Articles

What Is Unsustainable Will Not Be Sustained.

Milton Friedman coined this fundamental theory examining seemingly irrational or indefensible economic behavior. What is unsustainable will not be sustained. Applies beautifully to Europe right now where a mix of oil and water economies are being held together in a bureaucratic blender fueled by debt and borrowing to fund further debt and borrowing which every one knows will never be paid back and will eventually end in tears.

As Jeremy Clarkson was quoted as saying, “What have the Greeks – the world’s oldest serial debt defaulters – really done since the Romans left?”

The same theory of unsustainability applies to every area of economic activity. Agenda may supply the fuel to overpower the natural economic gravity for a while, but eventually either the agenda changes or the build up of gravity is so great it will explode. And it is transparent and obvious to us all.

In retail, the 21st century has brought with it many changes. But the most fundamental and far reaching is the change in transparency and distribution dynamics brought about by the Internet and e-commerce in all its forms. While it can be said that many retailers have failed to keep pace with consumers’ adoption of new methods of buying, one of the most damaging failures to date can be laid fairly and squarely at the feet of global brands.

As a consultant you get to see many things and the hypocrisy that I have seen first hand from some global brands is gob-smacking. Brands that have the hide to decry grey importing when they are the source of the grey imports. Let me explain by relaying a true story.

I worked for a global brand and one of their local retail partners. The so-called ‘Global Financial Crisis’ had hit and In Australia this brand was selling every product it could get its hand on at full wholesale price. It pleaded with head office to send more stock but head office wanted to “support” the United States market by redirecting stock there. The U.S. market was in turmoil. The stockpile was growing in equal measure to the desperation of the local American retailers who then turned round and offered the stock to global consumers online.

At less than the Australian wholesale price.

Very quickly the consumers caught on and sales in Australia went into nosedive. Domestic retailers were forced to price match or lose the sale. This meant in many cases the product was being sold at negative margin and the only money the retailer made was from volume rebates and promotion contribution funding.

The grey market for global brands is created by global brands that have not come to terms with global pricing and global distribution in the new interconnected, lightning fast, real time world we now live in thanks to the Internet. Is it any wonder we hear Australian retailers talking up their own parallel importing desires?

Brands can no longer price their product differently for different markets without fully comprehending that every retailer and consumer in the world can see what they are doing and will change their behavior accordingly. They can also not sustain pricing arbitrage and over-supply at the same time because all it does is destroy margins and domestic businesses.

Either the global brands will change their behavior or the rest of us will. And brands appealing to governments to stop parallel importing of their own product won’t cut it. Our government won’t even apply a consumption tax (GST) – that it actually believes in – to online purchases for fear of voter backlash. What hope have global brands got of getting rid of grey importing when voters love cheap prices regardless of the medium to long-term consequences?

The 21st century has been enabled by technology. Technology will destroy the historical pyramid of manufacturer, distributor, local agent and retailer – with its inherent inefficiencies and margin creep – and replace it with a more transparent, more equitable and eventually more profitable model.

Unfortunately – just like Europe – the unsustainable will continue to be sustained until the pain becomes too great.