Jane Lindhe Reporter

Jane is a retail and small business writer with a special interest in emerging companies and entrepreneurs. She covered the financial services industry before moving into general business journalism and has written for The Age and The Australian Financial Review.

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Nightmare before Christmas

Published 25 November 2010 05:01, Updated 01 December 2010 09:26

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“Browse it at Westfield, buy it brand new on eBay” is the latest billboard campaign reaching out to thousands of Sydney drivers as they make their daily commute into the office.

But to the $292 billion retail sector, the billboard is a bully’s taunt and a reminder of how much the marketplace is changing.

Traditional retailers are bracing for one of their most difficult Christmases in history as higher interest rates, the growth of online shopping and the rising Australian dollar squeezes their bottom lines.

Retail commentator and Deakin University senior research fellow Steve Ogden-Barnes suggests the tough conditions will be just the tip of the iceberg when it comes to the challenges facing retailers. The sector is experiencing a complete paradigm shift as consumers continue to change the way they buy.

“This isn’t a trend, it’s a fundamental paradigm shift for the industry,” he says. “Retailers better be ready, or the risk is they will be left behind.”

Australian Bureau of Statistics figures show retail sales are stagnant, rising 0.3 per cent to $20.5 billion in September. While sales for the year are up 3.4 per cent, analysts warn that a growing number of online sales, combined with the heavy discounting practices of many retailers over Christmas, will undo any of the gains the industry has experienced in the past year.

The biggest threat that physical retailers face is how to fight off the threat of e-tailers such as eBay. The world’s biggest online marketplace is gearing up for frenzied sales over the Christmas period – particularly as a result of the strong Aussie dollar.

Its punchy advertising campaign captures exactly how consumers are using the high street for the shopping experience and to figure out what they want but then are coming home and scouring the internet for a cheaper version of what they touched a few hours before.

“When we look back at this, we will recognise this period as a time of substantial change,” Ogden-Barnes says. “There has been a shift in consumer thinking. Ten years ago you wouldn’t bother checking the exchange rate before deciding which country to buy goods from. Now you can shop around and have purchases shipped in a matter of days. Exchange rates are now in the consumer psyche.”

In addition to the growth of online purchasing and the strong dollar, retailers are also being squeezed by rising interest rates and what they see as unfair competition from overseas e-tailers that aren’t subject to the same tax regime.

Australian Retailers Association executive director Russell Zimmerman says retailers are begging the Reserve Bank of Australia to not raise interest rates in the December quarter. “Retailers really didn’t need the latest interest rate rise and we’re pleading with the RBA to keep rates on hold in December when most Australians would be doing their Christmas shopping,” he says.

Zimmerman warns that small rises in retail sales segments, such as fashion, are being misinterpreted as growth.

“September’s trade boost of 2.5 per cent for fashion retailers shouldn’t be misinterpreted as cause for celebration – this is only monthly growth from a very low base in August. Compared with the same time last year, fashion retail trade growth is only marginally above inflation at 3.9 per cent,” he says.

As Christmas looms, retailers are pressuring the federal government to impose GST on international retailers that ship products to Australia. The ARA claims the government is missing out on up to $600 million in revenue by allowing goods under $1000 to be imported to Australia GST free.

ARA’s Zimmerman claims the GST-free threshold for international retailers creates an uneven playing field. Australians will spend an estimated $12 billion shopping online, with about half of it spent offshore, the ARA says.

“It’s never been easier or more cost-effective for consumers to purchase goods from overseas,” Zimmerman says.

“We currently have a situation where there is no GST or import tax ... the Aussie dollar is almost matching the US dollar and many overseas online shopping sites offer free delivery and easy return options.”

In addition to petitioning for change, expect retailers to fight these new challenges as they always have – by lowering prices.

Discounting is rife on the high street but competing on price alone is no long-term solution.

At the beginning of this financial year, department store chain Myer was forced to make an about-turn on its stated desire to end its practice of aggressively discounting.

Myer chief executive Bernie Brookes says Myer was unable to keep prices up in the first quarter as its competitors across nearly a dozen product lines kept their foot on the discount pedal.

Brookes blamed poor weather conditions, the rise in interest rates and heavy competition in the retail sector for the chain’s return to discounting.

‘‘We achieved it in the first two months but then in October as business got pretty difficult we were aggressively spending on mark downs, so the answer is we are going to continue to aggressively chase the consumer,’’ he says.

Ogden-Barnes says while the industry’s response to the rise in international online spending – by discounting or demanding changes in tax law – is understandable, it is not a viable long-term solution. “This kind of thinking will not turn the tide . . . it misses the point,” he says.

“The issue is much bigger than that. Even if an additional 10 per cent is charged, I don’t think it will stop people from shopping online.”

The real issue he thinks is that retailers need to address the shift in the way that consumers now shop. They need to stop thinking about simply the transaction, or how to sell to consumers, and start thinking about the relationship. “It’s about loyalty and engagement,” he says.

What physical retailers have going for them is the experience of shopping – something that
e-tailers just can’t offer. They need to capitalise on this with well-thought out experiential shop fronts, backed up by a good online service.

Shops that could do this could free up capital tied up in large property assets by having smaller shop fronts. This capital could be diverted to developing better, faster supply chains and investing in understanding customer buying patterns. Both these would help retailers to reduce the long tail inventories that retailers now have to have to meet customer demand.

Competing on price or product range alone is a mistake in an industry that moves as fast as the seasons that dictate its styles.

Local retailers should prepare for the entry of fashion chain Zara into the market next year, which will put pressure on mid-level fashion chains such as Country Road, Witchery and Sportsgirl. Swedish retailer H&M also recently told an investor briefing that Australia was in its sights as part of its wider global expansion plans.

Developing faster supply chains has been a priority for European retailers over the past three years.

European retailers such as Zara and Top Shop can turnaround new styles in just 24 days, as opposed to the six weeks-plus usually taken to design and stock new products.

Sarah Paykel, a retail executive who has worked at Esprit, Mambo and optical chain OPSM, is the founder of boutique fashion retailer pink zebra. Her model is a hybrid, with five stores in Sydney and Melbourne and an online store.

The boutiques are designed to deliver a shopping experience, with each store designed to feel like “the home of a stylish girlfriend”. Shop assistants provide personalised styling sessions and encourage customers to feel and try on garments.

“Customers are time-poor and they want to have the full retail experience without feeling like they have to do all the work. Online doesn’t provide that,” says Paykel.

Next year she will take customers on shopping trips to Los Angeles and New York in a bid to increase engagement. Customers will be shown the best shopping spots, receive advice from stylists and be introduced to the founders of US fashion labels.

“It’s not just about having the stores or the right layout . . . it’s about having products that are different and service that is outstanding,” she says. “It’s about having an online store and reaching out to your customers and giving them what they really want.”

While pink zebra will meet sales targets this year, Paykel believes many retailers won’t.

“They haven’t had the amazing recovery some thought they would after the GFC,” she says. “Things have changed.”

Ogden-Barnes agrees: “This summer, retailers will do a lot of above-line advertsing and discounting before and after Christmas. They will appear to do reasonably well but the question needs to be asked: How does the result compare to five years ago? You can’t live Christmas to Christmas.”

Retailer gives time-wasters the boot

When sipping schnapps at the lodge after a day carving up the mountain, the last thing a skier or snowboarder wants is blisters caused by poorly fitting boots. Customers at snow sports retailer Inski were well aware of this but were using the Sydney store as a fitting room then buying them from cheaper online retailers instead.

“We seemed to have a lot of people that came in and wanted to have the boots fitted and then they wouldn’t purchase,” store manager Manuela Ford says. “We started to ask the people, ‘are your intentions to buy a boot?’ And very often the answer was, ‘no we just want to try them on’.”

It was 2008 and sales of boots at Inski had dropped 20 to 30 per cent over five years, Ford says. It was time to respond.

Inski started a boot-fitting voucher system under which customers had to buy a $50 voucher before a fitting which would come off the purchase price of a pair of boots. Since the system’s introduction, although boot purchases haven’t jumped, time-consuming fittings have dropped.

“Boot fitting is quite a qualified job,” Ford says. “The people that we have are trained and go to courses and have a lot of experience. If you do a proper boot fit, it takes the best part of an hour.

“I’ve only got three or four people that can do that job. Those employees are very valuable to us. If we fit everybody that comes in, I have to turn away potential buyers to fit people that have no intention whatsoever to buy a boot from us.”

Ford and husband, Inski founder, Paul, came up with the idea when having their house renovated. The architect asked for an upfront fee, which was deducted from the final fee when the Fords committed to further work.

“Because we were seriously looking at getting the house done, we didn’t mind,” Ford says. “If [the customer] has the intention of buying the boot it’s not a drawback because they get it refunded in full on the purchase of the boot.

“[Customers] get the undivided attention and we feel like we’re providing the service to our customer, not to some person that wants to shop on the internet.”

The boot-fitting voucher is a simple defence for physical retailers fighting against cheaper online stores. Ford believes eBay’s new advertising campaign will hurt bespoke retailers more than the bigger chains. “If people do [as the campaign suggests] then those stores will disappear one by one.”

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