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Online spending hits $14.2 billion

National Australia Bank’s (ASX: NAB) Online Retail Sales Index for August is out and the figures show online retail sales for the year to August have grown by 9.6% to $14.2 billion. Excluding spending in cafes, restaurants and takeaway food to provide a like-for-like comparison, online retail spending is now equivalent to 6.3% of bricks & mortar spending (year-on-year to July).

For Australia-based companies who are expanding their online presence, the growth in online sales is not so much the worry as is the growth in online sales from competing overseas websites. Figures released by the Australian Bureau of Statistics (ABS) show that in the year to July, Australians spent $7.6 billion on purchases from overseas websites. This data coupled with the NAB survey suggests roughly 50% of online retail spend is occurring overseas.

In response to the ABS data, chief economist at the Commonwealth Bank’s (ASX: CBA) broking arm CommSec, Mr Craig James, was quoted on abc.net.au as suggesting Australian retailers will have to cut prices, trim margins and expand their range to lure customers back.

James’ suggestion, while possibly the right strategy to try and retain market share is unlikely to help retailers such as Myer (ASX: MYR), Harvey Norman (ASX: HVN) or JB Hi-Fi (ASX: JBH) boost their profits. While Gerry Harvey has been an outspoken critic of the $1,000 GST-free threshold, his firm is perhaps best placed to deal with online competition given its exposure to large household items, which are less likely to be purchased online.

Myer also has some protection thanks to its improving supply chain, which can provide speedy delivery and returns of apparel. Perhaps most at risk is JB Hi-Fi, which deals in commodity electronic goods where the lowest price usually wins.

Foolish takeaway

The online threat is hardly new and although many retailers were arguably too slow to respond, most now have credible online sales channels. The constant pricing pressure which retailers with bricks and mortar operations face from lower cost online competitors is a structural challenge and not an easy one for retailers to overcome.

Companies with pricing pressure often have to run as fast as they can just to stand still. This type of situation doesn’t bode well for investors after a growing stream of dividends. Luckily The Motley Fool has identified a great dividend-paying stock. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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