Dec. 11 (Bloomberg) -- When Mica Teh fell for a pair of gray Marc Jacobs studded ballet shoes at Australian department store David Jones Ltd. earlier this year, the first thing she did was leave the shop.
“They were very cute but the pricing was extortionate,” about A$300 ($313), Teh said. Back at her desk in a central Brisbane office overlooking David Jones’s entrance, she bought an identical pair for A$160 from Shopbop.com, a website owned by Amazon.com Inc. “I buy quite a lot,” said Teh, 26, who estimates she spent about A$1,000 online in November, mostly at overseas stores. “I’m trying to slow it down.”
Saks Inc., Macy’s Inc., and Bloomingdale’s have all opened virtual shop windows in Australia for Christmas, setting up local websites and offering discounted shipping to take advantage of the fastest-growing major overseas market for U.S. stores. Clothing retailer Tommy Bahama started shipments in time for the season, and Asos Plc, the U.K.’s largest online-only fashion store, says it sends four jumbo jets of apparel to the country every week.
“Australia is a very modern economy, but there’s been a lack of competition in e-commerce,” said Michael DeSimone, chief executive officer of FiftyOne Inc., which helps U.S. clients such as Saks, Macy’s, Neiman Marcus, J Crew Group Inc. and Williams-Sonoma Inc. sell overseas. “There’s definitely market space that foreign retailers can get into.”
Home to 23 million people, Australia is FiftyOne’s second-largest market, after Canada, accounting for about 20 percent of sales through its system, DeSimone said. After the company began shipments to Australia in 2010, sales doubled in the first year and then doubled again, and DHL Express operates two dedicated Boeing 777 freight flights a week from Cincinnati to Sydney to ship parcels for FiftyOne’s partner stores, DeSimone said.
Australian shoppers spent A$14 billion online in the year through June, according to Commonwealth Bank of Australia, 30 percent more than a year earlier. While that makes up just 5.4 percent of the country’s total retail bill, it’s more than the combined annual revenues of Australia’s five largest main street stores, JB Hi-Fi Ltd., Harvey Norman Holdings Ltd., Myer Holdings Ltd., David Jones, and Super Retail Group Ltd., according to data compiled by Bloomberg.
“Domestic retailers weren’t prepared and got caught out,” said Andrew McLennan, a Commonwealth Bank analyst in Sydney.
Increased access to e-commerce is shaking up an industry that’s been defined by its isolation since 1790, when the “glass, millinery, perfumery, and stationery” in Sydney’s first shop sold poorly because of the high cost of transport from England, according to an early account of the colony.
“You have retailers that have been fat for decades because they have this market that they completely controlled,” said Will Gensburg, chief executive officer of i-Parcel LLC, a delivery company based in Burlington, Massachusetts, that ships packages overseas for clients such as Amazon.com and Toys R Us Inc. “Now all that’s changed.”
The isolation has long helped Australian retailers and their suppliers churn out fatter profits. David Jones’s operating margin over the past two decades has averaged 5.6 percent, versus 3.1 percent for the comparably upscale Saks Inc. over the same period, according to data compiled by Bloomberg.
David Jones shares fell 1.2 percent at 10:43 a.m. Sydney time to A$2.45, their lowest level in a week. Myer slipped 0.2 percent to A$2.185 while the broader S&P/ASX 200 index climbed 0.3 percent.
With Commonwealth Bank estimating that four dollars out of every 10 spent online in Australia goes overseas, the country’s retail sector has raced to catch the competition.
David Jones, which didn’t set up its new Web store until November 2010, says it has increased the number of products available through the site tenfold over the past year, to 90,000. And the company has set up mobile applications and a magazine-style app for iPads.
After the site crashed for several hours during Click Frenzy, an online promotion on Nov. 20 modeled on the U.S. Cyber Monday discounting drive, David Jones doubled its server capacity, according to spokeswoman Helen Karlis.
Such initiatives will help Australia’s traditional retailers gain strength online, according to Bernie Brookes, chief executive officer of the country’s largest department store company, Myer Holdings Ltd.
“In less than three years’ time, the top 10 Internet sites in Australia will be dominated” by existing retailers, Brookes said at a business lunch in August. Long-standing relationships between the incumbents and their customers and suppliers will win out over new entrants, he said.
The price differential between Australian and overseas vendors can be substantial. On David Jones’s website, Micca sandals from shoemaker Merrell sell for A$149.95, versus about A$60 at the Amazon store of Comet Footwear LLC. Though the American site charges A$53.52 for shipping and David Jones will send the sandals for free, the Australian store is still a third more expensive.
While many stores have agreements with vendors that bar them from sending some products overseas, companies such as i-Parcel have sprung up to help. A 100 milliliter bottle of Dior’s ‘J’Adore’ perfume, A$180 at Myer’s and David Jones’s online stores, costs A$106.33 on Nordstrom’s U.S. website.
Nordstrom says it can’t send the Dior perfume to Australia, but i-Parcel has developed a way around that problem. The company charges Aussie shoppers about A$26 to receive the perfume from Nordstrom at a U.S. address and then forward it Down Under.
In a 5,000 square-foot warehouse two miles from the spot where Peter Stuyvesant, the last Dutch governor of New York, built a trading post on the Delaware River, i-Parcel has a staff of 15 processing parcels for customers in Australia, New Zealand and Britain.
The warehouse, in New Castle, Delaware, sits in one of a handful of U.S. states that doesn’t levy sales tax. Workers there repack the shipments into cartons that are then dispatched around the world from Newark airport, a two-hour drive away.
In the face of such competition, local retailers have pushed to lower the A$1,000 exemption from the 10 percent national sales tax granted to parcel deliveries from overseas.
David Bradbury, Australia’s assistant treasurer, said Dec. 3 the government was opposed to immediately dropping that threshold and would look at whether it was practical in the longer term.
“The costs of collecting revenue would exceed any potential revenue that might be collected,” he said according to the transcript of a briefing in Sydney.
Higher taxes might not deter some shoppers. Lenya Kovacevic, a 32-year-old advertising executive in Sydney, says that while she likes the lower prices available from U.S. e-tailers, it’s really the greater range of products that keeps her coming back.
“When I buy online, I want something that no one else is going to have,” she said. “What overseas retailers are doing is five steps ahead of what we’re doing here.”
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