Last week, we wrote about the second coming of the dot.com boom. Growing multiples, billions being spent on companies yet to turn a significant profit and the potent mix of China and any technology company touted as ‘the next (insert internet-related business here)’ are signs that we might be seeing the inflation of a bubble.

At issue isn’t the increasing rise of technology-based businesses, nor the seemingly inexorable shift towards conducting more and more of our business – and living more and more of our lives – online. That trend is well and truly proven, even if the speed of change ebbs and flows.

Our point was that some of these business models had not been tested over time, and even with a sound business model, an investor’s purchase price can be the difference between a big gain and a huge loss.

It is possible, indeed probable, that some of today’s social networking stars will be the Amazon or eBay of tomorrow. The question is which will be successful – and it may pay to stay away from those bets until the coast is clear.

Social Networking comes to Retail

Another sector of the online business world that is garnering plenty of attention – perhaps partly because of their social network characteristics – are the so-called ‘group buying’ sites. The most well known of these businesses in the US is Groupon – the name is a combination of ‘Group coupon’ – a site offering very deep discounts to consumers, only after a pre-determined number of people have signed up for that deal, and often capped on a ‘first come, first served’ basis.

Groupon operates in over 160 cities and claim over 41 million subscribers, over 46.5 million ‘groupons’ bought and almost USD$2 billion saved by US consumers.

If it’s true that imitation is the sincerest form of flattery, then Groupon must be feeling pretty flattered in Australia right now. Groupon have launched their own site in Australia – Stardeals.com.au, and have three high profile competitors in Spreets.com.au, Scoopon.com.au and Cudo.com.au.

A Bumpy Retail Road Online

In Australia, these group buying sites have been only the most recent wave of online retailing. Emerging from the original dot.com boom, online retailing had a bumpy start, with online grocer Shopfast.com.au and online department store dstore.com.au initially doing it tough.

Learning the lessons, the second generation have tended to be online arms of existing retailers. Grocers Woolworths (ASX: WOW) and Coles, part of fertiliser to retailing conglomerate Wesfarmers (ASX: WES) have online sites, as do electronics retailers JB Hi-Fi (ASX: JBH) and Woolworths’ owned Dick Smith Electronics. Almost all of the major retailers who can sell online now are.

Go (online) Harvey Norman!

The pace of internet retailing has continued to increase, and the past 12-18 months has seen some very significant changes, in large part accelerated by the strength of the Australian dollar. Of note, we have seen a campaign by Australian retailers to have GST applied to international purchases and even long-time internet retailing sceptic and Harvey Norman (ASX: HVN) boss Gerry Harvey has finally succumbed to what many see as the inevitable, launching a limited online retailing presence, with the promise of more to come.

Whereas the group buying sites rely on selling a minimum number of coupons for a physical store or service, others have sprung up selling discounted merchandise (some deeply discounted) – buying excess stock or stock that is approaching expiry from manufacturers looking to clear inventory. GraysOnline.com, DealsDirect.com.au and CatchOfTheDay.com.au are among the most prominent Australian examples, blending a broad range of products with some ‘limited time offers’ to appeal to bargain shoppers.

Vertical Integration Challenges Existing Models…

In the ‘pure’ online space, Kogan has sprung up online, cutting out both the branded suppliers such as Sony and Samsung, and retailers by sourcing consumer electronics products – TVs, laptops and the like – directly from the manufacturers (most of the ‘brands’ outsource their manufacturing these days). The result is a product that is claimed to be as good as the well-know branded alternative, often using identical components.

…and even the Shopping Centres want in

In the vein of ‘bringing coals to Newcastle’, Westfield Group (ASX: WDC) has launched an online shopping mall, providing an online presence for their tenants. When the king of shopping centres launches in cyberspace, you know things have changed.

In their February Statement on Monetary Policy, the RBA noted that online spending was estimated at around 3% of total household consumption, and that inbound postal items (a proxy for online purchases) has increased by a compounded 10% per year since 2005, while total domestic and outbound postal volumes have been in slight decline.

Compared to the growth in GDP, a continuation of those growth numbers will see online retail mushroom as a proportion of household consumption.

With all of these changes happening around us, it’s probably not surprising to see James Packer active in the online retail space. In the past couple of months, Packer has taken stakes in DealsDirect and Catch Of The Day (who also own the Scoopon.com.au business), not long after Yahoo!7 acquired the online group buying site Spreets.

Foolish Take Out

Only time will tell whether the recent buying frenzy (from both consumers and investors) will continue. When the dust settles, retailing in Australia may look very different – or not too different at all. Investors in Australian retail businesses (and their overseas counterparts) may have a bumpy ride ahead.

Perhaps now, more than any time in the past 50 years, the future of retail is most uncertain. Business models will come under new stress, and some may be cast aside. Investors will want to pay greater-than-usual attention to companies that have previously been safe in the ‘bottom drawer’.

Of the companies mentioned in this article, Fool contributor Scott Phillips owns shares in Westfield, Woolworths and Harvey Norman. The Motley Fool has an unchanged disclosure policy.

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