Stop Blaming Amazon For Big Retail's Death Spiral

Image: Tombstonebuilder.com

Amazon's anticipated entry into the Australian market is expected to have a massive impact on local retailers like Harvey Norman, JB HiFi and Big W. Credit Suisse released a report last week that suggested Amazon's entry could be rated as somewhere between "Catastrophe" and "We're all going to die". But is it all Amazon's fault?

There's no control experiment we can conduct to see what will actually happen when Amazon enters the local market. But when a new entrant joins a market, there are a few things that can happen.

The market can expand. We saw this when Google released Android. While Android devices outsell iOS, Apple's sales are still solid after a period of growth. When Google entered the market they didn't take Apple's customers; they added new customers to the smartphone market.

If the market is mature, then the likelihood is a new entrant will take customers away from incumbents. Think of Netflix and the corner video rental store. Or corner stores when supermarkets extended their trading hours.

Most experts expect retail to follow the Netflix/video store path rather than the Android/iOS one.

There's a big difference though. Big retail has had a 15 year window to get ready. Online commerce is not new. As soon as the Internet became a commercial platform, people started selling stuff over it. Also, large retailers could learn the lessons of the bookstore business and from video rentals and Netflix.

Macy's in the US is a good case study of why local retail is going to have its work cut out for it in order to compete with Amazon and other online retailers. And we're seeing what some call a "retail mall apocalypse" taking place with over 3,500 stores being shut down by retailers like Macy's, JCPenney, Sears, and Kmart, Crocs, BCBG, Abercrombie & Fitch, and Guess. Some of the chains are closing hundreds of stores this year.

Macy's is more than a department store - it's a symbol for traditional retail. Their business model is large stores that are heavily staffed selling a wide variety of goods. Almost every city in the US has a Macy's store - the one in New York is practically a tourist attraction.

But the chain has struggled over recent years and their long term CEO stepped down this year.

Comments by their CFO, Karen Hoguet, says their most significant existential threat isn't Amazon. In a recent interview CNBC story, Hoguet said the issue is their supply chain. And a walk through local stores highlights that the same challenge exists here.

Customers want to buy what what they want to buy when they want to buy it.

Online retailers like Amazon make this easy. And if you don't know what you want, Amazon's recommendation system will tell you!

The answer from local retailers to these challenges has been typically myopic. There's been the gnashing of teeth over GST on imports with the government now threatening to collect GST on personal imports. What Harvey and his mates don't understand is that we don't just buy online because of the price (although that is part of the allure). We buy online because we can find what we want, when we want it and get it shipped cheaply. It's a combination of price, product and service.

Penalty rates have been cut. Again, when under pressure local retailers revert to their default position of cutting costs by screwing those who can least afford to be screwed. When was the last time you read about an executive management team who took a pay cut rather than cut coal-face salaries?

US retailer TJ Maxx is planning to enter the Australian market and their model could be an insight into the sort of retail experience that can survive and thrive locally.

I shopped at TJ Maxx when on holidays last year (in the lovely town of Bend in Oregon. If you're into outdoor sports like trail running, paddle boarding and canoeing, skiing and the like, you need to go to Bend). It is an impulse shopper's paradise.

TJ Maxx has a rapidly changing inventory that is driven by two factors. What is available and what can be quickly sold. It's a simple formula. But I'll bet you can walk into a large Australian retailer and find items that are months old sitting on a rack. That doesn't happen at TJ Maxx.

If you walk into Myer, JB HiFi or any other retail chain in Australia, you'll find the same items in the same place in each store. TJ Maxx puts its inventory wherever it can place it as quickly and cheaply as they can. Say you want to buy a hat. Just because you see it at one TJ Maxx store there's no guarantee, if fact there's almost no chance, you'll find it at another outlet.

That model might not work for everyone and Australian shopping habits are different to those in the US. Our population is far more centralised with most of the population living in large urban centres. So we are accustomed to a more tactile shopping experience. But that is changing as more of us move our shopping dollars online.

I'm pretty sure that when Amazon officially starts trading in Australia that the lead story on all the current affairs shows will be Gerry Harvey bleating about foreign retailers screwing Aussie businesses.

Harvey and his counterparts have had over a decade to prepare for this. To compete, they will need a multi platform strategy with a 21st century supply chain.

That will include retail stores, but it's likely they will be a lot smaller and only stock large items like furniture, white goods and major appliances. Commodity items that can be easily and cheaply shipped will slowly disappear and only be sold online - it makes no sense to ship printer ink from a manufacturer to a warehouse, to a store in the hope it will be purchased off the shelf.

Skipping the store and shipping to the customer from the warehouse should result in a cost reduction that could be passed on to the customer. This will, theoretically reduce prices and allow them compete with new market entrants.

And, as warehouses are cheaper to own and manage than retail stores, there's further opportunity to reduce costs. With more people needed in warehouses, employment will shift. While job losses are possible, I expect to see job changes account for many of the lost store jobs with people shifting from shopping centres to warehouses. It won't be as sexy, but it will be a job. the

Big retail still has some time to get their stuff together. But the clock is ticking and, so far, there hasn't been any evidence that they are prepared to adapt to the new world. I guess blaming Amazon in the 21`st century is easier than admitting your 19th century business model is broken.

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Comments

    Penalty rates have been cut. Again, when under pressure local retailers revert to their default position of cutting costs by screwing those who can least afford to be screwed.

    And you think Amazon will be paying over the odds for staff. Google 'Amazon Workers' and get a feel for the Worker's Nirvana Amazon employees face.

    Don't get me wrong. While traditional retail will need to lift their game to compete, let's not pretend any of the new entrants will have any altruistic motives.

      Amazon will pay, I assume, the lowest they can legally pay. But the motivation for the recent cut in rates is about cost cutting by the incumbents. As far as I know Amazon was not involved in lobbying for the recent penalty rate cuts.

    What warehouses is this author talking about?
    Most retails don't use their own warehouses anymore, unless they import stock themselves. They will pull in stock from the importer/wholesalers warehouse. The Importer/wholesaler generally doesn't do retail. Amazons model only works if they import and warehouse all their inventory. Most branded products in Australia will already be imported under a licensed importer.

      It doesn't matter, in my view, whose warehouse. If more stuff moves from warehouses to customers then the warehouse operators will need to increase their slicking and shipping capacity

    I look at Bunnings as one that's ripe for disruption. They have an utterly pathetic web presence right now, If Amazon handle hardware well, can deliver the core range Bunnings have (which wouldn't be hard with their hopeless range), and can sort out deliveries properly, they'll (hopefully) smack Bunnings around enough to actually get some real competition into the sector!

      While you're not wrong Bunnings have alot to learn and there website is shit and only got marginally better when Masters was a threat Bunnings is different to most retail because you need Bunnings stuff NOW, not later. You can already buy everything at Bunnings for cheaper online but I don't want to wait 2 weeks for door hinges or screws... Online still had the delay and I am doubtful Amazon will be any better at that.

        Amazon's big draw in the States has been very cheap and quick delivery (especially with their Prime membership program), free, next day delivery, would remove all but a small number of needs to visit a Bunnings in person. Normally when planning a project or a purchase from Bunnings, I can wait until the next day to get the stuff I want.

    The tomb stone is wrong. It is not a case of retailers couldn't adapt; many retailers chose not to adapt.

    I don't see online being the demise of physical stores; there is still the click and collect option where one purchases online and then goes to the store to collect the goods.

    For consumers that is a good thing; they can collate all their shopping needs into one instance. For example, being able to do one's grocery shopping and electronics shopping in the one small area after buying and having the goods ready online.

    JB HiFi and Dan Murphy's are two examples of this model in effect so there is no excuse for others to do the same.

    The adaptation is easy enough; it's just a case of those who choose to change and those who choose not to.

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