Tipping Point For Retail Sector?
Tipping Point For Retail Sector?
Greg Hoffman was telling me this morning that, having broken his old earphones, he bought a new set from Ebay for $24, including postage. Price at JB Hi-Fi: $79.95. My brother’s crusty engineering colleagues claim web illiteracy when it comes to doing work, but are managing to procure their work boots overseas. Online price: $20. Cost in a local retail store: $80.
Anecdotally it seems that online shopping has gone mainstream. The high Aussie dollar is the main instigator at the moment. Many consumers are happy to pay a 30% premium to shop locally and get immediate access to their goods, but when you can get the same stuff for a quarter of the price online, the logic becomes compelling.
Useful statistics for online retail don’t exist at the moment but it seems fairly obvious that the lack of sales growth we’re seeing from the old bricks and mortar retailers is at least partly attributable to a structural shift to online retailers.
And the big risk is that the shoppers get used to buying over the internet and don’t come back. Even if the Aussie dollar falls, retailers can pass on lower prices themselves, or the government levels the playing field by imposing GST on imported goods, the price of goods online is still going to be substantially cheaper than in the stores.
Obviously bricks and mortar retailing is not going to disappear overnight. It beats me why but enough people enjoy shopping as an ‘experience’ to keep the show on the road for a long time yet. Even a gradual structural shift, however, could still mean a bleak future for our retailers.
Imagine that every year for the next decade, 4% of total retail sales shift from traditional retailers to the world wide web. That would completely offset the expected growth in overall retail sales (over the long term, growth in incomes and growth in retail sales will be approximately the same and 4% is a reasonable estimate for income growth).
With rising labour and lease costs, no sales growth is a bad outcome for the retailing business. The trend could continue for the next few decades and it could be much faster than 4% per year.
I was already extremely wary of our listed retail businesses (see Prepare Yourself For A Twenty Year Bear Market). The massive increase in consumer leverage has been a tailwind for the sector for the past 20 years – one that could reverse direction for the next 20. Now that this Christmas shopping period looks like it could be a tipping point in a structural shift to online sales, I’m even more wary than I was.
Custom Search 2
Comments
I used Amazon for the 1st time yesterday. Bought a book for US22 + 9.95 postage.
Same book at Dymocks is selling for $60. I have probably bought my last book from a bricks and mortar retailer.
and you may haved saved another 2-3 dollars with the book depository
That's what I worry about too, especially being a Westfield shareholder. I still think people (apart from myself !) enjoy shopping for the social experience. Postage is still fairly prohibitive in Australia, whereas when I lived in the UK, most of the online stuff I ordered was 'free delivery' i.e. books, dvds, printers, cameras.
Yep. Just looked it up and it's AUD 24.98 on the book depository with free shipping. Thanks for the tip.
There are other factors influencing the retail price of books. There was some discussion happening on this on ABC in the past year, I think. I'll try and find an article.
As for online retailers - try abebooks.com as well. Some books from Book Depository list only on abebooks and others only on its website.
Borders Online (borders.com.au) claims to beat Amazon's price. The process is explained on its website and I haven't personally tried it, but it might be worth someone giving it a go.
I have a few points that might be constructive to this discussion.
1) The first one is best explained by an example: I've been meaning to get a chair for myself from Milan Direct (www.milandirect.com.au). It costs ~$250. However, as Milan Direct is an online business only, there is no way I can try this chair before buying it. The only think I can go by is the description on the website and some selected positive customer comments.
I would prefer to pay a reasonable amount more and be able to buy it from a shop after trying the chair out. Maybe Milan Direct should establish a showroom. At the moment they only have a warehouse.
A display like Borders. You can browse books in-store, and buy them in-store for a premium. Or, you can order them online (they wish that you order from their website) for a cheaper price.
2) That brings me to the second point: Successful online businesses such as Catch of the Day (www.catchoftheday.com.au), Milan Direct, Game (www.game.com.au), Borders Online (www.borders.com.au), and large eBay stores do need to be able to warehouse goods to be able to offer price competitiveness by increasing scale. That is real estate.
I suppose that the retailing market will shift to more showrooms for goods that people generally like to try before buying, but the distribution channels will get centralized. In the future, you may be able to order online at the showroom, or from home.
I enjoy cycling and have spent at least $10,000 on O/s websites (mainly UK) buying parts and frames. Prices are now at least 50% lower compared to local prices. They were 30% cheaper before our dollar spiked. I try to buy local and am prepared to pay 20% more than the web prices but local retailers won't match it. Personally i think we are doomed. Even if manufacturers recognise local sales are dropping why worry when they are still picking it up via another destination. what incentive do they have to ensure prices are even throughout all markets?
Although westfield seem to be aware of the threat and have launched an online shopping centre recently. Who knows whether people will take to it though.
You go to a bricks and mortar store for 2 reasons, 1)Warranty and 2) advice. Many overseas purchases do not have a valid warranty for Australia. If you are not sure what you need/want you may go to a Harvey Norman or a Computer store for advice rather than buying the wrong item on-line. I always check the price of a book at Borders/Dymocks online and compare with the Book Depository, but electronic items I tend to go to a store to make sure that is what I need. You can also negotiate at a retail store.
I know I've bought my last physical book now I have a Kindle.
In my business, I sometimes use some computer parts for repairs but not enough to maintain permanent stocks. I normally buy through an online retailer. The online retailer is usually 20-30% cheaper than the business which I had previously used. The only problem with the online retailer is the delay in receiving the goods.
Recently I found the perfect present for my sister on Amazon. At checkout I was told I couldn't send here in Oz due to warranty issues. Being Lego I thought this bogus, so looked in to it and it is more a protection of local markets rather than 'warranty'. A quick shout out to an online friend in Chicago, shipped to his address, shipped to me, the total cost was $130AUS vs the local retail price of $299. There are websites set up to do this for those who don't have friends OS. USAtoMe is a forwarding agent that gives you a US address and then on forwards to you. It's a monthly subscription, so you would need to be doing a bit, but with so many items cheaper OS due to their larger markets, a buying syndicate of friends could definitely make it worth their while.
With regards to the buying online without seeing the product, I think this is one of the big positives of Web2.0. User reviews are an amazing source of information and while you're gut feel can never be replaced, it's a great filter to narrow your choices. This is where Amazon excels over other challengers, the volume of their customer reviews is amazing.
But as I say to my friends who claim eBay and the like are the future, when my mum 58 year old mother becomes a regular online shopper, I'll believe it's a threat.
Excluding socks, undies and bespoke suits, the last time I bought clothes from a bricks and mortar store was in 2003 (a reversible belt from DJs that I still wear)!
Excluding 2nd hand bookstores, the last time I did this for books was even earlier!
However, I am a creature of logic; less logical types (ie women), don't think in this way, and are not particularly price-sensitive, so what we are really talking about here is how retailers are losing their most price sensitive (ie least profitable) customers.
To properly fathom the folly of many consumers, go to the bottled-water section of your nearest supermarket - you'll find over a dozen different brands that not only successfully convince consumers to buy, lug home and store a heavy, bulky product that they could otherwise access instantly at the twist of a tap, but they manage to extract prices that represent eye watering markups.
If consumers were logical, they would demand payment to take delivery of bottled water whilst shopping!
I am looking at Harley motorcycle and in Australia it's $26,000.00 in US it's $13,000.00. It will cost about $5,000.00 in freight, GST and rego. Risk is no warranty as Harly will not warrant a bike they never imported themselves. What i see as the major problem is that manafactures and importers are profitering at our expence
what happens when he gets the earphones and they are wrong, or dont work or the shoes dont fit right? He then has to package them up, get to the post office in his time, probably pay return postage etc etc. I think the online is good for things that are relatively trouble free such as books etc, however as has been stated above, if you want to try things on or get advice it may be a little riskier
I'm not so sure Steve. This discussion has a familiar ring to it - remember the death of FLT? No doubt the threat remains to FLT, but the death of FLT is very far from certain. The threat to many other retailers is even less certain.
Horses for courses.
Online retailing is perfect for music and books, especially now with the advent of Kindle. The value of perusing a physical book is pretty minimal. Perusing a physically song is...well impossible. Here everything you need is available online – reviews, free samplers, even the distribution (though not distribution for physical books). But with physical books, as with earphones, individual delivery to ones doorstep is manageable and relatively inexpensive.
Clothing, furniture, whitegoods, air conditioners, beds, large TV’s, sound-systems. Surely here the retailer is fulfilling various functions from efficient distribution, to providing customer pre-purchase interaction. And as distrustful as many of us are of shopping assistants, they still serve the function of informing the customer. Sure, we can research on-line, but unless we are enthusiasts, how many of us are so inclined? How many furniture and fridge enthusiasts do you know?
Perhaps the small margin earned by the retailer is a reasonable fee for the above functions. After all, what is the alternative? Will the manufacture bear the cost of distribution? If the manufacturer pulls their products from the big box stores, who will perform the showroom/interaction function?
This has bugged me in the past as well. I saw mentioned in the AFR this week a newish company doing international logistics for online North American retailers. fiftyone.com - they have the list of customers on their site. Have not looked into it enough to know delivery costs but am sure to find out as my wife's favourite kids clothing store is on their list.
I wouldn't worry about Westfield, but I wouldn't invest in Westfield anyway its story are of the past going forward I cant see it generate decent return.
I be more worry about HVN
with Gerry at the hems.
He prosper only when good time roll on and there isn't much competition...
Now the market is crowded with plenty of competition and with the onslaught of online I dare say their electronic division will face decline earning for many years to come.
Retail of commodity rarely has competitive advantage unless you have economy of scale and efficient supply chain like Walmart and Woolies the rest you do ok for a while then the landscape change and you business face serious headwinds.
I'm more of ONT and NVT and CCL type of stock, though small look ordinary but look closer it has incredible moat ...share price up down and round about in short term but because of these moats, it price trending only one way and that is up over a long period of time
Good luck to you guys
or even better search using booko.com.au which does an online search/comparison at EVERY book store !
I'd be more worried that he has bought fake headphones. THis is a known problem for higher priced brands such as Sennheiser. It is true that you can buy eadphones cheaer online than through someone like JB - I've done it myself but the size of the reduction in this case would make me very suspicious. I certainly wouldn't have bought from ebay where a lot of these cheap fakes are sold. It might be worth checking out:
http://fakeheadphones.com/
There's a few interesting points in this short article; http://www.brw.com.au/Page/Uuid/f4704562-f760-11df-8e0b-9f172aeef08b?et_....
Yes, buying online is a risk, however I have bought quite a few things and there were only a couple I had problems with. I think of it as self insurance - I am getting such a good deal on most things I can afford the occasional dud!
I doubt very much this analysis will provide any use to separating future retail winners and losers whether on line, traditional or hybrid let alone the question of the death to bricks and mortar retailing.
Instead, as always with retail, the determining factor of operational success will be the associated costs of operating the business and having those cost savings passed to customers. Cost changes can come from many sources.
Sure prices have further to drop (and have already in some categories)and that will lead to traditional retail closures or consolidation that will create further economies of scale thus further reducing the cost of operation for some and those prices will be passed on. The dynamics of how this plays out are complex but there will be big winners – a lot more volume at lower margins over not a lot bigger cost base. And there will be plenty of casualties including on line operators. But hasn’t it always been the way in retailing?
Eventually pricing in more traditional retailing will meet online pricing through evolution and those competing online alone without critical mass paying for promotion etc won't be able to lower their prices anymore and they will be gone.
My guess is the large retailers will own the online distribution when they decide to play hard. After all they have the important critical mass buying power with manufacturers, distribution (sales) capability, supply chain advantages and financial backing (in many cases).
Retail is the ultimate Northern Pike concept - think Wal-Mart. The game never changes in retail, just the bar gets raised and its winner takes all.
The degree of pessimism here is very encouraging from an investment perspective.
This is an extract from an interview with Patrick Elliot, the Chairman of JB HI-FI from Business Sunday last week that gives an insight to how the retail war will play out. The rest of the interview is also well worth watching/reading if you follow the link below.
PATRICK ELLIOTT: Well, there's been a lot of talk about online retailing since the late 1990s and I remember quite clearly about ten years ago discussions about whether JB would be successful with the advent of online retailing, and it was clicks versus bricks.
Now, that hasn't changed. I mean, what has changed I think more fundamentally has been that the Australian dollar has now risen over parity with the US dollar and it's likely to stay here for some time.
And what that has done is it has really opened up the opportunity for parallel importing. The internet model is particularly well suited to do that, whereas the bricks and mortar model is less so.
So this discussion is very much more around where we are with currency, perhaps, than any significant change in technology or the uptake in technology.
For us at JB, we do have an online business. It's still relatively small. It represents for us probably two or so good stores, but we do see that it is growing and growing quite quickly and we certainly want to support that growth.
I think the other part which we absolutely recognise is that our bricks and mortar model is a very low cost model. Our cost of doing business - which is everything below the gross margin line - is about 14, 14.5 per cent of sales.
There wouldn't be too many online retailers who have that low cost base, and so we're comfortable that with our scale, our buying power and our low cost to business that we can compete quite effectively with an online retailer, and to that extent clearly pushing our own online model.
http://www.abc.net.au/insidebusiness/content/2011/s3180881.htm
wow it has been a year since this.....The retaliation from the big guys has started. Don't know if anyone in the industry will make any money out of it (know some will lose) but let's see how good the on-line only model is now. Hope the on line only models have room for decent advertising and promotional budgets because price is converging. Business is competition and competition is heating up for the local on line only guys in some sectors.
This kind of advertising, if it wasn't free, would cost a fortune!
Myer brings forward online 'Boxing day' sale
http://www.theage.com.au/business/myer-brings-forward-online-boxing-day-...
Harvey Norman joins web stampede
http://www.theage.com.au/business/harvey-norman-joins-web-stampede-20111...
Shum makes an excellent point. In retail, brand is king.
This is why the likes of JB Hi Fi and Oroton are beating the pants off everywone else.
The internet has removed any need for brick-and-mortar aggregators or middle-men.
So I wouldn't paint all retailers with the same brush. Look for exclusivity and branding.
Nope - in retailing cost control is king. In manufacturing brand is usually king but not always if it is generic product, then its cost again. Oroton is a virtically intergrated manufacturer (even if outsourced) and licencee who control distribution through their retail network - they aren't a pure retailer and don't prosper because they are great retailers (they proved this already) so can't be compared with the likes of JBH who survive on cost control which enables them to sell branded product cheaper than most.
Hey guys......remember that whilst you blokes are making most of the investment decisions the women in your lives are making most of the retail purchase decisions....and most importantly enjoy going shopping!
If you are indeed paying 20-50% of the cost, you can buy a completely new and probably more up to date replacement item if it breaks.
Secondly negotiation is great but if the price is significantly lower anyway online, it doesnt serve much purpose.
No argument here...apparently shopping it is the number one favourite pastime of 60% of women in Britain. I don't think football is even that popular.
Better yet, go to the bricks and mortar seek the advice you need (research) and then buy the product online.
It would be interesting to take a look at the supply chain and the price points/margins at each stage and compare these for a purchase (online or not) from an overseas source and from a local retail source. The price difference is very often way more than the 10% GST impacting the local supply chain.
I wonder whether the local "distributor" for an imported product is a central part of the problem? Do they too often see themselves as virtual monopolies, holding up prices accordingly?
As an aside, I find that one thing that keeps my investing discipline reasonably sharp when bargains on the stock market are thin on the ground is to see what sort of bargains I can find on eBay, the two have a remarkable number of similarities, especially on a psychological level, (and a lapse in discipline on eBay is a helluva lot cheaper than on the stock market).
The book depository is for patsies, people in the know use the grassy knoll ;)
I had the same experience as Glenn G with Amazon. I wanted a nice set of Sennheiser haedphones - at least half the price of those in Oz. But they cannot ship. No problem, I just went down the list until I got a nice set of headphones that they would ship. I am more than happy with my purchase.
Daren - be very carfeul. Make sure that you get an import licence BEFORE you purchase, otherwise you will never get it registered in Australia ! Look into it very carefully and have all the bases covered.
Hi Ben. The sort of business that HVN has prospered in, for many years, has always been one of intense competition. HVN has prospered in spite of this competition – and over many years (though I do accept that the leveraging up that has occurred in households over the last several years has been a tail wind). Remember HVN is about more than just consumer electronics – think whitegoods, appliances, furniture etc. If HVN do not have economies of scale in Australia, then who does?
I do wonder if we’re all getting a bit over excited by the current huge advantages conferred to ‘just in time’ imports from overseas (on-line purchases) thanks to our recent currency appreciation. This has obviously put holders of inventory in Australia at a disadvantage. How long will this last? Once the currency plateaus this source of disadvantage will be gone. If the currency drops, the advantage will go the other way (temporary though it may be).
Are we all getting a little over excited by what is effectively a more convenient form of ‘mail order’. At the end of the day, a retailer (on-line or not) has to hold stock. Hence it requires wharehouses. Add a show room, which will probably continue to be mandatory for many product segments, and you end up with a big box retailer. So I think Justin O’Kain, in his earlier post, is probably right, the current big-box retailers are probably best placed to continue dominating many product segments.
As for ONT, I too like many things about this business (actually I think you got me onto it some time ago – thanks!). I have not at this stage bought stock, because I made the call that at current prices there was insufficient margin to account for some things that remain uncertain. I refer to the fact that their practices in the larger cities (Brisbane and Gold Coast) are fairly recent, and I don’t know how sustainable these will be going forward. Without an ability to capture market share in larger cities, ONT’s growth prospects are fairly limited – remember, the opportunities in regional Australia, outside of Queensland, are not that great (Queensland has many ‘large towns’, other states do not).
But I digress from the topic!
morally i struggle with my behavior as i now seek the advise, range and recommendations from the bricks and mortar and then buy on-line cheaper.
however on the big items the warranty/face to a name etc.. still provide me with a secure feeling and that's when i'll buy from the shops.
has anyone done a study on mail/courier growth rates over the past 5 years? it must be significant.
md
I think the biggest issue is not Australian retailers margin but OS manufacturers pricing bias.
The decades old argument that the USA gets cheaper prices because they're a larger market just doesn't cut it anymore.
There are many US mail order retailers that aren't allowed to ship to Oz because even with postage products are significantly cheaper than what they charge here. There has been a deliberate decision to charge other markets higher prices regardless of size. Take the European iTunes debacle for example.
So I'm sorry Mr Harvey but the items that we can get sent here would still be a lot cheaper even if we had to pay GST.
You've hit on a good point Geoff.
I just checked sony.com and sony.com.au and compared the sony alpha 850 DSLR camera;
sony.com is US$1900
sony.com.au is AUD$3500
Having worked previously in electronics - the child company of the parent (ie Sony in Japan being the parent of Sony Australia) charge extortionate prices - it would be cheaper for Sony Australia to buy from Sony USA than from Sony Japan!
Beleive it or not, it is cheaper for a small retailer to import the cameras from america and resell here in Australia.....but then there's the warranty issues.
At the crux of this issue is how savvy the consumer is - will the blindly walk into a bricks and mortar to be sheared (or fleeced) each time, or compare their local store with the global marketplace.
One interesting thought I had while reading all these threads is the increasing percentage of conumers that will buy goods online.
Do the math, as each year passes another group of young net savvy consumers are moving into the marketplace to buy there goods online (and as such are replacing the elderly who would likely buy from bricks and mortar).
have to agree
it would be interesting to see Gerry Harvey respond on here; anyone got his email add........
Post new comment