Articles

What Happens When Your Dealer Won’t Sell You Any More Heroin?

As any junkie will tell you, when you get your first taste of your drug of choice it gives you a fantastic high. One you want to keep repeating. More and more frequently because you want to re-create that first high and make it even better.

Global sourcing has been to the retail world what heroin is to the drug addled. Addictive.

And the longer the addiction has gone on, the less rational thought has been applied to the context it was affecting, as the world becomes a smaller and smaller place. While the investment community pushed for lower and lower costs, supply chain efficiency and the reduction of inventory exposure, China became the generator of more and more frequent flyer points and more and more profit.

The retail world has ended up hooked on buying cheap production from factories in various locations – but dominated by China. That process has seen the commoditisation of most product categories as retail businesses end up sourcing the same product, from the same factories with variations not recognised nor more importantly valued by the customer.

Better buying prices have fooled many retailers into believing that they could discount and sell more. Which was half true. They sold more and maintained or in some cases increased margin percentage. But as Kerry Packer was once quoted as saying – “You can’t bank percentages mate”. We now sell record volumes of everything. But increasingly we are banking less profit dollars.

Three years ago I returned from a briefing by the Chinese government at the World Retail Congress with a scary conclusion. The one piece of data that hit me most in that briefing was that the middle class of China would exceed the total population of the United States of America by 2015 and that China’s GDP was rapidly heading internal – by design. This has been escalated since with the increasing disappearance of the American middle class.

I did a series of presentations, interviews and articles that illustrated the conclusion that China’s factory output would be increasingly absorbed for internal consumption and proposed a scenario where factory gate prices would rise and only the largest orders would even get a place in the queue. Ignored at the time, that day has now come.

In 2010 increasing US$ dollar supply costs were somewhat protected by the appreciating Australian dollar but that offset has now been washed through. More global brands and global retailers – brands that in many cases own the original intellectual property that has been ‘homage-ed’ in this country – and the ones who can actually produce a large enough order book to get the Chinese factories interest, are coming here in numbers and invading our shores ‘virtually’ through e-commerce.

Addicted local retailers who have survived on an intake of me-too products, sourced cheaply and sold on price will be forced to go cold turkey. Methadone is not the answer. Finding a new source of cheap goods will not overcome the increasing realisation that retail is a merchandize driven business that needs differentiation that can be ‘money-tized’ for good health.