Traditional retailers have only just begun to witness the growth of e-commerce, a new research note from Morgan Stanley has warned, with digital sales tipped to continue growing at more than 20% every year.
The bank says a combination of high rents and massive price differences will hurt electronics, department store, clothing and book retailers, adding that it has downgraded price targets for David Jones, Harvey Norman, Billabong and Myer.
“We expect the in-store retail sales compound annual growth rate to slow to 3.6% over the next four years, down from 5.9% over the past 10 years,” researchers said, adding that a worst-case scenario would see growth at just 2.1%.
“In contrast, we expect online sales will grow 20+% a year,” the note said, adding a list of top stock picks including JB Hi-Fi and Woolworths, with food retailing to stay mostly unaffected by the shift to online sales.
The bank says an internal price comparison across 99 products showed prices are 19-64% cheaper online, with books and cosmetics showing the highest discounts at 64% and 44% respectively.
“We think that investors under-appreciate the impact that internet retailing will have on the listed non-food retailers,” it warns.
The impact of higher sales online will be felt most in the non-food category, which will be largely unaffected, Morgan Stanley says.
“For non-food retail sales, we forecast incremental sales of $28 billion over the next four years, to $138 billion, but point out that in-store sales will account for just $8 billion of this increase.
“We expect retailers operating in electronics and electrical, department store[s], clothing and footwear and newspapers and books to be most impacted.”
Part of the reason for the shift to online retailing includes the fact rents are extraordinarily high, Morgan Stanley argues, with labour and rent costs combined representing more than 70% of overall industry operating costs.
Simon Fonteyn, chief executive of Leasing Information Services, says the Australian market is similar to Canada where occupancy costs are also high. He believes the shift to digital retailing represents a significant turning point for the industry.
“This is the interesting question – is this a structural change in the industry, or is it cyclical? I think it’s a structural change, and that’s being brought about the changing nature of consumerism,” Fonteyn says.
“You have a number of factors including interest rates, the flight to thrift, the carbon tax, rising power bills and no more tax cuts. People are constantly looking for bargains, and that’s where the internet is very, very useful.”
The research note says while retailers maintain costs are too high to support price lowering, it won’t stop shoppers from looking online.
“Put simply, either the existing Australian retailers will lower prices to compete – we think that this is very unlikely – or consumers will continue to increase the proportion of their retail spend online (very likely).”
Fonteyn says the Australian online retail industry is operating from a very low base, compared to the rest of the world.
“Westfield, in its own submission to the Productivity Commission, expects online retail to grow at 10% per annum.
“This is going to be a factor, and … the biggest sectors to be hit are the middle market apparel sectors.”
Meanwhile, eBay Australia managing director Deborah Sharkey said in an interview with Business Spectator the Australian Competition and Consumer Commission should investigate relationships between suppliers and online retailers.
The comments follow the findings of a survey which revealed online retailers are often blocked by suppliers who favour traditional bricks and mortar shops, thereby reducing their inventory and ability to compete.
“We are putting out a call to action to consumers, to let the retail industry know that this is how they want to shop,” she said.
“We are inviting government, the ACCC and also the industry to help us take a serious look at restrictive trade practices.”
