Brick and mortar retailers are facing a ‘sink or swim’ situation as we start the New Year with several prominent retailers entering voluntary administration, including SA icon Harris Scarfe.
South Australian retail sales dropped 1.3 per cent in December 2019, with various factors at play, including extremely hot weather and the impact of the unfortunate bushfires.
It’s not all doom and gloom, however, and BDO Associate Director Eythan Barraclough says we can certainly observe key signs of successful retail businesses.
“While it may seem ominous to have businesses like Jeanswest or EB Games going under following the traditionally strong December trading period, for every failed retailer, there are lessons the rest of the industry can take on board”, he says.
“It’s also important to understand the factors that have contributed to the downturn in the first place – not least of all the emergence and continued growth of the online (e-commerce) market.”
Online retailers are able to provide discounted prices, while offering a strong level of service to customers. Examples of this are through free delivery, free returns, next-day delivery, and future discount/reward programs.
This is perhaps best exemplified by the ‘Black-Friday’ sales in November, which continues to grow each year. Consumers are now purchasing heavily discounted products online prior to December, rather than shopping for Christmas in person.
Traditional retailers have jumped on board in the last couple of years, including major shopping centres with the support of the State Government in the form of extended trading hours.
Ultimately, this has led to stronger trade in November at the cost of December performance.
Increased online shopping has meant reduced foot traffic in prominent retail locations, while those retailers grapple with increasing overheads – in particular ongoing rises in rent costs.
Many wholesalers are also following the online trend and going direct to consumers – further impacting the market share of ‘traditional’ retailers. Prominent brands are using their e-commerce platforms to go directly to the end customer, while offering minimal support or rebate to their retailers.
Some retailers have increased their inventory purchasing in the hope of driving revenue, but this has largely resulted in higher levels of ageing inventory and working capital problems.
Bricks and mortar retail does still offer some remarkable success stories, however, particularly among those with a strong focus on customer experience, providing a differentiated service to build a loyal customer base.
JB Hi-Fi, for example, recorded a record half-year profit to December 2019, citing the growing demand for technology products, while providing an authentic and high level of service to customers in-store.
Barraclough says the key markers of successful bricks and mortar retailers are: differentiation; having an omni-channel approach; implementing effective inventory planning and management; and, protecting margins and profitability.
An omni-channel approach
Retailers who invest in e-commerce to offer online sales and grow their customer reach, while maintaining a physical presence. This is able to satisfy the preferences of a wider range of consumers and also provide greater opportunity to sell excess levels of inventory out of the business.
Effective inventory planning and management
“Reduced sales and excess inventory are a recipe for demise – it’s essential that inventory purchases align with the revenue base of the business”, says Barraclough.
Successful retailers resist incentives from wholesalers to over capitalise in inventory, therefore avoiding cashflow issues and the need to liquidate excess inventory to the detriment of profitability.
Protecting margin and profitability
“It is not sustainable to continually discount product”, says Barraclough, “instead, the focus should be on the brand and marketing strategy with discounting used strategically to drive foot traffic and promotional activity.”
Success in retail is directly linked to the protection of gross profit margins and ensuring these are appropriate month to month.
In a world where so many competitors are selling like-products, standing out from the crowd is key. Many successful retailers are focused on providing a unique in-store experience that differentiates them from other retailers, driving foot traffic and customer retention.
Simple examples of this include providing coffee in store, reward programs, social media opportunities for customers or in-store visits from media personalities or influencers.
“As the impact of e-commerce grows, retailers need to adapt their customer experience now to be relevant for the future”, says Barraclough.
As we look to that future, we may see more South Australian retailers entering voluntary administration to escape unviable long-term leases. Those that survive will almost certainly have these key strategies firmly in place.