Why online retailers are being left behind

I have just returned from two days at Australia’s largest (and the world’s second largest) online retailing conference and exhibition. With around 3,000 participants and a buzzing atmosphere, it was hard not to come away thinking that 2010 may finally be the year that Australian retailers start catching up with their customers online.

The messages from keynote speakers were both inspiring and worrying. Inspiring, because it is clear that Australia is the next golden land of opportunity for online retailers.

Worrying, because it appears that a lot of the gold may head offshore in the years ahead if Australian companies don’t invest heavily online right now.

Deborah Sharkey, eBay Australia’s managing director, outlined that online currently represents 3% of retail spending in Australia, compared to 7-8% in Britain and the United States. Five million Australians visit eBay each month. Australians are a sophisticated, affluent and, by global standards, early adopters of online trends. The National Broadband Network is on the way. The opportunities for Australian retailers are there for the taking.

Established Australian retailers (such as David Jones) invested heavily in online retailing in the dot-com boom. But when the boom went bust, David Jones pretty much closed up their online shop and they’ve been sitting on the sidelines ever since. During this period, pure-play online retailers (like Amazon and Zappos) and nearly all the major overseas multi-channel retailers (from Gap to Top Shop) have been working tirelessly to get the customer experience – and the profitability – of their online stores right.

Analysts’ consensus is that Amazon will achieve net income of around $US700 million in calendar 2009 and they spend close to $1 billion in research and development. Global retail powerhouses of the future such as Amazon are investing for the long haul, and world domination is most certainly their goal.

The domination of giants

Companies such as Amazon.com and Zazzle.com (another presenter at the conference and very inspiring company) are building marketplaces and tools to power other retailers. Given that customers demand the ‘best’ online experiences (which can lead to the kind of online market dominance Google enjoys) there is a very real possibility that Australian retailers will end up with little choice other than to use Amazon (or equivalent) technology, therefore sharing margin and profits while losing differentiation. It may sound far fetched, but I’m pretty sure this is Amazon’s “Big Hairy Audacious Goal”. And they are tracking well towards it so far, thank you very much.

Forrester Research says that Australians spent $23 billion online in 2008, with estimated growth of 9% annually to $32 billion by 2012. eBay’s Deborah Sharkey quoted statistics from the Australian Payments and Clearing Association indicating that 43% of the $23 billion spent online in 2008 went overseas. It’s a worry statistic, although much of this is probably airline and other travel spending. Further statistics suggested that the percentage of total online spending that was staying within Australia was shrinking at a rapid pace, as large and small international retailers gain share.

Sharkey made the point that Australian retailers “simply can’t afford not to be online” and says they “face risk of global retailers targeting their customers with increasing success”.

“Australian retailers must evolve or be disrupted,” Sharkey said.

The trend of Australian spending going to international retailers (either directly or via fees for the platform) is not only a worry for Australian companies – it’s a worry for Australia.

Australia has generally lost its manufacturing industry to Asian nations. What we buy online is typically designed and ‘branded’ in the US, Europe or Japan, and made in China. In return we dig up and sell minerals to pay for it all. Which could become increasingly uncool (pardon the pun) in our carbon-constrained future.

Zappos believes 30% of US consumer spending will eventually happen online. There is no reason why Australia would not follow suit. So there is a real possibility that in the next decade, we could lose a big chunk of all Australian consumer spending, to our trade deficit. I am not an economist, but I reckon this could be a big number, and certainly bad news for our kids. The online market leaders of the future are being built right now, but Australia isn’t in the game.