How to win the online retail war

The Conversation

Australians are among the most enthusiastic online shoppers in the world.

Our most recent survey, published in the CCi Digital Futures report, The Internet in Australia 2012, has found a quarter of Australian internet users make weekly purchases online, compared to 18 per cent  in the UK and only 12 per cent  in New Zealand.

And it is rapidly growing. Surveys we have conducted in 2007, 2009 and 2011 showed growth in all commercial activities we asked about. (Although, interestingly for the debate in Australia, we saw stronger growth between 2007 and 2009 than for 2009 to 2011.)

And while activity is growing among those who are online, the online Australian population is also continuing to grow.

In 2007, 73 per cent  of Australians used the internet; by 2009 this figure had grown to 81 per cent, and it grew again to 87 per cent in 2011. There are more Australians online, buying more often.

But amidst these figures, reporting has concentrated on flat “official” retail figures, high profile retail collapses and the “threat” of online retail.

Poor pre-Christmas sales in 2010 prompted big retailers including Harvey Norman and Myer to press the Federal Government to apply GST to goods bought online worth less than $1000.

But this reaction gave the impression they had only just heard of the internet.

While perfectly justified, their complaint that the GST-free threshold on goods bought by Australians from overseas sites made for an uneven playing field, was a little beside the point.

Australians were not going online just to save 10 per cent. A public campaign to increase the costs of goods bought online was never going to strike a popular chord.

So why have Australia's large bricks and mortar retailers been slow to respond to the challenge of the internet? If the conventional rule is “once bitten, twice shy”, the response to the tech-wreck of the early 2000s suggests that for Australian retailers, the multiplier is greater than the customary two. Cheaper prices and greater variety has led Australians to purchase overseas.

Australian retailers are not the only, or even the greatest, villains in the story. The high Australian dollar, the popularity of overseas travel, and the emergence of transnational online stores like iTunes, has highlighted how Australia is priced differently by many overseas firms.

Australia is seen by many as a “high-margin market”, which seems to be code for “a land of sweeping returns”. The number of parallel importing cases before the courts is an interesting by-product of this dynamic.

Yet news is far from gloomy for Australian retailers. Australians are keen to shop with Australian websites. Around half of Australian consumers who shop online make most or all of their purchases with Australian sites.

Reasons include the belief it is less risky for consumers, as returning products should be simpler and cheaper and that enforcing consumer rights is possible.

In addition, two major shifts in online retail have major potential upside for domestic retailers.

The first is a shift to purchasing that is more time sensitive. Up until now, online shopping seems to have been driven largely by the chance to save money and acquire goods that are hard to find locally.

The next phase is likely to be about convenience; making online purchasing easier than visiting the store. This requires distribution networks that can achieve next day or same day delivery. Large Australian retailers already have distribution networks that should give them a solid platform to compete on this basis.

In the United States, there has been a long debate — somewhat like our GST debate — about the application of state-levied sales taxes on online purchases. (Somewhat surprisingly, the Victorian state government joined the tax-free threshold debate just last week.)

It's interesting that some US online retailers now appear to be trading off their out-of-state tax-free transactions against the ability to deliver more quickly, through greater physical proximity to their customers.

The second is the rise of the mobile internet, and its promise of nearly ubiquitous, always-on connectivity. Debates about online retailing, like many other internet related debates, have tended to polarise between “the online” and “the offline”.

As the internet has matured it turns out that most of the interesting stuff is about reconfiguring the connections between the offline and online worlds. In a dial-up environment, people “went” online; now they are more likely to be moving between the on-and offline environments; often using the internet to navigate and complement their offline activities.

The attraction of the mobile internet is not only the idea that it is available almost everywhere (in cities, at least). It is increasingly sensitive to place. The result will be lots of new opportunities for communication and commerce for traditional retailers.

The possibilities include helping customers to find stuff, allowing them to search store layouts, to order for in-store pick up, and to use their mobile phones to purchase in-store. The challenge for retailers is how to best integrate these proliferating channels with their businesses.

Many smaller Australian companies and start-ups are showing the way. They will help ensure that local retailing remains competitive in an increasingly dynamic environment.

The research on which this article is based is funded by the ARC Centre of Excellence for Creative Industries and Innovation. Scott shops online.

Julian Thomas does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

Scott Ewing is a Senior Research Fellow at the Swinburne Institute for Social Research and at the ARC Centre of Excellence in Creative Industries and Innovation. Julian Thomas is Director of the Swinburne Institute for Social Research, and Professor of Media and Communications at Swinburne University of Technology.

This article was originally published on The Conversation on September 17. Republished with permission.