The Australian Small Business Blog

Wednesday, January 05, 2011

The Big Retail Dinosaurs are Revolting

Much has been written already about the self-serving retail giants trying to protect their monopolies under the cloak of fairness and patriotism. That is all retailers, wherever they are in the world should make us pay Australian taxes to protect Australian jobs. (Mind you this did not stop Myer avoiding a $1.5 billion tax bill when it changed hands recently through the use of offshore tax havens.)

As others have clearly shown, this has nothing to do with the gst - its the competition. These retailers already know applying gst to low value imports would not on its own stop offshore shopping with prices savings as much as 50%, but the red tape involved and delays probably would. In other words, they want to recreate soft tariff barriers for their competitors, who it turns out are their customers!

If their business is to import things into Australia, they have to be able to do it better than people can do it by themselves. This is like Jim’s Mowing trying to get lawn mower retailers put large mark-ups on lawn mowers for people who wanted to mow their own lawns.

The problem for these retailers is their business model. If you are selling products that are basically commodities, people will select on price- unless you can offer excellent service. Have you tired getting service at Harvey Normans on a Saturday afternoon?

The big retailers also have large overheads which they don’t seem to be able to convert into economies of scale. Part of this is due to high fixed costs such as retail rents and government controlled charges. These are sustainable only while people can’t buy offshore, or from local online retailers who can avoid some of these costs.

Why don’t the retailers just negotiate hard with their landlords to get rents down in the same way they do with their suppliers? Perhaps it is because their investors also have large property holdings so it is in everyone’s interest to maintain high rents. Some argue it is our labour costs. While our labour costs are higher than our Asian neighbours, they aren’t higher than our second biggest source (after China) of merchant imports, United States. The big retailers have also been ruthless in keeping their labour costs down with low wage casuals.

These retailers are like the Chicago Ice Company of the early 1900’s (a case study in a 100 MBA courses). They supplied ice to every household in Chicago every few days to keep perishable foods fresh in their ice boxes. This required a very large ice plant and an effective citywide distribution system. Then refrigerators became available which then began to destroy their market. The company reacted by trying to become even more efficient and by reducing their costs, but in the long term their business model was unsustainable.

Until the internet, the big retailers basically had a captive market. It took a lot of work for consumers to do their own market research and then import themselves. Now this can be done with a few mouse clicks and the big retail dinosaurs don’t like it one bit. They have become fat and lazy in a protected market with only a handful of competitors. They have forgotten what their value proposition was.

The opportunity for small business is to supply the service that big retailers won’t and to minimise their overheads. They also need a clear understanding of the value they offer and what they mean by “customer service”.

As for the retail dinosaurs, they need to challenge the retail rents and the continual hike in government controlled charges in the same way they pursue supplier and labour costs. They also need to understand the value they offer that will ensure their customers won’t become their competitors. This will require substantial changes to their business models, probably something that is not possible for the managers that run these businesses.

May Your Business Be - As You Plan It.

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

The Big Retail Dinosaurs are Revolting
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Arthur said...

Great Blog Greg,

Judging by the general public reaction the Big Retailers have not received much sympathy.

The Big Retailers are not interested in loss of Australian jobs, but rather the loss of their Profits. People will always find new jobs and opportunities elsewhere if the need arises.

The Big Retailers need to spend less time whining and being lazy and work on their flagging business models, just like the rest of us! They have all the money and resources to do it!

After all, as Independent senator Nick Xenophon so rightfully pointed out,

“…the government should be doing tax breaks to smaller businesses, not large corporations. If anyone needs our support, it should be the family businesses and the small shops that are not only battling a growth in online sales but also battling these retail giants.”

Anonymous said...

As a consumer, my purchasing depends on three things: Service, Price and availability.

I have a number of hobbies that require specialist equipment.
For one of my hobbies where possible I buy from a local shop because they have an excellent range and provide an outstanding level of service that to me more than compensates for the extra cost compared to what is available online.

Another hobby uses parts made primarilly in the US. I support the local online retailer where I can as the service is excellent but range and supply can be limited. About half of my purchases for this hobby are made locally and about half direct to the US, mainly for availability reasons.

These are small specialist retailers who provide a personal service that is outstanding and I consider that this more than compensates me for the higher prices I pay locally. I would be very sad if either of these retailers closed up shop.

Once upon a time the major retailers provided an expertise in what they sold, but this has degraded over time as "customer service representitives" have become "salesmen" over the years. The last time I was in a major chain to buy an item, I knew a lot more about the features of what was available than the salesman.

The major retail chains do not provide anything remotely near the level of service we deserve, they have a somewhat limited range and availability is sometimes an issue. Price is only one of the elements that make up "value" but if the other elements are lacking, or do not exist it is the only element on which a judgement can be made.

If I do not find "Value" in a store I will go elsewhere.

Anonymous said...

I find it hard to believe that United States wages are as high as Australian wages. There is evidence elsewhere that our labour costs (which must include superannuation, leave benefits etc) make Australians more costly to employ than US retail workers. This is even before we get to our amazing red tape, which would be enough to make a US entrepreneur cry. Unfair dismissal laws, anyone? Our relatively small markets and geographical isolation must also be part of the lousy Australian retail (and productivity) parcel.

Dene said...

To wallpaper over their problems the big retailers have run discount sales to boost turnover. They have been sending the message that "we are a good place to go to if you are a bargain hunter"

The trouble with bargain hunters is that they have no problem going elsewhere if they can save $1 or even a few cents.

The trouble is that most large retailers senior management (like most large companies) have made it to their position by cost cutting, usually by cutting staff positions or by screwing their suppliers. That means neither staff nor suppliers are willing to provide anything but that absolute bare minimum to get their money.

It's a reinforcing circle where management, suppliers, staff are supplying as little as possible for the money and the customers are supplying as little money as they can get away with.

It won't be until management is replaced and staff and suppliers are rewarded for doing something extra that the value proposition from large retailers will improve.

Businesses should be chasing higher margins through the provision of intangible value rather than just turnover. I read that for example that Myer has a nett profit of about 2%. If so that is pathetic. Senior Management should be resigning, not rewarding themselves.


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