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Australia Loves Shopping on the Internet

Neil Hume in Sydney
Sunday, 3 Jun 2012 | 11:46 PM ET

As a continent with big distances between its city centres, Australia might not seem an obvious leader in online retailing given the costs of delivery.

But the country boasts one of the highest levels of online sales penetration among developed nations, with much of the growth driven by offshore retailers.

The popularity of online shopping is bolstered by a strong Australian dollar, favorable tax policy, the strong take-up of smartphones, and high domestic prices for certain goods.

It is also one of the few bright spots in the otherwise-struggling retail sector, as Australian consumers have either looked to pay down debt or take advantage of their strong currency to travel overseas. A record 7.6 million residents left the country last year on short-term trips.

Australians’ changing shopping habits have been a factor behind a slew of earnings downgrades from some of the country’s biggest retailers such as David Jones, JB Hi-Fi and Myer, the department stores group that last month downgraded profit guidance for the second time in two years.

Recent government data showed retail sales unexpectedly fell in April for the first time in ten months as consumers cut back.

At 9.4 percent of non-food sales, Australia’s rate of online sales penetration is among the world’s highest, according to analysis by Citigroup, which estimates the country’s market was worth A$11 billion-A$12 billion last year. The UK has the highest penetration rate at 12.3 percent, followed by South Korea with 10 per cent and the US at 9.8 percent.

Unlike the UK, Australian shoppers purchase more of their goods from overseas websites — primarily Amazon and eBay, which, according to analysts, together account for 35-40 percent of online sales in Australia.

Citi estimates that one third, or A$3.7 billion-A$4 billion, of online retail sales are transacted on non-Australian websites.

The trend in part reflects the fact that prices for products such as cosmetics, books and consumer electronics can be as much as 50 percent higher in Australia than on offshore websites.

The reasons for this include the strength of the Australian dollar, which even after a recent 10 percent retreat is still close to parity with its US counterpart; the high wholesale prices paid by local retailers; and a loophole exempting foreign websites from charging a 10 percent general sales tax on purchases under A$1,000.

In addition, Australia has the highest rate of fixed and mobile internet usage in the world. A third of all mobiles are smartphones, second only to Singapore at just over 50 percent, according to TomiAhonen Consulting.

Fashion retailer ASOS last month highlighted Australia as one of its fastest growing markets as it reported a 46 percent rise in annual sales. Like UK rivals Next and sports goods retailer Wiggle, ASOS, which claims to have Australia’s most visited apparel site, offers free shipping on most overseas orders.

“They don’t have to charge VAT for the overseas sale, so that’s 20 percent off UK prices, and they don’t get caught up paying local sales taxes like 10 percent GST”, says the founder of one Australian clothing company. And “they negotiate absurdly good postage and courier fees based on volume”.

Australian retailers are not the only businesses suffering from the popularity of internet shopping. The country’s postal service is losing A$70 million a year because of a surge in the number of packages arriving on its shores from retailers based in the UK, the US and China.

The losses stem from complex international rules governing ­handling costs, which were introduced by the UN-backed Universal Postal Union at a time when letters, and not small parcels, dominated postal flows. Australia, a net importer, suffers because the money it receives from the UPN does not cover delivery costs and the developing countries that dominate the UPN do not want to change the formulas.

Online retailing is not immune to the headwinds buffeting the wider retail sector. As households have pruned discretionary spending because of worries about fallout from the European debt crisis, the pace of online retail sales growth almost halved in the two months to the end of April, the latest NAB Online Retail Sales Index showed.

Still, year-on-year growth of 15.5 percent for total online sales — and 13.4 percent for international sales — comfortably outpaced the 4.1 percent growth in traditional retail sales over the same period, fixing the spotlight on the challenges facing Australia’s bricks and mortar retailers.