Editorial

Is Ongoing Discounting Good for the E-commerce Industry?

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Many people shop online because they believe they will find products cheaper than in a physical store. While this may be true to an extent, the practice is hurting retail. Chris Morley, Director of eezyempire, explains why.

Everything is cheaper online, or so common perception goes.

E-commerce is seen as the place to buy items cheaply, it’s seen by retailers as the greatest threat since the GST was introduced, and as a concern for vendors who don’t want to see their margins slashed and brand damaged. Recent success stories such as Ozsales.com.au, CatchOfTheDay, Scoopon, Supermarket Deals etc., has seen the perception of bargains online expand and dominate the online industry; but is this necessarily good for the rapidly growing, fledgling e-commerce market of Australia? Will the idea consumers hold – that everything is cheaper online – be a hindrance for our industry?

Items will always be on sale at some point of their product life cycle, but having an online sales industry dominated by bargain and discount stores is akin to having the reject shop or the $2 shop leading traditional retail.

eBay and the Bargain Tradition

eBay, Australia’s and possibly the world’s most dominant online marketplace, was built on auctions and the belief that you could grab a bargain. Gradually, eBay has seen a rapid reduction in auctions and a move to ‘buy it now’. This, combined with eBay’s recent desire to attract big brands and strengthen its position as the first port of call for Australian shoppers, may hide some other potential issues for the online space. Hitwise will report ebay.com.au is the most popular Australian online shopping venue by some distance, having over 20 percent market share. And even with a move to add brand names normally associated with traditional retail, the emphasis is still on bargains. Their recent ads promote ‘dress like a model shop like an accountant’. So even as eBay aim to move away from the perception and belief that they are a place for bargains – by placing brands such as Alannah Hill, Witchery, MIMCO etc. – the products are often heavily reduce or out of season, adding further weight to the online clearance perception.

Australia’s unique e-commerce position is partly to blame as well, given the major bricks and mortar sellers have demonstrated the energy of sloths to embrace online, whereas companies such as DealsDirect, OO, Kogan, OZ Sales have all been able to gain massive market share that otherwise might not have existed. With online sellers being dominated by discount sellers, it is little wonder that the perception that everything is cheaper online is potentially hindering Australian brands and department stores in increasing their online offering. Old-style vendors are scared to look outside the box, especially if discounting is continued or expanded, then online will interfere with long term brand development by killing price perceptions that have taken years to develop. If a widget had a perceived price of $5, but this has since shifted to $2 as a result of online discounting and clearing of products, then the long term effect on the widget will be incredible. Who would invest into developing this widget if the margins are so greatly reduced?

Australia Versus the World

Goods have always been cheaper overseas – I remember my dad telling me this as a kid – and there are many reasons why things are cheaper overseas. But only recently has it become such a major concern for many retailers. This is primarily due to the high Australian Dollar combined with the lack of local options to purchase either traditionally or online, and US and UK online retailers are keenly targeting Australian consumers. The offerings from overseas retailers are usually cheaper (including overseas post being factored in) and would most likely still be cheaper than a similar item in store locally – even if the Gerry Harvey backed notion to collect GST on every item purchased online was acted upon.

No GST on overseas items does mean products are a little cheaper, but the item’s wholesale price is typically much lower as well and costs for retailers are vastly different overseas.

The freight component is also a concern for local traders, with Australia Post’s monopoly over our great, vast country – competitive local shipping prices are hard to find. Increased freight competition and travel options for sellers based in UK, USA and China – mean it is possible to ship products cheaper from Hong Kong to Melbourne, than Melbourne to Brisbane.

A Gloomy Outlook

So what long term impacts can such a notion and perception of discounting have on an industry? Is online just destined to be the end-of-line, clearance centre in Australia, with overseas sellers filling the brand and in-season void? While such a portal can be of terrific use for consumers, who really pays in an increasingly competitive environment?

There will come a point of time when returning a profit can become impossible while selling certain products online. It is this long term possibility that might put more Australian jobs at risk. The National Retail Association reported on the 16th of March that the retail industry will shed 118,000 jobs in the next three years as a direct result of online shopping, but the risk might be in the future that online jobs will be threatened if wholesalers and suppliers are continually cutting costs and margins as thin as possible and that overseas businesses continue to fill the void vacated by traditional retailers. Often the first thing to go in a business is labour.

So this then presents a problem for the online industry.

The Australian e-commerce industry, according to the NAB commerce index, is 4.9 percent of all retail, but growing at 29 percent year on year, compared to 2.5 percent growth for traditional retail. Yet none of our major retailers have any meaningful presence and are unable to capitalise on this growing section of retail. First businesses to the online market and with the longest credibility (remembering how important credibility is to online sales) are typically based on offering cheaper products – think DealsDirect, Kogan, oo.com.au, CatchOfTheDay and the savvy, experienced overseas sellers that are now starting to mobilise in a serious way for the Australian consumer’s dollar. These factors have added market power, with a high AUD and an increasingly conservative Australian economy where value for money is becoming paramount.

The internet has meant that our borders are now opened up to more traders, making it potentially a boom for consumers, however with many factors pushing Australians to buy from non-Australian businesses, will local business invest the required time and effort to make a strong, viable online industry not just predicated on discounting?

Now really is the time for local retailers to be embracing and ensuring their spot online before it is too late. Soon space will be taken over by discounting businesses and overseas-based sellers, risking further job losses in the online industry.

2 Comments

  • This article is an accurate reflection of what is happening in online retailing, not just in Australia – but worldwide.

    However it is not all doom and gloom.

    Savvy retailers and brands will build a unique experience into their physical retailing model – and consumers will choose this model for their purchases where price is not the only objective.

    (I know it’s a hackneyed example – but think Apple Stores vs Gateway Computers).

    Bricks and mortar retailers that rely on discounting will suffer the most in the long term. Meanwhile we will see some smart new bundled-service models arise that deliver a valuable “extra” to consumers.

    Reply
  • Nice article Chris and agree with you in the most part. Your comment that “goods are always cheaper overseas” is not always true. I travel a great deal and I often price compare between Australia and O/Seas. You can get great deals here and you get local warranty and service. Oh did I say service, that is of course a perceived service, as the service from local retailers is appalling. If Australian retailers could lift their game on the customer service front then I believe that they could compete easily with O/Seas competitors and even some of the local discount sites.

    Reply

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