Distance Selling

Distance Selling refers to the sale of goods or services where the seller and the consumer do not meet face-to-face. Think of it as any transaction where you aren't physically handing your cash or card to a person in a store. This includes a vast and growing world of commerce, from the classic mail-order catalogs your grandparents might have used to the slick e-commerce websites and mobile apps we scroll through today. The key ingredients are a seller, a buyer, and some form of technology—be it the postal service, a telephone, or the internet—bridging the physical gap between them. For investors, understanding the mechanics of distance selling is no longer a niche skill; it's fundamental. It's the engine behind some of the biggest corporate growth stories (and flameouts) of the 21st century, and it has permanently reshaped the landscape of retail, media, and services.

As a value investor, you're looking for durable, profitable businesses. The rise of distance selling has created new giants while ruthlessly exposing the weaknesses of old ones. Your job is to separate the future winners from the businesses built on hype and shaky foundations.

The most obvious impact of distance selling has been the disruption of traditional brick-and-mortar retail. Companies that master distance selling can build powerful competitive advantages, or what we love to call an economic moat. A powerful online brand, a user-friendly website, or a viral social media presence can be a moat, attracting customers at a low cost. However, the most formidable moats in this space are often operational. Consider Amazon: its seemingly endless product selection is impressive, but its true genius lies in its world-class logistics and fulfillment network. The ability to deliver millions of different products to your doorstep in a day or two is an operational moat that is incredibly expensive and complex for a competitor to replicate. Similarly, European online fashion retailer Zalando built its empire not just on selling clothes, but on mastering the complex logistics of fashion retail, including handling high return rates efficiently. These moats allow companies to achieve economies of scale, lower their costs, and offer a better customer experience, creating a virtuous cycle that reinforces their market position.

When analyzing a company that relies on distance selling, you must look beyond the top-line revenue growth. The real story is in the unit economics—the profitability of each transaction or customer.

• Customer Acquisition Cost (CAC): This is the total cost of sales and marketing spent to acquire a single new customer. A company might be growing sales at 100% per year, but if it's spending €200 in Google ads to land a customer who only makes a €100 purchase, it's on a fast track to nowhere. You need to ask: Is the Customer Acquisition Cost (CAC) sustainable? Is it rising or falling over time?
• Customer Lifetime Value (LTV): This metric estimates the total profit a business will make from a typical customer over the entire duration of their relationship. A great business convinces customers to come back again and again without massive new marketing spending. The Customer Lifetime Value (LTV) captures this repeat business and loyalty.
• The Magic Ratio (LTV / CAC): This is the holy grail. A high LTV/CAC ratio (ideally 3x or more) indicates a healthy, profitable business model. It means the company has a machine for turning advertising dollars into long-term profit. A ratio below 1x is a red flag, suggesting the company is effectively paying for customers who will never pay them back.
• Contribution Margin: What is the profit left over from a sale after subtracting all the variable costs associated with it? This includes the cost of the goods sold, payment processing fees, shipping, and packaging. A healthy contribution margin shows that the core transaction is profitable before accounting for fixed overheads like rent and salaries.

The world of “buy now” buttons and one-click checkouts isn't without its pitfalls. Distance selling is heavily regulated to protect consumers, and these regulations create operational requirements for businesses. In Europe, the Consumer Rights Directive provides strong protections, including a 14-day “cooling-off period” where customers can return online purchases for any reason. In the U.S., the FTC's “Mail, Internet, or Telephone Order Merchandise Rule” mandates that companies ship orders within the time frame they advertise. For an investor, these rules have direct financial implications.

1. High Return Rates: Generous return policies are often a key part of the value proposition, but they can be a major drain on profits. Investors must scrutinize a company's return rates and how efficiently it processes returned goods back into its inventory.
2. Compliance Costs: Adhering to various consumer protection laws across different jurisdictions adds complexity and cost.

Distance selling has fundamentally rewired how we shop, and therefore, how we should invest. It has created incredible opportunities for businesses that can build efficient, scalable models for reaching customers directly. As an investor, your task is to be a detective. Don't be dazzled by soaring revenue growth. Instead, dig into the numbers that truly matter: the cost to acquire a customer, the value that customer brings over time, and the profitability of the core transaction. A great distance-selling business isn't just a fancy website; it's a finely tuned machine of marketing, logistics, and customer service that builds a lasting, profitable relationship with its customers. That is the kind of durable value we seek.