COVID-19 has opened the path for challenger brands to capture significant market share in Australia’s e-commerce sector, according to Curtis Smith RBC Capital Markets’ Technology lead for investment banking in Australia.
“Australia has been at the forefront of some areas of digitization of the economy - such as banking - but in online retail, it has lagged behind comparable developed economies,” Smith explains. “COVID-19 has changed that, pushing consumers online and forcing retailers to focus on e-commerce. In the process, it is allowing new players to establish themselves potentially at the expense of existing large retailers.”
Distance, market domination and changing dynamics
A KPMG study found that before COVID-19, Australia’s e-commerce sector accounted for less than 9% of total retail spend. This compared to around 22% in the UK. Perhaps more tellingly, that gap had been growing in recent years.
The NAB Retail Sales Index revealed that the pace of growth in Australian online shopping peaked at 29% in 2011 but had fallen to 9.7% by 2019. This was at least two per cent below the growth rate in both the UK and the United States and off a much lower base.
Smith believes many of Australia’s online retail issues have stemmed from the high levels of concentration associated with the retail market more generally. For instance, Australia’s two leading supermarket retailers - Coles and Woolworths - account for close to 60% of all grocery dollars spent. This compares to the UK where the two largest supermarkets - Tesco and Sainsbury’s - account for just 40%.
“As a country, Australia tends to be prone to oligopolies where just a few players control most sales,” he explains. “You see this happen in many sectors from telecommunications to air travel.”
Smith says that this is largely the result of the country’s geography. Although occupying roughly the same area as mainland USA and twice the area of the European Union, Australia is only home to 25 million people.
“The sheer size of territory retailers must cover requires a significant investment in logistics, something only businesses with access to vast capital reserves have been able to do. But companies who have this much market share also tend to have little incentive to innovate.”
“As a result, many of Australia’s biggest retail brands have been late to the online retailing game.”
Filling the void
COVID-19 has changed the retail market dynamic altogether. Lockdowns mean fewer people are willing - or sometimes even able - to leave their homes to enter a physical store.
This suddenly and dramatically tilted the market in favor of those companies who have already invested heavily in the online space. These businesses have been able to adapt to the new environment without the need to change their model while other traditional retailers scrambled to deliver an online alternative for their customers.
Some of the beneficiaries have been established overseas players with deep pockets such as British fashion retailers Marks & Spencer and ASOS, both of which have Australia-specific online storefronts that ship from the UK. Another is Amazon Australia, which launched in 2017 and, after a sluggish start, saw its sales double to $520 million over 2019.
Surging sales from Australia’s coronavirus-impacted economy have encouraged Amazon to announce it will build the Southern Hemisphere’s largest robotic distribution centre in Sydney’s western suburbs. It is reportedly looking for similar space in Melbourne and plans to open another fulfilment center in Brisbane later this year.
Before COVID-19 struck Amazon had forecast that Australia would become a $23 billion market for the company by 2029 and a meaningful contributor to its top-line growth. Now, even this seems conservative.
Homegrown success
Not all companies filling Australia’s sudden demand for online shopping are large international players. Melbourne-based online retailer Kogan has been busy capturing market share in the consumer electronics space. The company reported that its sales grew 30% over the March 2020 quarter and then lifted another 100% over April and May 2020. Profits also grew 130% over the same two months.
“Kogan has been an overnight success story that’s been 10 years in the making,” Curtis says, noting that the company’s digital-only presence and value-focus have made it better equipped to deal with the current market than traditional retailers. As well as selling its own branded budget electronic products, Kogan also offers the same products as the major retailers but often for lower prices and with better delivery terms.
Kogan’s rising strength saw it acquire furniture retailer Matt Blatt, an entrenched brand that was forced to close 12 bricks and mortar stores as the coronavirus ravaged its revenue. Kogan has kept the Matt Blatt name but relaunched the business as an online-only operation. It says it will use its digital knowledge and established supply chains to quickly capture market share.
After acquiring Matt Blatt, Kogan immediately relaunched its website and expanded its range, selling diverse products such as dehumidifiers, steam cleaners and even toys, alongside furniture.
From sales to logistics
This, Curtis says, is the new reality of Australian retail and one that offers tremendous opportunities for businesses that already understand how to make digital work.
“In the evolution of retail over the last half-century or so we’ve seen the way people buy move from strip malls to shopping centers. Now we’re finally seeing the next evolution here in Australia where the predominant place people shop is online,” he says.
Curtis argues that the most effective model for a successful retailer has changed during each evolution and that increasingly it is the backend that is becoming retail’s profit engine.
“Of course, an online retailer needs to be easily Googled,” Smith says. “But in many ways, online sales are more about logistics than anything else. You need to be able to onboard products efficiently and then deliver an experience that drives repeat users.”
For this reason, he says the real winners will be those who are prepared to take an online-first approach to their supply chains.
“The future of Australian retail is no longer about shopfronts but warehouses,” Smith concludes.
