Offshore retailers join the party
It seems Ikea is not alone. For all the whinging by retailers about the tough conditions in Australia, including the high Australian dollar and an online disadvantage due to the GST-free threshold, ever more international retailers are opening up physical stores and customising their websites to target the Australian wallet.
In the past few years groups including Topshop, Gap, Zara and Costco have all opened stores in Australia. Costco is reported to have committed $140 million to opening up more stores. US department store Nordstrom now counts Australia as its second-biggest overseas market after Canada. And Saks Fifth Avenue's website, for one, now has a box that opens up on the home page saying, "Now Shipping to Australia. We make it easy to shop from Australia with all prices in Australian dollars, duties and taxes calculated at checkout." It is a similar story for Macy's and ASOS, which has opened a warehouse in Australia.
Besides the advantage of the GST-free threshold on internet purchases, which allows shoppers to buy overseas goods under $1000 in value GST free, the high Australian dollar has effectively made the Australian market at least 20 per cent bigger for these international players.
It goes a long way to explaining why British shirt maker T.M. Lewin and competitor Thomas Pink have come here. Another recent arrival is Finnish design store Marimekko and next year Japan's fashion outlet Uniqlo and US homeware group Williams-Sonoma plan to join the trend.
Depending on how successful they are, they will take market share and dollars away from Australia's existing retailers. Ikea and Costco together divert more than $1 billion in turnover a year away from the coffers of Bunnings, Harvey Norman and the supermarket chains. Speciality stores take foot traffic away from the department stores and offshore department stores are shaping up as formidable competitors as they target Australian customers.
Australian department stores have been relatively slow to migrate online, with online sales accounting for an estimated 1 per cent of total sales. In contrast, the US and British department stores generate up to 10 per cent of sales online.
A report by Goldman Sachs retail analyst Phil Kimber has investigated why the numbers are so low in Australia. His analysis suggests that a key contributor is the amount of investment made in technology and online capability. "US and UK department-store peers allocated a significantly larger portion of their cash towards capital expenditure," he said.
The reason? "The focus on maintaining strong dividend payout ratios, given the large weighting towards individual 'retail' shareholders and the tax advantages from fully franked dividends," he says.
It is an interesting observation that raises questions about the many companies - in all sectors - that have been reducing capital expenditure to accommodate investor obsession with dividend yields.
At some stage something will have to give. Companies that have underinvested in capital expenditure will have to make some hard decisions about whether to continue to direct cash to dividends or reinvest it in their business.
In the case of retailers, as offshore department stores beef up their marketing to consumers in Australia, Kimber argues that Myer and David Jones will need to reduce dividend payouts and lift their allocation of funds to online expenditure in order to compete and protect their longer-term sales.
Myer's higher level of investment in this area over the past six years, during which it spent $600 million replacing supply chain, investing in new stores, launching a new point-of-sales system and setting up four hubs in China, raises the question of whether David Jones will need to make a relatively larger increase in capital expenditure now.
The need for more capital to improve their online offering prompted Goldman Sachs to downgrade its earnings per share (EPS) estimates for David Jones and Myer over the next few years. It downgraded David Jones EPS estimates by 3 per cent in 2013, 7 per cent in 2014 and 10 per cent in 2015; and it downgraded Myer's EPS estimates by 1 per cent in 2013 and 2014 and 3 per cent in 2015.
Whatever David Jones and Myer argue about their investment in technology and their commitment to improving their online offerings, it is hard to dispute that many of their overseas rivals have been doing it better and for longer. Indeed, it wasn't until this year that David Jones and Myer provided investors with strategic plans for the omni-channel offering.
This was supported by a recent survey conducted by Credit Suisse of a panel 20 of upper-income shoppers who were asked to allocate $500 to $1000 among David Jones, Myer, Nordstrom and Net-a-Porter and rate the sites. The shoppers allocated 73 per cent of expenditure to Nordstrom, 16 per cent to David Jones, which relaunched its website in November, 7 per cent to Myer and 4 per cent to online designer site Net-a-Porter, more due to the cost of its designer products than the quality of its website.
Frequently Asked Questions about this Article…
In recent years a wave of international retailers have entered the Australian market, including Topshop, Gap, Zara, Costco, Nordstrom, Saks Fifth Avenue, Macy's, ASOS (which opened a local warehouse), T.M. Lewin, Thomas Pink, Marimekko, and planned entrants such as Uniqlo and Williams‑Sonoma.
The article says several factors make Australia attractive: the GST‑free threshold on internet purchases under $1,000, and a relatively high Australian dollar which has effectively made the market about 20% bigger for international players. Many retailers are also customizing sites and opening local stores or warehouses to win Australian customers.
Because goods imported into Australia worth under $1,000 aren’t subject to GST, offshore retailers and overseas e‑commerce sellers can price products more competitively for Australian buyers — a clear online advantage noted in the article.
The article highlights that Costco reportedly committed about $140 million to open more Australian stores, Ikea has committed to doubling its store footprint in the next few years, and ASOS has opened a warehouse in Australia. Saks Fifth Avenue also added an Australian shipping option with prices in Australian dollars.
According to the article, Ikea and Costco together divert more than $1 billion in turnover a year away from the coffers of Bunnings, Harvey Norman and the supermarket chains, while speciality and offshore department stores are taking foot traffic and dollars from local department stores.
The article says Australian department stores have been relatively slow to migrate online, with online sales accounting for an estimated 1% of total sales versus up to 10% for US and UK department‑store peers. Goldman Sachs analyst Phil Kimber attributes part of this to lower capital expenditure on technology and online capability in Australia.
Goldman Sachs’ analysis, cited in the article, argues Myer and David Jones will likely need to reduce dividend payouts and increase spending on online investment to compete with beefed‑up offshore marketing. The report also downgraded EPS forecasts: David Jones’ EPS by 3% (2013), 7% (2014) and 10% (2015); and Myer’s EPS by 1% (2013 and 2014) and 3% (2015). The article notes Myer had already invested about $600 million over six years in supply chain, stores and systems.
A Credit Suisse survey of 20 upper‑income shoppers asked them to allocate $500–$1,000 among Nordstrom, David Jones, Myer and Net‑a‑Porter. Shoppers allocated 73% of expenditure to Nordstrom, 16% to David Jones, 7% to Myer and 4% to Net‑a‑Porter, suggesting stronger consumer preference for some offshore rivals.
Call 1300 880 160
Start a chat
Schedule a call
