Greg Hoffman was telling me this morning that, having broken his old earphones, he bought a new set from Ebay for $24, including postage. Price at JB Hi-Fi: $79.95. My brother’s crusty engineering colleagues claim web illiteracy when it comes to doing work, but are managing to procure their work boots overseas. Online price: $20. Cost in a local retail store: $80.
Anecdotally it seems that online shopping has gone mainstream. The high Aussie dollar is the main instigator at the moment. Many consumers are happy to pay a 30% premium to shop locally and get immediate access to their goods, but when you can get the same stuff for a quarter of the price online, the logic becomes compelling.
Useful statistics for online retail don’t exist at the moment but it seems fairly obvious that the lack of sales growth we’re seeing from the old bricks and mortar retailers is at least partly attributable to a structural shift to online retailers.
And the big risk is that the shoppers get used to buying over the internet and don’t come back. Even if the Aussie dollar falls, retailers can pass on lower prices themselves, or the government levels the playing field by imposing GST on imported goods, the price of goods online is still going to be substantially cheaper than in the stores.
Obviously bricks and mortar retailing is not going to disappear overnight. It beats me why but enough people enjoy shopping as an ‘experience’ to keep the show on the road for a long time yet. Even a gradual structural shift, however, could still mean a bleak future for our retailers.
Imagine that every year for the next decade, 4% of total retail sales shift from traditional retailers to the world wide web. That would completely offset the expected growth in overall retail sales (over the long term, growth in incomes and growth in retail sales will be approximately the same and 4% is a reasonable estimate for income growth).
With rising labour and lease costs, no sales growth is a bad outcome for the retailing business. The trend could continue for the next few decades and it could be much faster than 4% per year.
I was already extremely wary of our listed retail businesses (see Prepare Yourself For A Twenty Year Bear Market). The massive increase in consumer leverage has been a tailwind for the sector for the past 20 years – one that could reverse direction for the next 20. Now that this Christmas shopping period looks like it could be a tipping point in a structural shift to online sales, I’m even more wary than I was.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.