Swimming against the internet tide: Four sectors fighting to stay relevant
The problem with cyclical economic downturns is that they often mask deeper changes.
Businesses may enter a downturn believing that cost cutting will eventually see them emerge into a new period of prosperity. But sometimes they weather the storm only to discover that those clients who went away during the downturn have found a better solution and aren't ever coming back.
In the past decade the recorded music industry saw revenues plummet as consumers embraced pirated content. Even the emergence of legitimate services such as Apple's iTunes have not come close to restoring their previous wealth.
The music industry is not alone. The combination of digital cameras, broadband photo websites, cheap digital photo frames and high resolution printers has also obliterated the photographic film processing sector.
As Australia's love affair with the internet rolls on, more sectors will face similar fates. Many of Australia's traditional retailers have bemoaned unfair competition with cheaper offshore rivals. But for online retailers, 2011 was their best year ever.
The reason is simple. IBISWorld senior industry analyst Ian MacGowan says the internet is becoming more integrated into our lifestyles.
"Every industry in some way or another is going to be impacted or affected by it," MacGowan says. "Whether industries win or lose or continue in their current state will depend on how they react to it."
The big question is, who is next? Some sectors whose demise was predicted a decade ago have weathered the storm. Others may be standing on the precipice, but just don't know it yet.
Cosmetics and fragrances
While 2011 was the year that mainstream Australia warmed to eCommerce, there are still some categories that are yet to translate online. One that is shaping up for a major transition is fragrances and cosmetics.
IBISWorld's MacGowan says just 3.3% of sales in this category are made online. That is less than a third of sales in other developed markets.
"With women in particular, when they find a brand of a product that suits them, they tend to stick with that brand," MacGowan. "So this is one market that has significant potential."
Australians are also waking up to the fact that a large number of products are available from foreign suppliers at significant discounts. Hong Kong-based StrawberryNet in particular has made a name for itself through heavily-discounted prices. That company also sells through eBay, and eBay is now selling one cosmetic item to Australians every 14 seconds.
Australian company Perfume Connection sells through 58 retail stores and through its own website, and through eBay since October 2010. Online business manager Stephen Smorgan concedes it is hard to match prices with foreign sellers while also maintaining profitability for physical stores. Hence while site traffic is rising, sales are not keeping pace, indicating that many shoppers are price-matching and buying elsewhere.
What works in the company's favour however is its ability to assure customers that goods are genuine – a big concern for many when buying from discounted foreign sites.
"Our fragrances have always been genuine and we buy directly from suppliers," Smorgan says.
He expects to see much stronger online sales this year, but is worried that that the market might be flooded with less-reputable local suppliers.
"Last Christmas has shown that more and more people are buying their products online," Smorgan says.
"In the online space, there are beauty and fragrance sites popping up all over the place.
"We have to make sure that we are getting more traffic and eyeballs and push our message that we are the genuine product and at a reasonable price."
Crowdsourcing is a buzzword that will leap into general usage in 2012 as more people learn how it and online outsourcing can provide access to a cheap global labour pool. But as Australians warm to the idea of getting everything from house plans to corporate logos completed online for less, the ramifications for some Australian businesses could be dire.
A battle is already smouldering between Australian designers and the operators of crowdsourcing sites such as 99designs and DesignCrowd. The sites work by having clients post design briefs as a contest, with designers responding on spec with their best efforts. The client then selects the preferred design and awards the contract. In most instances it is winner takes all, with the losing contenders receiving nothing for their work.
While Australian designers are free to compete for work, some have expressed frustration at essentially working for free should they not win, while the amounts paid are often below what they would receive for commercial work.
The volumes of work are becoming significant. In 2011 Australians launched more than 110 contests each week through 99designs.
Not surprisingly, the Australian Graphic Design Association (AGDA) is dead against the practice. Recent comments from national president Brenton Murray in the magazine Desktop saw him label the practice "exploitation".
"You'll always find people willing to work for nothing with the possibility of payment, but that doesn't make it right," Murray said.
Curiously, many designers have also chosen to take advantage of crowdsourcing and launch their own contests to source creative ideas for their clients.
According to 99design's chief executive Patrick Llewellyn, as the economy tightens more designers will use crowdsourcing sites for global business development.
"This is what a number of smart designers have done and are now they are earning great money from a mix of competitions and ongoing work that results from the competitions," Llewellyn says.
There was once a time when every shopping strip had its own independent travel agent. Those days are long gone, but despite the internet drawing millions of dollars away to online direct sales and aggregation sites, retail travel agents have proven remarkably resilient.
The reason for their survival is in part due to the same reason why numbers dropped significantly in the last decade – industry consolidation.
According to the executive chairman of the Australian Federation of Travel Agents Jayson Westbury, of the more than 3,000 retail travel agents in Australia, only 200 or less would be independent.
While the rise of sites such as LastMinute and Wotif.com have drawn millions from the corporate sector (according to IBISWorld 57% of online spending is on tourism), greater damage was done a decade ago when Qantas launched its own sales site and then stopped paying agent commissions.
But he says the holiday market remains stable.
"About the same numbers (of retail agents) open as close each year," Westbury says. "2001 is when we really saw people moving away in droves from travel agents for domestic bookings. We see consistency for at least five to eight years in the current market mix."
Westbury says the emotion and spontaneous nature of holiday travel booking remains well serviced by face-to-face meetings in retail environments. The complicated nature of holiday travel booking and limited options of many websites makes dealing with a travel agent preferable.
IBISWorld's MacGowan says that many that have survived have incorporated the internet into their service offering.
"We have seen an increase of those that are online, which is a combination of traditional travel agents providing services online, as well as a significant number of specialised travel agents that are only offering services online."
And even young people, who are often cited as the first to abandon a traditional model, are continuing to use agents.
"STA Travel is still reporting strong sales growth, and its market is the school leaver and the university student," Westbury says, adding that the Student Flights brand of Flight Centre opened four new stores in 2011 also.
The demise of DVD rental has been predicted since consumers first started watching video online. The industry has experiences massive consolidation in the past decade, but continues to defy the doomsayers, at least locally.
According to IBISWorld's MacGowan, DVD rental is in significant decline and has been for quite a number of years, thanks to cheaper DVD sales prices, the expansion of free-to-air TV, internet-based video services and DVD rental kiosks.
"One thing that is going to have a huge impact on video rentals is really going to be the way they interact with the internet, and the provision of video-on-demand services, where we predict strong growth over the next five to 10 years," MacGowan says.
IBISWorld estimates that the industry will generate revenue of $1.04 billion in 2010-11, down 3.1% on 2009-10. This is in line with a 2.9% per annum decrease over the last five years. Revenue is expected to fall by 2.7% per annum for the next five years, reaching a low of $905 million in 2015-16.
According to IBISWorld there are 1,397 rental outlets in Australia – a 1.8% decrease over the past year. The story in Australia is rosier than in the US however, where the decline of brands such as Blockbuster and Hollywood Video has seen around 5,000 stores closed.
According to the executive director of the Australian Video Rental Retailers Association, Ross Walden, massive growth early in the last decade meant rationalisation was inevitable. He puts the local number of stores at between 1,450 and 1,500 in Australia, and believes the decline has levelled out.
"You are not going to see the numbers drop significantly like they have in the last five years," Walden says. "You might see 1,350 to 1,390, but it is going to be nowhere near the amount that we have seen."
"Our stores offer a consumer-orientated service to the people who come in," Walden says.
Many stores have found additional uses for their real estate, including adding Optus and Subway franchises.
Franchise Entertainment Group (FE Group), which operates the Video Ezy and Blockbuster (no management association with the US company) franchises, has struck deals with Metcash's Lucky 7 convenience stores and Cold Rock Ice Cream.
FE Group co-owner Paul Uniacke says the goal is to diversify the range of products offered in stores.
"It's about how proactive and progressive we want to be into the future – do we really want to be here?" Unicke says. "And I think there is a real opportunity."
Uniacke says the massive decline in the US has been due to rigid business models and a failure to compete with the DVD mail rental and online streaming service Netflix, which now has 25 million subscribers, and with cheap DVD rental kiosks. FE Group has purchased 1,000 NCR DVD rental kiosks, which it will add to the 120 that it acquired when it bought RedRoomDVD in December last year. It operates numerous online DVD retail sites, and is launching a DVD rental mail service.
But that market is already dominated in Australia by Quickflix, which now has 110,000 subscribers after reporting a 24% increase during the December 2011 quarter. Quickflix has also launched an online streaming service accessible through PCs, Sony Bravia televisions and Sony's PlayStation 3.
Chief executive Stephen Langsford says his company is busily signing content owners, and to date has added Warner Brothers, Sony Pictures, NBC Universal and HBO.
"This will be the year of IPTV's true arrival," Langsford says. "We are at a point now where we have broadband connectivity and data caps that are sufficiently high so that costs of broadband are not an issue."