The reality of online retail

I read today that Myer intends to do away with shipping and handling costs for its online store, to stop the leak to internet shopping. Apparently “Commonwealth Bank estimates that Australian consumers spent $9.5 billion online last year, with $4.2 billion going to overseas online retailers and the remaining $5.3 billion paid to domestic retailers.”

Competing on price isn’t going to work, as the competition is always going to roll you. Here’s a real example.

This week I had my quarterly breakfast meeting with Scott Kilmartin of haul. haul is a highly successful multi-channel retailer that upcycles advertising billboards into laptop bags, iPad cases and promotional products for companies from their materials. Scott and I get together regularly to dissect our businesses and offer each other impartial advice. I value Scott’s insight into retail trends as he is a keen watcher of players in the market, a keen reader of analysis of retail trends and has bags of experience (excuse the pun).

Scott conducted a couple of experiments this week that have got him worried. He purchased two items off eBay that were shipped directly out of China. The first was a black sweater, XXL size, and in his words “well made, no loose threads or rough sewing/joins. It could be from Country Road”.  The total cost – AUD$9.90 including shipping (but retailing in Australia for around $89.95). The second item was a fake leather iPad case, for AUD$10.45 (retailing in Australia for around $49.95).  Both were delivered in 10 days in an Australia Post eParcel box. (Note Scott’s rate to send an empty eParcel box from Carlton to Fitzroy is a whopping $7.65 at the 1,000-5,000 pieces a year contract rate.)

So can Myer and big retail compete on:

• Price? Not a chance.
• Quality? Nope, goods are coming from the same factories.
• Delivery speed? Perhaps if they lift their game. Seven days delivery from local stocks is slow when you can get something from China in 10 days.
• Risk of fraud? Absolutely. The much lower buying from an Australian retailer and a fear campaign could work well.
• Impact of fraud? Nope. Almost everyone I know is happy to trial an order or two and write-off the $10 if it doesn’t work.
• Range? Nope. Australian retailers can’t afford to stock all shapes and sizes, as most men in their 40s find out when they go to buy jeans.

The conundrum retailers face is an old one, not just in retail. On a number of occasions businesses I have worked for have had an agency for wholesaling electrical products that we practically built the market for. And when our sales were strong enough, the manufacturer decided to directly step into the market and we just couldn’t compete. This always happens.

The solution though is not to compete on price, but to endlessly innovate and provide superior customer service.

Cutting costs and only competing on price is a death spiral. Always has been, always will be.

Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club and Flinders Pacific. He has set up businesses for others in Romania, Indonesia, Hong Kong and Vietnam and is the sole Australian representative of the City of London for Foreign Direct Investment. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.