• CBA cards data indicates growth in total online retail spending remains strong – up 30 per cent in the year to July to $14 billion. Online sales represents 5.4pct of total retail sales, with Clothing now the fastest growing category
• Online retail spending grew faster at domestic retailers (up 40 per cent) than for international retailers (up 17 per cent) – suggesting that Australian consumers are increasingly able to satisfy their online consumption needs from local retailers.
• After a year of explosive growth in 2011, the pure play online retail sales growth is converging with total online sales growth. This convergence suggests bricks and mortar retailers are making a greater impact online and stemming channel share losses to the pure play operators. This may be an early sign that the international trend of traditional ‘bricks and mortar’ retailers dominating the online channel is playing out in Australia
  A taxing issue. CBA’s pure play online data suggests imposing GST on foreign sourced online purchases above $100 would impact ~57 per cent of transactions by value versus ~4 per cent currently. While GST is only one factor in Australia’s higher retail prices, imposing GST on a larger proportion of transactions would help even up an otherwise unfair playing field.

What does it all mean?
The latest analysis by CBA research analysts has provided interesting insights into the Australian online retailing landscape.

• More than two million CBA cardholders were assessed and given the massive sample size it provides a credible picture of the shift in spending into total online spending. And the results have certainly been an eye opener. In fact spending growth amongst online retailers remains strong – up 30 per cent for the year to July 2012 to $14 billion, representing 5.4 per cent of total retail sales, with Clothing now the fastest growing category.
• Clearly these growth rates are a far cry from the low single digit growth results being achieved amongst domestic store retailers. In fact over the year to October 2012 overall retail trade grew at an anaemic 3.2 per cent. Granted online spending is just a small component of total retail sales but it is certainly growing at a staggering rate.
• Interestingly the domestic online retailers seem to be clawing back market share from the international online retailers, with online sales growth more than double at the domestic online stores compared with their international counterparts. Looking at overseas metrics it is likely that this trend will continue to gain traction over the coming year.
• Looking forward there remains plenty of growth potential online, with 76 per cent of online consumers using the medium just once in the past year for an online retail purchase. Clearly as consumer trust in the online space increases, volumes are likely to grow exponentially. In addition we have seen a 25 per cent increase in the number of CBA customers consuming online over the past 12 months. Further, the customers shopping online have lifted their transactions by 22 per cent (on average). In combination, this translates to an increase in online transaction volumes of 52 per cent.
• No doubt the shifts in technology and the strength of the Australian dollar is also playing a part in the shift to online spending. And given that the dollar is expected to remain well above parity over the coming year, domestic store retailers will need to continue discounting in the traditional store space to remain competitive with the online space.

What do the figures show?
Scope of CBA’s analysis
We have re-cut CBA’s credit and debit card transactions to look at the Australian online retail trends for the year to 31 July 2012. The analysis covers two data sets:

• We have updated our estimate of the overall online retail market size (now $14b) using a top-down approach using CBA’s credit and debit card spend of greater $50 billion.
• We have analysed the transactions of 2.0 million customers (across more than 100 pure play online retailers) using a bottom-up approach to determine the categories with the fastest trend towards online, and their characteristics.

Five things we learnt about the current state of online retailing:

1: Strong growth continues.
We estimate that total online retail sales over the year to July 2012 were $14.0 billion, up 30 per cent on 2011 and now represents 5.4 per cent of retail trade.

The primary drivers of online spending are growth in the number of online consumers and the rate at which they are increasing the proportion of their total spending online. We have seen a 25 per cent increase in the number of CBA customers consuming online over the past 12 months. Further, the customers shopping online have lifted their transactions by 22 per cent (on average). In combination, this translates to an increase in online transaction volumes of 52 per cent.

2: Domestic online retail firing up
Online retail spending grew faster at domestic retailers (up 40 per cent) than for international retailers (up 17 per cent), increasing the mix to 60 per cent/40 per cent respectively (55 per cent/45 per cent last year), and suggesting that Australian consumers are increasingly able to satisfy their online consumption needs from local retailers.

3: Pure play online retailers no longer have the channel to themselves
After a year of explosive growth in 2011, the pure play online retail sales growth is converging with total online sales growth. This convergence suggests bricks and mortar retailers are making a greater impact online and stemming channel share losses to the pure play operators. This may be an early sign that the international trend of traditional ‘bricks and mortar’ retailers dominating the online channel is playing out in Australia.

Pure play online retail revenues have increased 34 per cent over the year to July 2012, which is a slowdown in the rate of growth experienced in the 12 months to 31 October 2011 (107 per cent).

While volume growth has also slowed to 52 per cent (from 147 per cent in 12 months to 31 October 2011), it remains above value growth.

4: Online penetration reaching saturation point but spending frequency increasing
CBA cardholders have continued to convert to the online channel, but the pace is slowing and suggests we are approaching a saturation point for new online consumers. We estimate that almost 50 per cent of online spending growth is now coming from existing customers shopping more frequently online. This compares to ~33 per cent last year.

Frequency of online transactions is becoming a more important driver of online spending. 76 per cent of CBA cardholders consumed online, at a pure play retailer, at least once in the last 12 months, compared with 62 per cent in the prior year. On a monthly basis, penetration rates have shown a more obvious slowdown in penetration rates.

5: A taxing issue
CBA’s pure play online data suggests imposing GST on foreign sourced online purchases above $100 would impact ~57 per cent of transactions by value versus ~4 per cent currently. While GST is only one factor in Australia’s higher retail prices, imposing GST on a larger proportion of transactions would help even up an otherwise unfair playing field.

What are the implications for interest rates and investors?
Pure play spending growth rates are now converging to that of the broader online retail data set. This indicates the pure play online retailers (both domestic and international) are no longer materially outgrowing the online sales generated through the traditional bricks and mortar retailers. This change is important given how underprepared the domestic retail sector was three years ago.

Last year, many in the industry were permanently writing off Australia’s retailers for missing the online consumer revolution. However, the trends emerging in CBA’s data could be domestic evidence confirming the trend seen from retailers offshore. In particular, the observation from Google in that US multi-channel retailers are now dominating online retailing, representing 26 of the top 30 online operators. This is not currently the market expectation for Australian retailers.

We are already aware of a number of large unlisted retailers successfully transitioning online. However, the Australian listed retailers continue to lag. There remain a number of headwinds faced by local retailers competing against international online competitors, such as regional pricing disparities, higher retail rents and wages and GST. It is imperative that these issues are aggressively managed by retailers in order to ensure the industry overcomes this current competitive disadvantage.

The online retail channel remains a significant issue for Australia’s retailers, but the latest trends suggest the local industry is finally adapting. This should be comforting for the many retailers who now have online as a strategic goal.
MYR and DJS have to work hard to deliver a credible online offer in the short term, but the convergence between the growth rates of pure play online operators and bricks and mortar operators is encouraging.

JBH and HVN have some categories that are aggressively moving online, like Entertainment and Media and portable electronics. However, traditional electrical products and furniture offer some online defensibility.

Food, discount department store and home improvement are not significant online categories in CBA or international online data. WOW, WES and MTS appear reasonably resilient to online retail trends.

Australia still has relatively low online penetration rates as compared with offshore markets. However in recent times the trend to online has gained traction. The higher Australian dollar is making it more attractive to purchase goods directly from overseas. The conservative nature of Aussie consumers and the ongoing shift to online spend will continue to hurt traditional retailers. Domestic store retailers will need to continue discounting in the current climate in order to entice customers.

The Reserve Bank is well aware of the headwinds being cause by the stronger Aussie dollar, and providing a degree of relief for an array of sectors would be the best outcome. A further rate cut in November would certainly help to support confidence and provide a modest degree of stimulus.

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