Clock is ticking for traditional retail’s remaking: Bartholomeusz

The odd thing about Dun & Bradstreet’s latest survey of business expectations is how long it has taken retailers to recognise the severity of the threat posed by internet retailers.

A clear majority (56%) of retailers now expect online retail to impact mainstream retail businesses, yet it was only six months or so that the big retailers were still arguing about the GST-free status of online purchases below $1,000 rather than accepting the reality that the structure of retailing is changing and that the change is accelerating.

While the penetration of online retailing is still relatively low – last month’s Productivity Commission report on the retail industry estimated it is only about 6% – it should have been obvious to the big retailers that once it developed some momentum and credibility with consumers, e-tailing would grow very rapidly.

The PC report cited estimates of growth of 10 to 15% a year in sales through the online channel over the next three years, but it wouldn’t be surprising if the growth rate were even greater as e-tailers develop more established brands and the trust that is associated with known brands.

The traditional retailers had only to look at what’s happened in other consumer markets – music, books and media, for instance – to get a sense of what was coming.

Myer’s Bernie Brookes, at least, having reluctantly recognised the inevitable, is not only building Myer’s online presence but is now factoring the growth in e-tailing into the management of his portfolio of physical stores. Just Group’s Mark McInnes is another who is re-thinking his physical retailing strategy to take into account continued growth in e-tailing.

The mood of consumer conservatism that has emerged since the financial crisis developed in 2008 has not only denied retailers growth and cost them margin but it also appears to have fuelled the acceleration in online purchases.

Consumers become more value conscious during recessions or uncertain times, although until the Christmas period, the real problem for Australian retailers wasn’t really that consumer activity had fallen dramatically but rather that the cost of getting them to spend was being paid for in the form of reduced margins.

That value-driven psychology isn’t likely to disappear any time soon. Research by McKinsey into retailing in the past has suggested that it can take up to five years after the end of a recession for retailers to return to pre-recession growth rates.

Given that the global economic outlook in 2012 remains threatening and that any growth in retail that might be generated now has to be shared with the new online players, that’s not an encouraging outlook for traditional retailers.

John Hempton may or may not be right when he argues that retailers like JB Hi-Fi and Harvey Norman will be irrelevant within a decade.

It would appear obvious, however, that unless the chain retailers start re-thinking and re-making their business models with some urgency, they could be undermined quite quickly.

The speed at which the internet demolishes old business models has been consistently under-estimated by helpless and hapless incumbents focused on trying to protect legacy assets and income and unprepared to cannibalise themselves.

This year is the one where the big retailers have to get serious about multi-channelling and have to begin re-shaping their physical store strategies and economics for a future in which online activity – whether actual purchases or consumer research – diminishes further the pricing power once associated with established retail brands.

While their brands still have potency and greater credibility that those of new e-tailers or offshore retailers, and the traditional retailers have relationships with customers (and lots of information about them and their purchasing habits), there is still a window of opportunity to leverage them into strong online businesses that complement their physical presences.

As argued in Business Spectator previously, the structural changes bricks-and-mortar retailers will have to make to make to survive will inevitably involve similar pain for their landlords, which have become accustomed and addicted to ever-increasing rents and ever-expanding inventories of retail space.

The retailers might complain about the GST-free status of some online purchases but a major element of the cost disadvantage they face against pure online competitors is the high cost of the space their stores occupy. That’s going to come under ever-increasing pressure.

The growth strategy for most retailers used to be simple: just open more stores. Simply expanding an uncompetitive business model, however, doesn’t look like a winning strategy in 2012, given the knowledge of the way in which retailing is already evolving here and overseas.

This article first appeared on Business Spectator.