Red Zebra Business Centre - Management Memos

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March 2013 Now including My Local Pool Shop Monthly News.  

Price Harmonisation Vital For

Future Growth In Retail Pool Shops

Store shoppers expect competitive prices

It might not be evident yet to shoppers, but prices on a wide range of goods are starting to come down at Australia’s venerable department stores, David Jones and Myer. When major stores like these two take the lead, it follows that other retailers will inevitably follow suit. Prices are coming down. Everywhere. Permanently.

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

These changes underscore the challenges faced by all Australian retailers. All are caught between cheap on-line competition, and a cost structure that was built on the golden days of high-margin sales.

The process is called ''price harmonisation'', a smooth-sounding euphemism for what has become a powerful wrestle between in-store retailers and their on-line rivals.

The key is the past history of "golden days of high-margin sales". Those high-margin sales were a reliable support for stores having high cost structures, and time helped create a sense that trade should always be so profitable.

That is changing. Rapidly. Two factors have conspired to create the present turmoil.

First, the established way of doing things in a pool shop leads to a high cost structure. Simply observing the number of retail staff on hand all day long, all year round, in a pool shop - and comparing that with the number of customer visits - marks the business as having a high cost structure.

Second, prices historically available have supported those costs. For instance, a pool pump typically bought at $220 could have been listed at $600 in the 'golden days'. Today the 'street price' is around $450 - $460, while the real economic value of the purchase of that pump is about $250!

As you can see, this means a premium of $350 has historically been asked by the pool shop to pay for the real cost of providing the services normally championed by pool shop owners. Today, that premium at 'street price' is down to about $200, and falling.

At present, the main question for pool shop owners has been "how to insulate and buffer pool shop prices from the competition of lower cost outlets?" But this is ultimately a question with only one answer - "You can't!"

Inevitably, prices will keep coming down, until they reflect the real economic value of the purchase. The only question is how long this process will take. That can't be known of course, and it is likely the process will take more than ten years.

What that means is that prices will continue to fall over those next ten years, until they stabilize at the real economic value. Such a collapse of a price regime is far from un-precedented, and in fact happens all the time in evolving markets.

Example 1: When 'Officeworks' was first being created in Australia, your correspondent had the opportunity of working (on another project) with the (then) Coles-Myer director charged with the carriage of this project. By "re-engineering the supply lines", Officeworks was able to sell some products and achieve target profit, at a price lower than Coles Supermarkets was paying to buy the same lines!

Example 2: A past client had made a major impact on the Australian market for automation products by developing a  national distributor network and achieving superb sales results. Today, 25 years later, that distributor network has been completely dismantled and supply lines 're-engineered', so that this world leader in the category can remain world leader. With lower costs and lower prices!

Recently, a major Australian pool equipment distributor was sold to an American supplier. Look closely at the industry and you will see the beginnings of even more escapes from the tyranny of 'third-party' distributors. Margins won't support today's supply chains in the long run, and prices will come down.

So the issue of pool shop prices being 'harmonised' with lower cost outlets involves two sides:

  • Supply side re-engineering to reduce overall costs to you on the supply side, and,
  • Complete Expense Review and Reduction in-store

It's little wonder that the whole industry is fighting against lower price outlets; both suppliers and retailers are facing the need to completely restructure their businesses. As for you in the pool shop, looking at your supply arrangements, and managing down your buying price, is a vital element of future growth, and indeed of your survival.

The whole issue of lowering the overall cost base for a pool shop is complex and challenging. In many years of expense reduction for clients and others, it has become clear that enormous sacrifices in a business lead to relatively small and disappointing reductions in total expense. Achieving a sustainable long-term outcome requires a much more sophisticated response than simply  'circling the wagons', and trying to hang on to prices and practices that are passing into history.

But in the end, those costs will be reduced, and prices will be 'harmonised'. Better to start sooner, do it better, and finish further in front!

The challenge of changing the small business that is a pool shop is daunting. It is not made easier by putting it off. And the sooner you begin the complex analysis that is necessary, the better you will be able to respond to these rapidly changing circumstances. And then you can harmonise your prices to build your business to its peak.

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