25/09/2007 - 22:00

Price always wins them over

25/09/2007 - 22:00

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A friend bought a pair of shoes last week. There may seem nothing special about that, but these shoes were bought over the internet from a shop in London on Friday, and delivered to her home in Perth on Monday – and they cost half the price of the same product being sold here.

If the price and the speed of delivery haven’t got your attention, then you know nothing about the way retailing works, or how price dictates everything.

Loyalty, as someone once said, is an attribute confined to dogs.

Two days after Briefcase had its shoes experience it had a Rupert Murdoch experience, which provided another insight into the way the internet will dominate business in the years ahead.

Mr Murdoch let slip that he is thinking about dropping the fee paid for accessing the best writers on his new acquisition, The Wall Street Journal.

Free access to The Wall Street Journal is part of a grand plan being developed by Mr Murdoch to create a global business news service that will utilise all forms of media distribution – paper, television, radio and the internet.

If The Wall Street Journal is converted into a free service it effectively means a declaration of war with every other publisher currently trying to find a niche on the net.

In Australia, for example, The Australian Financial Review currently charges for accessing its news and archives – but that will change because of pressure from above (The Wall Street Journal), and pressure from below (from an as-yet secret, but very interesting business news services being developed in Melbourne and Sydney).

Briefcase sees a quite clear pattern here, even if his dog doesn’t, and it can be explained in a single word – price.

People love saving money, and if they can do that and get the same (or better) service by switching providers they will do it without hesitation.

The petrol vouchers offered by Coles and Woolworths have devastated small food retail businesses, even though any sensible analysis will show that the savings are illusory. The key is simply the offer of cutting four cents off a litre of fuel – no matter whether there’s an overall saving, or not.

What has prompted these thoughts on the power of the internet to change the way we buy things, or access services, is the fact that Perth’s biggest company, Wesfarmers, is about to plunge headlong into the retail world.

•••

The plan to buy Coles is being hailed by some observers as the great triumph in the 20-year upward run of Wesfarmers, from its roots as a rural trading co-operative to a national business star.

However, as Briefcase has remarked on previous occasions the jury is not yet fully convinced that Coles will turn out to be a win at all.

Time, that often forgotten factor in business decisions, is working against Wesfarmers on two levels.

First, there is the time it will take to revive the Coles supermarkets. This is a three-to-five year operation; and it will cost hundreds of millions of dollars.

Second is the realisation that, while Coles sets about chasing Woolworths (and Woolworths will not be standing still), the entire world of retail is changing – as illustrated by the shoes from London arriving three days after purchase.

Briefcase is not suggesting that the internet is about to make a second grab at the food retailing. That was always a nonsense, because shoppers do like to squeeze their own avocados.

But there are a host of non-food items that can be easily bought over the internet, and all without the legacy asset of a big barn of a supermarket forcing up costs.

What Briefcase is saying is that the internet has pushed us into a new area where delivery of goods and services is changing.

And we have no idea where it’s heading, though it’s a fair bet that in the future (as in the past) it will be the lowest cost, most efficient, supplier who wins the day.

This undoubtedly makes for an exciting time in retail, but is it really a good time to be buying a collection of run-down supermarkets?

•••

On the question of winners and losers, there is another company that was once a favourite of Briefcase but which has recently become a big worry.

Telstra, like other retailers of services, is being seriously challenged by the internet, and by the problems of trying to modernise in a fast-moving world – just like Coles.

Recent events that should have investors seriously considering their exposure to Telstra include (a) its loud, and unseemly, bickering with government, (b) the damaging exposure in a court case over how it played games with a bid to upgrade internet services, (c) its continued difficulty in providing a seamless email/internet service to customers (Briefcase knows just how true this is), and (d) the fact that it proposes to borrow money next year to maintain its dividend.

Poor service from Telstra is something most of us have learned to live with, largely because we succumb to the ‘devil we know’ approach to business decisions.

Borrowing money to pay a dividend, at a time when the fundamentals of your business are being challenged, and when you’re engaged in wars of words with government, is a totally different matter.

Like Coles (and Wesfarmers), it might be wise to shift Telstra to the investment sin bin until a clearer picture emerges.

•••

While consigning three of Australia’s best-known business names to a new, and lower investment grading, it might also be time to consider another favourite of Briefcase – private equity.

Not on the grounds that it’s a business built on weak, debt-laden, foundations (we all know that), but in terms of what happens to the unfortunate business sold into private equity structures over the past couple of years.

As far as Briefcase can tell, private equity deals have dried up because of the cost, and lack of availability, of debt.

But what does this mean for businesses now owned by private equity consortiums?

Surely the answer is that the owners (the private investors) will be clamouring for a faster-than-promised return, even if it means screwing down the asset even harder to accelerate the exit strategy.

Briefcase might be wrong with this assumption but it reckons if you’re working for a business owned by private equity investors (who carry their own debt load), then now might be a good time to look for a job somewhere else. Rest assured, life is probably going to become quite unpleasant as the owners demand a fast return on their money.

•••

 “Most people are about as happy as they make up their minds to be.” Abraham Lincoln

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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