted to print their logo on things. Those are the raw blanks and you can go to a website, like 4imprint or one of the other players and they have tens of thousands of products.

Will all of them translate perfectly to print on demand? No. But they have laid out a vision of having 500 products and, whilst I don’t know precisely what they are, I certainly think there is room to figure it out what is next. The other thing I’d point to is, the technology that is evolving in print on demand is allowing them to do new modalities that haven’t been possible before. Something like stitched in products had never been possible, even two or three years ago. With things like backpacks, you could print a panel and attach it to a product.

I dream of a day where they have custom sneakers; where a kid can buy exactly the sneaker panel they want, on the side, and they can stitch it in. There are mega products that we just can’t imagine yet; even printing on steel on things like that. These are just coming to the fore now. I think we’re limited by our imagination and what the technology can do and I don’t think we’re anywhere near done, in terms of rolling out new ways to print.

Analyst 2: As you mentioned, the print, cut and sew area has opened up fairly large opportunities for Redbubble. But I do think there are some fairly serious gaps in their category range. If you think about fashion, it really sits at low to medium value, and it hasn’t translated. If you think about where Society6 has consistently won against Redbubble, it has been in young female fashion. I think that’s partly brand, where Redbubble has always been a slightly more techy brand and attracted a slightly more techy crowd. But I do think there are some categories around fashion and around taking each of these as category strategies.

It seems to be implied in some of the stuff that Michael is saying, in terms of doing category reviews and making sure that they are getting a higher level of coverage in each of their core categories, rather than just products that are popping up in a less coherent way. I think that’s a good plan; a product opportunity allows you to become branded, in a particular category. If it has achieved a brand, it’s been in the t-shirt space. That’s okay, but I think category and branding sit closely together, in some homewares, women’s fashion and accessories. I think, having a category strategy, to take advantage of new and emerging products in backpacks and others, it is amazing what you can now retail on demand. Whether or not it’s print on demand, it’s retail on demand, and design is at the heart of retail on demand.

Coming back, Will, to your first question, I think we’re only starting to see the impact of retail on demand. If you think about the long-term economics, at the moment, if you are a retailer, you’re making inventory decisions 18 to 36 months out. If you can actually manufacture and retail on demand, that whole inventory structure in the marketplace can be disrupted and I think Redbubble is right at the heart of that.

What do Society6 do in fashion that is unique?

Analyst 2: I don’t think it’s unique; in fact, far from it. I’m not a fan of their execution, but whether it’s by great execution or just by happenstance, they actually had a more complete range in fashion.

Such as dresses?

Analyst 2: Yes, dresses, and the designs were there, the color and range were there, as well as the fit. They just had a more coherent range. They got in early for stockings and leggings. For dresses, they were in a little bit earlier, as well as different form-fitting t-shirts.

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