The Curious State of Retail
FROM THE BULL | Until 3 years ago the retail sector was booming. Then the GFC hit. Then online retail got more traction making life more difficult for bricks and mortar retailers. Then retailers started to falter and some failed.
But what’s the story behind the story?
What about the $42bn of “stimulus funding” the Australian government pumped into the economy to stave off a recession – a good chunk of it ending up in the coffers of retailers?
Or the Australian dollar’s 100% value gain (vs. the US$) in the past 10 years effectively halving the cost of any goods sourced from China, USA etc?
Should these two things have provided smart retailers with enough financial protection to entrench themselves in their market positions and ward off any up-start competitors, online or otherwise?
The answer appears to be – no. The reality seems to be that many retailers got lazy and complacent choosing to bank the “easy” FX gains and managing their businesses to preserve their fat margins. Instead of looking for ways to enhance their value offerings to their customers (including establishing meaningful online presences) they instead turned inwards thinking that the boom would continue forever and that their customers would continue to buy goods at artificially-inflated retail prices. In the early-mid 2000s this worked a treat. The economy was booming and credit was easy. But like anything built on sand it eventually fell over.
When sales started to fall they ran regular price-discount promotions – lots of them. Unknowingly, they were training their customers to shop only during sale periods. Eventually customers refused to pay full price for anything. Previously they had no other options but the internet had democratised the retail sector and savvy customers now had greater choice about where to purchase and on what terms.
A wise man once said that if you continue to do what you’ve always done you’ll continue to get the same results you’ve always got. He’s half right. What he should have also said is that when you become predictable you become vulnerable. In the past few years many retailers have become predictable. Worst still their high fixed cost structures have made them vulnerable to competitors who can operate successfully with lower margins.
But it’s not all doom and gloom. Far from it. Online is only a very small part of overall retail activity. Even if it grows beyond the current (reported) 3% to 10-15% of total retail sales that leaves 85-90% that will be transacted by bricks and mortar retailers.
Like any distribution channel, online has its challenges and vulnerabilities. These can be exploited.
Firstly, it’s not an ideal “shopping experience” unless you know exactly what you are looking for. Randomly browsing an online bookstore or fashion retailer is a decidedly boring (and unsocial) experience versus the off-line alternative.
Secondly, you have to wait around for the product to be delivered which, even for the great online retailers like Amazon, can take a few weeks. It doesn’t provide instant gratification like bricks and mortar retailing can.
Thirdly, apart from the obvious candidates, most online businesses are small and under-resourced and don’t have enough customers to sustain themselves. Some might move through this stage and become meaningful market participants but most won’t. The vast majority aren’t a threat now and never will be.
Finally, online only works if the product being purchased is CHEAP or is it rare. But mostly it’s about being cheap. The MAIN selling point of Amazon, Group-On and local market leader, Catch of the Day, is about being cheap.
The good news is that for consumers price is only one part of the purchase decision, albeit an important one. Customers hate being ripped off and are generally good judges of “value”. They will choose a more expensive option when they perceive it is more valuable to them than a cheaper alternative. Value can take many forms including convenience, service, relationship trust and a myriad of other matters. In the end they’ll decide whether your offer is good enough vs the other options available to them.
Competitive threats emerge regularly but most don’t embed themselves. The successful ones find a market inefficiency that nobody else has seen. Mostly they have worked out a way to do something at a lower cost than the incumbents in the market. Ultimately, this provides customers with more choice and a better deal.
The problem is that they are chasing YOUR customers and you will eventually lose them if your offer is inferior to your competitors. So what are you going to do about it?