Red Zebra Business Centre - Management Memos
August 2010 Making Measurably More For Your Business Since 1985!

MaxProfile
It's called the 'Wheel of Retailing' for a Reason!

Max Williams, Principal Consultant

When the 'dotcom' boom wound up in the late 1990s, it looked as if the face of retailing was going to change forever. The stock market went mad, the bubble blew up and then burst, and 'dotcom' seemed to fade into the background of our conscious thinking.

You might say that the dotcom bubble was an outbreak of silliness on a massive, and global scale. Now that's past.

The reality of e-commerce is taking hold on a much more solid footing. Gradually, retail buyers are turning to the web, and e-commerce enabled websites, and buying quite ordinary things.

In our own office, all kinds of office supplies, including printer inks and cartridges, are routinely bought on-line, and delivered by courier. Just 18 months ago, we would have walked across the street to Officeworks to buy what we needed, and Officeworks itself had already been a fundamental change in the market.

At the time Officeworks was established by the then Coles-Myer Group, the Company compoletely re-engineered the supply chain. The effect was dramatic!

Officeworks could sell some items at its target margin and still have a selling price below the esatablished buying price for its supermarket siblings.

That was a massive change in that market, which itself is now being overtaken by on-line sales with courier delivery.

Today we hear individual retailers continuing to express real concerns about the ways in which on-line sales threaten established price points. It's just the same as others found their business threatened by the introduction of Officeworks fifteen years ago. This is the modern day incarnation of the time honoured 'Wheel of Retailing'.

The classic expression of the 'Wheel of Retailing' is for a small retailer to offer a high degree of service, get larger, increase purchasing power, reduce prices, and so trade on high volumes with low margins and with reduced services. Once this pattern has been established, the way is open for other new retailers to start small and offer a high service value - then grow their business until they get bigger, reduce the service offering, and allow the next generation to get a start.

This is a wheel that keeps going round and round. Endlessly.

The only difference here is that the new retailer on the block is not in a bricks-and-mortar store. It's an electronic channel into everybody's home and office. My own father's lifetime was spent as a 'motion picture exhibitor', and his business and his career was bult on people 'going to the pictures'. All that came crashing down with the introduction of television. It was unstoppable, and 'movies at home' has continued to go from strength to strength. On the other hand, cinemas eventually adapted to the change, and cinemas, television, video streaming and home theatres now all co-exist together.

There is little point looking to ways of stopping internet sales. King Canute couldn't hold back the tide, and 'on-line retailing' or 'e-tailing' will not be held back either.

The race is on to find the right accommodation to this new aspect of retail selling.




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Transaction Cost

CONTROLLING TRANSACTION COSTS THE KEY TO RETAILING FUTURE



W

ith the increase in on-line retailing, many small retailers worry about the impact of 'price-only' web sales on both volume and margin. There are small protections to be found in warranty and support issues, but what is the long term future for small retailers?





"If you fail to plan, you plan to fail."

If only it were that simple!

It's a common saying: "If you fail to plan, you plan to fail", and meant to convince business people to plan the futures of their businesses.

In many respects, its a silly statement. It presumes that people know how to plan, and will plan effectively. Unfortunately, what is nothing more than a 'good idea' can pass for a plan, when really it is no plan at all.

Proper planning for any business requires gathering a lot of information, and making good judgements about what that information tells us. There are hundreds and hundreds of examples of monumental blunders made by businesses in response to just some of the available information, but not considering all the information.

It is particularly hard for owners of small and medium businesses, with the pressure of day to day demands of customers and staff taking up way more time than is readily available, to get the necessary time to plan. Most small and medium businesses (SME's) simply run without adequate planning,and often without any planning. Almost always, without any strategic planning!

This is the first of two articles to address this issue, with the conclusion in September 'Management Memos'..


Small Retailers Most 'At Risk' from Internet Trading

With the greatest concentration of small and medium businesses in the retail sector, it is this sector which is most at risk by not taking a serious approach to forward planning. Nowhere is this seen more clearly than in the approach of small and medium retailers to the issue of e-commerce, internet trading, and selling over the web.

Simply raising this topic in discussion leads to a fairly predictable response. The response is usually a mixture of amazement, anger, and frustration at the low prices being touted on the web, a sense of frustration that the allegedly high service delivery of the traditional retailer is not properly valued.

There is also a fair measure of uncertainty as to how one should respond to this recent addition to the retailing landscape. In trade groups and conferences, there is often a sector on "How to Respond to the Threat of the Internet".


'Big Boxes' Big Threat to Small Retailers

When it comes to small retailers in particular, it is not only the internet which appears to present a serious threat to future profitability. So called 'big box' retailers, otherwise known as mass merchants, are usually treated in a similar way. Too big to buck, but with massive merchandising clout, and a value equation which, in the eyes of the small retailer, is flawed, these retailers attract high volumes of trade, and thousands of customers.

Presumably these customers are satisfied, because their size just keeps growing and customers keep returning for repeat purchases.


Most Responses Entirely Defensive

There are a number of ready-made responses to these competitive threats, and just about all of these responses are defensive moves which are generally attempts to stave off the inevitable.

One such response is "Look at the expert advice and help we provide, I bet they don't get that over there!"

In a market research exercise we undertook for an agricultural supplier, we found that farmers greatly valued the agronomy advice that went along with the sale of certain chemicals. However, while the advice was 'greatly valued', farmers put no dollar value on that advice. Almost universally, buyers selected the lowest priced supplier. The unpalatable fact is that expert advice is always deeply appreciated and warmly welcomed -  provided it comes free!

Defensive Responses Misguided

Similarly, when a sale has been lost and the customer has bought the product from the internet, a traditional retailer will generally respond by asking "What are they going to do when they want warranty support?"

Having recourse to warranty support in this way both misunderstands the purpose of warranty, and overestimates its value.

On the one hand, offering a warranty is intended to reduce any small residual perceived buying risk, in case things go wrong. Emphasising the warranty component of the retail offer is emphasising that things will probably go wrong - and buyers will probably need help. That's a complete reversal of the underlying purpose and role of a product warranty, and focuses on the risk rather than the benefit.

On the other hand, modern manufacturing techniques and very sophisticated quality assurance programs, mean that the incidence of calling on warranty is quite limited. Buyers just don't expect to call on the warranty provisions - so these provisions have a correspondingly limited value. Today, statutory warranties can be relied on with the force of law, and that confidence in consumer law further diminishes the value of a supplier's warranty offer.

In any case there are scores of stories where even quite reputable, large scale, companies have messed people around. These warranty horror stories substantially reduce customer expectation of every supplier's response on the rare occasions that warranty support is required.

In other words, while customers are voting with their pocket book, we need to formulate more creative and proactive responses to the constantly changing competitive landscape. It can be quite hard to do that, and sometimes it is necessary to go back to grass roots.

'Grass Roots' Thinking Provides Strategic Clue

Very deep amongst those grass roots, is the concept of 'transaction time'. Since time is money, when we look at the 'transaction time', we also need to focus on the 'transaction cost'.

The term 'Transaction Cost' may sound a bit theoretical, but you can calculate it very easily. Simply look at the total monthly expenses, divide that number by the number of individual transactions in the month, and there is the 'transaction cost' for the period.

If you look at the 'big box' retailers, while the monthly expenses are high, the large number of transactions (because of their high business volumes) means that individual 'transaction costs' are generally lower than for the small retailer. Where the price is not lower as a result, the profit is higher!

In the case of internet trading, the costs of doing business are usually much lower than the cost of running a retail store - but it is easy to underestimate the cost of running an e-commerce enterprise. It costs a lot more than most 'bricks-and-mortar' retailers realise!

In fact, the key issues for e-businesses are the twin issues of supply and delivery.

Consider the example of a music CD ordered through an ABC shop, with expected delivery of three weeks within Australia. Compare that with while the same CD delivered in three days from amazon.com.

The difference here was that the e-commerce business had a well engineered supply line, and a very well engineered delivery mechanism. Putting these things in place and maintaining them is a costly process, and good e-commerce (like big box retailing) depends on achieving a high volume of demand.

Every trader's response to these issues will be different.

Next month we will discuss suitable proactive responses for you.



Some related comments by Brian Kilcourse, Managing Partner of Retail Systems Research - April, 2010:


Celebrity

.. in the wake of the exuberant spending spree on the new e-channel in the late 1990?s and early 2000?s, ...retailers expected the new channel to contribute sufficient new revenue to cover the investments made (as opposed to becoming a major factor in bolstering store sales, which is what actually happened). When that didn?t occur, new IT spending [on eCommerce] was throttled back.   ...  Finally of course with the so-called Great Recession [GFC], many corporations slammed the brakes on all kinds of discretionary spending, including IT.


Old news perhaps, but worth reviewing even this briefly, because it explains the box that so many retailers find themselves in now. In short, while the world of consumers has changed dramatically in 10 years, many retailers? technology portfolios, built to support a business model from the last century, are still in .. [use].


Further,

  • 'Customer centricity' is still 'hot', and its exhibiting itself in new spending on social media and mobile even while retailers continue the slow but steady store technology 'refresh' that has been underway for several years
  • 'Mobile' commerce has made it to the mainstream, but innovation is happening incrementally, not as radical transformation; and,
  • Retailers are adjusting to new conditions of the 'new normal', and that's being driven by IT.



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