26 Apr 2023
Australian Specialty Retailers' performance pressures could eventuate.
The Australian specialty retail sector has been experiencing significant change over the past few years, primarily due to the rise of e-commerce, the trading results during the Covid-19 pandemic, and shifting consumer preferences. These market shifts have resulted in a highly competitive market where retailers are adapting to remain relevant and competitive.
Specialty retailers thrive by offering a wide range at better prices, such as Bunnings, Officeworks, Supercheap Auto, Rebel, and JB Hi-Fi, dominating their respective categories. However, the sector possibly faces future profitability impacts, with the performance benchmark now being 'pre-Covid' levels; the questions are, could it dip below that level, or is there even an opportunity for some to take market share?
Here we will explore a few factors facing the Australian specialty retail industry and pose several considerations to see how they remain competitive and adapt to the changing landscape.
Shifting consumer behaviour
Australian consumers are becoming more discerning and are seeking better value from retailers. Also, with consumer sentiment being a vital driver of the retail sector, the post-pandemic conditions and the stressed economic environment will continue to impact consumer outlook.
According to the Westpac-Melbourne Institute Index of Consumer Sentiment, consumer confidence fell 6.9% from 84.3 in January to 78.5 in February 2023 (the lowest point it has been in decades, where an index lower than 80 is rare, and remained unchanged in March). The report highlights the index decline is due to households being affected or concerned by inflation, economic conditions, budget and taxation, interest rates, and employment security.
Consumer behaviour and the focus on value could become more skewed to price, affecting some in the sector. For example, consumers looking for better value (with a greater weighting towards price) will shop across online and in-store retailers rather than relying on a single retailer for all their needs. This development could make it harder for specialty retailers to attract and keep customers by offering compelling and distinctive value propositions aligned with the customer's definition of value to reduce switching behaviour.
Pressure on retail prices and margins
In recent times, due to many factors, Australian consumers have faced considerable inflationary pressure across their entire household budget, from mortgages and utilities to petrol and food.
Yet, according to estimates by the Australian Institute think-tank, Australian companies' profit growth (from 2020 to the present) has accounted for 69% of the economic inflation experienced by consumers. So, many businesses have taken full 'advantage' of the inflationary environment, some more than others.
But, suppose the company-led inflationary pressure continues, compelling consumers to balance their household budgets with spending cuts more and more.
Specialty retailers typically operate on thin margins, making them vulnerable to price competition and cost pressures. Rising cost components, such as the CODB, cost-to-serve, or even crucial supplier trade terms and investment pressure, can quickly erode profitability, mainly if there is no systematic approach to measure and manage the pressure.
For example, customer behaviour towards scanning a few critical items across channels to find a like-for-like item cheaper, if coupled with a solid last-mile proposition, makes strong pricing a key in the customer value purchase conclusion. In that case, some specialty retailers could face pricing competitiveness pressure not seen in recent years to have consumers continue to spend within their household budgetary constraints.
As a result, with consumer budgets becoming the guide to spending rather than a desire to want something, specialty retailers must manage the value chain effectively to maintain their margins while their value proposition remains competitive.
Online competition and Amazon disruption
E-commerce competition has increased in Australia, particularly during the Covid-19 pandemic, and will continue. For instance, we saw in 2022 (with the lifting of pandemic restrictions), Australians spent $353 billion (up 9.2%) on retail goods online (Australia Post report), and non-food online retail sales rose 2.3% in February 2023 (ABS).
Australia Post has also reported that 82% of Australian households (9.4 million) had made an online purchase in 2022, and 60% of households made 12 or more purchases over the same period. It predicted online retail sales would reach $42 billion by 2024, so the battle for the customer will continue to intensify.
This trend may be where we see Amazon taking hold. By default, Amazon Australia's value proposition tries to create an ecosystem of customer stickiness and lifetime value without a store network. Their 2022 result saw sales from its online store hit $1.3 billion, up 46%, yet see profitability in the red. So, they're still investing in the market, allowing their business model to adapt to market conditions (e.g., partnering with AusPost, or setting up an Amazon Flex network for fulfilment which isn't in their traditional playbook). At the same time, other online-only players feel the pinch as consumers continue to discover Amazon and reengage with retail stores again post-pandemic.
We can see the performance pressure from the Amazon market entry strategy initially targeting online-only retail. For instance, eBay is now second to Amazon for monthly traffic (in March 2023, per SEM Rush, Amazon Australia had 53 million visits versus eBay Australia's 45 million).
Once gaining market share within that pure online channel, Amazon moves towards greater competitiveness with the traditional multichannel retailers. With the years of customer data acquired through the initial period of operations, a progression towards developing core assortment and price positioning across all categories intensifies, resulting in deepened brand loyalty and ultimately growing market share.
Many tools in the Amazon kit allow this to occur, mainly activating customers onto a Prime subscription. This subscription model supplies customer value through multiple offerings beyond the shopping transaction and free next-day delivery (e.g., Video, Music, Books, Subscribe and Save are all included). Further product and brand assortment development occurs as Amazon site traffic increases and customers pull sellers and suppliers into the site. Pricing is a global imperative to be the market leader in price, increasing the competitiveness and customers' willingness to switch away from other retailers. Ultimately the flywheel is in motion, and customer lifetime value grows.
A review of the Amazon global expansion playbook shows not many incumbent retailers thrive; some survive, some barely hold on, and some demise. The performance effects on the Australian retail sector will vary. Many retailers are employing ways to create their versions of customer lifetime value strategy (e.g., eBay Plus, Wesfarmers' OnePass). So, with that considered, the question would be, are these incumbent retailer strategies and value propositions equipped to withstand continued Amazon growth, mainly when more customers learn of the Amazon value proposition?
While facing economic uncertainty, customer household budgetary pressures, the rise of competition strength, and the shifting consumer value preferences, there are some considerations for observers to see how retailers tackle these factors to remain competitive.
Adaptive value propositions to meet changing consumer value preferences
Consumer preferences are changing primarily due to their financial conditions, and specialty retailers must ask themselves if they are cultivating their core proposition yet adapting to these changing preferences. We could see Australian consumers becoming more selective and seeking greater value (where the definition of value could also be changing).
As a result, specialty retailers still offer a compelling value proposition relevant to their target market and competitively defendable, but will value now be more about price? Or is it about convenience, assortment, digital and store experience, or is it a hybrid, and how is it weighted in customers' minds when shopping within specific categories?
Supply chain efficiency to improve productivity and customer experience
There should be a never-ending pursuit for productivity gains across the chain. Are efficiency improvements being captured in the supply chain and across the wider value chain to increase productivity and improve customer experience?
As many know and backed up by ABS analysis, supply chain management accounts for a significant portion of the cost structure of Australian retailers. As a result, it will be vital for the continued optimisation of supply chain operations to improve integrated productivity across the value chain, and enhance customer experience, to manage the potential threat to profitability.
Leverage data to improve operations and decision-making
Retailers using data analytics to optimise operations and the customer experience can achieve a significant competitive advantage. Specialty retailers and suppliers can collect vast amounts of data on their customers, operations, and value chains.
Retailers investing in data and analytics are likelier to see a positive impact. That is, data and analytics provide knowledge the team needs to know versus what they'd like to know, i.e., actionable analytics. So, for example, using analytics to grow categories, have a smaller margin of error with inventory forecasting, optimisation cost-to-serve, develop performance through trade terms and promotional investment management, and measurable return on investment across the value chain.
Australian specialty retailers could face critical strategic questions to remain competitive, whether to take advantage of a positive or negative shift in the operating environment. However, by adjusting to meet changing consumer preferences, improving value chain efficiency, and leveraging data and analytics, specialty retailers can continue to thrive in the Australian retail sector during the more challenging trading environment – it's just a matter of how.
About the Author
Dean is a proven retail and consumer products professional with extensive local and international experience at technical and managerial executive levels, including four years with the globe’s largest retailer delivering end-to-end transformation within its South American division. More recently, Dean was General Manager of Group Strategy at JB Hi-Fi Group, responsible for managing the Group’s corporate strategic planning process and business improvement implementation. Dean has also held positions within consulting firms, assisting retail and consumer products clients in developing and delivering strategy and attaining gains from continuous improvement initiatives. Dean now provides independent operational and strategic consultancy services to the retail and consumer products industry, investment banks, and equity analysts. He has 20 years of experience and is familiar with all value chain areas of the retail and consumer products sector—a thorough knowledge of the industry, its opportunities, and challenges.
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