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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Young clicks v old bricks

Published 27 September 2012 04:45, Updated 01 October 2012 05:03

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Young clicks v old bricks

Vocal ... While building his $145 million personal fortune, Ruslan Kogan has earned a reputation for slamming old-style competitors for being out of date, unresponsive to the needs of customers and arrogant in the face of competition. Photo: Luis Ascui

In July, when Ruslan Kogan’s flagship business, Kogan Technologies, recorded daily sales of more than $1 million for the first time, he celebrated in true generation Y style – by using social media to take a swipe at his competitors.

“They [traditional retailers] can no longer say, ‘These guys are insignificant’ when we’re doing a million dollars a day in sales,” Kogan recounts. “If the current trends continue, we will be bigger than Harvey Norman in four years.”

Online retailers and bricks and mortar retailers are at war. The continual growth of new-age retailers such as Kogan has meant the old guard, often represented in the media by BRW Rich 200 stalwart Gerry Harvey, are facing a substantial threat to their long-established business models.

While traditional retailers hold prominent positions on the Rich 200, online retailers are flooding the BRW Young Rich. Whether there is enough room for both groups to prosper in the long run is open to question.

For his part, Kogan says taking on the bricks and mortar giants, such as Harvey’s Harvey Norman chain, has been a rite of passage. While building his $145 million personal fortune, he has earned a reputation for slamming old-style competitors for being out of date, unresponsive to the needs of customers and arrogant in the face of competition.

Back in 2010 (before he gave up criticising Kogan for fear of helping to build his profile) Harvey was openly critical of Kogan and his products.

“When he says he’s cheaper, if he is, it’s very marginal and sometimes he’s dearer – but it’s all unbranded shit, it’s not the quality product,” Harvey said then.

Entrepreneurs will always be a product of their environment and Kogan recognises the role good timing has played in his success. If he had started 20 years ago, he estimates that he would have needed an investment of $5 billion to establish bricks and mortar stores throughout the country to get the same kind of market penetration that his business has achieved.

He also doubts his ability to manage a traditional retail operation.

Kogan, in his own way, is happy to pay his respects to traditional retailers. He says that without the likes of Harvey and Premier Investments’ Solomon Lew, the $248 billion Australian retail sector would look substantially different.

“People like Gerry Harvey and Solomon Lew have achieved amazing things,” he says. “They helped to shape retail.”

Like Kogan, fellow Young Rich member and coffee entrepreneur Phillip Di Bella acknowledges that the top traditional retailers are “very talented business people”. He does, however, question their reasoning for entering the online retail space. Di Bella Coffee is a manufacturer and retailer of coffee and has recently started its own online store.

“What I think you need to ask though is: are they going online because they want to or because they have to?” Di Bella says. “The results will tell. If they believe it and they want to, then the consumer can see it. You can tell.”

The new breed of retailers undoubtedly has been quicker to adapt to the new retail environment. They have broken with the traditional retail mould to in effect become both the manufacturer and the retailer. By cutting out the middleman, they have changed the supplier arrangement and reduced retail prices.

In recent times, online retail has been a standout performer in an otherwise stagnant retail market. The boom in online commerce, advancements in tablet and smartphone technology, increased internet speeds and a new breed of smarter, faster-acting young retailers has also spurred the trend.

Online sales are growing about 15 times faster than other retail sales.

In the year to June 30, 2012, consumers spent about $10 billion in online stores (not including auction sites such as eBay), according to IBISWorld. That figure increases to an estimated $30 billion when personal selling platforms such as eBay and Gumtree are included. IBISWorld forecasts online sales growth of 8.6 per cent a year over the next five years as consumers adapt to new shopping styles.

But importantly, online retail remains a relatively small part of the overall sector. The NAB Online Retail Sales Index suggests that online shopping accounted for about 5 per cent of the industry’s $220 billion sales 2011-12.

In the past two years, traditional retailers have been forced to join the burgeoning online retail space. In 2010, retail chains Myer, David Jones and Big W launched online stores and in 2011, Harvey Norman followed suit.

However, retail analysts suggest the move has come years too late. Gerry Harvey, who is chairman of Harvey Norman, has described 2011-12 as one of the retailer’s toughest years yet in its 50-year history. The company reported a 32 per cent profit fall but predicts a return to growth later this year.

Jupi Corp founder and fashion entrepreneur Bruno Schiavi says traditional retailers are hampered by bureaucracy and the size of their businesses. Schiavi, who has hundreds of retail contracts in the United States, Europe, Asia and the Middle East, believes operating like a small private business is the key.

“I get puzzled by Australian retailers,” Schiavi says. “They don’t have a big online presence, whereas it is very much what is happening in all other countries. They [Australian retailers] have only really implemented online in the past 12 months . . . and not in a big way. Management continually needs to report to the board and nobody wants to take risks.”

While online and bricks-and-mortar retailers compete for the same consumer dollar, they have vastly different operating models.

The traditional ones hold a large proportion of their wealth in property and sales are determined, in part, by foot traffic.

Many online retailers, however, have minimal property investments and choose to invest in websites, technology and logistics. While traditional retailers operate face-to-face businesses, online retailers operate from behind a computer screen.

“As I walk through some stores, it makes me cringe to hear what some salespeople are saying,” Kogan says. “You can’t ensure good customer service – I don’t like that about bricks-and-mortar retail. With online, every conversation is tracked and recorded. Everyone is accountable.”

Having large stores in prime locations is a “huge competitive advantage”, according to Kogan, and traditional retailers should use that advantage to continue expanding.

Young retailers also claim to be more accessible to both their customers, employees and suppliers than traditional retailers, like Lew, who are regarded as “untouchable” in retail and business circles.

Di Bella says the main difference between traditional retailers and new, young online retailers is their communication skills.

“As young business people we try to talk to our customers all the time,” he says. “This is the main tip. Talk to your customer. I have always run my business from the outside in. We are a customer-focused company and we are constantly asking people what they want.”

Schiavi says the new breeds of retailers are also more aware of the need to promote themselves as a brand. “It’s not good enough just to have a great product – you need to be able to market the product properly,” he says. “ I have four full-time publicists in different countries. I have a full-time social media strategist.”

“I am also a control freak . . . anybody can contact me on my cellphone . . . from a journalist to the CEO of Harrod’s,”
Schiavi says.

While the business models and culture may differ, both traditional and new retailers agree on one thing: bricks and mortar will survive – at least in some form.

“People don’t spend their whole lives at home staring at their computer screens,” Kogan says. “They still want to go out to shop.

“My advice to Gerry Harvey would be to stop worrying about online. They need to concentrate on their competitive advantage.”

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