Companies

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 Wiggle.co.uk (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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