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Why it May Be Too Late for Retailing Slow-Coaches to Get Online.

In 1998, upmarket US department store chain, Nordstrom [NYSE: JWN], launched its online shop. It was one of the first big department stores to move from catalogue shopping (a large American trend in the 1990s) to internet sales.

And now, a decade later, this transition has paid off. It has created a shopper-friendly website, helping online sales top $1 billion dollars last year. About 10% of Nordstrom’s total revenue. The stock price hasn’t done too bad either.

Nordstrom [NYSE:JWN] stock up 267.78% since the web store launch

Nordstrom [NYSE:JWN] stock up 267.78% since the web store launch
Click here to enlarge

 

Source: Google Finance


Gerry Harvey (owner of the Harvey Norman retail chain) argued back in March 2011 that goods bought online from overseas merchants don’t have GST on top of the price… This makes them cheaper for Aussies to buy, which, Harvey says, is stealing sales from Aussie-based retailers.

But perhaps Aussie retailers don’t have that to worry about after all…

The Australian Communication and Media Authority’s (ACMA) ecommerce report on internet shopping habits for Australians had some surprising results.

According to the ACMA’s latest ecommerce report…

  • 59% of Australians shop online
  • Online shopping is up 53% from two years ago
  • 70% of Aussies in remote locations buy stuff on the web
  • And, surprisingly, 53% of Aussies like to buy from Aussie retailers

The evidence from the ACMA report clearly suggests Aussies want to buy from domestic companies. But big Australian retailers, like Myer, David Jones and Harvey Norman have been slow to embrace this.

 

Why?


Probably because no one wanted to make the first move into the market after the dot-com crash of 2000…

No Aussie business wanted to be the first to invest heavily in another ‘dot-bomb’ enterprise.

Maybe it was fear. Or retailers were too late to capitalise on a growing trend. But by letting the chance slip past, retailers such as Harvey Norman, Myer and David Jones have seen their stock prices tank.

But that may be about to change…

Since Nordstrom announced its $1 billion sales success using the web, David Jones [ASX: DJS] has decided it wants to copy Nordstrom’s model. ‘They’ve been operating an online business for just over a decade and they’re doing about 10 per cent of sales and about 20 per cent of EBIT (earnings before interest and tax) which has come from online,’ said CEO of David Jones, Paul Zahra, on Nordstrom’s online turnover
The thing is, DJs has dabbled in online retail before.

It set up an online shop in 2000. But after the dot-com crash, DJ’s management shut down the shop front. That seems a waste, considering the company spent $28 million to set up the site.

But the ‘relaunch’ of the David Jones online store (in November 2010) hasn’t done much to boost investor sentiment. Since the web shop started up, the David Jones share price is down 44.46%.

 

Internet shopping hasn’t saved David Jones’s share price

 

Internet shopping hasn't saved David Jones's share price

 

Source: CMC Markets


DJs may want to copy Nordstrom’s $1 billion turnover, but reaching 10% internet sales might be harder than it thinks. For the 2011 financial year, David Jones turned over $2.017 billion. Internet sales for the company accounted for just 0.2% of revenue. Barely $3 million. In order to reach 10%, it’s going to need to increase its online sales 5,000%.

DJs isn’t alone in the below expectations internet revenue department either.

Australia’s other major department store chain, Myer [ASX: MYR], launched its limited online store in 2007 (selling mostly perfumes and gift cards). And the full shopping website came online in March last year. In 2011, internet sales accounted for $5 million of Myer’s sales… on par with David Jones at a small 0.18% of revenue. And the share price has tanked 35.73% in that time.

 

Myer – share’s drop 35.73% after internet shopping is available

 

Myer - share's drop 35.73% after internet shopping is available

 

Source: CMC Markets


And what about Gerry Harvey? He had high hopes of Harvey Norman [ASX: HVN] capturing 5% of revenue through online sales… and less than two months since its launch, internet sales make up 0.5% of sales.

Of course, it’s still early days. And given the time to grow and develop, Gerry could one day make 5% of all his sales through the internet. When that will be, who knows?

 

Harvey Norman – Stock down 10.69% since web sales launched

 

Harvey Norman - Stock down 10.69% since web sales launched

 

Source: CMC Markets

 

The fact is, the opportunities for online sales were there a decade ago. Yet the major Aussie retailers just weren’t interested

Sure, growth in retail is small, coming in at 0.1% for the December quarter last year. But would these companies’ revenues and stock prices have suffered as much if they had developed an online shopping outlet sooner?

 

Those Who Dare Win


As you’ve probably seen in the past, taking chances can pay off. And it certainly did for this one small Aussie company who made the move online and returned higher revenues and a much higher stock price to investors.

Oroton Group [ASX: ORL] isn’t an everyday company. It specialises in luxury items. Handbags, wallets, belts, small luggage bags, heck even a key ring from the company will set you back a pretty green $100 note. The average handbag from Oroton costs about $500.

In 2006, when Oroton Group Ltd’s share price was scraping around the bottom, the company took a gamble. It launched a website to sell its goods online. Since then, its share price has moved 346.93% higher.

And despite offering leather goods that cost more than a set of tires for a small car, it was able to report a 12% increase in revenue for 2011.

 

Fancy handbags could’ve got you a triple digit gain

 

Fancy handbags could've got you a triple digit gain

 

Source: CMC Markets


Sally MacDonald, the chief executive for the company, confirmed its commitment to its online presence rather than physical stores.

‘Online is giving access to a consumer pool that their store network previously did not allow for, which is bringing very strong sales through their online channel.’

In fact, the company plans to close less profitable stores when leases expire and invest that money back into web sales.

In 2010, the Oroton online store became one of the company’s ‘top 5? most profitable stores. Reducing business costs along the way.

And even though the company has distribution rights to another luxury brand, Ralph Lauren in Australia and New Zealand, the Oroton online store accounted for more than 6% of total brand sales last year.

Not only has there been significant capital growth. Investors have seen the dividend grow 10 times – from 5 cents to 50 cents – since the company introduced web sales.

The market presented an opportunity and the Oroton Group took the risk.

Let’s say, that Oroton ‘read’ the market right. And Myer, David Jones and Harvey Norman got it wrong. Judging by the way the market is pricing them right now, they’ve paid the price.

Does that mean you should snap up these beaten-down retail stocks now, in the hope their new web presence will turn sales and sentiment around? After all, now they know what went wrong, they’ll fix it and before you know it… they’ll report triple-digit gains?

Not likely.

They’re behind the times. The internet is old. Mobile technology is growing. These companies aren’t leading the pack. They’re chasing the crowd.

If you’re looking to bag yourself an explosive triple-digit winner, you should look at companies willing to try something new. Something innovative. Not another ‘me-too’ company chasing after the game changers.

Like Oroton, those companies are out there. But you have to find them. And investing in them means you take on the risk that they’ll fail – and if they do, you’ll lose your money or get stuck with a worthless stock.

But, they could turn out to be onto something… something the consumer wants.

And if the company calls it right, buckle in and enjoy the triple-digit ride.

Shae Smith
Editor, Money Weekend

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.