Oct 3, 2011

How retailers are shooting themselves in the foot

Forget about high interest rates, or poor consumer customers -- retailers are being destroyed by smarter competitors.

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

While retailers complain about interest rates, and unwillingness of consumers to spend, your correspondent experienced the woes of retail first hand last weekend. And the prognosis for Australia’s largest employer is not good at all. Looking to purchase a pair of Vibram barefoot running shoes, the closest location was "category killer" Rebel Sport in Melbourne’s Prahran. Category killer-type shops have always seemed to be a strange concept. Despite the fanfare in the late 1980s and early 1990s, the model, of massive inventory levels and huge shop sizes appears an anathema to smart retail strategy, which usually prescribes low, fixed costs and high stock churn. The Vibram website indicated, however, that a few shops stock its product, and Rebel was one of them. Upon visiting Rebel there was one attendant assisting another customer. The attendant, while well meaning, clearly had very little understanding of the product. Perversely, the other customer was far more knowledgeable.  A second attendant would later appear, who appeared more knowledgeable, but provided advice that was incorrect. While the shoes were able to be tried on, in a move to prevent theft, the store had attached a wire between both shoes, so while they could be placed on a foot, they couldn’t actually be properly tested by potential buyers. Hence, the two major benefits to shopping at a shop were non-existent -- we were not given any level of service, and we were not able to properly try on and test the shoe. But the kicker -- the cost of the shoes was $229. This seemed expensive, so your correspondent jumped on his iPhone and checked (didn’t stock Vibram) and Amazon. Amazon sold the exact same shoe (same colour and same size) for $US89. Including international postage, the total cost was $135. Even allowing for GST, the cost of the shoes on Amazon, including delivery, was 35% cheaper, a saving of about $100. Bear in mind, the entire purchase on Amazon took less than two minutes, less than the time if took to get served at Rebel, and considerably less when you consider the drive, finding a parking spot and waiting for 10 minutes in line at checkout. The death of modern-day retailing will not be a quick one. Most shoppers are not in the habit of purchasing from the internet. Some don’t trust using a credit cards online (which is peculiar, given online transactions are far safer than offline purchases) and others do not have the requisite computer literacy. But when you can purchase products for about half the price in far less time, the ability for "bricks and mortar" retailers to survive in anything resembling their current form in 20 years appears highly questionable. Retailers won’t be the only losers from this scenario. As current Premier Investments and former David Jones boss Mark McInnes noted last week, the spiralling rental costs are proving a huge burden for retailers. Ultimately, when retailers, such as Borders and Angus & Robertson stop trading, the yields received by retail landlords slump. If the business models of their major customers are broken, that also means that commercial landlords face a significant loss of future earnings. This is one of the reasons that Westfield’s share price has slumped by almost 50% in the past year. Austrian economists would not be surprised at the declining state of retail -- as Joseph Schumpeter observed, the foundation of modern capitalism is "creative destruction", that is, innovation created by entrepreneurs destroying the value of established companies. The business models of retailers such as Rebel Sport (and Harvey Norman, David Jones, Myer, Borders) is being destroyed by fast-moving and innovative entrepreneurs. Purchasing products online cuts out retails costs and large staffing costs -- two major expenses of retailers. So forget about high interest rates, or poor consumer customers -- retailers are being destroyed by smarter competitors. And even if they did realise in time, they almost certainly wouldn’t have the ability or the fortitude to effectively destroy themselves and start over. Borders will certainly not be the last retailer to close its doors.

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6 thoughts on “How retailers are shooting themselves in the foot

  1. zut alors

    Apart from the ground floor cosmetics’ department, it’s a challenge to even sight a sales assistant in the large department stores. Where is retail management getting their advice? Certainly not from customers (or former customers).

  2. MCee

    Have to agree with it all. Unless you need it right now, its hard to find a compelling case for retail. The obvious impact of the real estate costs involved are being factored in by “the market.” Consumers are no longer interested in paying for the privilege of being ignored, patronised, condescended to or outright lied to when shopping for the things they want or need. With the ability to compare the items we are interested in, read respected reviews and make informed choices from the comfort of our homes, and indeed anywhere we carry our phones, retail is dead in the water.
    Though the same was said about cinemas when dvd’s came along.
    I can only see that a new model has to emerge where those consumers who actually need, or want to hold the physical item in their hands, or try it on, will do so from “sample” sits and expect to collect there goods from a storgae area, or have it shipped.

    Most of us are tired of paying the landlord and its about time Gerry Harvey admitted that what he really is is one of the largest landlords in the country.

    Its the rent stupid, and unless the landlords an dthe retailers work it out; they both lose in the end.

  3. Carbonbasedlife

    Yes, we’re all being screwed by the landlords. And we all think it’s easier to preserve our shareholder’s (lets face it we’re all part-shareholders also, through super …) so we cut our head counts. The heads who remain need to work twice as hard. So they get the ‘bad attitude’ we all complain about. That causes us to buy from Amazon, so more heads will inevitably roll locally. Some of those will be you & me. Surely we live in challenging times. We all want everything, for less than before, and we want it all sooner, like now. But our society , our world as we know it, may disintegrate around us. When all our local retailers are gone, and the social fun of ‘window shopping’ is long forgotten, if we’re still lucky enough to be employed somewhere (maybe we’ll be mining what’s left in the ground here!), we’ll need to spend our money on different social activities. Instead of walking around shopping malls with friends, maybe we’ll buy holidays on the moon…

  4. Gerry O'Sullivan

    About 10 months ago, when my wife and I were shopping for the imminent arrival of our bundle of joy, we went to David Jones in Sydney CBD to check out the Stokke Xplore baby stroller. It is a seriously expensive stroller. But we don’t have a car so thought we would go expensive with the stroller.

    We spent 20 minutes on the DJ showroom floor examining the product, rolling it up and down the aisle, comparing it with other brands on display, and so on. During that 20 minutes no member of staff approached us. Indeed, we did not even see a member of staff.

    We decided they didn’t deserve our money. We popped downstairs, jumped in a taxi on Market St, took a ride to the suburbs and bought the identical product from a baby supplies store in the inner west. Same product, same price, but we wanted to spend our money where someone was at least prepared to engage with us.

    I don’t believe that stores such as DJs and Myer have the simple common sense to reverse this situation. And don’t get me started on the electronics/music/DVD shops which play music like a nightclub at 3am. Anyone would think that the music was on to entertain the staff. It couldn’t be, could it?

    I am fully sold on internet shopping.

  5. Bob the builder

    The ruthless hyper-shops crushed the small, local shops and main streets and are in turn being crushed by a model which does everything they do – only sell, not advise, engage, help – without the extra price tag. Indeed, why shop at a shop when they don’t know anything, obstruct you getting a refund/repair when your consumer plastik dies and generally provide nothing to the transaction?
    I’d unhesitatingly pay more for a locally-owned shop that had good staff who knew their stuff… but living in a small remote town with a business class accustomed to sitting on its arse and profiteering off a captive market, it’s online every time.

  6. Dogs breakfast

    I look forward to the demise of Westfield. Can’t come soon enough.

    The likely upshot is that the corner store may be revived as the westfields become ghost towns, and best of all the young may not look to a career in retail as a job.

    If we can’t put our youth to some better activity then sitting in a cave in Westfields we really have very little to offer the future.

    And paying for all those employees and Westfields rent by paying double or more what can be bought on the internet is a very poor use of our money.

    Money liberated, our children liberated and ultimately the land that is taken up by those god awful shopping centres also liberated.

    It just doesn’t sound so terrible after all does it, unless you are a member of the Lowy family, and money long since lost all meaning to them, at least in the way it does to you and me.

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