Two months ago the Swedish furniture maker Ikea fingered Australia as one of the most expensive places to do business yet committed to doubling its store footprint in the next few years.
It seems Ikea is not alone. For all the whinging by retailers about the tough conditions in Australia, including the high Australian dollar, price deflation and an online disadvantage due to the GST-free threshold, an increasing number of international retailers 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 up stores in Australia, with Costco 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. Websites such as Saks Fifth Avenue's have a pop-up that opens 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, low international shipping rates and guaranteed landed costs".
It is a similar story for Macy's and ASOS, which has opened a warehouse in Australia as part of a systematic plan to target Australia.
Besides the advantage of the GST-free threshold on internet purchases, which allows shoppers to buy overseas goods under $1000 in value with no GST charged, the high dollar has effectively made the local market at least 20 per cent bigger for these international players.
It goes a long way to explaining why the British shirtmaker T.M. Lewin has opened in Sydney. Others include Finland's furniture store Marimekko. 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.
Local department stores have been relatively slow to migrate to online offerings, 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 their total sales from online operations.
A report by a Goldman Sachs retail analyst, Phillip Kimber, investigates 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 across 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 under-invested 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 their dividend payouts and lift their allocation of funds to IT and 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, where it spent $600 million replacing its supply chain, investing in new stores, launching a new point of sales system and setting up four hubs in China, raises questions whether David Jones will need to make a relatively larger "step-up" in capital expenditure going forward.
The need for more capital to improve their online offering prompted Goldman Sachs to downgrade its earnings per share estimates for David Jones and Myer over the next few years.
It downgraded David Jones's EPS estimates by 3 per cent in 2013, 7 per cent in 2014 and 10 per cent in 2015, and 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. A panel of 20 upper-income shoppers were asked to allocate $500 to $1000 among David Jones, Myer, Nordstrom and Net-a-Porter, and rate the sites. The survey found that 73 per cent of expenditure was allocated to Nordstrom, 16 per cent to David Jones, which relaunched its website in November, 7 per cent to Myer and 4 per cent to luxury goods site Net-a-Porter, more due to the cost of its designer products than the quality of its website. There's a long road to hoe.