COVID-19 has been a historic catalyst for online retail — now the race for market share is on
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Most local investors are aware of the opportunities in online retail. However, adoption rates among Aussie consumers have lagged that of the US and UK.
While growth rates for online channels have comfortably exceeded storefront sales, the overall slice of the pie was still below 10 per cent in 2019.
But in the wake of the COVID-19 pandemic, the sector just had a rocket put under it.
To appreciate the scale of the shift, a recent ecommerce industry report released by Australia Post is a good place to start.
The report highlighted that historically, April was typically a quieter month on the retail sales calendar, as shoppers continued to wind back from the Christmas period.
But with most of the country confined to their homes this year, April 2020 set a new monthly record for online sales, eclipsing the pre-Christmas December rush by 6.8 per cent.
In the end, a total of 5.2 million Australian households bought an item online in April. And the result is that previous estimates — for online sales to reach a 16-18 per cent share of the market by 2025 — have been brought forward almost five years.
“We’re anticipating that by the end of 2020, online spend will hold a 15 per cent share of the total retail market (excluding cafes and restaurants),” Australia Post general manager Ben Franzi said.
And according to Richard Ansell, director of retail at advisory firm Gordon Brothers, the catalyst has “created behaviours that going forward won’t change”.
To get an on-the-ground perspective of the recent surge, Stockhead spoke with James van Rooyen, CEO of internet retailer Bicycles Online.
Aside from a pandemic-enforced break that saw lots of Aussies go through with a bike purchase (sales roughly tripled), van Rooyen said he’d noticed a shift in consumer shopping patterns.
“I think previously there was a need to convince people it’s OK to buy online, particularly in our industry. Historically, the ratio of bikes sold in stores to online was around 10 to 1,” van Rooyen said.
“So it’s been slow in that sense, but since COVID there’s been a shift where a lot of people are more comfortable doing their research online, and want the added convenience of being able to buy online as well.”
Stockhead tracks a cohort of 20 ASX small caps that operate either retail or retail-adjacent business models.
Stocks that met two key COVID-19 criteria — homeware products with a more advanced online offering — have outperformed, with furniture store Adairs (ASX:ADH) posting half-year online sales growth of 93 per cent.
However, bricks & mortar department store Myer (ASX:MYR) (which now has a market cap of just $160m) remains stuck in the retail malaise with an annual share price decline of more than 60 per cent.
Those results can be contrasted against online furniture retailer Temple & Webster (ASX:TPW), which has more than tripled from its March lows. Those gains followed a surge in first-time orders through the peak COVID-19 period, which jumped from around 20,000 to more than 45,000.
Clearly, online execution will be pivotal to the earnings outlook for listed retailers. But Ansell, who spent a decade working for brands such as Radio Rentals, Freedom Furniture and Ikea, said it didn’t necessarily have to be a pure-play strategy in the new retail paradigm.
“I think what retailers will be forced to do is make sure customers don’t think in terms of physical or digital stores, but rather in terms of what works best for them,” he told Stockhead.
“An online offering can be a benefit for physical retailers as a research tool. Customers then have an expectation they can jump online to assess their options, then complete the purchase or visit the store if it’s more convenient.
“But there’s still stores out there who don’t have any online presence. A digital presence is key now, whether for transactions or general information.”
Another key factor investors should look for is how companies are converting their online presence into a full-service offering to build customer loyalty.
van Rooyen said one of the key challenges in building an online footprint was building credibility without having the customer-facing advantage of a physical store.
“We’ve developed the whole buying experience to be customised for buying online, all the way through to how the product is packaged and shipped. And that extends to after-sales support as well,” he said.
Then once a company has built the requisite level of trust, it can leverage numerous advantages specific to online such as a wider product range, detailed customer data and fixed costs centred around logistics, rather than store rental overheads.
“A good example of that in our sector is bike parts — there may be a specific type of part a customer needs for their bike, and it’s just not efficient for bricks & mortar stores to hold that part, so we can offer products you wouldn’t be able to get elsewhere,” van Rooyen said.
“Another simple one is customer reviews. If you’ve got 5-10,000 customer reviews on your site, that’s a real competitive advantage because it’s hard to build that organically.”
For David Kirk, co-founder and partner at Bailador Investments, the growing size of the online market makes it an increasingly attractive investment. However, within that rising tide the individual attributes of a specific company are still essential.
The Bailador portfolio is geared towards fintech and SaaS businesses such as SiteMinder and Lendi, the group also has a stake in online furniture retailer Brosa.
“In any sector, you’re looking for companies with great growth economics and a first-move advantage. So in that sense, online isn’t that different to offline — you need to be able to drive customers to your website through different channels, then convert those customers. And that conversion is related to the quality of your product and its pricing,” Kirk told Stockhead.
“Then particularly for online retailers the offer around returns and delivery is important, along with a well-integrated supply chain to deliver products into Australia at the right cost. So we look for all of those metrics.”
After that, the next thing investors should look for is successful bricks & mortar models that can be replicated more efficiently online.
“Then you look at market and you say, well who’s moving early here? If store retailers are building out an online offering, then if you go early before they’re established you can get an advantage as a leading brand. That’s what we look for as well and we found that in Brosa,” Kirk said.
As evidence of challenging conditions elsewhere in the sector, Ansell said Gordon Brothers was working with clients to secure short-term funding facilities and help liquidate excess stock.
Meanwhile, online behemoth Amazon continues to build out its logistics network in preparation for a full tilt at the local market.
“As a retailer you’d hope stores still have an important part to play in the retail landscape, but certainly there’s a shift to online and that’s likely to be accelerated to the 15 per cent mark (of overall sales) in a couple of years, as opposed to the five or 10 years it would have taken,” Ansell said.