Retail: online sales boom is still yet to peak, says NAB – The Australian Financial Review

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Seventy-three-year-old Ann Ngo made her first major online purchase during COVID-19 lockdown last year – a Uniqlo ultra-light down jacket.
She had never shopped online before, but found the experience so straightforward that she now struggles to find a reason to revert to her old ways.
“There’s just so little incentive to shop in-store again,” Ngo says. “Shopping online in lockdown was a necessity, but today it’s a choice.”
The pandemic has propelled Australia at least five years ahead of where e-commerce market share projections sat pre-pandemic. 
Ngo is part of a previously impenetrable demographic for online retailers. Seniors over 60 were notoriously stubborn in their commitment to in-store purchases. But COVID-19 changed the game. National Australia Bank is watching the demographic behaviour in its latest retail sales index keenly. It shows old-timers spending less online than they did at the height of lockdowns, but they are not turning their back on the sales channel.
Mark Green, Accenture Song boss and co-founder of The Monkeys, says the pandemic has propelled Australia at least five years ahead of where e-commerce market share projections sat pre-pandemic.
“In 2021, e-commerce represented more than 19 per cent of overall retail spend, a jump from pre-pandemic levels of around 10 per cent,” Green says.
The online sales boom has elevated Amazon to the nation’s second-largest online retailer. Its Prime subscription numbers have skyrocketed to around 4 million.
Lockdowns played havoc with traditional market approaches, says Mark Green, of Accenture. 
Retail chains, including Coles and Woolworths, have ramped up their number of dark stores, laid out like supermarkets but with no customers, designed solely for fulfilment of online deliveries.
Distribution models have diverged, with the likes of Coles opting for a centralised distribution centre, while Woolworths has adopted the micro-fulfilment centre model to improve home-delivery capacity, reduce cost-to-serve, and increase profit margins. This is presenting government with new urban planning and re-zoning challenges and opportunities.
The great dispersion – with people working from home, moving to more affordable suburbs on the outskirts of cities, or to regional areas – has stretched and strained logistics networks optimised for dense collection and delivery locations.
The ability to solve supply chain fissures, in particular the last-mile delivery challenge, has produced a windfall for outfits such as Shippit. The value of its multi-carrier logistics platform – which uses artificial intelligence to connect retailers with the best delivery options, offer same-day delivery and track last-mile logistics – has tripled to $300 million in less than 18 months.
The battle for online domination saw Woolworths acquire a $250 million, 80 per cent stake in ASX-listed online marketplace MyDeal last week. The market is wondering if it can make a better fist of it than Wesfarmers, which acquired online retailer Catch Group for $230 million in 2019.
NAB’s monthly retail index shows just what an extraordinary accelerant the pandemic has been for e-commerce in Australia. In 2018, the growth rate of online sales was close to 30 per cent. During the 2020 lockdowns, this surged to over 60 per cent.
Consumers got more comfortable spending more money online, both in terms of total basket size and bigger ticket items. The average order value on Shippit’s platform shot up around 50 per cent.
Things tapered off as lockdowns eased, but Australians still spent $55.24 billion on online retail in the 12 months to March this year.
Shippit co-founder Rob Hango-Zada likens it to a party that is followed by an inevitable hangover, as e-tailers are now forced to grow by stealing from competitors, rather than market expansion.
However, NAB chief economist Alan Oster says there is still plenty of expansion left in the online retail sector.
The average order value on Shippit’s platform shot up around 50 per cent, says co-founder Rob Hango-Zada. 
“COVID had a market share effect and I don’t think that’s ever going to be completely reversed. It’s a permanent change,” Oster says.
Even as the economy opens up, online sales continue to grow at a faster rate than traditional retail. Online accounted for around 8 per cent of retail sales pre-pandemic. It now hovers around 10 per cent. Of the $20 billion in monthly retail trade, $2 billion is occurring online rather than in-store.
“We were doing nothing like that before,” Oster says.
Accenture’s Green points to the continued growth in Click & Collect as a sign that consumer appetite for convenience and flexible shopping options is a permanent fixture.
“The tipping point is starting to take effect,” he says.
In March 2020, when COVID-19 lockdowns commenced, Sydney-based candle company Southern Lights Candles lost 85 per cent of its business overnight.
“Ninety-five per cent of our sales were to events companies at that point. Within a week we went from doing $70,000 a month to $2000,” owner Sean McCormick says.
The only people buying were those stuck at home. McCormick and his wife knew they needed to reorient their offering to consumers to survive. They improved the product and packaging, added a scented range, and invested $1000 a month in Google Ad Words through a digital marketing company.
By July 2020, sales had recovered to $25,000 a month and they had to hire another worker. They’ve since upped their weekly digital marketing budget to $2000 per week. It still generates a 30-fold return, according to McCormick.
Sales are on track to hit $1.3 million for the financial year ended June 30, and profit margins have improved from 52 per cent to 65 per cent.
Sean McCormick had to reinvent and reignite his business, Southern Lights Candle Co, during the pandemic. 
The couple reflect on the pandemic as the worst and the best thing that happened to their business. “COVID made us really think about our business,” McCormick says. “It gave us entry to a market we felt we couldn’t access before.”
Southern Lights Candles’ income is now derived fairly evenly from three distinct segments – consumers, retail outlets, and events and stylists. “Our customer mix is better, and we’ve a lot more growth to be had out of all of them,” McCormick says.
NAB’s executive of business banking metro Michael Saadie says the quality of small and medium enterprises has not been as good as it is today for a very long time.
He says the pandemic has forced SMEs to innovate, understand and plan for risks differently, work out key dependencies to stay afloat, and interrogate operations line by line to increase effectiveness and efficiency.
The extent of digital transformation is evident in NAB’s merchant spend data.
A lot of our customers are more profitable than they’ve been in a long time, due to the efficiency they’ve built in.
Michael Saadie, NAB
The online distribution of products and services is dramatically different from two years ago, Saadie says, whether it’s pubs operating more profitably despite running at 60 per cent capacity because QR code ordering has reduced their payroll, or omni-channel retailers reducing their physical footprint to specific locations based on data analysis, and reinvesting savings into stock management and control systems.
“A lot of our customers are more profitable than they’ve been in a long time, due to the efficiency they’ve built in,” Saadie says.
“It has taken people out of the equation, especially because labour has been tight. The physical premise piece is a lot lower than what it was two years ago,” he says.
Most businesses on NAB’s ledger are paying for technology upgrades using reinvested earnings rather than debt, according to Saadie.
He says technological investments haven’t put enough leverage into companies that they can’t sustain a contraction in online sales. And they are in better shape to control their cost base to weather inflationary pressures.
However, not everyone has emerged a winner from the COVID-induced online sales surge. The share price performance of several pure-play retailers has been lacklustre.
Green says there are a few reasons for the rocky state of e-commerce business valuations.
“The biggest hit came to those with a pure player business model, as lockdowns played havoc with their traditional market approach. Most pure players own warehouse inventory while also operating a third-party marketplace for drop-shipped goods.”
Drop-shipping, as a business model, allows a third party to ship the goods directly to a consumer, without the seller having to own stock, thus allowing the seller to carry less risk of keeping inventory.
“As Australia entered multiple lockdowns at unpredictable moments over the last couple of years, different speeds of the pure-play business model had to kick in. Those increased investments made during the lockdown periods are starting to expose them.
“Secondly, as e-commerce became the norm, the established Australian brands accelerated their e-commerce experience to capture the new online shoppers,” he says.
According to Oster, online sales should reach between 12 to 15 per cent of total retail sales in Australia, based on trends in the United Kingdom and the United States.
“I don’t think we’re at full maturation,” he says.
This poses a question for retail property groups such as Vicinity, Scentre Group, GPT and Stockland around new shopping centre investments versus online.
“It may be that building a new shopping centre is not the best way to service your customers,” Oster says.
As competition intensifies, Hango-Zada says customer experience and efficiency will become the ultimate growth levers for e-tailers in 2022.
Customer expectations shifted when online purchasing went mainstream. There is lower tolerance for mis-deliveries, incorrect tracking dates, and delayed delivers, says Shippit’s Hango-Zada.
While driver and vehicles shortages continue to plague the sector, along with intermittent strike action, he sees technology as central to satisfying consumers’ expectations. Technology is also key to realising what Hango-Zada sees as a “fundamental requirement” to scale the logistics network to absorb e-commerce growth over the next five to 10 years.
Shippit wants to develop a code-sharing system, similar to that used by airlines. It claims this would allow carriers to specialise in certain freight profiles, and increase their profits.
New models emerging in countries such as China also highlight an opportunity to connect traditional logistics providers with crowdsource logistics providers to cope with peaks around things like Singles’ Day.
“That is a very replicable model on a global scale, but there are a few structural issues we have to work through as an industry if we’re really going to scale the delivery performance,” Hango-Zada says.
“The crowdsourced economy can scale up and down easily, which is very different to unionised workforces, where contracted labour is a hotly contested topic.”
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