The shift to online commerce is a shift that major retailers of discretionary products have failed to anticipate. They really did not appreciate their vulnerability, and this is true for several reasons:
1. Economies of scale - Online sellers have far better economies of scale
2. Superior profit margins - Online sellers have slightly higher distribution costs, but they have much lower capital overhead, staff costs and warehousing costs. They don'y have to sit on as much dead stock.
3. Sales exemption - In many countries online retailers can avoid sales taxes, whether they are claimed legally or illegally by the buyer of the goods.
4. Recession - People are looking for discounts more than ever.
5. Security - People are feeling more and more secure buying product online, and are broadening the range of product they buy online.
6. Less staff turnover - Showroom retailers rely on cheap youths whose jobs are seasonal, and the consumers buying habits are also seasonal. Online websites can be internationally integrated.
7. Fewer product returns - Online buyers are less likely to return products.
8. Product disclosure - Online sellers have a far easier and more effective product and sales policy disclosure. There is a tendency for customers to just trust major traditional retailers.
9. Regulation - Online sales are regulated by the market. Online sellers are far more accountable than showroom retailers because unhappy customers can get online can discredit a business, and any maligned customers soon establish a presence. If I was unhappy customer of Harvey Norman, I might find that the company has technically done nothing wrong, i.e. There are loopholes in arbitrary statutory law, or I might find that the government offers few resources to assist retailers. For online customers, they need only search for 'RETAILER, scam, bad service, complaints' and see what comes up, or go to forums. Once you high a reliable supplier, you can stay with them, or keep searching.
10. Online sellers stock the latest products and at reasonable mark ups. I suspect that manufactures have dropped the discrepancies between major product markets. i.e. the latest digital camera in Japan might be $500, but in Australia it will be $1200. Over time that price margin will erode, but you will always be buying old product.
Consumer Backlash: Some traditional 'showroom' retailers are lobbying governments for tax concessions, and are being attacked by consumers who oppose their lobbying to increase taxes on the consumer. Those in the firing line in Australia include Harvey Norman, Myer Group, and others. These companies and others have set up a coalition to lobby the government. The problem is - they only have lobbying muscle so long as they are able to create jobs, and they are a dying industry who only preserve some relevance for those elderly people who have not grasped the internet, and who don't have grandkids to help them. Expect tools in the future to help those elderly people adjust, i.e. Some product search feature which trolls the databases of major online retailers.
The reality is that any consumer complaining about the high mark-ups of Australian retailers are not likely to pose much of a threat to these retailers, simply because they are the people already enjoying the benefits of online buying. The problem is the lobbying by the retailers themselves - they are effectively telling customers they can save 50-80% by buying online. They are posting nationwide newspaper advertisements to tell them. Basically any 'showroom' retailer selling discretionary items is going to suffer because people can afford to wait a few weeks for these items. The biggest exponent of tax reform has been Gerry Harvey, and he is being savaged in the traditional and social media for his support of adopting the GST upon foreign online sales.
Looking at the stock prices for these two companies -Myer and Harvey Norman - and it is safe to say that these businesses will be a shadow of their former self, and will eventually disappear. You soon realise that many of the services they provide can be offered by online sellers as well, if they ever needed to.
The Australian 'showroom' retailers are particularly vulnerable if they don't own the stores and since they are not integrated in with railway developments. The good news is that the Australian economy is very strong, and there are a lot of wealthy who are not terribly discerning about where they buy from, and thus not particularly fuzzy. That price gap will be closed. In Japan, 'showroom' retailers like Sobu and Toban are vertically integrated with the ownership of railways. I think people will want to go out and 'window shop', as they do in Japan, but I think you will find people increasingly just walk into the store, kick the tyres, eat at a restaurant and go home, knowing that they had a nice day out "virtually" shopping, before they do their "real" shopping online. Harvey Norman, CEO of Harvey Norman Ltd, attributes this trend to the 10% tax. Nonsense, its the least significant factor.
For my thoughts on Gerry Harvey's tax lobbying - see here.
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Andrew Sheldon www.sheldonthinks.com
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