Threats and Opportunities in Online Retail

online retailThe threat online shopping poses to traditional retail formats is capturing increasing attention. For the grocery chains, such as Woolworths and Coles, there is probably very little real threat as they have their own established online strategy and infrastructure.

And importantly the nature of their merchandise is less given to online cannibalisation than higher value merchandise. They are further protected by the volumes they buy from manufacturers and the discounts they extract from suppliers leave little room for online operators to undercut prices.

The story is very different in the non-grocery sector of the market. Here discounting below the department store (and discount department store) pricing has become a national sport, or rather an international sport. The campaign by retailers against the $1000 GST exemption on imported goods has only served to heighten consumer awareness on the great deals online.

If one was to draw an analogy with the experience of traditional media vs online advertising outlets such as Seek, Carsales, Realestate.com and others, then one would feel extremely anxious about revenue and margin pressure within the traditional retail sector.

It took quite a few years for online advertising to have a significant impact on print revenues but new online applications might move a lot quicker now because the broadband platform already exists. Additionally, payment systems are now accepted as safe. An indication of growth rate is perhaps shown in PayPal revenue, from $US 2.4 billion in 2009 to an expected $US 4 to 5 billion this year.

There are however important differences between distribution of information and physical items. If there is a potential impediment it might be in the establishment of physical infrastructure -- distribution centres, logistics, etc, which will require capital and generate some breathing space for traditional models, but it is not a long-term defense.

In the US, which is far more advanced in the online retailing sphere, it has taken time to build penetration. It would be a mistake to be complacent about new retail formats and their potential damage to incumbents.

It will be interesting to see how the marketing and distribution strategies of the major merchandise brands develop in a changing retail environment. How they deal with their existing distribution partners and their future pricing strategies. And changes to the powerful position retailers have enjoyed vis-a-vie manufacturers.

These issues and their paths toward resolution require careful watching in relation to traditional retail investments.

Hugh MacNally, September 2011

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