Navigating dangerous retail waters

2011 has been a disastrous year for many Australian retailers and their hapless shareholders. After years of retail expansion fuelled by easy credit, consumers and retailers have slammed on the brakes. For many retail businesses, expansion is no longer a priority, and the odds are high that corporate vultures will be feasting on retail receiverships by March.

The Australian Bureau of Statistics released their September 2011 retail trade figures recently, showing very weak growth in spending. The ABS retail report shows clothing retail and department store spending declining, with furniture, hardware, and sporting goods spending growing strongly.

African QueenWhile there have been a few glimmers of innovation in recent times amongst the major retailers, it is still amusing to see the major newspapers getting excited by Harvey Norman introducing an online shopping cart.

While Harvey Norman is undoubtedly the 800lb gorilla of Australian retail franchising, their business model relies heavily on extracting rent for floorspace, and franchise turnover fees.

Franchise business models rely on territorial exclusivity, which inevitably falls apart in the harsh reality of the online world. After struggling for more than a decade with the online shopping cart, it will be interesting to see how long it takes Harvey Norman to build their online sales.

It has become clear over the last few months that large retailers are reacting to the slowdown by exerting their market clout, and putting the blowtorch to their supplier margins. In a move that is reminiscent of the ongoing supermarket war against milk suppliers, JB Hifi is now bypassing local distributors for some products, purchasing inventory items from foreign distributors who charge lower prices for the same item.

Cutting out the middleman has always been a popular discount retail slogan, but warranty and customer support can be the expensive sting in the tail. Retailers usually handball all costs relating to product faults and customer support back to their distributors, which greatly reduces the product risk for large retailers. Bypassing local distributors may be an attractive short term tactic to recapture market share, but it could easily turn into an expensive mess if there is a product recall.

If you were looking for the perfect retail business model for the current economic malaise, you would struggle to find one better than eBay’s. eBay reported earnings for their quarter ending 30th Sep 2011 of $490m USD, on revenue of $3000m USD. Not content with very solid margins, eBay announced that they plan to agressively move into mobile phone based applications and payments, and are starting trials of physical retail outlets in shopping centres.

When you consider that eBay do not actually “sell” anything or handle any retail inventory, their decision to follow consumers into shopping centres is interesting. Perhaps this is a sign that online retail battles will soon also be fought in shopping centres, and that online retailing is also heading into dangerous waters.

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