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The rising influence of digital retail

Since 2007/2008 the global retail market has gone through a permanent structural shift in power between the retailer and consumer.  Technology has given consumers greater access to information and brands to find the best value propositions. 

As digital becomes a staple piece of each consumers’ daily life, the convenience and ability to mass-search means stores are having to compete with digital platforms as well as other physical stores.

Now the rapid growth of online retail and social media is influencing customer purchasing behavior more and more.

Chris Wilkinson, managing director of the First Retail Group, says online shopping continues to grow five times faster than brick and mortar stores.

“Online retail has been regarded as the bogeyman for some time, with expectations that it would decimate traditional brick & mortar retailers.  Because there was no immediate and catastrophic disruption, retailers and people in general seemed to be losing focus on online.”

Wilkinson says the growth of online retail can be draining for traditional retailers who do not get involved with it.

“Retail profit margins are only 4 percent in New Zealand and 4.2 percent in Australia, so if you lose 8 percent of your sales to online, you are no longer making any profit,” says Wilkinson. “Online sales continue to grow at 15 percent+ pa, whereas bricks & mortar sales grow at low single-digit rates, not even keeping up with increased wage and rent costs.”

According to the graph above, New Zealanders are now spending 44c/$ with international online retailers.  Australians spend only 25c/$ with international online retailers.

Wilkinson says to note that the international growth rate has not changed in the last seven years, regardless of what happens with our FX rate.

“We buy from offshore online retailers because their range is better, their products are better, and even at low exchange rates they still offer better value.”

Wilkinson says, as a result, we need to consider digital influence, not just digital transactions.

“In the US in 2015 and in AU in 2016, 64 percent of purchases were influenced by digital research.  That is now 80 percent in the US. I.e. consumers researched online first for 80 percent of purchases that they then went into a store to buy.”

Inadequate websites can be the cause of bad sales, and that brand perception can influence consumer behaviour, according to Wilkinson.

“Online is not just about the 7 percent of transactions that occur via the web, it’s about the likely 80 percent of transactions that are researched via the web.”

“Is it no surprise therefore that digital advertising spend is now half of total advertising spend in the US and 40 percent in New Zealand. And by the way, of that digital advertising spend, 70 percent is spent with Google and Facebook.”

Conor McElhinney, partner at McGrathNicol, says the expected retail market of clothes and shoes is still growing the slowest, with the fastest growing retail sector being electronic, housing and housewares. 

McElhinney says that online affects different categories in different ways. 

“Total New Zealand retail spend online is now 7.4 percent, but:

•22.4 percent of electrical and electronic goods are purchased online
•16 percent of clothing, footwear and accessories are purchased online
•But only 4.1 percent of groceries, liquor & specialised food is purchased online
•And only 3.2 percent of furniture, housewares, hardware, building supplies etc. are purchased online

“So if you need to also consider online in the context of your particular retail category,” says McElhinney.

This story first appeared at The Register.
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