Economy

Online retailing: the growth will slow

SmartCompany /

Consumers have taken to online shopping with enthusiasm, but the $16 billion industry is set to lose some momentum. By ROBERT BRYANT

By Robert Bryant

Electronic Shopping

Consumers have taken to online shopping with enthusiasm, but the industry is set to lose momentum.

The $16 billion online retailing industry, which includes e-tailers, mail-order houses and online auction sites, has enjoyed five years of strong growth as consumers have moved online. The future will not be quite as good.

Recent industry performance

This industry has grown by 8.1% a year on average over the past five years as consumer confidence in online security and technology has grown. Pet supplies and cosmetics found 2006-07 to be a particularly good year.

OnlineRetailTrend1

 

Growth in the number of internet connections, along with a rise in PC density, has also increased sales.

Mail-order houses are more established compared to electronic shopping, so they experienced a moderate contraction in their share of total retail sales. The main cause of this has been a shift in the purchasing patterns of consumers from catalogues to the internet.

 

OnlineRetailTrend2

 

IBISWorld forecasts that the industry will grow by 4.7% a year over the five years to 2012-13.

In 2008-09, industry revenue is forecast to grow thanks to a rise in disposable income and growth in household consumption. In 2009-10, industry revenue is expected to increase, but declines in the consumer sentiment index and weaker growth in disposable incomes will have an impact. In 2010-11, industry revenue will be supported by stronger GDP growth.

By 2011-12, industry revenue is expected to benefit from anticipated growth in disposable income and a recovery in the consumer sentiment index. In 2012-13, industry revenue is expected to continue a pattern of growth, with change in the unemployment rate along with stronger GDP growth predicted to bode well for retailers over the year.

This industry has experienced a convergence between traditional retailers and pure internet-based operators. This trend is forecast to continue into the outlook period as operators merge to retain profits and market shares.

Another trend that is set to emerge over the outlook period is lower priced products and cheaper delivery costs.

This industry is forecast to become increasingly competitive as an influx of players give consumers more options to choose from. Industry operators are also forecast to increase their level of after sales service in an attempt to keep customers coming back to their site.

 

OnlineRetailTrend3

 

Products and service segmentation

Major market segments

Geographic spread, 2008

Persons purchasing online

Key sensitivities

The key sensitivities affecting the performance of online retailers and mail-order houses:

10-year bond rate. This industry is sensitive to fluctuations in interest rates. In general, due to the characteristics of this industry, the key payment method is credit card. As a result changes in interest rates affect retail spending levels.
Average age of population. This industry is sensitive to the age distribution of the population. Data suggests that a population group that comprises predominantly of a younger demographic mix is more likely to purchase products via electronic shopping or mail-order.
Consumer sentiment index. This industry is sensitive to the consumer sentiment. During periods of low economic growth, the consumer sentiment with regard to the economy declines and as a result consumers limit their expenditure. This subsequently affects the demand for products from on-line sites and mail-order houses.
IT&T literacy of population. This industry is sensitive to the IT and T literacy of the population. This is particularly relevant to the electronic shopping segment of this industry. It is assumed that as the IT literacy of the population increases, more people become confident with using computers and “surfing” the internet. This is expected to result in more knowledgeable consumers who are confident about purchasing goods on-line.
Real household disposable income. This industry is sensitive to the level of real household disposable income. Industry data suggests that income levels have a significant impact on differentiating between on-line/catalogue and “bricks and mortar” shoppers. In general, higher income earners are more highly educated and hence more apt to utilising technology which is an integral part of on-line shopping. Income however does not appear to affect demand for catalogue products.

Key success factors for operators in the industry

  • Ability to control stock on hand. By maintaining adequate stock controls, retailers are able to monitor key selling items and ensure a sufficient supply of popular products are on hand to meet demand during key selling periods (Christmas, Valentine’s Day, Easter, etc).
  • Ability to quickly adopt new technology. Due to the nature of this industry it is imperative that operators are able to adopt and implement advances in technology in an efficient manner so as to minimise disruptions to consumers and maximise sales revenue.
  • Having a clear market position. Retailers should ensure that their online site or mail-order catalogues project a clear picture of the company’s target market, products and pricing, delivery costs, returns policy, etc.
  • Having a loyal customer base. Retailers benefit from establishing a loyal customer base through the quality of their product, efficient delivery and exceptional customer service.
  • Provision of superior after sales service. Retailers should address all after sales issues in a prompt and efficient manner so as to build a loyal customer base.

 

 

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au

 

Advertisement
SmartCompany

SmartCompany is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.

We Recommend

FROM AROUND THE WEB