No 'WOW' in an online retail slowdown

The latest NAB retail sales index shows a sharp slowdown in online growth, but this was due to weakness in household and electrical goods, so traditional retailers can't be consoled by the numbers.

National Australia Bank’s latest online retail sales index appears to show a sharp slowdown in the rate of growth in online sales. That won’t however, provide much consolation for traditional retailers.

For the year to end-April, NAB’s index showed year-on-year growth of 15.5 per cent, falling back from the growth rate of about 19 per cent in the year to end-March and holding around 5.1 per cent of total retail sales.

That might suggest some lowering of the threat to traditional retailers posed by the growth in online retailing but that would be false comfort because there was a particular reason for the lower growth, the meltdown occurring within the household goods and electrical sector.

The collapses of the WOW Audio Visual group and Retravision Southern, the earnings stresses being experienced by JB Hi-Fi and Harvey Norman and Woolworths' decision to downsize and sell its Dick Smith business has made it clear that the electrical goods and appliances segments of retail are under acute pressure.

The NAB index simply demonstrates that the pressure isn’t simply related to the competition from online retailers, but is part of a larger malaise as consumers have reduced their purchases of electrical goods. Online spending in the segment was down 5.5 per cent.

The slowdown in housing activity may be part of the explanation but the larger issue is probably just the defensive mindset consumers have increasingly adopted towards discretionary spending as the eurozone began wobbling again and the dysfunction in Canberra increased.

If those segments were excluded, the other online categories were still growing at around 20 per cent year-on-year against 4.1 per cent growth in traditional retail. The other number to emerge from the index that would be disconcerting for brick and mortar retailers would be that total online sales, excluding food, now account for 8.3 per cent of total non-food sales.

Highlighting the reality that online retailing isn’t immune to the broader economic influences was the finding of the analysis of more than two million transactions a day that Western Australian online sales grew at 32 per cent, more than double the national average, with Victoria, South Australia and Queensland below the average. That reflects the patchwork and multi-speed condition of the national economy.

Perhaps more encouraging for traditional retailers was a slowdown in sales from international retailers and, even more significantly, the continuing dominance of local online retailers.

International sales into this market received an enormous boost when the Australian dollar went on its dramatic charge towards and beyond parity with the US dollar in 2010 but have slowed dramatically since about the middle of last year. Their year-on-year growth of 13 per cent to end-April compares with the 16 per cent experienced by domestic online retailers, which account for 73 per cent of online sales.

That domestic dominance is reflective of the experience offshore and, with traditional retailers slow to embrace online retailing, provides a sense of the opportunity now that the big retailers are beginning to embrace multi-channel retailing. Overseas the 'bricks and clicks’ model is dominant.

With the major department store and specialty retailers beginning to ramp up their online presence it is conceivable that the underlying growth in online sales could accelerate, particularly if consumer sentiment improves.

There’s already $11.1 billion of annual online sales occurring within this economy. If the slower growth rate of the year to April were maintained online sales would double within five years and could represent a double-digit proportion of overall retail spending.

The Australian experience appears to be tracking along a similar path to what has happened in the US over the past five years, where online sales have nearly doubled and are approaching 10 per cent of total retail sales.

If the big retailers are successful in building their online businesses, the rate of growth in this market, informed by the pioneering efforts of the offshore retailers, could be even higher. Given that the online channel is lower cost and offers higher profit margins, that ought to encourage traditional retailers rather than frighten them.

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