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Retail industry In Australia to grow at 2% until 2023

The retail industry in Australia is facing disruption. By 2020, it is predicted that 1 in 10 items will be bought online.

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Definition / Scope

Retail is the process of selling consumer goods to end users through multiple channels of distribution. The purpose of selling is not for resale but for use and consumption by the purchaser. The purchasing can be done from a brick-and-mortar retail store, an Internet shopping website, a catalog or even a mobile phone. Here are some examples of the different types of retail stores –

Department Stores – These stores sell wide range of categories including shoes, apparels, beauty products, jewelry, housewares, etc. Examples of department stores retailers include JCPenney, Macy’s, Nordstrom, etc.

Grocery Stores and supermarkets – Grocery stores sell all types of food and beverage products and also offer non-perishable foods that are packed in bottles and boxes. Large grocery stores that sell significant amount of non-food products, such as home products, clothing and consumer electronics are called super markets.

Specialty Stores – They specialise in a specific category of products, such as office supplies, men’s or women’s clothing or carpet.

Convenience Retailer – These are small shops that sell range of everyday items such as groceries, snack foods, tobacco products, drinks and are open for long hours for the convenience of shoppers.

Internet Retailer – They sell from an internet shopping website and ship the purchases directly to customers at their place and without the expense of a traditional brick-and-mortar retailer.

Market Overview

The Australian retail industry has evolved dramatically over the past decade. Technology advancements, mainly through the introduction of online retailing has allowed consumers to have an almost unlimited access to goods both locally and globally. Online shopping sent a wave through the retail sector since its introduction in the early 2000's and has gradually taken a larger proportion of consumer spending over the past decade.

The National Australia Bank (NAB) Online Retail Index released in February 2017, states that the Australian online retail market was worth $21.65 billion in the 12 months to December 2016. This is 10.4 per cent higher than the previous year and 7.1 percent of total retail bricks and mortar spend. The rise in online shopping is affecting the offering of the traditional bricks and mortar stores.

The Australian retail industry is a large and significant part of the Australian retail economy. The below number reveals the importance of Australian retail industry-

  • $120 billion - Total economic activity in retail sectors
  • 1.5 - Percentage of retail trade growth from 2014 to 2015
  • 5.99 - Average year-over-year increase in total Australian retail industry revenue between 1983 and 2016
  • 5,500 - Total number of retail companies
  • 77,000 - Total number of brick-and-mortar retail companies
  • 1.7 million - Total number of retail industry jobs
  • $60 billion - Wages earned by Australians working in the retail industry in 2015
  • 11% - Percentage of all employed Australians working in the retail industry
  • 40% - Percentage of retail industry employees who only work part-time

Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Market Risks

  • There is intense competition among retailers in Australia. There are more than 77,000 brick-and-mortar retail locations and about 5,500 retail companies in the country
  • The Australian retail landscape is undergoing a profound structural shift, with new technologies disrupting the retail ecosystem and transforming how consumers interact with stores online, offline and on-the-go. As most of the retail industry uses technology in Australia, it is necessary for the retailers to maintain and improve the system continuously.
  • Competition from online shopping and large international retail players has created a challenging environment for domestic brick-and-mortar retailers. About 1.3 per cent of the number of consumer goods retailers are expected to close, bringing the number down from 76,490 to 75,503. The last five years has seen the number of consumer goods retailers, both foreign and local, decrease by annualized 1.5 per cent.

Top Market Opportunities

  • The shift of buying power from the US and Europe to China and South East Asia has begun, driven by the burgeoning rise of consumers accessing e-commerce marketplaces. This represents huge opportunities for Australian retail industry. The close proximity to China and South East Nations means Australia can offer the region quality, trusted brands through cross border trade or via physical experiences such as tourism, where visitors to Australia are at a record high.
  • Australia is a good expansion option for international retailers/brands looking outwardly to different markets. Australia's total online sales surpassed $21 billion in 2017, up 18.7 per cent versus 2016. Also, in the 2017, digital retail comprised 8 per cent of total retail sales, which is considered low. This low percentage of online sales to retail represents opportunity.

Market Drivers

Low Interest Rates

During past year’s low interest rates have given a relief to retail sectors. Due to low interest rates, purchasing power of customers was increased and thus the retail industry which was decreasing as suddenly started growing.

High Internet Usage

In 2018, about 88 per cent of Australian's were active internet users and the number of online users grows at a rate of 1.7 per cent, which is considered high. Australia is also ranked 51st in the world when it comes to internet speeds. The Internet is becoming as common as a cup of tea for many Australians. They spend on average 3 to 4 hours per day online, which is 21 to 28 hours per week. The online goods spend was worth $21.3 billion in 2017, an increase of 18.7 per cent. A new research from Roy Morgan shows that over the year to March 2018, 9.46 million Australians 14+ (46.8 per cent) purchased something online in an average four week period, an increase of 590,000 in just 12 months.

Demographics

A new generation of consumers are reshaping the face of online shopping. Australia’s 18 to 36 age demographic has increased by half a million since the last census, now representing 26 per cent of the total Australian population. This group values flexibility and transparency, and embraces new technology and services.

Strong Economy

Australia is the second wealthiest nation is terms of wealth per adult. Australia's economy is dominated by its service sector, comprising 61 per cent of the GDP and employing 79 per cent of the labor force. Despite having a smaller population than neighboring Asian regions, the strong economic fundamentals has assisted in driving the growth of retail industry.

Market Restraints

The number of retail stores are decreasing by 1.5 per cent annually. The stores closure are the result of competition from international players and a profound shift in consumption to online, naming Amazon or Alibaba. International retailers tend to have lower cost bases, greater economic of scales and 'just-in-time' production models that allow rapid changes to inventories to keep up with trends.

At the same time, online retailers are gaining market share with online sales growing much more strongly than in-store sales. The growth in online sales surged by close to 50 per cent, accounting for around 60 per cent of total growth in retail turnover.

Industry Challenges

Change in retail landscape

The retail industry in Australia is undergoing disruption. International players have entered the market and are bringing with them new approach to retailing. Amazon's arrival has been tipped to shake up the retail industry, with predictions that Amazon Australia would put price pressure on department stores and retail chains.

Changing consumer

Consumers are more tech savvy, affluent and busier than ever. Their expectations are evolving and technology is changing their behavior. Customer expectations for immediacy have created an environment where consumers want to make payment and receive goods without delay. Traditionally, the quickest and easiest way to do this has been via retail stores, however shifting behavior driven by digitization, a ‘mobile-first’ consumer, emergence of new digital channels and social media has altered the customer expectations and behavior.

The need of omni channel

The rising importance of having a retail presence across multiple channels encouraged retailers to invest heavily in omnichannel offering, with a particular focus on their digital presence, as consumers continued to favor the convenience and price-competitiveness offered by internet retailing. For retail today, it is not enough to only have a pure bricks and mortar presence nor is it wise to be a pure online player. For pure brick and mortar, retailers suffer as general foot traffic continues to shrink. For the online retailers, they face a very high cost of customer acquisition.

Fierce Competition

Fierce competition from online, overseas, and bricks and mortar retailers combined with subdued consumer demand has led to margin compression. While cheap goods have flooded the global market, currency movements have worked against retailers. For example, the AUD has depreciated over 16 per cent in quarterly trade-weighted terms since peaking in March 2013. However, retailers have not been able to pass those increases on with retail prices in the CPI rising less than 1 per cent over the same period.

Technology Trends

  • Retail payments innovator Afterpay is stimulating sales with ‘buy now, receive now, pay later’ model. It does not require end-customers to enter into a traditional loan or pay upfront fees or interest. Merchants at the same time gain incremental sales, boost conversions and reduce returns. Looking back to 2015, less than 10 per cent of Australians used a smartphone to make an online purchase, Afterpay launched its first product, and online spend on physical goods grey by a mere 6 per cent. Fast forward to 2017, and one in five online purchases were made from mobile device, payment services such as Afterpay had attracted over 1.5 million customers, and online spending grew by 18.7 per cent.
  • Shoppers are becoming more comfortable in buying on mobile phones. The purchase from mobile phones grew 58 per cent in 2017, a six percentage point increase from the previous year. One in a five online purchases are now made from a mobile device. In 2015, about 35 per cent of e-commerce transactions were made on smartphones and 27 per cent consumers buy products from mobile devices on a weekly basis.

Other Key Market Trends

  • Food retailing has been one of the better performers in the retail sector, driven by boom in cafes for breakfast and lunch and online ordered take away for dinner.
  • The grocery retailers experienced stronger growth than non-grocery retailers. This growth can largely be explained by the success of discounters, which continued to gain relevance through the aggressive expansion of Aldi. In 2017, marketplaces and discount department stores were the favourite destination sites for online shoppers, with purchase via these channels growing over 50 per cent.
  • Sales events are shaping the retail year more than ever in the Australian online shopping landscape. Many of these events originated from overseas, such as Black Friday and Cyber Monday, which grew by 27 per cent in 2017. Shoppers are choosing to wait for a bargain while retailers are having hard time to manage fluctuating inventory levels and margin erosion.

Market Size and Forecast

  • Retail sales in Australia increased 3.5 per cent in September of 2018 over the same month in the previous year. Retail sales YoY in Australia averaged 5.79 per cent from 1983 until 2018, reaching an all-time high of 12.70 per cent in October of 1985 and a record low of 1.9 per cent in October of 2017.
  • The annual retail turnover in Australia from 2004 to 2017 is in increasing trend. As of 2017, the retail turnover amounted to approximately 311.39 billion Australian dollars in Australia.
  • Online shopping in Australia reached 8 per cent of total traditional retail sales at the end of 2017, a one percentage point rise on the year before.
  • Australians spent US$ 21.3 billion buying goods online, an increase of 18.7 per cent. The online spending growth outstripped traditional retail by 16.2 percentage points. While there is growing shift towards online channels, traditional retail sales excluding cafes and restaurants still accounted for US$ 267.4 billion spent in 2017. Purchases were up 19.2 per cent in 2017, after an 11.5 per cent rise in 2016.
YOY.PNGAnnual turnover.PNGVariation.PNG

Market Outlook

  • Retail industry is expected to grow at CAGR of 2 per cent by 2023.
  • By 2020, it is predicted that 1 in 10 items will be bought online.

Competitive Landscape

About 38 top 250 global retailers or 15 per cent on the list operate in Australia. The entry of international retailers is expected to create change and uncertainty in the Australian retail landscape. JD Sports, the UK sports-fashion retailer has opened five stores in Australia. The luxury retailers like Swarovski and Tiffany & Co have also opened new stores. In 2017, the French-owned retailer Decathlon opened its first brick-and-mortar store in Australia. In the same year, Amazon, the world's largest retailer and Alibaba, also stepped into Australian market. With the increase in competition from both international and domestic retailers, further consolidation can be expected in this industry.

Key Market Players

  • Woolworths Ltd 2016 Global Ranking - #212010 Global Ranking - #26 Convenience/Forecourt Store, Discount Department Store, Electronics Specialty, Other Specialty, Supermarket
  • Westfarmers Ltd. 2016 Global Ranking - #232010 Global Ranking - #28 Supermarket

Only two companies were included on the "World's Largest Retailers" and both were grocery retailing companies. Recently, JB Hi-Fi also made its entry into the Top 250 largest global retailers by revenue.

Foreign retail companies like Gap, Abercrombie & Fitch, Apple, Zara, Fossil have presence in Australia. Startupsmart.com.au states that 43 per cent of online sales in Australia go to overseas companies that are doing business in physical stores within Australia's borders and online.

Strategic Conclusion

Australian retail is complex, noisy and fast-paced. Customers’ expectations around convenience, value and choice have driven higher proportion to shop online. The future of the Australian retail industry requires an agility and multiplicity of delivery platforms that can leave non-responsive retailers behind.

Further Reading

Appendix

  • CPI - Consumer Price Index
  • GDP - Gross Domestic Product
  • NAB - National Australia Bank
  • US - United States
  • Y-o-Y - Year over year


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