How Can Australian Retailers Survive The Amazon Onslaught?

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 Table of Contents

1. Innovate Or Die
2. Amazon's Impact Overseas
3. The Australian E-Tailing Consumer
4. Australian E-Tailers
5. Leveraging Tech To Remain Agile
6. Innovation Through Partnership
7. Summary

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Innovate Or Die

Changes in technology can be viewed as a risk or an opportunity for business. Changes in technology allow consumers to change their behaviour. The risk of not understanding how changes in technology could change your consumers’ behaviour is significant. A prime example of a lack of understanding of customer behaviour is Kodak. In 1975, Kodak invented the digital camera but the product was not launched as management believed that it could damage Kodaks’ photographic film business. Unfortunately for Kodak, they did not focus on digital until the late 1990s after the market had begun to adopt digital and in January 2012 they filed for Chapter 11 bankruptcy in the USA. Changes in technology can also affect retailers. For example, Blockbuster was a home movie and video game rental business that had 9,000 stores throughout the world in 2004. Due to consumers switching to online streaming, on-demand rental sites and pay TV, Blockbuster sales declined and in 2010 the business filed for bankruptcy.    

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In September 2017 Toys R Us filed for bankruptcy. BT Investment Management head of income and fixed interest Vimal Gor noted that: 

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“The issue underscores the broader structural challenges facing bricks and mortar retailers as the threat from deep discounters such as Walmart and online merchants like Amazon grows”.

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So for Australian retailers to survive the onslaught from Amazon they must understand how e-tailing (electronic retailing) has or will change their consumers’ behaviour. It is vital that they innovate to meet the changing demands of their consumers.  

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Amazon’s Impact Overseas

The following section highlights what has happened to other retailers overseas that have tried to compete with Amazon. The key point is that if Australian retailers are not ready to compete with Amazon today and try to play catch up tomorrow their profitability will decrease and maybe their business will not survive. Alix Partners analysed five years of financial reports for 20 publicly listed American retailers and realised from 2012 to 2016 online sales grew from 10.5% of total sales to 15.5%. The issue was the increasing online sales actually decreased their profit collectively by over US $1 billion (ouch).   AlixPartners’ Shawn Ashworth and Alexa Driansky interpretation of the data is that “the move online comes with many expense pressures” that they will need to offset to keep profitability healthy. In the JDA and PWC 4th annual CEO survey of 350 global retailers, it was discovered that only 10 per cent of those surveyed able to make a profit while fulfilling omnichannel demand.      

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Some of the actions CEOs were taking to improve online profitability included:

• Investing in mobile-enabled applications (85%), big data (86%) and the use of social media data (85%) to give retailers a better understanding of their customers
• Fewer retailers (12% in 2017 vs 19% in 2014) are offering a seamless omnichannel experience for customers due to the offerings being too complex or expensive
• More retailers (51% in 2017 vs 47% in 2016) are offering click and collect – called buy online, pick up in-store (BOPIS) overseas. More retailers (48%) are also offering buy online, ship to store.
• To minimise costs retailers are decreasing the availability of costly delivery options. Same day delivery has decreased (33% in 2017 vs 43% in 2016) and specific delivery time slots have decreased (27% in 2017 vs 48% in 2016).
• To cover costs retailers are also increasing charges for customers. 57% will increase charges for online orders, 62% will increase the minimum order for free standard home delivery and 55% will increase the minimum order for click and collect (called BOPIS o/s)
•   Lee Gill, group vice president, global retail strategy, JDA explained the situation as “supply chain complexities and cost will continue to challenge retailers and the difference between winners and non-winners will be how much, or how little, retailers understand their customers moving forward”. Moody’s analyst Charlie O’Shea described the current situation as “difficult to compete with Amazon when it has been focused more on sales and market share growth and cash flow generation than margins and profits”.

The Australian E-Tailing Consumer

  The AT Kearney 2015 Global Retail E-Commerce Index indicates Australia is a Top 10 nation based on “several variables that rate both a country’s current market and its potential for growth” in the global $840 billion e-commerce market (2014). This would suggest that Australian retailers should invest heavily into e-tailing, however, the research highlighted “the need for omnichannel ... physical stores remain the preferred shopping channel” in Australia. The global AT Kearney 2014 Connected Consumer Study highlighted “overall, electronics, fashion, services, book, and tickets are the top categories for e-commerce; groceries and household items are the least commonly purchased” in Australia. So should all Australian retailers have an e-commerce option to compete with Amazon? Unfortunately, the answer is not a simple yes or no. It will depend on the type of products or services you sell and how consumers prefer to purchase them. Australian retailers should investigate an e-commerce option to ensure they are able the deliver product or service offered at a competitive price and in a timely manner. Equally, online sales are still a small percentage of overall sales in many categories in Australia so investing in e-commerce may not be profitable at this stage.  

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Amount spent online in Australia = >$40 Billion  

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Some insights about Australians internet usage that further supports all Australian retailers investigating an e-commerce option include:

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85% of Australians have access to the internet 11.9 million Australians used social networking sites e.g. Facebook at least monthly in 2016 19.4 million mobile phone users in Australia 35% of eCommerce transactions in 2015 were completed on mobile devices 69% of Australian digital buyers make cross-border purchases, primarily from the U.S., China, and the U.K. 45% of consumers made mobile purchases (smartphone, tablet) on a monthly basis in 2016

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Australians spent $41.3 billion online in 2016 with 76% of that being spent with Australian retailers All of these statistics highlight that Australians are increasingly using new technology to shop. As their behavior changes then so to must retailers change to meet the new shopping behaviors.  

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Australian E-Tailers

  This section explains how Australian retailers can develop an e-commerce business to suit the demands of Australian consumers. The 4 key questions you need to answer before launching an e-commerce store are:

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1. How do your consumers prefer to shop? Australian consumers still prefer buying most categories in store. For major retailers (with deep pockets) e.g. Coles and JB Hi-Fi, less than 5% of total sales are online. Australian consumers will buy some categories e.g. experiences (Red Balloon) online.

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2. How can you deliver your product or service in an acceptable timeframe? Australia is a big country with a small population so logistics/delivery is an issue. Today, 90% of the Australian population live in urban areas but the distance between these urban areas can still be a major issue. Many retailers are using a store based delivery system to deliver ASAP after the order is placed, even the same day.

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3. How will you deliver your product or service? There are a number of different e-commerce business models including ‘click and bricks’ (online and store) and 100% online. Delivery can be made using company-owned logistics or third-party service providers or both. The consumers have different delivery options such as Click and Collect and home delivery from a warehouse or local store or sometimes the product is sent directly from the supplier to the consumer.

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4. How much is your customer prepared to pay for an online service? In September 2016 McKinsey & Company noted in their report, Parcel Delivery: The Future Of The Last Mile, that only 25% of respondents would pay a premium for the same day or instant delivery. Free same day delivery has become the new- norm. The issue for Australian retailers is Australian consumers may not pay for the convenience either. Canstar Blue Online Grocery Shopping for 2017 highlighted the biggest frustration for Australians currently using online grocery shopping was delivery costs – 25% of respondents. The following section highlights how Australian retailers meet Australian consumer demands online.  

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Coles

Coles’ online business was awarded the most satisfied customers award in the Canstar Blue Online Grocery Shopping for 2017 so they are meeting their customer demands in e-commerce. Today, Coles online can deliver to approximately 85% of Australians. The reason Coles online does not deliver to the entire population is that the cost to serve people that live in remote areas is too high. The existing warehouse/store supply chain gives Coles the potential to deliver faster to customers as the product is stored in close proximity to their household or office. Coles is trialling same day deliveries in some regions. Coles customers have the option of click and collect or home delivery.

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All retailers, including Coles, can compete with Amazon by offering faster delivery times, or pick up times for Click and Collect, as Amazon does not a large number of stores throughout Australia.

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Dan Murphy's

Dan Murphy’s is part of the Woolworths group and is the largest online liquor retailer in Australia with an estimated online market share of 50% and 2 million customers using the online store in 2016. In September 2014, Dan Murphy’s launched their Connections range with 30 Australian suppliers and today they have over 200 suppliers. The supply chain for their Connections range is different to the normal warehouse/store supply chain. As their website explains: “Connections products are sourced directly from their distributors and delivered straight to our customer's doors.” This type of arrangement is common in e-commerce and is normally called drop-shipping.

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All retailers, including Dan Murphy’s, can compete with Amazon by adopting a similar supply chain to Amazon e.g. drop shipping to decrease their cost of doing business and be price competitive with Amazon.

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JB Hifi

JB HiFi’s 2017 annual report highlights that online sales grew 38.4% to $158.9 million but were only 3.8% of JB Hi-Fi Australia total sales. What is interesting to note here is that the vast majority of sales are still in store for an electronics retailer.

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All retailers, including JB Hi-Fi, can compete with Amazon by delivering their product or service how their customers prefer it. NB, Not all customers prefer 100% online due to issues such as returning faulty products and post-sales customer service so many retailers are focusing on omnichannel - both online stores and traditional brick and mortar stores. Amazon focuses on online sales so Australian retailers offering great in-store service, at local stores, can compete with Amazon.

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The Iconic

The Iconic is an online fashion and sports retailer launched in 2011 and they use using cutting-edge technology so they can be “Defining the Future of Retail”. They have an in-house technology team of over 50 people in Sydney constantly improving the user experience (UX) on their website and app. They attract over 10 million visits per month and have Australia’s most downloaded fashion app. They launch 200+ new products daily and employ over 400 people in Sydney. The Iconic are able to deliver to customers in Sydney in 3 hours and offer same day delivery to Melbourne, Brisbane and Adelaide plus free overnight delivery in Australia.    

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All retailers, including The Iconic, can be ‘better’ at e-commerce, than larger organisations such as Amazon, by focusing on their niche and delivering what their customers want, in this case cutting edge fashion delivered quickly using advanced IT systems. Just because Amazon ranges ‘Earth’s biggest selection’ does not mean they have what the local market wants.

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This brief review of how different Australian E-Tailers are currently operating in e-commerce offers insights for all Australian retailers on how they could compete with Amazon in e-commerce. It must be stressed that each retailer is unique and there is no ‘one solution’ for all Australian retailers. The above describes four key ways in which Australian retailers can compete with Amazon:

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1. Improving delivery times for a minimal cost

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2. Adopt a similar/better supply chain to Amazon, to reduce cost and improve efficiencies

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3. Focus on a great omnichannel experience

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4. Focus on a niche and deliver exactly what your customer wants

Today, for many categories, the in-store experience is preferred by Australian consumers so Australian retailers have not had to offer an e-commerce solution. Those who have offered e-commerce in addition to the physical store generally have not achieved significant sales but Australian consumers shopping habits are changing. Australians are purchasing more goods and services online now and new entrants such as Amazon are promising to offer a better online experience to Australian consumers. This change in the market means all Australian retailers should investigate the option of having an e-commerce option today to meet the changing demands of Australian consumers tomorrow. The obvious risk of not meeting changing consumer demands is that sales could decrease as shoppers switch. Brittain Ladd, former global logistics senior manager at Amazon, explained the situation as “If Australian’s are unhappy with Amazon and they prefer to shop at other retailers, Amazon will fail. Based on my experience, I believe consumers will be very happy with the service provided by Amazon”.  

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Leveraging Tech To Remain Agile

A core way for Australian businesses to compete with Amazon is to ensure that their company remains agile. A critical element of agility is keeping your workforce able to adjust to changes in the market by bringing in fresh talent for short-term work. This talent can inject new ideas into your business and execute on critical projects.   Thousands of Australian businesses have begun to partner closely with technologies that allow them to bring in talent in order to address changes in the market and execute work. While widely adopted now, the number of large companies in Australia utilising freelance and contract workers is expected to increase over the next 3-5 years. According to Expert360’s Getting Trendy 2017 study, nearly half of the ASX100 expect at least 20% of their workforce to be made up of contingent workers by 2020. Large corporations have recognised that keeping talent agile, flexible and high-skilled, large corporations will have a significant advantage over international incumbents.  

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Innovation Through Partnership

Some Australian retailers have already realised the opportunities that e-commerce offers and have decided to innovate. Perhaps the solution is to partner with e-commerce platforms such as eBay or Amazon. There are numerous examples of people that have developed successful e-commerce stores with platforms such as eBay and Amazon. One example is Neil Waterhouse, who lives in Sydney, and is now a multi-million dollar seller on e-commerce sites such as eBay and Amazon and has published a book (Million Dollar eBay Business From Home) explaining how he operates his online stores. Neil highlights that Amazon has 278 million active customers worldwide so Amazon has “the largest reach of all e-commerce marketplaces in the world”. At the other end of the scale in January 2016, Woolworths announced they have partnered with Tmall.com in China to offer Chinese consumers Australian products. Tmall.com is a business to consumer platform allowing businesses from all over the world to access China’s consumer market and they claim to be “the largest business-to-consumer (B2C) retail platform in Asia”. As Woolworths noted “Australian products are increasingly being sought by China’s rapidly growing middle class who are looking for high quality and trusted international products”. These 2 examples of totally different businesses, sole trader vs multi-national, highlight that all Australian retailers, irrespective of resources available, have a unique opportunity today to adopt new technologies/business models to launch new businesses and/or grow existing businesses.  

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Summary

Technology is changing how consumers shop / behave throughout the world, not just Australia. So for Australian retailers to be successful they must innovate or die. New entrants such as Amazon, and also local start-ups such as The Iconic, offering better online experiences for Australian consumers will only increase Australians consumers expectations of retailers in terms of product and service. These changes in the Australian retail industry do pose risks to businesses that will not innovate but they also offer huge opportunities e.g. China for those who will. Carpe diem.