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Facing in to retail headwinds the best strategy

Despite news reports of a retail decline, research shows innovative consumer businesses can still thrive.

It seems every day there’s another news headline about change and challenges for the retailing sector. We often see stories on shoppers abandoning traditional retail channels. And yet, looking beyond those headlines you can build a case that Australian consumers are continuing to spend and retailers who face into industry changes can do well.

The changes facing retail are no surprise; a continuation of trends for shoppers to embrace online sales across a range of channels from apps to mobile sites and fulfilment methods such as click and collect. However, dire reports of Australian consumer spending going overseas via online sales are exaggerated. Research shows the majority of online spend by Australians goes to domestic retailers. Not only that, online purchases of less than $1000 made from overseas suppliers will be subject to the goods and services tax (GST) from next financial year, levelling the playing field for locals.

However competition is set to intensify as a growing number of overseas competitors open their doors down under.

Some, like Williams-Sonoma, Zara and H&M are already here. Others, most notably retail giant Amazon, are reported to start local operations and fulfilment soon. These companies are heading here for a reason.

Despite subdued wage and employment conditions, Australian consumers are still spending. At a time of low global growth and heightened competition, overseas retailers look at the Australian market and like what they see. These new entrants have deep pockets and ambitious growth plans. That means local businesses need to become increasingly innovative to compete in an evolving market.

We believe the best response to the headwind of increased competition is to face into it, by increasing your capacity for innovation. Innovation was the focus of our most recent Retail Insights Report which provides key insights to help businesses meet change and challenges head on. Our starting point is that the best investment your business can make today is in your own capacity to innovate, allowing you to evolve with a changing market. The report explains how to get started, based on the experiences of other Australian retailers who are already actively innovating.

It also measures the level of innovation of key industries via the new CommBank Innovation Index, and the retailing sector scores above the national average.

While the research shows many Australian retailers are already innovating, the scope of those innovations is often relatively limited, reducing businesses’ return on investment and limiting their capacity to respond to a market that is constantly changing. Retailers seem to be adding individual innovations, say in process or marketing, but to be truly innovative they need to innovate across a number of disciplines, including organisational structure and product.  This manifests in a culture of innovation which involves releasing the skills and ideas of everyone in the organisation, not just the top team.

The industry’s response to Amazon is a case in point. Our research showed 70 per cent of retailers were aware that Amazon is coming, 47 per cent of whom saw it as a threat. Yet even among businesses that are aware of Amazon’s plans and consider it a threat, only 14 per cent had a strategy in place, while another 51 per cent were still working on their response. Most were focused on outcompeting Amazon on its own ground by providing a superior customer experience (33 per cent) or offering better products (30 per cent). Few planned to respond with truly disruptive change.

At a high level, key research take-outs were:

  • Retailers could benefit from investing in the innovation capabilities of their people
  • Turn innovation into a repeatable process
  • Empower staff to constantly trial a small number of creative ideas (and to fail and learn from that).

The good news is there is still time, and many retailers already have many of the skills they need to drive genuine change. But it’s important to start acting now, before the competitive landscape is transformed even further. As well as our Retail Insights Report you may want to check out our practical guide to becoming more innovative, the 21 Day Change Challenge.

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1 year TSR5 year TSR
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497thTelstra-4%21%
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722 WA (and selected non WA) listed companies ranked by 1 year TSR relative to other companies with similar revenue
Source: Morningstar

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77 listed non wa companies ranked by revenue.
Source: Morningstar

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