12/01/2017 - 10:38

Customers control the retail relationship

12/01/2017 - 10:38

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ANALYSIS: The popularity of online shopping in the US has reached a tipping point, breaking bricks and mortar retailers’ hold on the market.

Richard Goyder is wary of the threat from the internet-only retailers. Photos: Attila Csaszar

ANALYSIS: The popularity of online shopping in the US has reached a tipping point, breaking bricks and mortar retailers’ hold on the market.

There is a revolution happening in American retailing, and like so many events that start there it should not be long before Australia feels the effects – for better and for worse.

Internet shopping, which has been slowly heating up for the best part of 20 years, hit boiling point in the US during the annual Christmas and New Year binge.

Consumers loved it, for the obvious reasons that include having the equivalent of a shopping centre on their home computer, tablet or smartphone, with delivery of some items being achieved in a matter of hours.

Traditional retailers were hammered, with some of the biggest announcing spectacular New Year downsizing programs in what appears to have been an event that changed retailing forever.

If that sounds dramatic, consider the response of Macy’s, the biggest department store chain in the US, which earlier this month revealed plans to dismiss 10,000 workers and close 100 stores.

Sears, another big department-store chain in the US, is closing 150 outlets, including 108 Kmart stores, as well as selling business units that make home appliances.

What happened to the big department stores is easy to explain – the internet did it – with the only complicating factor being the question of why now, and why not last year?

The answer to the timing question is a combination of: growing consumer comfort with the internet versus the discomfort of crowded shops over Christmas; a smorgasbord of choice on the internet versus shops not carrying as much stock as they did before the internet era; and confidence in the delivery and returns process.

In financial jargon, Christmas shopping in 2016 was the time retailing reached its long-predicted but slow-to-arrive inflection point – or change of direction from the old to the new.

The winner in the US department store train wreck is the company that has already carved out a foothold in Australia, Amazon, which started selling books and music (and now sells everything).

Some of Amazon’s astonishing Christmas sales numbers have already been released, including the delivery of 1 billion items and the capture of more than 30 per cent of total online sales in the US.

The stock market is the best measure of the trend. During the past 12 months, Amazon’s share price has risen by 65 per cent. Macy’s is down 20 per cent and Sears is down 50 per cent.

Australian retailing suffered a lesser Amazon effect over Christmas, but it is crystal clear that a period of spectacular change has finally started in retailing and that the knock-on effects will be significant, including:

• Australian department stores facing the same existential threat to their survival as Macy’s and Sears;
• shopping centres facing a similar threat, with the biggest and best surviving while second-tier centres struggle;
• a rush by all traditional retailers to beef up their internet offering, and
• stock exchange-listed retail companies coming under increased investor scrutiny, with Myer, Harvey Norman, Woolworths and Wesfarmers top of the worry list.

So far, the biggest victims of the shift to internet retailing have been traditional department stores which are burdened by their heavy investment in property, often in prime locations.

What was once a department store’s best asset, a shop in central Perth, Melbourne or Sydney, has morphed into a dead weight on a retailer’s balance sheet.

The response of department store management to the internet challenge has been almost as damaging as the initial assault of Amazon and other internet-only retailers not burdened by the high cost of buildings and an army of retail staff.

The department stores’ reaction to falling sales was to cut costs, carry less stock and employ fewer staff.

The net result is that department store shopping became a hopeless exercise. Either you could spend hours walking the aisles looking for something that either wasn’t there or wasn’t in the right size, or waste even more time trying to find a shop assistant.

Everyone has a personal experience to share in comparing internet and traditional shopping, but all of those experiences are boiled down to three words – choice, convenience and cost.

Choice is the first hurdle for traditional retailers. They are limited by shelf space and store locations. Amazon and other internet retailers have an almost infinite offering via electronic catalogues.

Convenience is the second hurdle that burdens traditional shops, forcing the customer to visit the shop rather than shopping from home via the internet.

Cost is the killer. Internet retailers can simply do it cheaper because they essentially operate a big warehouse (or series of fulfilment centres) that dispatch orders quickly and, in the case of Amazon Prime, guarantee delivery in some US cities in a matter of hours.

Walter Loeb, a US retail industry observer and contributor to Forbes magazine, summed up the changes under way in a report written in August, before the Christmas retail revolution.

“I believe that retailing is undergoing a revolutionary change,” Mr Loeb wrote. “Merchants are no longer the driving force for retailing. This is a major change that will be hard to swallow.

“In the past, merchants interacted with customers. They talked to them as a market. Now, these same customers are demanding products and services that match specific needs.

“In other words, the customer is now in charge”.

Last week, Mr Loeb continued his analysis of the American retail scene with a look at the Christmas sales figures, which showed Macy’s sales down 2.1 per cent on a comparable store basis. Amazon sales boomed, with clothing sales up 32 per cent, furniture up 46 per cent, toys up 24 per cent, and beauty products up 31 per cent.

“These are impressive figures that show consumers believe the values offered at Amazon and contrasts with the lack of credibility at department stores,” Mr Loeb said.

One criticism of the US experience that can already be applied to Australia involves credibility, for example when a shop announces a one-day sale and then runs the sale for three days.

“Events must be truthful and believable,” Mr Loeb wrote. “Christmas shoppers obviously shifted to a trusted low-price retailer.”

Those are powerful comments about traditional retailers not appreciating the damage they do to their reputations by over-promising and under-delivering, and also by not understanding that they will always struggle to beat an internet-only retailer on price.

The challenge now for Australian retailers is to calculate when the US Christmas experience arrives here, with a two-year window the customary gap between overseas trends and the local experience.

Investors, so far, seem unconcerned by what’s happened to Macy’s, Sears, Kohl’s and other one-time US retail leaders.

While the American retailers’ share prices have crumbled under the Amazon assault, the opposite has been happening here.

Over the past year share price moves include:

• Myer, up by 25 per cent;
• Harvey Norman up 20 per cent;
• Woolworths, which has the Big W department store chain as well as its better known food and liquor outlets, up 5 per cent (a modest recovery that reflects its failed hardware business); and
• Wesfarmers, which has the Target and Kmart department stores plus Coles, Officeworks and Bunnings brands) up 8 per cent.

While it is unwise to draw a direct link between a business event in the US and Australian conditions (with Woolworths’ experience with US-style hardware a case study), it would equally be unwise to ignore a trend that is easily transferable, with variations to account for population size and density.

The critical lesson of the Amazon effect in US Christmas retailing is that the internet revolution has come of age in that country, and what’s been learned there will be applied here –if not by Amazon then by other internet-only retailers.

Wesfarmers chief executive Richard Goyder is acutely aware of the challenge from the internet-only retailers, famously saying last year that Amazon was planning to “eat all our breakfasts, lunches and dinners” unless Australian retailers became more innovative and competitive.

US retail executive Steve Odland told The Australian Financial Review newspaper that retailers with traditional shop fronts were a ‘slow-moving train wreck’.

Second-tier shopping centres will become white elephants, he said, which would cut the value of commercial real estate.

“This has been an enormous sea-change and it has been driven almost entirely by Amazon,” Mr Odland said.

Traditional retailers, he added, have not understood that people do not want to drive to a shopping centre, walk around for a few hours only to discover that a shop doesn’t have your size because it has cut back on inventory.

The retail revolution, while slow to arrive, is on Australia’s doorstep.

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