How Australia’s e-commerce sector stacks up against the US

Heather McIlvaine

23rd Oct 2018

In comparison to America’s US$450 billion ($636.7 billion) online retail market, the e-commerce sector in Australia – at $26.9 billion, according to the latest NAB Online Retail Sales Index – is just a drop in the ocean.

But a recent report from FTI Consulting reveals some surprising ways in which Australia’s e-commerce sector punches above its weight, as well as areas where Aussie retailers could learn a thing or two from their overseas counterparts.

Released earlier this month, FTI Consulting’s annual forecast of US online retail provided commentary on the Australian market for the first time, including the fact that online sales drove 54 per cent of the growth in Australia’s retail sector in the 12 months to August 2018.

“Australia is well and truly following the US trend. Here, online retail sales are also soaring,” said Kate Warwick, senior managing director and head of retail and consumer products at FTI Consulting.

Opportunities by category

Warwick predicts that a quarter of US retail sales will be made online by 2040, compared to 13 per cent today, but that growth is unlikely to be shared across categories, with grocery one area that will remain largely offline.

“[A]s the key impediments continue to wear away, the online growth in the category will improve further, though in the US it is unlikely to achieve more than 10 per cent of total grocery spend,” Warwick said.

However, that is not necessarily the case in Australia. While online grocery sales Down Under currently sit around 3 per cent of total grocery sales, according to Nielsen, on par with the US, Warwick noted that it is growing at a much faster rate than the sector as a whole, 24 per cent, compared to just 2 per cent.

“Where Australia differs from the US may be in the potential for, and rate of, growth within the e-grocery category,” she said.

“While the category is growing slowly in the US, here it is racing ahead faster than the total grocery market.”

Warwick also cited homewares as a strong growth category for e-commerce in Australia, where she said online sales represent almost 15 per cent of the market, and are growing at a rate of 7 per cent.

“Given the Australian fascination with home improvement and renovating, fostered in part by reality television programs, the advancements in product design and packaging, and improvements in logistics, this category may well experience significant growth rates,” she said.

Amazon’s impact

In the report, Warwick noted that the “test is yet to come” for Amazon in Australia, but she said it is not the time for retailers to be glib. She cited Morgan Stanley’s prediction that Amazon will own 24 per cent of Australian online retail by 2027, at which point FTI Consulting predicts Amazon will own more than 50 per cent of online retail in the US.

According to the company’s forecast model, Amazon’s share of online sales in the US will reach 60 per cent by 2030. But while omnichannel retailers have increased their efforts to sell online to defend against the encroachment of Amazon, Warwick said this could backfire.

“[L]ook closer and it becomes clear that some of these retailers may be cannibalising their in-store sales with little to no top-line revenue growth. Consequently, some large retailers are consistently profitable companies; others are struggling, while some are barely hanging on,” she said.

On this front, retailers in the US and Australia are in much the same boat, as they realise their multi-channel strategies are far less lucrative than previously thought.

“Across the board, while online sales are booming (for large retailers, in particular), margins are being squeezed. The incentives that were intended to lure consumers online – lower prices, bigger selection, free shipping, generous return policies — have instead become permanent features and there’s little sign that shoppers will ever have to bear any of these costs,” she said.

To remain competitive, Warwick said, Australian retailers must address multiple aspects of their business simultaneously: bring the right product to the customer, at the right cost, faster than the competition; deliver products and services to stores and online at the right cost; and ensure healthy returns on invested capital.