Article

Australian retailers battle for customers as online shopping registers

The number of Australian consumers willing to shop online has grown dramatically. But will retailers be able to rise to the occasion?

Par David Zehner, Katrina Bradley and Melanie Sanders

First published on avril 06, 2011
min


The year 2011 will represent a turning point for Australia's retailers, with dramatic growth in the number of consumers willing to shop online. But will retailers be able to rise to the occasion? Retailer Harvey Norman's recent decision to launch a branded online site is the latest evidence that Australia's retailers are getting serious about selling online. In announcing the new site, chairman Gerry Harvey said the time was right to go online even if it created competition with the retailer's 173 physical stores. The new site is bound to spur other companies to innovate in an area where Australia finds itself playing catch up. It's no secret that Australia lags other countries in making online purchases. Although Internet penetration is strong, Australians spend one-third as much online as US consumers on a per-capita basis and one-fourth as much as shoppers in the UK. Why is Australia so far behind? Unlike their US and UK counterparts, the overwhelming majority of retailers in Australia have focused efforts on their traditional stores, where they've made heavy investments, instead of developing online stores. And with the Australian online market still relatively small, even those retailers with an online presence have found investments in a broad product range or advanced website functionality difficult to justify. Despite these issues, Australian consumers are on the verge of a major shift in their shopping habits. A new Bain & Company survey of more than 1,000 Australian consumers concludes that online spending will dramatically increase this year. The question is: will Australian retailers—sellers of everything from whitegoods to cosmetics to travel to groceries to mobile phones—be able to profit from the coming boom? Or will they lose the sales to overseas sites? With the Australian dollar suddenly soaring—reaching parity with the US dollar for the first time in 2010—more consumers are bypassing Australian retailers and shopping overseas. Online sales overall in Australia are expected to grow almost three-fold by 2015, to nearly $30 billion, according to Morgan Stanley. For the second consecutive year, Bain surveyed consumers representing all ages, incomes and locations throughout Australia. The results show online retailing is beginning to reach mass adoption rates. Based on the survey results, the number of consumers who have shopped in some categories has doubled in the past 12 months. This growth is particularly striking given subdued consumer confidence and weak retail sales growth overall. Meanwhile, the number of consumers who would "consider" shopping online has more than doubled in certain categories—a strong indicator of the growth still to come. Our survey was designed to help us understand who is shopping online in Australia, what they're buying, and the challenges facing companies hoping to sell to them. We learned that the highest growth in online shopping is in categories where sales penetration has so far been relatively low—hardware and do-it-yourself products, clothing accessories and furniture. And people who already bought books, videos or travel services online (among the most popular items) are now buying a wider range of new products, everything from fitness equipment to stationery to groceries, a traditionally unpopular online category. The survey results show a 50 per cent increase in the past 12 months in the number of consumers who tried online grocery shopping. We also learned that in addition to the growth of low-penetration categories, we can expect increased activity in high-penetration categories such as digital content, event tickets, travel, insurance and mobile phones. For example, we found the ranks of those who purchased digital content grew by 34 per cent this year, to the point where more than half of consumers we surveyed have now bought digital content. An increase in spending In addition to expanding the range of products they will purchase online, Australian shoppers expect to spend more money over the next 12 to 24 months. Among those surveyed, nearly seven per cent plan to significantly increase the amount they spend on web purchases of general merchandise and more than 26 per cent will modestly increase their spending. More than 50 per cent intend to spend roughly the same amount, and only 17 per cent said they would either not purchase general merchandise online or spend less. This rise in volume has big implications for retailers. Consumers who are trying online shopping and are satisfied with the initial experience tend to return to those sites. In a market that is moving quickly from a small base, first-movers will have an advantage. In an increasingly competitive online landscape, Australian retailers argue that overseas sites have an unfair advantage because they are exempt from collecting the Goods and Service Tax (GST) on purchases below $1,000. A more serious issue may be the prices that the owners of global brands have come to expect that Australian consumers will pay, and the strong gross margins that Australian retailers have come to enjoy. A full 53 per cent of survey respondents who shopped on overseas websites said that price was the main reason they did so, and nearly 40 per cent said that product selection or availability was the main reason. But our survey found that Australians are willing to shop on domestic sites if they provide the right mix of price, selection, convenience and security. In fact, Australian consumers in 2010 still made 77 per cent of their online purchases on Australian websites compared to 23 per cent on overseas sites. Australian retailers will need to invest in their online capabilities—and some may need to reduce their prices—if they are to maintain this advantage. What do consumers want? How can retailers better satisfy the Australian consumer? To dig deeper into what consumers want, we asked survey participants to rate the importance of 13 different factors in making online purchases. They ranked secure payments and low price at the top of the list, followed by ease of delivery, convenience (shopping outside regular business hours), and the quality of the website. While consumers who've made online purchases are generally happy with the price, value for money and convenience, they are less satisfied with online customer service. The message to online retailers is unambiguous: Invest in a site that looks good and makes it easy for customers to find what they want, and don't forget the importance of having superior customer service online. What's keeping shoppers from going online for even more of their purchases? The number one reason among respondents was something that online retailers sometimes find difficult to overcome: 31 per cent ranked a desire to feel the product as the most important factor. To address this, a growing number of companies offer easy return policies, and in the US, some retailers are experimenting with creative online solutions. For example, Land's End customers can zoom in on a picture of a garment to see the weave of the fabric. Other issues raised by consumers may be easier to address. For example, among survey respondents, 13 per cent cited delivery concerns as a reason to resist shopping online. To help overcome this obstacle companies are introducing next day or even free shipping. Coles and Woolworths both offer next-day grocery delivery (for a fee) and, to make it more convenient, customers can pick a two-hour delivery window. Eleven per cent of our respondents say they don't shop online because they want to speak to a salesperson. Pro-active companies now offer online chat options. And nine per cent say they don't trust online payments. That opens the door for retailers to convince consumers that online transactions are secure. Taking advantage of the online shopping trend Based on the survey results, traditional Australian retailers have a tremendous opportunity as consumer habits undergo a radical shift and they spend more online. Australian consumers listed four sites as their favourites for new general merchandise: eBay, Amazon, DealsDirect and JB Hi-Fi. DealsDirect is an online-only retailer that has used bargains and a wide range of products to become Australia's largest online department store. Its cavernous 40,000 square metre distribution centre allows it to offer everything from toys to furniture to kitchenware to bedding for immediate delivery. JB Hi-Fi is an even more important case example for traditional retailers. The consumer electronics player has emerged as one of Australia's most successful online retail shops, offering a broad range of products and competitive prices. The company invested in online capabilities while also building out its network of physical stores. Experian Hitwise named JB Hi-Fi the second-most frequented Australian online retailer. In the nine months ending January 1, the site had 9.5 million hits. Only Apple, with 10.8 million hits, had more. Like JB Hi-Fi, more Australian retailers will find that their biggest advantage when competing with overseas websites may be their bricks-and-mortar assets. The winners will be those who make the most of their substantial investment in physical stores to build online sales, and vice-versa. In the US, companies like Sears allow customers to make purchases online and then, after they receive an email that the products are available, pick up the products in the stores within minutes of customer arrival. Many others offer in-store returns of products purchased online. These are the kinds of services that will help Australia's retailers win the battle for the online shopper. David Zehner and Katrina Bradley are Bain & Company partners based in Sydney. Melanie Sanders is a Bain partner based in Melbourne.

The year 2011 will represent a turning point for Australia's retailers, with dramatic growth in the number of consumers willing to shop online. But will retailers be able to rise to the occasion?

Retailer Harvey Norman's recent decision to launch a branded online site is the latest evidence that Australia's retailers are getting serious about selling online. In announcing the new site, chairman Gerry Harvey said the time was right to go online even if it created competition with the retailer's 173 physical stores. The new site is bound to spur other companies to innovate in an area where Australia finds itself playing catch up.

It's no secret that Australia lags other countries in making online purchases. Although Internet penetration is strong, Australians spend one-third as much online as US consumers on a per-capita basis and one-fourth as much as shoppers in the UK. Why is Australia so far behind? Unlike their US and UK counterparts, the overwhelming majority of retailers in Australia have focused efforts on their traditional stores, where they've made heavy investments, instead of developing online stores. And with the Australian online market still relatively small, even those retailers with an online presence have found investments in a broad product range or advanced website functionality difficult to justify.

Despite these issues, Australian consumers are on the verge of a major shift in their shopping habits. A new Bain & Company survey of more than 1,000 Australian consumers concludes that online spending will dramatically increase this year. The question is: will Australian retailers—sellers of everything from whitegoods to cosmetics to travel to groceries to mobile phones—be able to profit from the coming boom? Or will they lose the sales to overseas sites? With the Australian dollar suddenly soaring—reaching parity with the US dollar for the first time in 2010—more consumers are bypassing Australian retailers and shopping overseas.

Online sales overall in Australia are expected to grow almost three-fold by 2015, to nearly $30 billion, according to Morgan Stanley. For the second consecutive year, Bain surveyed consumers representing all ages, incomes and locations throughout Australia. The results show online retailing is beginning to reach mass adoption rates. Based on the survey results, the number of consumers who have shopped in some categories has doubled in the past 12 months. This growth is particularly striking given subdued consumer confidence and weak retail sales growth overall. Meanwhile, the number of consumers who would "consider" shopping online has more than doubled in certain categories—a strong indicator of the growth still to come.

Our survey was designed to help us understand who is shopping online in Australia, what they're buying, and the challenges facing companies hoping to sell to them. We learned that the highest growth in online shopping is in categories where sales penetration has so far been relatively low—hardware and do-it-yourself products, clothing accessories and furniture. And people who already bought books, videos or travel services online (among the most popular items) are now buying a wider range of new products, everything from fitness equipment to stationery to groceries, a traditionally unpopular online category. The survey results show a 50 per cent increase in the past 12 months in the number of consumers who tried online grocery shopping.

We also learned that in addition to the growth of low-penetration categories, we can expect increased activity in high-penetration categories such as digital content, event tickets, travel, insurance and mobile phones. For example, we found the ranks of those who purchased digital content grew by 34 per cent this year, to the point where more than half of consumers we surveyed have now bought digital content.

An increase in spending

In addition to expanding the range of products they will purchase online, Australian shoppers expect to spend more money over the next 12 to 24 months. Among those surveyed, nearly seven per cent plan to significantly increase the amount they spend on web purchases of general merchandise and more than 26 per cent will modestly increase their spending. More than 50 per cent intend to spend roughly the same amount, and only 17 per cent said they would either not purchase general merchandise online or spend less. This rise in volume has big implications for retailers. Consumers who are trying online shopping and are satisfied with the initial experience tend to return to those sites. In a market that is moving quickly from a small base, first-movers will have an advantage.

In an increasingly competitive online landscape, Australian retailers argue that overseas sites have an unfair advantage because they are exempt from collecting the Goods and Service Tax (GST) on purchases below $1,000. A more serious issue may be the prices that the owners of global brands have come to expect that Australian consumers will pay, and the strong gross margins that Australian retailers have come to enjoy. A full 53 per cent of survey respondents who shopped on overseas websites said that price was the main reason they did so, and nearly 40 per cent said that product selection or availability was the main reason. But our survey found that Australians are willing to shop on domestic sites if they provide the right mix of price, selection, convenience and security. In fact, Australian consumers in 2010 still made 77 per cent of their online purchases on Australian websites compared to 23 per cent on overseas sites. Australian retailers will need to invest in their online capabilities—and some may need to reduce their prices—if they are to maintain this advantage.

What do consumers want?

How can retailers better satisfy the Australian consumer? To dig deeper into what consumers want, we asked survey participants to rate the importance of 13 different factors in making online purchases. They ranked secure payments and low price at the top of the list, followed by ease of delivery, convenience (shopping outside regular business hours), and the quality of the website. While consumers who've made online purchases are generally happy with the price, value for money and convenience, they are less satisfied with online customer service. The message to online retailers is unambiguous: Invest in a site that looks good and makes it easy for customers to find what they want, and don't forget the importance of having superior customer service online.

What's keeping shoppers from going online for even more of their purchases? The number one reason among respondents was something that online retailers sometimes find difficult to overcome: 31 per cent ranked a desire to feel the product as the most important factor. To address this, a growing number of companies offer easy return policies, and in the US, some retailers are experimenting with creative online solutions. For example, Land's End customers can zoom in on a picture of a garment to see the weave of the fabric. Other issues raised by consumers may be easier to address. For example, among survey respondents, 13 per cent cited delivery concerns as a reason to resist shopping online. To help overcome this obstacle companies are introducing next day or even free shipping. Coles and Woolworths both offer next-day grocery delivery (for a fee) and, to make it more convenient, customers can pick a two-hour delivery window. Eleven per cent of our respondents say they don't shop online because they want to speak to a salesperson. Pro-active companies now offer online chat options. And nine per cent say they don't trust online payments. That opens the door for retailers to convince consumers that online transactions are secure.

Taking advantage of the online shopping trend

Based on the survey results, traditional Australian retailers have a tremendous opportunity as consumer habits undergo a radical shift and they spend more online. Australian consumers listed four sites as their favourites for new general merchandise: eBay, Amazon, DealsDirect and JB Hi-Fi. DealsDirect is an online-only retailer that has used bargains and a wide range of products to become Australia's largest online department store. Its cavernous 40,000 square metre distribution centre allows it to offer everything from toys to furniture to kitchenware to bedding for immediate delivery. JB Hi-Fi is an even more important case example for traditional retailers. The consumer electronics player has emerged as one of Australia's most successful online retail shops, offering a broad range of products and competitive prices. The company invested in online capabilities while also building out its network of physical stores. Experian Hitwise named JB Hi-Fi the second-most frequented Australian online retailer. In the nine months ending January 1, the site had 9.5 million hits. Only Apple, with 10.8 million hits, had more.

Like JB Hi-Fi, more Australian retailers will find that their biggest advantage when competing with overseas websites may be their bricks-and-mortar assets. The winners will be those who make the most of their substantial investment in physical stores to build online sales, and vice-versa. In the US, companies like Sears allow customers to make purchases online and then, after they receive an email that the products are available, pick up the products in the stores within minutes of customer arrival. Many others offer in-store returns of products purchased online. These are the kinds of services that will help Australia's retailers win the battle for the online shopper.

David Zehner and Katrina Bradley are Bain & Company partners based in Sydney. Melanie Sanders is a Bain partner based in Melbourne.