Saturday, November 12, 2011

The Internet and the Death of Retail?

[O]ne of the most harmful habits in contemporary thought, in modern thought even; at any rate, in post-Hegelian thought: the analysis of the present as being precisely, in history, a present of rupture, or of high point, or of completion, or of a returning dawn ... I think we should have the modesty to say to ourselves that, on the one hand, the time we live in is not the unique or fundamental or irruptive point in history where everything is completed and begun again.  We must also have the modesty to say, on the other hand, that . . . the time we live in is very interesting; it needs to be analysed and broken down, and that we would do well to ask ourselves, ‘What is the nature of our present?’ ...  With the proviso that we do not allow ourselves the facile, rather theatrical declaration that this moment in which we exist is one of total perdition, in the abyss of darkness, or a triumphant daybreak, etc.  It is a time like any other, or rather, a time which is never quite like any other.
Michel Foucault 1983
The end of everything we call life is close at hand and cannot be evaded.
H.G Wells 1946
Is the Internet killing traditional bricks and mortar retail? There's no doubt that retailers are doing it tough at the moment, but the Internet is only one of a series of problems facing the sector. The major concern about the Internet for the retail sector is prospective, rather than current, loss of sales.

The major short- to medium-term problem for retailers is the paying down of debt by Australian households and the end of debt-fuelled consumption. This is reflected in increased saving by Australians. Together these pressures are damaging confidence about future possibilities for retailers to make money with their traditional model.

While many in the industry want the government to 'do something' to fix things, it's clear that adaptation to changing consumption habits and technologies will be essential for medium to longer-term retail survival. In this post I consider a variety of statistics and measures about the impact of the Internet on the retail sector and outline some of my own experiences. I conclude that the future has not yet arrived and that retail sector still has time to adapt to change that is happening more slowly than many imagine. 

According to the Productivity Commission (PC) there are "140 000 retail businesses in Australia, accounting for 4.2 per cent of GDP and 10.7 per cent of employment". This makes it one of the most important sectors for employment after "health care and social assistance", at 11.4 per cent of employment. (For a detailed account of the structure of the Australian economy see here)

Let's begin by something close to my heart - books. I buy a lot more books from overseas suppliers than I used to because they simply are much cheaper. Books from the Book Depository (no postage) and Amazon are generally less expensive than bookshops or online suppliers in Australia, although not always, especially for Australian books (Fetch, for example, provides an online comparison service for online book purchases).

The longer-term worry for book sellers might be from eBooks rather than overseas suppliers of paper copies, but currently it's online sales that are the major threat. So what are the numbers? Luckily the Department of Innovation, Industry, Science and Research has just produced a report on the Book Industry. Its market analysis estimated that "the total value of books sold in Australia during 2010 was $2.3 billion", with "online book sales worth $280 million in 2010, or 12 per cent of the total book market."

In a survey of "1,000 Australians, 53 per cent of books purchased online in 2010 were bought from overseas online booksellers". If we tie these two figures (improperly) together we get a figure of about 6 per cent of total sales bought from overseas book sellers.

The analysis also reported that:
Adjusted for inflation, the total value of books sold in Australia increased by an annual average of 1.1 per cent from 2001 to 2010. Relative to other retail industries, the Australian book industry underperformed over the past decade. It performed more favourably, however, when compared against other creative industries in Australia and overseas book industries.
So what about eBooks?
Australians purchased approximately $35 million worth of eBooks in 2010, which is equal to 1.5 per cent of the total value of book sales for that year. The eBook market in Australia is projected to reach between $150 million and $700 million in 2014, representing between 6 per cent and 24 per cent of total estimated book sales.
Between $150 million and $700 million? That's a fairly big grey area of $550 million. In other words, they have no idea.

So people are still buying hard copy books, just not from Borders anymore. Borders might have been a great store to visit, but you would have to be making a last minute purchase, uninformed or insane to buy books there. The mark up on books (and CDs) at Borders was ridiculous when compared to the Book Depository or even other bricks and mortar book stores. I can remember trying to buy my son a copy of the yearly AFL Record at Borders and finding out that their price was about $8 dearer than the recommended retail price.

Still my son and I used to love going to Borders at the mall to browse and we miss it now that it's gone. I hope that bookshops survive, but generally I only buy books from book stores when I want the book for someone else as a last minute gift or for my son when he's finished his last one and doesn't want to wait the 4-5 working days the Book Depository takes to deliver.

It's not all bad news for bookshops. Recently I visited Avid Reader in West End, Brisbane, on a Saturday morning. My son bought some books and I bought a coffee. The shop was packed with browsers and, it seemed, buyers. If there's a future model for bookshop, Avid certainly looks like it. If Avid or Riverbend Books in Bulimba can't survive I'd be extremely worried for all book shops.

But it's not just books of course that are facing growing competition from the Internet, StrawberryNet is considerably cheaper for skincare, cosmetics and perfume and less trying on the olfactory system than than those huge, smelly sections of department stores. Buying a pair of ASICS Gel Kayanos will set you back $250 at Rebel Sports, but I've seen them online (from the US) for just over $100.

The higher Australian dollar and the GST exemption on purchases under $1000 are also factors in the appeal of overseas Internet purchases, but the major factor in the excessive price differential appears to be high mark ups by retailers to cover employees, rent and profits (obviously).

I know that my friends increasingly look to the Internet for many different types of goods, but as someone once said "the plural of anecdote is not data" so it's important to try to get some indication about the total level of Internet purchases. (Apparently the original quote was "the plural of anecdote is data", but I much prefer the later more cynical version!)

According to the best estimate of the PC, "online retailing represents 6 per cent of total Australian retail sales - made up of 4 per cent domestic online ($8.4 billion) and 2 per cent from overseas ($4.2 billion)". The Reserve Bank of Australia reports that there are "no official data on the total value of online purchases, although a range of industry estimates suggest that these purchases are equivalent to around 3 per cent of household consumption".

Note that total retail sales and household consumption are different measures. Nevertheless it is clear that both the PC and the RBA acknowledge that sales have grown rapidly in recent years from albeit low bases.
While there are some structural breaks in the data due to changes in reporting over time, the data on domestic spending show rapid growth in online purchases over recent years. Since 2005, the value of online spending on debit and credit cards has grown at an average annual rate of more than 15 per cent, although over the past year there has been little change in this type of spending. In contrast, traditional card spending has increased at a slower average rate of around 9 per cent since 2005. It is important to note that despite the stronger growth in online spending, online payments account for only around 10 per cent of total domestic payments on credit and debit cards.

According to the RBA:
The data on payments made on Australian cards at overseas merchants include payments made when Australians travel overseas, as well as payments made by Australians for online purchases from overseas merchants. In total, the value of international electronic purchases has grown at an average rate of 15½ per cent since 2005, which is faster than the growth in electronic domestic purchases of 10 per cent.

To buy online obviously requires access to the Internet and that has grown rapidly as well. The Australian Bureau of Statistics (ABS) reports that "at the end of June 2011, there were 10.9 million Internet subscribers in Australia" a figure which excludes "Internet connections through mobile handsets".

Internet usage increased at an annual rate of nearly 15 per cent and increased by 4.4% since the end of 2010. Significantly 95 per cent of connections are now broad-band and 87 per cent of Australian Internet users are accessing download speeds of 1.5Mbps or greater. All of this adds up to greater Internet penetration and the potential for further inroads into traditional retail.

International purchases have not just been spurred by the Internet, but by the massive increase in the number of Australians travelling overseas. As the RBA reports:
It is likely that much of this growth in international purchases reflects the significant increase in the number of Australians travelling overseas. In 2010, Australians made around 6¼ million trips overseas, excluding business-related trips. This has increased by 55 per cent since 2005, with this growth in travel leading to increased spending overseas. In addition, the appreciation of the exchange rate has made foreign goods and services cheaper. While this has reduced the value of a given quantity of foreign goods and services in Australian dollar terms, it is also likely to have led households to increase the quantity of purchases abroad. Although it is not possible to specifically identify online offshore purchases, the data suggest that the share of this type of purchase in total spending remains relatively low. In aggregate, total spending at foreign merchants – including spending by Australians travelling abroad – is less than 4 per cent of total payments.
According to the ABS, the real change is in the number of Australians going overseas with the number of foreign visitors remaining relatively static. Increases in overseas travel means less domestic travel and less domestic spending.

Visitor Arrivals, short term 

Resident Departures, short term

So Internet and international purchases are growing rapidly, but with a long way to go until we can definitively announce the death of traditional retail.

Another way the RBA considers the growth of Internet purchases is by considering "the number of inbound postal items delivered through the Australia Post network". While it doesn't seem that long ago that pundits were arguing that email would kill traditional postal services since 2005, "the total number of items delivered has increased at an average annual rate of around 10 per cent, in contrast to an average annual decline of 1 per cent in the total number of domestic and outbound postage flows."

Another measure is the "steady increase over a number of years in the number of Google searches for ‘Amazon’ and ‘eBay US’". As the Australian dollar appreciated from mid-2010 these searches increased significantly.

Another thing close to my heart are movies and television. I wonder how long video stores will survive? Will they also find  new ways to stay profitable like Australia Post and other parcel deliverers? Or will they gradually fade away as more and more people connect their televisions to the Internet?

People have long been predicting the death of the video store, but they continue to survive and appear to be doing reasonable business, at least whenever I visit. Still it's not really a business with great growth prospects. I certainly wouldn't be encouraging anyone to invest in a video store right now. Perhaps technologically adept Internet store employees will create businesses to help people like me set up their television and Internet combinations! 

The reasonably tech savvy, especially 'the downloaders', probably still account for only a minor percentage of DVD watchers. Nevertheless Torrent Freak reports that 15 per cent of all torrent downloads of the final episode of Lost "originated from Australia, despite the country representing only 0.3% of the world’s population", proving that Australians are both reasonably technologically competent and frustrated by the lack of immediate access to popular shows. 

Another report estimated that one million Australians accessed illegal downloads via BitTorrent sites in April 2009, a figure that no doubt would have increased since then. Rolling Stone reveals that most illegal downloading (as a percentage of total downloads) occurs outside of the US and Europe, but "fewer than 20 percent of Internet users worldwide pay for downloads of individual songs, and even fewer pay for downloads of full albums".

The difference between the US and Europe and the rest of the world is borne out by a mid-2010 survey of 7000 illegal downloaders who reported that they "would pay for them if there was a cheap and legal service as convenient as file-sharing tools like BitTorrent".

Such findings tie in with my personal conversations with friends and students, many of whom tell me that they would be happy to pay for legal downloads as long as the costs are not too great and they could get immediate access. A friend recently laughed at me when I told them I still occasionally bought CDs i.e. the physical item in a plastic case. Students are always amused when I show a video (as in VHS) in class. Video, of course, was once the wonder technology: "You mean I can record a television program?". I wonder what young people think of those who still buy vinyl, let alone those who continue to use reel-to-reel players.


Like so many things in the world today, we tend to imagine a possible future and then 'teleport' it back into the present as though it were already the current reality. This has probably always been true as Dan Gardner outlines in Future Babble: "Excited predictions of the amazing technologies to come — Driverless cars! Robot maids! Jet packs! — have been dazzling the public since the late nineteenth century." Gardner outlines how Herman Kahn published  a book in 1967 called The Year 2000. In it he wrote that "by the end of the century nuclear explosives would be used for excavation and mining, 'artificial moons' would be used to illuminate large areas at night, and there would be permanent undersea colonies." As you might realise, he was wrong about this and he was also wrong when he argued that the Soviet Union would be "one of the world’s fastest-growing economies at the turn of the millennium".
I also vaguely remember visions of future technology in the 1980s, such as the hopes for full immersion virtual reality. If I remember correctly it was almost certain that by 2011 we'd be able to lose ourselves completely in virtual worlds and not just by looking at computer screens. But perhaps I was just watching too many 'futuristic' movies.

As Ferdinand Mount wrote quite some time ago, apocalyptic visions are more interesting than the idea that things will gradually change.
Of making end-of books, there is no end. Whitaker’s Books in Print, 1994, lists 150 books entitled The End of ... Among those things designated for termination are Art Theory, Beauty, British Politics, Central Planning, Christendom (by Malcolm Muggeridge), Comedy, Conversation, Education, Elitism, Empire, Eternity, Gin-and-Tonic-Man (a book about public relations), Housework, Innocence, Insularity, Laissez Faire, Marriage, Modernity, Motherhood, Philosophy, Punishment, Science, the Cold War (six titles), the Family, the Novel, the World, Time and Zionism – not to mention the most celebrated post-war exercises in Endism, Ideology and History.
Things generally tend to fade away rather than end completely. But not always. I remember writing an essay in the course "Soviet foreign policy" in 1991, thinking that the Soviet Union would gradually change rather fall apart as it did. Wrong. Still, while Soviet-style central planning appears to have fallen off the back of the history bus, desires among authoritarian governments for more centralised control has not.

In various places in the back streets of Brisbane (and no doubt other cities) one can see the remnants of old delicatessens, butchers and the like, seemingly gone forever. But more recently, the corner shop appears to have made a bit of of a comeback, in parts of Brisbane at least. The
New York Times recently had an article on how to order cuts of meat from butcher shops, which apparently are making a comeback in New York.

The world is changing rapidly and the Internet is playing a big role, but we're not as close to the future as we might think. More recent figures show that retail has not been doing as badly in recent months.

Recent figures show that retail as a whole is not in as bigger hole as the news stories seem to suggest. Turnover has increased over the past 3 months and the interest rate cut should make a difference as well, especially coming just before Christmas.

According to the ABS: "In trend terms, Australian turnover rose 2.4% in September 2011 compared with September 2010.

The following industries rose in trend terms in September 2011: Food retailing (0.5%), Other retailing (0.6%), Cafes, restaurants and takeaway food services (0.6%) and Household goods retailing (0.5%). Clothing, footwear and personal accessory retailing (-1.4%) and Department stores (-0.4%) fell in trend terms in September 2011.

All states and territories rose in trend terms in September 2011: New South Wales (0.4%), Western Australia (0.7%), Queensland (0.2%), South Australia (0.3%), Victoria (0.1%), Tasmania (0.7%), the Northern Territory (0.5%) and the Australian Capital Territory (0.3%).
Traditional retail will have to adapt, but it won't die. People will still want to walk around shops and buy things legally, but the days of soft profits and complacency seem to be numbered!

From 1956:


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