Is there an internet bubble in 2016?

The co-founder of a prominent online retailer has suggested that a bubble is forming in internet retailing, with mass casualties expected in the near future.

Speaking with My Business, James Patten, who co-founded beauty and hair care retailer RY in 2007, said the biggest challenge for his business is competing with overcapitalised online retailers in the midst of “an internet bubble”.

“If you look at the likes of the news that's come around … recently, there seems to be lots of venture capital coming into the industry; everybody is going after market share, and I feel like it's a bit unsustainable,” he said.

“We haven't taken any venture capital, we need to make a profit each year to make sure that we keep growing and we can reinvest those profits. The biggest challenge would be us competing against brands with deeper pockets and different strategy, just to go off the market share and maybe looking at floating in the future.

“They're just basically going after top-line revenue. In a competitive environment, trying to compete with companies that are just going for top-line revenue, it's quite challenging. If I feel like everybody in our space needed to make a profit this year, I think it would be easier.”

Investment in online retailers is not matching the profits being generated, making the venture an unsustainable one over the longer term, according to Mr Patten.

“There's definitely a bit of an internet bubble … people invest in online stores that I don't see how any of them are ever going to make a profit. It's like the last thing that anybody ever talks about. I mean … profit is almost like a dirty word sometimes,” he said.

“I wouldn't be surprised to see some others go by the wayside, spent all their investors’ money and now they're scratching their heads, looking for the next big thing.”

According to Mr Patten, this is one of the reasons why RY is actively diversifying its business with an expansion into bricks-and-mortar stores.

“Making sure that we can make every transaction a profitable one is just one of the reasons that we've gone into bricks and mortar,” he said.

“Bricks-and-mortar stores generally don't run a business model that says, 'You can lose $100 million a year and then go for another round of funding’. People look at bricks-and-mortar retail in a slightly different way than what they're looking at online retail.

Mr Patten added: “You have to remember there's only 25 million people in the country, so I don't know how much money they can punch into these businesses; where do they think the growth is going to come from?”.

 

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