Aussie Retailers Spooked by Online Rivals
Big Australian retailers such as Myer and Harvey Norman have for years enjoyed a cozy dominance of the local market and fat margins, but now they are howling in pain as shoppers discover bargains are to be had online.
The cold wind of international competition has fanned protectionist pleas, with stores lobbying the government to introduce a 10 percent sales tax on goods bought by individuals from overseas web sites. Currently items under A$1,000 are exempt from sales tax.
Australia's retailers have reason to fear greater competition: a stronger currency, increased broadband internet access and greater use of smartphones are expected to accelerate growth in internet retail sales.
"The threat of internet retailing to in-store retail has been around for more than 10 years, but we think this threat is now becoming real," said Morgan Stanley analyst Thomas Kierath.
He estimates that internet sales could snare up to 20 percent of industry growth over 5 years from less than 10 percent now and says online retailers have considerable cost advantages, especially saving on Australia's high property leases that can cost as much as 20 percent of sales.
The retail sector, which accounts for about 23 percent of Australia's GDP and is the country's second-biggest employer, has endured a tough few months — November sales rose just 1.3 percent from a year earlier, compared with historic growth of about 6 percent a year.
Some of that slowdown in growth is attributed to leakage to online shopping, to overseas web sites and smaller domestic sites that may not be captured in the official sales data.
Research firm IBISWorld says online sales are expected to grow 5 percent in the year to June.
Retailers seem unlikely to be successful in their campaign to broaden the tax net to offshore purchases online. The issue has been referred to an independent inquiry, which could take most of the year to respond and the government has said lowering the tax threshold would be costly to enforce.
Experts say that Australians save much more than the 10 percent goods and services tax by shopping on overseas sites — as much as 30 to 50 percent off the retail price. The Aussie dollar trading at parity with the U.S. dollar has also spurred sales.
"People are buying online because it is 10 percent cheaper. Even when you include shipping, things are much cheaper and the range is much greater," said Karara Capital investment manager Akshay Chopra.
"The margins in Australia for many retailers are probably too high compared with retailers globally."
For example, Bill Bryson's history of domestic life, "At Home", retails for A$55 ($55) in Australian bookstores; it sells for A$16.62 on Amazon plus A$10.39 shipping to Australia, for a total of A$27.01.
Shares in Australian retailers have fallen 3.4 percent since October, while the broader market is up 1.2 percent.
Sales Under Pressure
Stung by competition, top retail chains have taken out full-page newspaper ads, held joint press conferences in Sydney's central Pitt Street mall, and proposed setting up online sales from China to bypass sales tax and import duties.
Myer, rival David Jones and Harvey Norman are feeling the pinch as consumers, more frugal since the financial crisis, wait for sales or buy more online than before. First-quarter sales at Myer fell 1.7 percent, David Jones rose 1.2 percent and Harvey Norman fell 0.6 percent, all below forecasts.
One retail survey found in-store clothing and electronics sales — bothtop-selling categories online — fell 3.6 percent and 4.2 percent in December from a year ago.
"As internet retailing grows, we expect it to be a meaningful headwind for in-store retailers' growth," Morgan Stanley's Kierath said in a note.
U.S. and European retailers such as book and music stores have also shown signs of losing out to the online market. Bookseller Borders Group, in talks to secure a $500 million credit line, has lost ground to rivals, including online retailer Amazon.com .
More Time Online
Estimates of how much Australians spend online vary widely, but retail industry figures show 30-50 percent of total spending is destined for offshore.
Online sales on Australian web sites account for A$7.5 billion or 3.1 percent of the nation's total A$240 billion retail sales, while a further A$4.5 billion or 2.0 percent are made on overseas web sites, according to Citigroup. (The figures are for merchandise only and exclude online bookings for travel, concert tickets and other services.)
Australians have been slow to embrace online shopping, and the proportion of online sales of total consumer spending remains well below that in the U.S. and UK markets.
"Australians a few years ago were really reluctant to get online and buy merchandise. They were especially afraid of giving out credit card details, but we are more comfortable now and spending more time and more money online," said IBISWorld retail analyst Ian MacGowan.
MacGowan said the most popular domestic online sites were small unlisted businesses, all with annual turnover of less than A$100 million, including Catch of the Day, DealsDirect, Booktopia, GraysOnline and Kogan. DealsDirect.com.au had more than 2 million visitors to its site over the Christmas shopping period.
Offshore favorites include Amazon, iTunes, cosmetics retailer StrawberryNet and gadgets site Deal Extreme, while U.S. discounter T.J. Maxx has recently opened an Australian web site.
Indeed, local retail chains have lagged in their own online offerings. New online sites for David Jones, discounter Big W owned by Woolworths and Kmart only launched last year.
"They have been laggards in this space and they have been a bit naive. Look at department stores, they haven't even had a proper online offering till recently," said Karara's Chopra.