KordaMentha Retail Series: What's in Store?
In the first of a series of KordaMentha articles discussing the future of the retail sector and its many micro-markets, we contend that struggling bricks-and-mortar discretionary brands need to re-define their purpose if they are to survive and prosper.
Australia's retail sector has faced headwinds over the last decade, as brands with inadequate omnichannel capability have struggled to compete with the acceleration of online shopping popularity and changing consumer habits.
The list of recent retail restructures is sobering: Tigerlily, Target, G Star, Aussie Disposals and Seafolly are just some of the brands impacted by the difficult trading conditions.
The COVID-19 pandemic has further exposed the weak business position of many retailers, intensifying the downward trend in sales and shattering brands that were once considered an indispensable part of Australian retail. According to data from ShopperTrak, shopping centre footfall declined by more than 80 per cent year-on-year during the peak of the recent lockdown measures. Meanwhile, digital purchases are booming, with PayPal sign-ups in Australia almost tripling to eight million during the lockdown.
While the pandemic has certainly hastened store closures, the problems besetting the retail sector have been evident for close to a decade.
In 2012, 4G-enabled mobile phones were introduced, pitting bricks-and-mortar stores against cheaper online offerings, such as Amazon, by allowing shoppers to browse physical stores while comparing online prices on their smart phone.
Many retailers responded by cutting prices in a bid to compete with online stores, which meant sales volumes were maintained, but margins were squeezed and gross profits reduced.
By competing with the online experience rather than incorporating it into their business model, many retailers inadvertently hastened their own decline.
The way out
Retailers are facing a moment of reckoning and the scenario planning they undertake now will help determine whether they are still standing when lockdown measures are eased.
The Federal Government has put a range of stimulus measures in place to stave off insolvencies and provide businesses with breathing room, including a moratorium on penalties for insolvent trading. Retailers must use this time in hibernation wisely to plan for the future and assess all available options. With future economic uncertainty a key characteristic of this crisis, retailers have a window of opportunity to act while these support packages are in place. Those who transform before a tipping point will come out stronger.
Of the instruments available to retailers, voluntary administration can be a valuable option to restructure a business into a leaner, more profitable entity and should not be seen as a last resort. Retailers, such as Oroton and Tigerlily, have emerged stronger and well positioned for growth following a voluntary administration process.
Rather than hewing to an out-dated model that no longer serves them, retailers must transform into adaptable, flexible businesses with new methods of responding to change.
This requires an optimal blend of e-commerce and carefully curated, physical shopping experiences, backed by a supply chain that can effectively deliver on a retailer's service promise. There is no doubt many retailers are carrying too much physical retail space and some right-sizing needs to occur, but the widespread abandonment of bricks-and-mortar stores is equally unnecessary.
Instead, retailers should opt for a lean model - vertically integrated, where possible - combining a strategic physical presence with a compelling e-commerce offering and fulfillment capability that complements their storefront business.
While the costs of maintaining a large store network will reduce as physical stores are closed, retailers will still need to attract buyers online through considerable marketing efforts and investment in e-commerce platforms and fulfilment capabilities.
To achieve the lean operations that will support this model, retailers who are exposed by extensive physical footprints and large centralised costs will need to act to lower their cost base. Unlocking cashflows to invest in transformation will be a critical element of success.
Some experts estimate that up to 80 per cent of in store purchases have a digital fingerprint on them somewhere. Many customers research online and buy in store ('ROBIS') and, vice versa, many research in store and buy online ('RISBO'). So, it's not as simple as bricks and mortar versus online, it's just shopping wherever, whenever, however the consumer wants to, without the pain points.
With consumers increasingly attaching themselves to brands rather than businesses, it is essential that retailers focus on their point of difference and seek to define what it is they stand for. Their brand needs to be clearly articulated, and easily identifiable. Those retailers that remain generic or beige will not survive.
The human connection that defines the retail brand is also important. Consumers will pay more and travel farther for a shopping experience that makes them forget the transactional aspect of buying.
Retail services in particular can harness their passion for a particular hobby or service and ensure that passion is evoked by the retail experience. This is harder to achieve in the era of social distancing, but those brands that manage a seamless click-and-collect experience, which enables customers to feel passionate about what they are buying while abiding by hygiene protocols, will eclipse their competitors.
It is hard to estimate how many brands will re-emerge from hibernation, but there is no doubt we are at the tip of the iceberg of disruption and the retail sector will change dramatically.
Some brands may collapse and then re-emerge solely as online players, others may be bought by retail giants - such as in the case of Kogan purchasing Matt Blatt - while others won't survive.
We need to remain mindful that retail is not a set-and-forget game, but a constantly evolving, unfolding story of human trends and product technology.
The increasing pace at which retail is evolving is highlighting the interdependence of the retailer and landlord. The retailer's need for personal connection with its customers is matched by that of the landlord to curate a shopping destination, defined by experience and sense of occasion.
We must be cautious not to call time on brands before they have re-structured, nor to be doomsday prophets or naysayers when speaking of the sector's future.
But equally we must not put our head in the sand and pretend that when the pandemic subsides, and lockdown measures ease further, it will be business as usual.
In fact, we are entering a radically altered business landscape, one that will test the mettle of the Australian retail sector, but will also offer enormous opportunities for businesses to begin anew as differentiated, agile and ever-evolving brands.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.