Given the post Christmas sales are almost upon us, I found a recent Morgan Stanley price comparison across 99 products (online versus in-store) particularly interesting. It showed that prices are 19% – 64% cheaper online, with books (64%) and cosmetics (44%) having the highest discounts. Others of note were apparel (30%), computing (27%) and Electronics (21%).
So how are online retailers able to offer these high discounts? Its simple – they don’t have the same high labour and rent costs as in-store retailers (rent and labour account for >70% of an in-store retailers costs, while shipping costs account for only 4%).
Labour and rent costs in Australia are very high by global standards (the following are minimum wage comparisons):
Asia (average) <$3.00
On average labour costs are 29% higher in Australia compared to the UK and US.
In terms of rent, Australia is the most expensive country per square metre in the world for retail space, largely due to the monopoly of Westfield and restrictive zoning laws. Online retailers rental costs are typically 80% lower than in-store retailers.
This means that retail prices are very high in Australia compared to other countries, leaving the Australian market particularly vulnerable to online retailers offering significant discounts. This means that Australian retailers will need to lower prices significantly (which is unlikely in the short term given their inability to meaningfully lower their rental and labour costs), or consumers will increase the proportion of their retail spend online (given Australian retailers have been slow to embrace online retailing, this means more sales to offshore retailers such as Amazon).
While food retailers (52% of all retail sales) will largely be unaffected by the online boom, non food retailers will be significantly affected. Non food retail sales are forecast to grow by 25% ($28bn) to $138bn over the next four years, 71% of this increase will be online sales. It is important to note that online sales in Australia currently account for less than 8% of total retail non food sales, or $10bn. (Interestingly Amazon’s online sales in Australia are circa $700m or 7% of all non food online sales, and 26% of all book and newspaper sales).
Online’s share of non food sales is forecast to grow to 15% by 2015 (ie double in the next 4 years).
In the US online retail penetration is even higher (2009):
Computer products 45%
In the US and the UK, online sales accounted for 19%- 39% of the growth in the retail sector since 2005. In comparison Australian online sales has contributed only 9% of growth in the industry over the same period. This means that internet retailing has only just begun to take sales from in-store retailers – over the next 3 years this will accelerate – Australian retailers will need to enhance their online offerings to stay relevant (if the trends in the UK and the US are an accurate indication of what is to come). And if the Australian dollar remains high as predicted, the proportion of sales going offshore will also accelerate because the internet makes it easy to compare Australian retailer prices and International prices online. The likely response by Australian retailers will be to import even more offshore manufactured product to stay price competitive.
Consumers who shop online are wealthy, educated and employed. They are also more time-poor. In other words, online shoppers are more affluent than in-store shoppers. This means that online retailers have been (and will continue to) successfully steal retailers best and highest spending clients.
The NBN rollout and advancing speed of wireless and the penetration of smart phone mobiles will mean an even faster take-up of online retailing.
To conclude then, the race to embrace online retailing in the non food sector is well and truly on! (And as an aside I wouldn’t be investing in Westfield either.)
If you would like any further information about any of the above or would like some help getting online please do not hesitate to call us on 1800 919 321 or email us at email@example.com. We have a number of clients across most retail sectors and service sectors that we have assisted in successfully moving into the online space. In fact we work with a plumber, menswear retailer, tile cleaner, carpet cleaner and mobile self storage company who now derive over 90% of their sales online, and all are growing at over 25% p.a.
Merry Christmas and happy New Year from the CFO Advisory team!