The online retail enigma

It is obvious from his weekend comments that Gerry Harvey doesn't 'get it.' It is equally obvious that Grant O'Brien does. Later this month we'll find out in which camp Bernie Brookes and Paul Zahra belong.

The ‘it,' of course is the internet and in the case of the chief executives mentioned above, online retailing and the digital platforms and strategies that support it.

Harvey said at the weekend that he had reduced Harvey Norman's online sales targets from five per cent of sales within two years to between one and two per cent after the launch of the group's online transactional site last year had generated only half a percentage point of its turnover.

Grant O'Brien, in contrast, said last week that Woolworths is aiming to generate $1 billion of online sales within two years and ensure that all of its retail brands are trading on the web by 2015.

Woolworths' mobile app has already been downloaded more than 1.5 million times and its online sales more than doubled in the first half of this financial year. 

It has launched a daily deals site and is trialling virtual shopping walls and a ‘'click and collect'' service. O'Brien has also said the group is working on improvements to its supply chain to support the fulfilment of its online sales.

He describes the growth of online retailing as ‘'the biggest opportunity in retail for many years'' and says that a failure to recognise that should lead to the questioning of a retailer's future. He gets it.

One of the clever – far-sighted – things Woolworths has done in recent years was to launch its Everyday Rewards scheme which, when combined with its mobile app, gives it access to vast amounts of data on customers' behaviours and preferences and the ability to make very highly targeted offers to them.

When Myer reports its first-half results next week the market will presumably get an update on the progress of its e-retailing strategies. Publicly Myer's Brookes was a late convert to online retailing and it isn't generally appreciated how far developed the group's strategies – and the infrastructure to support them – are.

Myer has been developing a completely new e-commerce site and the capability to click and collect in stores. It plans a private digital club for its MyerOne card members, a 'daily deals' offering and an overhaul of its digital marketing strategies.

Myer has an asset of inestimable value in its MyerOne card program, which has more than four million members who already spend more than $2 billion a year in its stores.

It has massive amounts of data on those members' behaviour and the capacity, in a digital environment, to leverage that data far more effectively into sales.

It also has a brand new IT platform and point-of-sales system, an extensive direct-sourcing capability and a big physical network of stores, which means it has the core infrastructure and supply chain to support its digital offerings.

It is understood that Myer is using a significant amount of external expertise as it tries to accelerate the development of a greatly-expanded and multi-dimensional online presence.

David Jones' Zahra launched a permanent online site late in 2010 and is committed to upgrading its online presence but is handicapped by the fact that it has legacy IT and point of sale systems.

It has launched tenders for new systems with multi-channel functionality but its ability to offer a full suite of e-retailing offerings will be hampered until it has them in place and bedded down.

The fact that the big retailers have an increasing proportion of house brands in their stores does provide them with some protection from online competitors – and creates an online opportunity of its own in an environment where the development of international online retailing, coupled with the strength of the Australian dollar, means consumers can access international brands globally.

That's something that Just Group's Mark McInnes has identified as an opportunity for capital-light growth, and not just in Australia. Just Group's Peter Alexander and Smiggles brands have the potential to be international brands. Just Group's website is already it's largest 'store'.

Earlier this week the Commonwealth Bank released a report on online retailing based on research into the credit card records of its customers which estimated that online retailing now accounted for just over five per cent of the total retail market.

It said that online retailing sliced about 1.3 percentage points off the growth in bricks-and-mortar retailers' sales growth last year and said something similar should be expected in 2012. By 2018 it expects online sales to account for more than nine per cent of the market, which may be too conservative. 

There has been an explosion in smartphone and tablet take-up over the past two years which has the potential to accelerate the growth in online retailing as e-retailers become smarter in their digital marketing and customers become more comfortable buying online.

The CBA research estimated that about two-thirds of total online spending growth was attributable to the growth in new customers, rather than increased spending by consumers already accustomed to buying online. That ought to be a discomfiting factoid for bricks-and-mortar retailers.

The penetration of e-retailing in this market is still at a very early stage, although it is accelerating.

There is a window of opportunity for the established physical retailers to develop the kind of multi-channel strategies that Grant O'Brien talks about and use their resources and brands to limit the impact of their new pure online competitors while expanding into an environment one that doesn't have the occupancy and staffing costs of their existing networks and which enables a very direct and personalised relationship with individual customers.

The sense of urgency within groups like Woolworths and Myer and Just Group has been elevated because of the exceptionally tough conditions for traditional retailers, which has caused the discretionary retailers to re-think their established strategy of growth via the expansion of their store networks.

Over the next couple of years one would expect their presentations, and the questioning they receive from analysts and fund managers, to focus more and more intensely on the quality of their online capabilities and strategies and their execution of them.

The looming Myer and David Jones interim presentations will presumably provide a better sense of how developed their plans and digital infrastructure are.

As the most exposed segment of traditional retailing to online competition, and the most impacted by the new-found conservatism and price consciousness of consumers, the non-food retailers like Myer, David Jones, Just Group and Harvey Norman have to ensure that as online penetration of their sector grows they at least grow with it rather than being cannibalised by it.