Ben Gilchiest from the MSS Practice in Australia looks at hybrid business models and the impact digital is having on Australian retailers. As we’ve discussed on this blog over recent months, ”digital”, fuelled in part by the incredible rise of social media and its maturation from a social to a real business tool, is having a resurgence. There are many echoes here of the early days of the internet with some commentators re-predicting the demise of bricks-and-mortar as large brands like Borders, Angus & Robertson and Blockbuster go into receivership. Will this next wave of digital transformation really bring these predictions to life? Or are we looking at an evolutionary shift in the way that retail companies need to think about their operating models? Our starting point may seem an unlikely place to explore these ideas.
Since moving to Australia lots of people have asked me whether it feels like a long way from everything (we’ll get to the answer of that question a little later). Granted, it’s a hefty plane ride to anywhere, however, this geographic isolation makes it the perfect case study to explore how digital might be helping to shrink distances and allow retailers to enter new markets.
In a post-GFC (global financial crisis) world, home markets in the US and Europe have contracted sharply and although they’ve looked to maintain domestic sales, to find real growth many have started looking beyond their own borders. Australia is finding itself at the forefront of this expansion; the Australian dollar is at an almost 30 year high, fiscal growth rates far exceed that of many advanced economies, the population is culturally similar and the existing big brands are familiar even if they aren’t always available, helped in part by the record number of immigrations from the UK. All of this adds up to Australia being a logical and attractive country for European and US companies to find growth.
Gap, Zara, Costco and other familiar brands from both the US and UK are taking a traditional route to this, opening physical retail stores at an aggressive rate. Gap is looking to open between 10 – 15 stores in Australia over the next few years, Zara is expected to open up to 40 stores and CostCo has marked Australia as a key growth market. Whilst this gets the brand visible it subjects them to some of the challenges that local players are facing right now; high competition for retail sites, a known limitation for Costco’s growth plans, and some of the highest retail rental rates in the world.
Other retailers are looking to different, digital routes. Recently US retailers Macys and Bloomingdales both stated that Australia is a key market for them with localised websites in place. Australia is now the No.2 overseas market for on-line sales from the USA, second only to Canada. The UK shirt-maker TM Lewin is another example which has recently made the jump to a localised website for Australian buyers. John Lewis has also cited that its strategy is focused on taking advantage of the strong Australian dollar through a 100% on-line entry into the market. All of these companies are looking to tap into an on-line population that’s growing at 17%/annum, is online much more than their US and UK counterparts and spent an estimated A$12bn last year (at per capita rates that’s comparable to the UK). Common to all of these companies is that on-line has allowed them to leverage existing strengths to take advantage of changes in economic growth between geographies.
The success of these ventures relies on the creation of a hybrid digital operating model, focusing on the core strengths of the existing, physical business, be that brand, supply chain, logistic etc. and then merging these with a digital offering to allow rapid expansion into new markets. For example, John Lewis is targeting expats familiar with the brand as a starting point, bringing us back to the influx of Brits, and through this build on existing brand and customer relationships strengths. In addition, it will use its not insignificant procurement strength to source the products, and manage the delivery (i.e. logistics) though partners, neatly side-stepping the need for any local retail presence or staff.
TM Lewin has adopted a similar tact; focusing on the strength of the brand and customer relationships though diverting the existing supply chain and logistics run out of China Southwards rather than Westwards. In both cases they are able to react relatively quickly. At least much more quickly than a multi-year retail expansion plan, and at comparatively lower risk.
So what does this mean for Australian retailers? The local digital presence has a long way to go. Some commentators place Australia’s e-commerce market three years behind the US and UK and nearly 50% of Australian’s look to overseas sites to buy products on-line citing limited options from local retailers. In fact, many of the country’s largest stores have only recently added e-commerce capability to their websites. Harvey Norman, a major national electronics supplier, launched an online store just three months ago. David Jones, a local equivalent of John Lewis, made a similar move but again only in November last year. Competing through on-line alone will be a challenge given how far they have to go and how much further ahead and more experienced overseas competitors are. John Lewis, for example, has had an e-commerce site since 2001; moreover, it’s one that has won multiple awards, including being voted the best high street website last year. Local players have a lot to be worried about.
The main advantage local companies have are physical retail outlets. However, digital still has a key role to play since on-line remains the main entry point for most consumers (over 70% of Australia’s internet users read reviews or discuss products on-line). The key is to capture the customer in the digital space and bring them into the physical via this channel. For example, Westfield is using an iPhone app to help their customers navigate and explore its Sydney malls, in essence blurring the boundary between physical and digital. As discussed in other posts some companies are using other tools like augmented reality, digital signage, and ping marketing to blur this line even further.
So back to the original question; does Australia feel like a long way from everything? With the digital retail battle brewing and innovative hybrid digital operating models emerging right here, the short answer is, not anymore.