I have just returned from two days at Online Retailer, Australia's largest (and the world's 2nd largest) online retailing conference and exhibition. With around 3,000 participants and a buzzing atmosphere, it was hard not to come away thinking that 2010 may finally be the year that Australian retailers start catching up with their customers online.
The messages from keynote speakers were both inspiring and worrying. Inspiring because it is clear that Australia is the next golden land of opportunity for online retail. Worrying because it appears that a lot of the gold may head offshore in the years ahead if Australian companies don't invest heavily online right now.
Deborah Sharkey, eBay Australia Managing Director, outlined that online currently represents 3% of retail spending in Australia. (The UK and US are in the range of 7-8%). 5m Australians visit eBay each month. Australians are a sophisticated, affluent and early adopting online audience by global standards. The National Broadband Network is on the way. The opportunities for Australian retailers is there for the taking.
Established Australian retailers (such as David Jones) invested heavily in online retailing in the DotCom boom. But when the boom went bust, David Jones pretty much closed up their online shop. They've been sitting on the sidelines ever since. During this period, pure-play online retailers (like Amazon and Zappos) and nearly all the major overseas multi-channel retailers (from Gap to Top Shop) have been working tirelessly to get the customer experience – and the profitability – of their online stores right. Analysts' consensus is that Amazon will achieve net income of around US$700m in CY2009. And they spend close to $1b in R&D. Global retail powerhouses of the future such as Amazon are investing for the long haul, and world domination is most certainly their goal.
Companies such as Amazon.com and Zazzle.com (another presenter at the conference and a very inspiring company) are building marketplaces and tools to power other retailers. Given that customers demand the 'best' online experiences (which can lead to the kind of online market dominance Google enjoys) there is a very real possibility that Australian retailers will end up with little choice other than to use Amazon (or equivalent) technology, therefore sharing margin and profits while losing differentiation. It may sound far fetched, but I'm pretty sure this is Amazon's 'Big Hairy Audacious Goal'. And they are tracking well towards it so far, thank you very much.
Forrester Research says that Australians spent $23b online in 2008, with estimated growth of 9% annually to $32b by 2012. eBay's Deborah Sharkey quoted statistics from the Australian Payments and Clearing Association indicating that 43% of the $23b spent online in 2008 went overseas. It's a worrying statistic (although much of this is probably airline and other travel spending). Further statistics suggested that the percentage of total online spending that was staying within Australia was shrinking at a rapid pace, as international retailers large and small gained share.
Sharkey made the point that Australian retailers "Simply can't afford not to be online". And that they "face risk of global retailers targeting their customers with increasing success".
Sharkey said it another way: "Australian retailers must evolve or be disrupted".
The trend of Australian spending going to international retailers (either directly or via fees for the platform) is not only a worry for Australian companies, it's a worry for Australia.
Australia has generally lost its manufacturing industry to Asian nations. What we buy online is typically designed and 'branded' in the US, Europe or Japan, and made in China. In return we dig up and sell minerals to pay for it all. Which could become increasingly uncool (pardon the pun) in our carbon-constrained future.
Zappo's believes 30% of US consumer spending will eventually happen online. There is no reason why Australia would not follow suit. So there is a real possibility that in the next decade, we could lose 43% of 30% of the retail margin of all Australian consumer spending, to our trade deficit. I am not an economist, but I reckon this could be a big number, and certainly bad news for our kids. The online market leaders of the future are being built right now, but Australia isn't in the game.
You may remember a SmartCompany article published last November, quoting Gerry Harvey. Harvey suggested further investment in online retail would be a "recipe for disaster". I can certainly see why Harvey doesn't want to contribute to the erosion of the existing Australian retail status quo (of which he is significant beneficiary). And of course further investment would drain capital expenditure and impact short term profits. Harvey claimed that "The whole world was conned with online retailing" and that no one was making serious money. Many established US retailers now list their online store as their largest by revenue, and best by profit margin.
I certainly can't claim to have 1 millionth of the retail knowledge of Harvey, but I can claim to be closer to the web connected, Generation Y and Z shoppers that will drive his business into the future. I have spent more online in the past month than I have in Harvey Norman in the past year. I am certainly an early adopter (and in the minority) but I'm far from unusual. Harvey Norman is an incredible retail performer, but imagine how much better they could be if they combined their Aussie market knowledge and buying power, with the online sophistication of Apple, Amazon or even Wal-Mart?
On a couple of occasions I have visited the Harvey Norman website looking for information while researching a major purchase decision. On realising that there was no detailed information available, I looked (and eventually purchased) elsewhere. The experience of multi-channel retailers in the US suggests that for every $1 of sales captured online, an online store drives $3 of in store revenue. While the likes of Harvey Norman spend a huge amount of money shouting at customers through expensive 'push' media advertising, customers are pulling their hair out trying to 'pull' information about the products they sell. Give the customers what they want.
Change can happen fast. Who would have thought a few years ago that Apple would be the world's largest music retailer, with 25% of all songs sold in the US being downloaded via iTunes? The laws of the universe suggest that if entities don't adapt in a rapidly changing environment they ultimately face extinction.
Therefore I would suggest that further investment (and the learnings that would follow) might end up being the best insurance against the global deconstruction and reinvention of retail (and rapidly changing consumer behavior) that money can buy.
In contrast, Myer (who already sells a limited range online) and David Jones, have indicated that growing their Internet businesses were becoming an increasing priority. These two have very trustworthy brands, are among the world's best performing retailers in the current climate, and I look forward to seeing them turn their hand to the web.
My prediction: 2010 WILL be the year that Australian online retailers and consumers leap to catch up with the rest of the world. And those that evolve the fastest will be the retail winners of the next decade.