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Observations of Australia's Retail Scene

I had the privilege of spending the last week in Sydney, Australia, attending the Online Retailer conference and expo. I was really excited to go not least because it was my first opportunity to go to Australia, but also because I was very interested to get an on-the-ground glimpse of Australian retailing and how it compares to developments in the US.

Retail in Australia: My Impression

First, some context. Currently, about 5% of Australian retail sales are currently online. However, Australia apparently also has the largest contingent of smartphones per capita – which tend to be iPhones more than anything. Amazon looms on the horizon, with as-yet-dormant plans to open a warehouse, somewhere along the eastern seaboard, where Australia has the highest concentration of population.

On a global scale, prices are expensive – to the point where certain items are more economical to ship from the US or UK to Australia, rather than purchase locally. And China, India (and the swath of southeast Asia that exists between them) and actually manufactures much of that inventory that Australians are ordering from the States, are increasingly visible – and accessible – via eBay and other marketplaces.

The online pureplay ecosystem is very vibrant there, it actually feels to me more so than in the US, which is saying something. And bricks and mortar retailers, through some interesting market developments, have been very slow to embrace the idea of cross-channel. They did go out and establish online channels like everyone else during the great internet land grab of the late 1990′s. But many quickly rebranded the online channel to something separate in order to avoid price transparency issues with their bricks-based brands. In the US, it would be the equivalent of if Petsmart had established instead of a startup.

In some ways, I feel like Australian retailing is a bit like traveling through the looking glass into an alternate reality. Just like I left Sydney kind of feeling like the city is representative of what, say, Los Angeles might’ve felt like in an alternative reality where the US had never rebelled against the Brits (without the craziness of Hollywood as added spice), I felt like Australian retailing looks a lot like what American retailing might’ve been if Amazon had never existed – or if the company had ever only defined itself as a bookseller.

What If?

It led me to an interesting question: what if Amazon had never approached its strategy as it had? Had never grown to be the online giant that it is? Well, first, I think a much larger number of niche pureplays might have proliferated for a lot longer and across a much wider breadth of retail than what we find today in the US. Also, I’m not sure that bricks and mortar retailers would have turned so quickly to separate online vs. store branding in order to solve their channel conflict problems. Whether it’s something unique to the US or not, just knowing the retailers that I know, I can’t help seeing them as being convinced their own brand online would be a benefit. In other words, brand hubris might have encouraged them to stick with their main brand online as well as in stores.

But I could also see traditional retailers in the US learning to address the channel conflict problem by pushing a more segregated assortment between online and store, or having online serve as the big factory outlet in the sky instead of a genuine alternative to the store experience. And then also deciding along the way to open competing, alternately-branded pureplay online properties, just to make sure they had a hand in the online space.

This structure would naturally make cross-channel less of a priority. Whether consumers want it or not, there just wouldn’t be a lot of paths to purchase that cross channels, either because the brands simply aren’t the same online vs. store and consumers shouldn’t expect a seamless experience, or because the assortment wouldn’t be set up to support any kind of cross-channel activity other than maybe ship-to-store.

And pureplays would consolidate more slowly, because really only until Google’s Panda search updates did it become less advantageous to have multiple niche sites instead of one consolidated site. And thus, there would’ve been little pressure for the likes of Hayneedle or Wayfair to consolidate their offerings under one umbrella. And there really wouldn’t be a lot of pressure on big box category killers, because without that consolidation, their value proposition for a single-category one-stop shop wouldn’t be threatened at all.

Back to the Future

It would lead to the biggest attitude difference that I saw at the conference between Australian and US retailers, which emerged during a panel session at the event. The panelists spoke about a bricks & mortar executive attitude that apparently is prevalent right now in Australia. The attitude can be summed up like this: “If online is only 3% of my business [the number thrown around at the event], why would I want to invest in it? It’s just not big enough to command my attention.” In the US (and UK, and increasingly western Europe at large), retail executives’ attitudes are the exact opposite. The thinking is, “If store sales growth is flat or negative and online is growing at 15% or more, why would I invest in stores? Why wouldn’t I take all that money and pour it into online where not only will it support fantastic growth, I have much more leverage because online isn’t nearly as asset-intensive as stores?”

In some ways, I would say the Australian perspective is the attitude that we saw in the US circa about 2002. What changed in the US to lead to such a different point of view today? Amazon. Amazon forced two major differences.

First, it made it very difficult for niche online pureplays to survive. If you look at all of the retailers that the Online Retailer conference honored in their awards this year (check the site for an update on the winners), outside of the marketplace category, only one retailer was not a niche player, and that was Woolworths. I’m sure it’s possible to find a comparable niche US company like Australia’s Surfstitch, but they just don’t operate at the same level of scale relative to their market size as Surfstitch can in the Australian market. When you look at the Internet Retailer 100 in the US, I’m guessing less than 30 of the top 100 are niche players in the sense of an online specialty retailer. The rest are either consolidated online players or the online presence of multi-channel brands. It’s not all bad news – because it’s difficult to be a niche player with depth and still compete with Amazon, I think the US has benefited from some innovative online retailing models in the pureplay space, like Etsy, Threadless, and Aha Life. Like Gilt Group.

Second, Amazon has forced traditional retailers to reevaluate their differentiators. From RSR’s research, multi-channel retailers invest in online in order to boost their cross-channel customer experience – they see making online connections into their stores as a vital way to differentiate from a pureplay’s purely online experience. The downside is that multi-channel retailers in the US have been a bit asleep at the wheel when it comes to the receiving end of all of this investment – stores. The store experience just hasn’t kept up with the quality of the experience that you find online. It used to be that the online division talked about trying to make the online shopping experience as good as a store experience. Now, retailers talk about making the store experience as rich as the online experience. In the US, I would peg the timeframe of that shift around 2009. And shortly after that is when I began my campaign to raise awareness that the store is in trouble – that it just won’t be able to keep up with the pace of digital change. And for a lot of other reasons – way too many reasons – there is no way that retailers are going to be able to fix stores quickly. So they’re going to be a drag on US retailers for a while still.

Next week, I’ll examine where all of this leaves Australian retailers, as well as what it means for stores, and as always, I’ll have some advice on what I think they can do about it. Tune it for Part 2!

Read the final part of this article, Through the Looking Glass: Australia Retailing

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About Nikki Baird

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Although Ms. Baird writes on issues for big retailers and company chains, franchisees can learn what is leading edge in retailing trends. These issues will be coming down the pike, if they aren't there already.

Managing Partner of Retail Systems Research, Nikki has led retail research and analysis at RSAG. Forrester Research, Viewlocity,and PwC Consulting, now IBM Global Services. Nikki has an M.B.A. from the University of Texas, Austin and holds a bachelor of arts in political science and Russian, with a minor in physics.

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