It’s all your fault. You, the consumer. You’ve stopped shopping with the same ferocity you once did and everyone’s looking for an explanation as bookstores and clothes shops close, major retailers downgrade profit forecasts and economists try to work out what’s going on. Yesterday, Glenn Stevens offered a forensic analysis of the rise in household savings, and then topped it off with an almost Panglossian opinion that a turnaround is just around the corner.

Well, Glenn, maybe not if we have a substantial chunk of our politicians and businesses insisting, for purposes of pure self-interest, that the Four Horsemen of the Apocalypse will ride into town on 1 July next year.

What’s missing from most of the analysis and coverage, especially from business journalists preoccupied with covering companies rather than consumers, is an effective understanding of how potent the threat of online shopping is to the Australian retail model. Australian retailers are, at the moment, about where the music industry was ~1999. The penny has dropped that this internet thing is a threat, but they’re still trying to understand what it means and how it can be addressed. And the problem is going to get a lot worse in coming years.

And Australians retailers show all the signs of following the same template of denial that we’ve seen from other industries whose business models have been smashed by new media: first ignore the internet as irrelevant, then fail to grasp its potential because you’re too comfortable with your pre-digital business model, then realise it’s a threat, then demand governments make the threat go away by forcing consumers back into your old business model, then watch as new entrants with whom you’ve never had to compete before – who indeed may not even be in your industry — arrive to offer the innovation you could have offered if you’d been smart enough from the get-go.

Think Apple for music. Amazon for books and, now, virtually any retail, and Google for advertising. Companies that, strangely, know how to make money off the internet while traditional industry sectors panic.

About the only big Australian service providers who’ve been genuinely innovative in responding to the internet have been banks, which realised early on the potential to dramatically cut costs with a switch to online banking.

Much of the coverage over the last couple of days has featured a new report from PriceWaterhouseCoopers. PWC forecasts online shopping will grow at least twice as fast as the total retail market over the next four years, and will grow at 13% this year. They also note that we lag — quite substantially — the US and the UK in the proportion of retail sales revenue going online.

That’s bad news for Australian retailers — and I suspect worse news than PWC suggests.

There are two forces driving the switch to online retailing by Australians: price and convenience. Increasingly, consumers want to shop online rather than venture to the local shopping mall. And on that score, there’s no reason why Australian retailers can’t establish strong online offerings to supplement their bricks-and-mortar operations; it’s just that they’ve been too lazy to do so so far. They’re now waking up, but very slowly. In the meantime, new, small entrants have staked a claim in the online space in Australia, but struggled with problems like the unwillingness of manufacturers to sell online, and Australia Post’s charges.

So far, so good for local retailers — they can compete on convenience if they’re prepared to be smarter and the bigger retailers of course don’t have the problem of manufacturers refusing to cooperate — in fact, they’re the reason manufacturers won’t cooperate with small online retailers.

The problem is that the bigger driver is price, and local retailers won’t be able to compete on price without a fundamental overhaul of their supply chains and business models. For generations, Australian retailers, wholesalers and manufacturers have lived off a substantial mark-up, secure in the knowledge Australian consumers were unaware of it and couldn’t do anything about it if they did. Now they face a competitive jolt from foreign retailers who operate in bigger, more competitive, lower-cost markets. It’s no good Australia’s big retailers going online to offer the same price range as they do in their bricks-and-mortar outlets. Their price range is likely to be twice as much, or more, than that available online from foreign suppliers.

This is why the gap between Australia — 5.5% of retail revenue from online sales — and the US — 7.5% — and the UK — 9% — is so ominous for local retailers, because there’s no reason why Australians won’t take up online shopping as readily as their counterpart consumers elsewhere, but far more of that will go to overseas sites in pursuit of savings that retailers here can’t match under their current business models.

The response of retailers here so far suggests ignorance of the problem, or probably more accurately, a wish that it would just go away. They’ve started developing a half-arsed online offering to try to compete with foreign websites, and like the copyright industry trying to convince governments to spend taxpayers’ money attacking filesharing, the retailers have conjured reports on the economic impact of online shopping — so many thousand jobs lost, so much lost GDP etc etc — and demanded governments attack it by lowering the GST threshold.

But the only long-term solution is to shake the built-in mark-ups and inefficiencies out of their supply chains and offer prices competitive with those available from overseas.

Until then, the amount of spending Australians are directing overseas will continue to grow far more quickly than overall retail trade. It’s the internet. Get used to it.

Peter Fray

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Peter Fray
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