Red Zebra Business Centre - Management Memos

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January 2013 Now including My Local Pool Shop Monthly News.  

Slower Than Usual Economic Growth, Price

Deflation, Make Merchandising Key to Success

Export activity continues, growing less quickly

Good managers are always looking at the business environment; adjusting their business activities to suit. 2013 promises real challenges with weak growth, and prices on a wide range of goods starting to come down. Permanently. Success will come to businesses, (whether retail or business-to-business) who run effective merchandise campaigns all year long.

A pessimistic outlook for the economy has both National Australia Bank and ANZ slash its interest rate forecasts for the year. Economists from NAB have tipped three more interest rate cuts this year, taking the Reserve Bank's rate from 3 per cent now to 2.25% by the September quarter.

Bank data and business surveys point to a weakening economy, with the unemployment rate being tipped to rise to almost 6% by late this year.

Treasurer Wayne Swan, acknowledging that the government will not be able to return the budget to surplus by June, says he is aiming for ''trend'' growth. This means growth in line with Australia's long-term trend of 3.25%. While the weakest forecasts put growth at less than 2%, the average forecasts are for 2.6% this financial year and 2.7% in the year to December. These forecasts strongly indicate the government won't achieve a budget surplus by June.

The gloomy outlook came even amid growing optimism of some recovery in the global economy with exports from Asian power China rebounding, while Europe is starting to show some signs of stabilising. This change of mood helped push the Australian dollar higher.

And, while it might not be evident yet to shoppers, prices on a wide range of goods are starting to come down. Permanently.

A quick look at a section of the David Jones website labelled ''lower everyday prices'' reveals the price cuts on a range of goods from international suppliers ranging from beauty products to ballpoint pens.

It is called price harmonisation, a quaint euphemism for what is effectively a wrestle between the department stores and global brands suppliers to close the price gap between local retailers and their on-line rivals.

Myer is seen to be taking a more hard-nosed approach than DJs, with demands that pricing be within 10% of global rivals, according to retail analysts.

''We have chosen to exit brands where we can't be competitive,'' said Jo Lynch, the head of corporate affairs at Myer.

Last month, a research report from Macquarie forecast that price deflation - primarily from harmonisation efforts - will continue to crimp any upside department stores may otherwise have got from sales volume growth, which is picking up again after years of stagnation.

''Despite the latent recovery in retail volumes, it is likely in our view to be largely offset by continued price deflation over the 2013 and 2014 financial year as the department stores continue to focus on achieving price harmonisation across its international brand exposure,'' said Macquarie's retail analyst team.

It underscores the challenges faced by all Australian retailers, but especially the department stores, which are caught between cheap on-line competition and a cost structure that was built on the golden days of high-margin sales.

David Jones says the experience so far suggests shoppers are trading up to those brands offering price cuts and are buying more of the brand. The company says it does not expect to have to match on-line prices to compete. The retailer's internal research suggests a cost difference of 10 to 20 per cent is generally considered acceptable by customers given high labour and rent costs in Australia.

What these projections show, is that retailers will find the going very tough this year. Although you might not be in retail, most small business is, and so retail becomes a metaphor for all small business.

So all small businesses (and that includes 'medium' too) will face the task of building volume to offset price reductions. Your traditional advertising is already producing as much as it can.

Merchandising holds the key to increasing that volume you so desperately need. Whether it's promotional merchandising, or visual merchandising, you need to do more of it - and you need to do it better! If you don't quite know how, find someone who can help you. Quick! Or call My Red Zebra!

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