Online retail gathers momentum in Australia

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Online retail gathers momentum in Australia

Online retail gathers momentum in Australia
Online retail gathers momentum in Australia

The Australian online retail market has evolved over the past five years, driven by changing consumer preferences coupled with favourable sectoral trends and increased international competition.

Key Takeaways

  • / The A$24bn online retail sector in Australia represents around 8% of the spending on brick-and-mortar retail with high internet penetration (88% of the total population) and the increasing penetration of smartphones among Australians driving traffic to ecommerce websites
  • / Australian buying preferences are increasingly shifting towards online retail, driven by greater savings associated with online products and access to diverse product ranges. Investments in improving logistical facilities have led to quicker response times, thereby drawing a greater number of shoppers to online retail
  • / Cash-back rewards are extremely popular with an average Australian family spending A$200 a week on groceries being able to save up to A$700 a year just by shopping from different online platforms
  • / Global players such as Amazon have arrived, albeit well foreshadowed. Local retail chains such as JB HiFi and Myers are now under increasing pressure to remain relevant and maintain their share of the market and wallets.
  • / Omni-channel strategies have surged to the forefront as rising costs have led physical stores to seek online channels to benefit from the synergies associated with multiple channels

Introduction

The global and Australian retail environments have been relatively stable recently. However, the A$24.2bn Australian online retail sector expanded rapidly at a CAGR of 13.3% over the past five years, reaching a level of around 7.8% of brick-and-mortar businesses as of December 2017, up from 6.5% as of December 2013[1]. Currently, Australia is the tenth largest ecommerce market in the world.

Figure 1. Size of Online Retail Sector in Australia

SOURCE: NAB Retail Sales Index Data

In Australia, online retail has a long way to go yet before it catches up with conventional brick-and-mortar retail in terms of spending volumes. Australians are ‘Early Adaptors’ to this shift in paradigm, as suggested by the recent growth rate in the sector. With the entry of global giant, Amazon, the sector is expected to witness stiff price competition, which we believe bodes well for its long-term growth prospects.

Trends driving consumer shift to online retail in Australia

High Internet usage, proliferation of handheld devices

Measured by four key indicators (availability, quality, breadth and infrastructure), Australia ranks eleventh worldwide in terms of Internet inclusivity. The country has a high Internet penetration rate; around 88% of the population had easy, quick access to the Internet as of 2017[2]. This has virtually guaranteed that ecommerce websites are able to reach large audiences.

Another important factor driving the switch to online retail is the widespread usage of handheld devices and applications (with nearly 19.4m mobile phone users[3]). Almost 35% of Australia’s ecommerce transactions are currently carried out over smartphones[4]. In terms of online shopping behaviour, around 61% of Australian smartphone users found it more enjoyable to shop via a mobile app than via a mobile-supported website[5]. Overall, this trend has enabled online businesses to easily target potential buyers in this domain.

Going forward, we believe growth in Internet penetration and significant investments in mobile application development would drive growth in this sector.

Big savings, convenience of shopping, free delivery and swift online buying experience drive shift from conventional brick-and-mortar to online retail

Nearly 71% of the Australian population shopped online in 2016[6], a trend that is steadily rising. Australians are quite used to purchasing things on the Internet; nearly 80% of Internet users prefer this mode to traditional shopping trips[7].

According to most Australians, the main reason for shopping online is “saving money”. The general perception is that products bought online are more economical than those in a store. Almost 80% of the surveyed participants believedthat the opportunity of grabbing a 10% discount (or more) versus the in-store price was the primary factor motivating them to shop online[8].

After monetary savings, Australians assign significant value to free or low-cost delivery. For example, BWS launched the ‘Free Quick Delivery’ campaign for low-value orders via its website, www.bws.com.au. Even the ‘Click & Collect’ service has several potential upsides and is more economical (based on consumers’ experience in the UK).

The third important factor driving online shopping in Australia is new payment methods, which are being constantly innovated considering the convenience factor. For example, a technology from Face++ in China is being increasingly used to transfer money through Alipay, using only the face as credential over popular mobile apps; Afterpay, a digital service, enables purchases that can be paid off in fortnightly instalments. The checkout method is quickly gaining popularity in Australia. As of September 2017, more than 1m customers made A$560m worth of purchases from over 7,200 stores[9].

Shoppers place immense value on cash back

Globally nearly 45% of global shoppers preferred monetary perks in the form of rebates or cash backs[10]. Globally, cash-back reward sites have gained vast popularity and are now a multi-billion dollar industry. In a survey of over 1,000 US respondents, more than 76% stated that cash backs and other third-party rewards significantly influenced their decision on where to shop online during holidays[11]. In the US, during the 2017 holiday shopping period, cash-back reward sites including Swagbucks, MyPoints.com, and ShopAtHome.com awarded nearly US$500m in free gift cards and cash rewards[12].

While initially fragmented in Australia, consumers now access cash-back almost exclusively through local operator Cashrewards. Cash-back sites are usually free for shoppers to join; the retail brands aligned with the site pay a commission to the cash-back site, a part of which is passed back to the consumer. Cashrewards already has ~350,000 members; after nearly doubling its members from the previous year, it is now looking to add other 1.6m members over the next two years, following the boom in online shopping[13]. One of the biggest challenges for cash-back sites is reminding shoppers to begin their shopping session at their website rather than going straight on to the retailer’s site.

Nonetheless, we foresee a great potential here, more so because reward sites have counteracted by using measures such as ‘downloadable notifier’ to attract shoppers to their websites.

Investments in modern logistical facilities with emphasis on automation

Historically, 85% of Australians have admitted to abandoning their online carts, primarily due to shipping-related reasons, the convenience of round-the-clock accessibility and free shipping being the core reasons why they shop online. However, the gap between delivery options provided by online retailers and conventional retailers has diminished greatly with the entry of big international player like Amazon.

The importance of shipping in modern retail cannot be denied; nearly 79% of Australian retailers witnessed a surge in sales when they increased the number of shipping options at checkout, with 20% reporting a substantial increase. With this in mind, logistics firm Toll’s recently invested nearly A$160mn in a state-of-the-art automated retail and ecommerce hub[14]. The efficiency at the hub has reduced turnaround time for deliveries to as low as three hours, making it quite convenient for an average shopper and immensely benefitting local retailers.

We expect that investments in improved infrastructure and shipping facilities, with special focus on tight turnaround centres, would ensure shopper stickiness in this fiercely competitive sector.

Entry of Amazon, subsequent likely disruption to benefit shoppers

Amazon is the world’s largest online retail business; its last reported annual revenue was US$136bn. Initially, Amazon Australia had a rather limited website; but Australians were buying from its US site for years. In October 2017, ~4.6m Australians visited the Amazon US site, before the country-specific site was launched in November 2017[15]. While yet to launch its full product range in Australia, Amazon’s arrival has already shaken up the domestic retail market.

The new amazon.com.au is expected to bring a lot more to the table for Australian consumers, including effective prices, shipping benefits, a possible marketplace for local businesses and a range of products. As per a survey conducted by Commonwealth Bank, big retail and ecommerce businesses view Amazon as a potent threat and may remain under-prepared to deal with its massive scale and capability. In the US, reputed departmental players such as RadioShack, True Religion and Toys R Us went bankrupt as they were too slow to open an online marketplace following stiff competition from Big boys, Best Buy and Amazon. Fearing a similar fate, Myers launched an online marketplace in November 2017 to extend the range of its offerings and bolster its digital credentials ahead of Amazon’s launch in Australia. We also expect Harvey Norman, a long-time holdout against online retailing, to struggle under Amazon’s onslaught.

In contrast to big businesses’ fears, small businesses and independent brands see Amazon as a potential opportunity to grow their business by selling on its marketplace.

Amazon’s entry is expected to heat up the online retail market space in Australia in the near future, with more discounts and rewards being offered to entice shoppers as large local players such as Kmart, JB Hi-Fi and Harvey Norman anticipate competing with the global giant on price.

Rise of the multichannel shopper

Australia’s evolution towards a truly omni-channel retail environment has continued steadily, driven by changing consumer preferences and an intensely competitive market. Today, the majority of shoppers are multichannel shoppers, switching between physical, online and mobile storefronts, often in the same purchasing journey. This has blurred the line between online and offline commerce.

Many retailers have started expanding operations to online channels and vice versa to benefit from the synergies associated with both online and physical retail. An online channel becomes important for a local retailer because it then enables the retailer to showcase products and services across all channels.

[1] NAB Online Retail Sales Index In-Depth Report December 2017

[2] Internet World Stats, Usage and Population Statistics as of June 2017

[3] “Australia’s Growing Ecommerce Industry and How It Is Changing Retail Trends” Article by Upwork

[4] Survey conducted by Norelle Goldring

[5] Australian online shopping behavior Report 2017 by Norrelle Goldring

[6] GEA’s Australia Ecommerce Country Report 2017

[7] Australia Ecommerce country report 2017 by GEA

[8] Australian online shopping behavior Report 2017 by Norrelle Goldring

[9] “Afterpay: What is it and can it be trusted?” Article by Tony Ibrahim of 3tijourno

[10] Global Loyalty Sentiment Report 2016 by Neilson

[11] Consumer Survey 2018 by Swagbucks, a prodege, LLC Company

[12] Consumer Survey 2018 by Swagbucks, a prodege, LLC Company

[13] “Cashback sites offer incentives for simply doing your shopping” Article by news.com.au

[14] “The $160m automated eCommerce hub that Australian retailers hope will give them the edge over Amazon” Article by Benedict Brook on news.com.au

[15] “Australia’s Ecommerce in 2018: How Amazon Challenges the Retail Industry” Article by WebAlive Team