Five Things Holding Back Online Retail in Australia

www.digitalministry.com.au
Chris Hitchen
6 November 2007

Online retail in Australia continues to grow from a low base, with a little over 4% of all retail in Australia conducted online. However after a couple of false starts, it is yet to hit the long-awaited tipping point, and is unlikely to do so until several factors come together to create the right environment.

A five part series by Chris Hitchen, Managing Director of Getprice

The consumers are there already - credit cards at the ready, wanting to take advantage of the convenience and transparency afforded by the internet - but they are unable to buy from some of their favourite, most trusted brands. Forrester and AC Nielsen estimate that between 62% and 78% of Australian internet users are also online shoppers. So why are we so behind other countries and how do we resolve it?

Below I've listed my top five reasons that the industry continues to lag, both in terms of other verticals within Australia (e.g. travel, cars, jobs, real estate and finance), as well as in comparison to international markets.

1. The lack of known retail brands selling online
2. Fulfilment costs
3. Wholesalers' attitudes to online retail
4. Online retailers themselves
5. Online marketing expertise

1. The lack of known retail brands selling online

06.11.07

We have all been frustrated by not being able to buy goods online from the big-named Australian retailers like Harvey Norman, David Jones, Woolworths, Coles, Myer, Target, Kmart and JB Hi-Fi. Some are making headway, for example Coles with its Officeworks and Harris Technology sites (let's hope Wesfarmers continue to invest in these areas, should their planned takeover proceed as expected) and Woolworths with Dick Smith Electronics, however many leading off-line retailers remain either inactive or ineffective.

When I recently tried to buy a gift from the David Jones gift registry, I was able to browse the products online, but not pay for them. After having paid using a credit card over the phone, I fired-off a frustrated email and received a response, explaining that they closed the online store in 2003 in order to "enhance shareholder return". The response went on to say to create an online purchasing facility for a store of their size would be a "complex solution both technically and logistically". As Abe Lincoln said, "opportunity is missed by most people because it is dressed in overalls and looks like hard work"!

Some Australian retailers are already operating effective multi-channel strategies, for example Bevilles, Ezy DVD, Home Couture, Pharmacy Online and Organiser World, in addition to the larger companies named above and the mobile phone networks 3, Virgin, Optus, Vodafone and Telstra. A survey by the Aberdeen Group revealed that 33.3% of world wide retailers and consumer goods manufacturers engage three channels in their marketing: store, catalogue and online. 19.5% have both a physical store and an online retail presence, with only 4% relying solely on their physical store. As such, the large Australian retailers are in the minority with their one-channel approach when compared to their worldwide counterparts. C'mon Australia! Whilst there are undoubtedly complex issues to overcome, these have been surmounted in other markets and successful case studies exist for Australian retailers to examine.

Department stores like David Jones quote complexity and cost as issues, however international department stores like John Lewis, Harrods, Selfridges, Marks & Spencer, Next and Debenhams in the UK have established good ecommerce functionality, as have their US counterparts Target, Macys, Bloomingdales, Barney's and Saks, to name a few. Similarly, international retailers of Consumer IT, Computing equipment and Homewares are far ahead of Australian retailers when it comes to ecommerce; Argos, Tescos, Dixons, Comet, PC World, Currys, Pixmania and Dabs in the UK, and Best Buy, Circuit City, Office Depot and many more in the US.

Of course it requires a quantum shift for the Australian businesses to expose their pricing on a medium as transparent as the internet, but pricing transparency is happening anyway and to pretend otherwise is to be at best desperately defensive and at worst grossly negligent. Leading retailers need to realise that they can compete on factors other than price, for example trust, payment options (not many pure-play online stores offer a "pay nothing until 2010 to rival the likes of Harvey Norman!), after-sales service, returns policy, fast delivery and product bundles. As a shareholder of any of these businesses, I would demand to see their strategy for future-proofing the business against pure-play online companies. At what point do the online specialists like Deals Direct, with an estimated 2007 turnover in the region of $50m, become a threat for the behemoths and a catalyst for them to take things into their own hands?

International retailers hamstrung by similar issues have thought around the pricing issue. Take UK retailer Comet for example, who launched vertical white-label sites under completely new brands (see http://www.laskys.com and http://www.kitchenscience.co.uk/). This allows them to test different price points and online strategies from the core Comet.co.uk website, whilst still leveraging their core infrastructure (fulfillment, customer support, marketing etc.). See also http://www.bootskitchenappliances.com and http://www.sainsburyskitchenappliances.co.uk for vertical approaches to online retail leveraging known brands.

I also applaud the likes of Argos and Comet in the UK who offer a 'click & collect' option to their customers, allowing them to reserve an item for collection and payment in their local store one hour later. For traditional retailers in Australia looking to drive people in-store to take advantage of their existing infrastructure, including trained sales staff who are incentivised to up-sell accessories and high-margin products, this is a savvy multi-channel strategy that does not need to be overly complex to set-up.

In the case of franchise business models, retailers are understandably loathed to take business from their franchisees. So why not cut them in? The role of a franchisor is to provide support and infrastructure for their franchisees to sell product; by taking a consumer's postcode, such operations can pass the sale and order-fulfilment to the franchisee closest to the consumer, thus avoiding so-called channel conflict. Some forward-thinking Australian franchises already operate a multi-channel strategy, for example Shaver Shop and Dymocks. In a world where Amazon has a loyal Australian customer base without even having a local site, it is tough for Dymocks to compete. CEO Don Grover has previously said that their "online business equates to a very large store's turnover, but [we] think it will grow significantly as we bring more product into the mix." He is spot-on that a larger inventory is necessary to grow and compete, however he will also need to address pricing, given that Amazon not only has a much larger range, but can also deliver product considerably cheaper - and often faster - to Australian consumers than Dymocks in almost all cases at present. As an Australian I want to buy from Dymocks, but logic prevents it!

Australia's retailers would also do well to examine the trend of manufacturers going direct to the consumer. Companies like Dell, Sharp and Apple have been doing this for a long time (in Apple's case playing them squarely in competition with their resellers, with a clear margin advantage) and other examples include HP, Lenovo, Acer and Sony. As these multi-national powerhouses have realised, the internet removes the need for the middle man in certain circumstances and this is a trend that will only increase as they grow their reach and improve their direct marketing skills. Although Harvey Norman has formidable market power in Australia, the balance is slowly shifting and removing these household brands from their shelves and replacing them with lower quality no-name imports would hardly constitute a long-term, customer-winning strategy.

Whilst Australia's largest retailers might be focused on increasing footfall into their stores, they would be well-advised to create a consistent multi-channel environment that fosters customer loyalty, drives incremental sales, increases brand recall and loyalty, and allows them to get to know their customers better. There is a clear first-mover advantage for a major retailer to dominate the online shopping space, which is set to become a significant market in Australia.

2 .Fulfilment

28.04.08

At the end of last year I wrote about some of the reasons that the leading retail brands in Australia are not yet selling online. I've since met with many of these companies and am happy to say that there is real progression, both in terms of their philosophy towards online and the progress they're making with respect to evolving their businesses to capitalise on the opportunities presented by the channel. Here are some indicators of that progress:

• Wesfarmer's Kmart has launched an online store
• Myer has started selling a limited range of products online and are planning to launch a full scale ecommerce operation around the end of the year
• Harvey Norman will launch their new stationary business Ofis online to compete in a multi-channel environment with Westfarmer's Officeworks
• Woolworths, Myer and Dick Smith Electronics (also owned by Woolworths) have all recently installed new senior managers to run their ecommerce divisions
• JB Hi-Fi have launched their Digital Home site selling brown goods and consumer electronics

Of course there are still some naysayers, including a leading seller of consumer electronics with a sizeable physical store presence in almost all states who were like a rabbit stuck in the headlights when I spoke to them about ecommerce. They explained to me that they fear for their own livelihood as a business, given the threat from online pure-plays and were indignant that they spend hundreds of millions of dollars opening new stores, whilst online-only retailers operate from a much lower cost base. Whilst I can identify with their exasperation, I can't understand their strategic (lack of) response and believe they will miss the boat unless the current management changes their attitudes.

I firmly believe that market forces will result in these attitudes changing, however there are other issues the Australian retail market needs to overcome in order for us to realise the potential of online and fulfilment is one of those.

When I talk about fulfilment, I refer to the broader components of the service that kick-in after the sale has been made. This includes warehousing and inventory management, order packing and dispatch, as well as freight and delivery. Ensuring that customer orders and fulfilled is hard at the best of times. The most advanced websites monitor stock levels in real-time, always informing the customer of availability as they browse through products on the site; no mean feat when thousands of SKUs (Stock Keeping Units) are involved. Of course storage is then an issue as the retailer picks and packs shipments to all parts of the country and, in many cases for Australian retailers, internationally. Getting the final product to the customer is the home straight of fulfilment and can be where the race is won or lost. Leading Australian retailers should consider ways to differentiate themselves by providing superior services in these areas. Companies like Pronto, Quids, Sterling Commerce and Australia Post cater to a range of these end-to-end business needs, however to go into detail on their services here would be too ambitious (might be one to cover at a later stage), so I want to focus on the cost and limitations of the existing freight options open to Australia's online retailers, because the forced dependence on third parties means it's the bit that is hardest for the retailer to control.

So what are the issues? From a customer's perspective it's simple: "give me the product I want within a reasonable time frame and don't charge me too much to get it" (and in some cases, "let me return it easily if I don't like it"). Unfortunately in many cases however, it doesn't seem to be that simple for retailers to deliver on these expectations.

For starters, some retailers won't deliver to an address that doesn't match the billing address in an effort to counter fraudulent transactions. Whilst understandable, this is frustrating for online shoppers, especially when other options exist in overseas markets, such as after-hours deliveries (which can be prohibitively expensive); public locker systems; and "Click & Collect". The Click & Collect option, as offered by UK multi-channel retailers Argos and Curry's, is a terrific model that would suit the Australian market; customers can do their research and reserve the items they want to buy online, then go to the store to pay for and collect them. Some online retailers have already tested a similar model, including online department store OO.com.au (who don't have an off-line retail presence, but allow customers to collect items at their west Sydney warehouse) and online IT retailer Itech, however the larger multi-channel retailers in Australian are yet to embrace it, which is baffling seeing as they're the ones who are set-up to deliver this sort of service (I'm hearing from some of the country's leading retailers that this is set to change, so wait with bated breath!).

Perhaps even more frustrating are online retailers that charge a flat-rate delivery fee per product, so if you buy two of an item, you are charged double the delivery fees. This lack of sophistication on the part of retailers is hurting their bottom line and the industry as a whole.

For retailers, the selection of a third party fulfilment partner is an important task. After all, if things go awry, it is the retailer's name that is remembered, not the shipping company. Many retailers work with Australia Post, who will do some daily pick-ups, but most of the time the retailer needs to drop items off at their local Post Office which hardly represents an efficient supply chain. edeliver is an Australia Post service, which in their words is "a technical platform that facilitates a seamless flow of data between your website and Australia Post's back-end systems." Sounds good, however it may be prohibitively expensive for smaller operators. Another reason to use Australia Post however, is that they deliver to private houses which often proves difficult for couriers. Australia Post's eParcel (the corporate division of Australia Post) allows online gift shops to print bar-coded mailing labels that can be scanned to allow for tracking during transit. For retailers, it pays to remember that volume discounts from freight suppliers can normally be negotiated.

Other national freight suppliers, in no particular order:

• Toll IPEC (generally for larger items)
• Couriers Please
• DHL
• TNT
• Fedex
• EMS
• Startrack Express
• Australian Air Express (50/50 JV Qantas & Australia Post) – also deliver to PO boxes

Most of the leading ecommerce operators partner with several providers in order to offer cost-effective, timely solutions for a range of customers and products.

Following are some final thought-prompters for Australian retailers and online shoppers to consider:

Australia Post's "Pay it @ Post" offers customers who prefer not to pay for goods online an alternative by allowing them to print the purchase details and pay at the Post Office. This is the sort of creative option retailers need to consider in order to make buying from them as easy as possible for as many people as possible.

Some US-based online retailers take this sort of customer service a step further; Zappos.com, the leading online retailer of shoes, send all customers that order a pair of shoes three pairs: one in the actual size ordered, one size larger and one size smaller. The customer then returns the two pairs that don't fit in a pre-paid package. Now that's customer service! Australian retailers have a lot to learn from such value-adds.

Under German law, the "right of return for distance selling" (rough translation!) required retailers engaging in ecommerce to carry the costs of any customer returns (including the initial shipping charges) if the total value of the goods exceeds €40 ($65). This law was introduced to protect consumers from over-zealous door-to-door salesmen who were in and out with a signed contract before many customers knew that they had committed to buying something. Whilst such a law would be an additional cost for Australian retailers, it would go a long way to allaying the concerns of many consumers who, unlike consumers in markets that are used to buying from catalogues, are often uncomfortable buying unseen goods.

To highlight some of the local challenges, consider how hard it is for someone like Dymocks to compete with Amazon. Take 'Harry Potter and the Prisoner of Azkaban', which I can get for $39.76 on Dymocks ($29.95 for the book, $3.31 for GST and $6.50 for shipping), or for under $20 (shipping included) on Amazon.

To paraphrase Abe Lincoln, it would seem hard for retailers to meet the all the expectations of all their customers, all of the time; the important thing however, is that they give those customers options around how they want to pay and how quickly they want to receive goods. Choosing the right freight partners is highly important for an online retailer and can even be a competitive advantage.

posted 6/11/2007
www.digitalministry.com.au