2012 – How Loud Do The Warning Bells Have To Toll?

While a gaggle of very serious grown up types endlessly debate their varying views on the minutiae of the economy – agitating for market movement up or down that assists their particular agenda – the economic reality for retail is very straightforward. Household income and household wealth have never been higher. Employment levels are as good as they can get before labor shortages put massive pressure on wages. The dollar is high. Interest rates are low.

At retail, consumers are buying at all time record levels and have not stopped spending for one minute despite the commentary from people who do not understand how to read retail sales figures. Volume increases are outstripping sales dollar gains by a factor of almost four to one. This indicates that there is no such thing as a ‘cautious consumer’ but rather a deflationary impact caused by competitive forces (industry discounting behavior) and a consumer that is bored by the mono-syllabic appeal of cheap prices.

The underlying retail landscape has an abundance of unrealized opportunity right now and current projections see this continuing for the near future. But………..

The warning bells are ringing and their chimes are getting louder.

Cost of living increases and business input cost increases will drive underlying inflation and while inflation is actually good for retail – putting pressure on consumers to buy now rather than delaying purchases – it is bad for investment and central bankers don’t like it. As we all know, markets are driven to the overwhelming benefit of investment and usually to short term time frames.

In the next twelve months the tensions between the markets insatiable need for short-term gains and the needs of retail businesses to build long-term solutions will reach breaking point with massive cracks opening up in retail businesses. Private equity models – many of which naively pursue capital management as the panacea to all retail issues – have been and will increasingly be caught out when the real central issue is exposed – retail leadership that is woefully underprepared to face up to the radical changes that will be forced upon them.

While the seeds of the change were sown with the fatally flawed theory of ‘open markets’ that began its life in the 1970’s, the vines that are creating a stranglehold on retail didn’t flourish until the advent of the mass-market reach of the online world. In the last twelve months in this country, with the rise in the dollar and the subsequent enhanced purchasing power of the consumer combined with radically improving technology, the full reality of the inalterable changes to global distribution have confronted an ill-prepared industry.

According to the Australian Bureau of statistics All Retail Sales are growing around two percent per annum on a moving annual turnover basis. Online sales – through a hotchpotch of commissioned analysis – while representing a minority of total retail sales, are alleged to be growing at up to forty per cent per annum in this country. ‘Cautious Consumer’? I don’t think so.

There are many reasons online is growing so rapidly but fundamentally they come down to price and access. The distribution of information and goods is now for the first time truly about a global marketplace. The cheapest is not about the cheapest locally but the cheapest globally. Retail reflex reaction, to meet competition on price, is now leading to the inevitable failure of countless retailers as technology makes price comparison on like for like goods completely transparent and obvious to consumers on a worldwide basis.

Retail categories that are still adjusting to protectionist policies that were removed more than ten years ago are being caught out as information travels in real time to consumers globally.

We used to talk about the changing social trends in consumption – access to more information; pressures on time; ability to access products at the cheapest price; ability to buy 24/7 with ease – as if they were a long way off. That long prophesized world is here now and in the next 12 months all these pressures will increasingly result in the rapid need for many retailers to over-haul their businesses or face an escalating descent into the abyss of irrelevance.

Physical retailers are – more often than not – trying to fight a losing battle with the virtual world on price. In order to survive they are stripping out costs, much of which supports the differentiation that consumers need to justify the investment of the time which physical retail demands of them. Physical retail further undermines price integrity through discounting and increasingly poor retail strategy exposes their pricing architecture inadequacies through online price lists that technological solutions lay bare and global competitors under-cut.

Yet retailers from Super Cheap Group to Aesop to Louis Vuitton to Apple continue to thrive with high double-digit growth in sales and profit. The lessons in their success are obvious but not adopted by others.

In the immediate future we will see major international retailers make further inroads into Australia – online and in physical retail. We will see consumers with increasing pressures on time allocation continually trading off the emotional benefit of how they spend their time in their shopping behavior. We will see simpler and simpler technology doing all the work for the consumer to get the cheapest price. We will see home delivery and convenient delivery alternatives continue to eat into the distribution paradigm.

Retailers that sell me-too products, products that have no benefit what so ever to the consumer to buy in a physical store and retailers with poor marketing and seduction skills failing.

In the ‘Age of Anxiety’, when consumers are connected 24/7 and looking for the constant stimulation of ideas, those retail brands that move fast and understand the power of being ‘in the consumer’s face’ with something fabulous, new and exclusive to buy will trounce the opposition creating even more pressure from investors on the poor performers.

Apple can go from not even being in a category to the largest seller of an item in the world within a twelve-month period through consumer seduction and exclusivity. Zara can create a need for consumers to visit more frequently and queue for long periods of time to spend more money than the market average transaction through fear of being sold out.

The sectors that will be hit hardest in the market will be: – - Electronics and electrical goods retailers that sell easy to compare branded product through increasingly transactional environments – Apparel retailers that ‘borrow inspiration’ from international brands that are increasingly available either physically or virtually locally – Any retailer competing unsustainably on cheapest price with a rising cost base – Categories relying solely on cheap global sourcing – Retailers who simply publish their inventory and prices online without a strategic realignment of their entire business model – Retailers that sell products with no compelling consumer justification to buy from a physical store

Capital is vanilla. Its application in and of itself may provide temporary life support to poor financial management. But increasingly it is exposing the underlying problems in retail business models to which it is applied. In a very noisy world filled with stressed out, bored consumers looking for inspiration to buy, the retail leaders stand out like beacons. We have far too many retailers offering no consumer choice because they are all the same. We have landlords increasingly moving towards higher rents and power brand franchises.

The warning bells are getting louder.

The world we thought was coming is here and is enabled by technology. The large retailers that are at risk are obvious and from recent behavior will only make the competitive environment worse. The next twelve months will be telling.

One way or the other – as all retail paradigm shifts historically have proven – the renaissance of physical retail in on its way. Retail leadership is at a crossroads and must choose between relevance in the competitive context that confronts them or – like the hunchback of Notre Dame – be sent deaf and insane by the bells.