kate mills Reporter

Kate monitors the social and economic dynamics that drive business. She has been a financial and business journalist for 17 years in Australia and the United Kingdom, working on publications including CFO, ALB (Australian and Asian editions), Investor Weekly and Legal Business in the UK.

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The price is wrong

Published 21 March 2012 12:59, Updated 22 March 2012 06:59

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Department stores Myer and David Jones have never looked in worse shape. Last week, Myer chief executive Bernie Brooks told investors the bad news – its half-year profit was down 20 per cent to $87.3 million, leading to expectations its full-year profit will be down 14 per cent to $140 million. At press time, David Jones’ half-year results, due to be released on Wednesday, hadn’t come through but the fall in profit was expected to be about 30 per cent.

Consumers have known for years that traditional retail has been struggling because sales used to be a once-a-year event but when they became everyday it was obvious that something wasn’t working. In any case, the strategy has failed and competing on price has proved dangerous.

It’s easy for bricks and mortar retailers to see their online competitors as the problem but really it’s because they have failed to keep up with a consumer whose behaviour has fundamentally changed in three aspects.

The first point is that consumers are now more informed. The internet is not just a rival shopfront, as many traditional retailers assumed, it’s a tool that enables consumers to access global pricing transparency. This puts pressure on margins and requires a change to the business model. The mistake has been to see the internet as a rival and to compete on price rather than consider new business models.

Second, consumers that are better informed on price demand more value. The problem for traditional retailers is that they have been slow to understand the difference between cost and value. They see that consumers have stopped spending and drop prices, whereas giving value is about adding more to the mix by investing in the back end of the business (supply chain and inventory) as well as the front end (better service).

Third, retailers have failed to meet the challenge of time-poor consumers. It’s true that online retail can happen around the clock but consumers don’t want endless shopping, what they require is for retailers to know them better. Customer analytics is key to this and here online retailers have taken the lead in tracking buying patterns. Traditional retailers, which have had years to collate this kind of data, are scrambling to catch up.

Online retail is about 6 per cent of the overall retail market but it is only going to grow. However, as it’s still a relatively small part of the overall market, established stores with their many advantages such as deep relationships with suppliers and strong brands have everything to gain from getting their strategy right.

Online is key – consumers want a seamless experience of the retailer via a multitude of platforms. However, the real opportunity for retailers is to shift what they sell away from the pure product, which will nearly always be a price game, to a service where pure online stores can’t compete. Here there are already success stories, with the pharmacy chain Priceline – now the biggest seller of Revlon products in Australia – moving away from being a seller of pharmaceutical products to being a provider of health and beauty services. For clothes stores, it’s a question of asking if they want to sell items or provide fashion services with the advice and personal touch with which no online retailer can compete. If retailers can shift from product to service, their margins may again start to grow.

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