The Lollapalooza effect
The internet is starting to have a dramatic impact on real world business in Australia by opening up some genuine domestic and international competition. Initially people thought that only generic products could be moved over the net. We could obviously see books, CDs and some electronic items moving online. But could we move clothes, furniture, cars and property online too? The trend has become inevitable and there appears to be a Lollapalooza effect[i] supporting this trend.
Let’s examine these causes first which help create this wave for change and then consider the impacts and benefits on society and the economy. The supporting trends are:
- The increase of high speed reliable internet -leading to improved web content, speed and reliability.
- The ubiquity of the net - now that most people own smart phones with a genuine web surfing screen and data speeds sufficient to allow mobile surfing and researching.
- The local currency strength – parity with the USD or above makes conversion easier to international websites plus supports the economic incentive to look to international retailers of goods.
- The digitalisation of goods – for example books, music and newspapers are now not just generic goods but also intangible products. Amazon recently announced it was selling more eBooks than physical books. Not only is it easier to buy them online but you CAN’T buy them in a bookstore. The emergence of 3D printers also has the potential to turn many physical goods into intangible goods over time. You will be able to buy a digital template of something, say an iPhone case, and then simply ‘print’ the goods at home!
- The lower cost of doing business online - enables more dollars to be spent on marketing and lower prices to consumers.
- The growth in social media and blogs - people can share great product purchases instantaneously with their friends, gift them or review them. This review mechanism means that more and more research is being done by consumers online and the need for “education” by a salesperson is diminishing, hence the way consumers are buying from bricks and mortar retailers is also changing.
- The growing acceptance and trust in electronic payment forms speeds the shift online - MasterCard, Visa, PayPal are the payment choices of the web and consumers are becoming increasingly comfortable with using them online and the prevention of fraud.
- Pricing transparency, speed, ease and choice - Now you can shop 24x7, know you are getting a competitive price and have things delivered to your door. You can also “walk” into a virtual shop and look at 40,000 items rather than the typical 3-4,000 items in your average shop. Amazon aims to have “the Earth’s biggest selection”. I could go on but the tide and benefits of online are overwhelming.
At Schroders, we think a lot about these trends and it is starting to shape our investment universe. Our thinking was spurred on by comments from one CEO who pointed out that the days of a second hand car dealer clearing $5,000 for the sale of a second hand car were well and truly over. How many other industries does this apply to? Does it apply to everything? The answer is potentially Yes.
Consumer brand dynamics in the digital world
Brands are mostly a consumer short cut for thinking and information. As the price/value equation narrows however, trading based solely on reputation becomes short lived. Instantaneous feedback from real consumers now has the potential to stop a product launch in its tracks. Equally, it has the potential to expand the winners’ takings greatly. One of the reasons for rapid success for products like the iPhone, I suspect, has come from this digital word of mouth. If your price premium is no longer worth paying for, you will get short shrift from informed consumers. Also, your competitor set, even in stable fast moving consumer products, has just gone global. I just don’t think people have fully realised it yet. A relevant example here is a great product called the dollar shave club (www.dollarshaveclub.com). This is a direct online subscription service for razor blades. You subscribe online and for $1 a month they will send you your monthly razor blade requirements. Its success can be attributed to two things: very amusing advertising and the fact that no one would have thought to launch a shave product competing with Gillette (now P&G) if they had to persuade leading retailers to stock their product. Today the consumer gets to choose if they want to buy it rather than the retailer. New online brands are being created daily. No one had heard of ASOS, the Iconic, oo.com.au or Kogan 4 or 5 years ago.
So, what is the value of a brand now? Zero, unless it can deliver what it used to promise – reliability and reasonable performance for money. In this world the transition from well-known brands with low consumer value propositions to lesser known brands with high consumer value propositions can become rapid. The old barriers of customer acceptance and distribution have just collapsed. Sourcing and distribution are now global commodities. You just have to connect your buyers with a great and differentiated idea.
Another term I want to throw into the pot is what one multinational CEO termed “online legitimacy”. That is, the idea that everyone now has an equal voice online. Bloggers, reviewers, in fact anyone with a Facebook or twitter account can stick a thorn in the side of larger businesses. Just ask Vodafone Australia what vodafail.com did to their brand image here. Do you think that guy got out of his contract? But turn it around and the power of Tripadvisor and other review sites can be formidable. The process of consumer discovery is now much faster and deserving businesses can gain critical traction with alacrity.
In our search for investments on behalf of our clients we have been vigilant in seeking to profit from these trends and our investments in realestate.com.au, Carsales.com.au and Trademe.co.nz as well as some of our telco investments have been the beneficiaries of this digital tailwind. We are also cautious about investing in sectors that are facing aggressive business obsolescence from the digital shift. We remain cautious on the traditional retailers in Australia who have been both over-earning and under-prepared for the internet threat. Whilst many retail and traditional media share prices here have been sold off strongly, we will only seek to invest here when we feel management teams have adapted to offer consumers a comparable digital experience.
Despite our view that the world is generally entering a lower growth and more volatile environment, the significant price moves of the past quarter have potentially thrown up some opportunities in the more cyclical areas of the market. We continue to look for investment opportunities where we can demonstrably invest well below our assessment of mid cycle earnings whilst avoiding undue operating or balance sheet risks.
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