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Through the Looking Glass, Australia Retailing

In the first of this two part series, I shared my first-hand experience of Australian retail, having visited the country for the first time. Within that piece, I pondered what Amazon’s looming presence will mean for a country has the highest per-capita ownership of smartphones, particularly since only 5% of Australia’s retail sales are currently conducted online.

Transparent Glass

To date, Australian retailers have been relatively isolated, but the same trends that have wracked American retailing are heading their way – with even more of a vengeance. Yeah, there’s Amazon, and yeah, it will probably force some consolidation among pureplays, if the company doesn’t actually initiate some of that consolidation itself by buying its way into the market, much as it did with Zappos and others in the US.

But I’m more interested in the transparency challenge, as well as the future of stores. Transparency is already impacting the Australian market, and it’s an even worse kind of transparency than exists in the US. It’s bad enough to be price comparison shopped against Amazon. Try competing with Chinese manufacturers. China is far enough away from the US and our population is sufficiently ignorant about just how much of our products come from there that it’s not the first place that consumers think of looking at for cheaper alternatives. But if it’s cheap to ship from the US to Australia, just think about what it costs to get things from China or India – or Malaysia or Vietnam or wherever else manufacturing is moving to.

It’s already happening with car parts. In the four days I was in Sydney, I heard three separate, unsolicited anecdotes about how people saved literally hundreds of dollars by sourcing replacement car parts directly from the overseas factory that makes them, rather than go through a car dealer. And right along with those stories came the same kind of disgust and broken trust that is happening at an even lower price point in the US – the universal attitude from the car part storytellers: Car brands and car dealers must be ripping us off hand over fist, if I can get a part – a certified by the brand part, mind you, not even a questionable knock-off – from the factory in China for A$350 and the dealer wants to charge me A$1000.

This is the most dangerous sentiment that retail is exposed to right now, because broken trust takes way longer to repair than it does to build a new relationship in the first place. In the US, retailers have to fight against Amazon for transparency. The first product category to go this route was electronics, particularly high price-point electronics like flat screen TV’s. In Australia, the future may hold not only competition against Amazon on price, but increasingly also from the Asian factories that make these products, as they find it easier and easier to reach into the Australian market. And when American retailers get to a certain volume, they may find it advantageous to start fulfilling orders into Australia from their Asian manufacturers, making it even less expensive to service the Australian market.

What it Means for Stores

As for the future of stores, here’s what happened in the US. Retailers didn’t brand their online sites differently, so consumers had an expectation that the experience they could get online would be seamless to the experience they could get in stores. And brick & mortar brands found that strongly supporting a traditionally branded online experience helped people find them vs. Amazon – these are brands that people know and trust. At the same time, when online sales hit about 5-7% of a retailer’s total sales, the economics shifted – dramatically. The cost of a transaction in a store is way higher than the cost of an online transaction. Real estate, inventory, labor – these are all much more expensive for a store than a call center and a warehouse and they aren’t nearly as leverageable.

So at the same time that traditional retailers realized that yes, online is cannibalizing some store sales and stores are not financially positioned to sustain that kind of shift, they also realized that stores are the biggest differentiator they have to the online behemoth of Amazon. Except that stores can’t really take advantage of that potential differentiator, because they are designed around the idea that the customer path to purchase begins and ends in the store. The shift right now in the US is all around store – how to make employees smarter, how to make stores smaller or at least diversify what’s under a store roof so that it’s more services and not so much product. Apple has perfected the “owner experience” and now Ron Johnson, of Apple Store fame, is trying to invent that owner experience in a department store – JCPenney.

A Little Advice

This future is coming to Australia too. Whether consumers get there naturally through the convergence between digital and physical that mobile forces on retailers, whether it happens through the natural growth of a brick & mortar retailer’s online business, or whether disruption from Amazon or others forces it to happen “unnaturally” – and fast – it’s coming. And it’s true that Australian retailers can probably take advantage of the hard knocks lessons that American retailers have learned along this journey. But there’s one thing that I’ve learned about cross-channel in my globetrotting this year.

Geography matters. It matters a lot more to cross-channel than it does for online, because it impacts store economics and the inventory economics of whether you can leverage store-channel inventory to fulfill cross-channel demand. When it comes to some of those lessons, they may not apply so well from the US to Australia. So my bit of advice to Australian retailers – brick & mortar retailers – is this:

  • Understand the “economics of the box” – for each store, at what point would a drop in sales from online cannibalization create an unprofitable situation? This depends a lot on where the store is located and who shops there.
  • Understand your cost to serve for each channel. How much does a transaction cost in a store vs. online vs. the call center? This also depends a lot on geography and where populations tend to be concentrated, and real estate and labor costs. It also depends on infrastructure and how easy or cheap it is to ship things from one place to another.
  • Take your online purchase funnel, or customer lifecycle or however you look at it, and apply it to stores. How much of the store experience is designed to actually support each and every stage of the funnel? My guess is the store is heavy on product selection and not nearly so good at brand or category education. Not really exploration. And probably not so good at after-sale experience either.

Word of warning about all of this advice: US retailers haven’t figured out how to address a lot of these gaps. So in terms of solving these problems, come on through the looking glass. And welcome to the bleeding edge.

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About Nikki Baird

Nikki Baird's picture

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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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