Why retail in Australia is fast becoming another screwed-over economy

Date Posted:1 November 2017 

Throughout this year, we have published many articles on the conditions afflicting retail in Australia.

Some of these have featured opinions on the likely or possible impact of Amazon's imminent arrival in Australia and the rather frantic attempts by organisations to "Amazon-proof" their businesses. Any way you look at it, Amazon is already having an effect long before it's operational - just look at the deflated share prices for many of Australia's leading retail equities.

Australia has long been regarded as one of the toughest retail environments in the world and most global brands either have a keen sense of fear or suffer from naive bravado when it comes to thinking about how to succeed in our local market.

Often, many truths about the real performance of Australian subsidiaries of global brands are carefully guarded or hidden under rolled-up regional figures. Instead they continue to trade on without revealing the full extent of their local country losses, or the Australian subsidiary is being propped up by more profitable countries. Of course, who could forget to mention deliberate tax avoidance strategies designed to siphon revenues offshore, or load up the local operation with exorbitant debt and licensing costs to show minimal local Australian company profits.

So why is retail in Australia now viewed with negative sentiment ?

It's not just coffee beans that I'm talking about here, you only need to look at long faces from small business owners on any High-Street shopping strip or the once mighty traditional department stores Myer and David Jones struggling to identify how to remain relevant to their customers. It seems there is a constant fight for survival and limited prospects of future growth.

Myer in particular is now seemingly unable to occupy a strategic position in department store retail whilst David Jones has not fared much better and has just commenced transforming itself into a gourmet food Providore with forays into vertical integration of premium cafe/restaurant.

Friends that have been determined enough to launch businesses overseas - Asia, Middle East and the US, talk about enormous opportunities from population scale and more importantly less competition. All they ever see is blue sky and for them the only thought that occupies their mind is about how to build a faster and greater capability/capacity, it's never about how to win a customer  - they seemingly beat doors down, or so they would lead you to believe.

When I talked recently with someone that has traded across 4 regions in the last decade, the message was plain and simple - mate, you need to get out of Australia - come over here and do it , you will kill the market. It seems the only outcome likely to be achieved in Australia is working too hard for a basic wage.

But is retail in Australia so much different to the rest of the world ? Surely Europe has many parallels to our environment - mature, established, structured, etc.

What is widely acknowledged are 3 main differences specific to our local Australian market - difficulty in logistics, lower population density and reasonably high costs of living. It's debatable that Sydney and Melbourne would be described as low population density, but let's not argue metrics.

Interestingly, another important factor emerged - consumer expectation.

It seems that we Australians are a tough, ruthless mob when it comes to demanding excellence, intolerant to less-than-ideal experiences, unwilling to pay for service and demonstrated some of the lowest levels of brand loyalty compared to other nations.

That's right, apparently Aussies are really "hard to please" customers. A stark contrast to our global reputation as an easy going, larrikin, "She'll-be-right mate", party-loving culture.

So how does our moniker of being a country of difficult customers impact retail in Australia ?

Let me give you an example of "screwed-over economics" in Australia - online shopping and shipping charges.

The majority of consumers expect shipping for free and it's certainly the strategic mandate of selling portals such as eBay and Amazon, in fact they demand merchants wear the cost and any merchant brave enough to be transparent with individual product and shipping charges is quickly penalized by lower search rankings.

Of course, this how it's done in other countries and they just use the sledgehammer to force it upon Australian merchants. Well, quite frankly, free shipping does not make sense in Australia where it can cost $6 or $26 to send the same parcel to different destinations around the country, so you can imagine this creates mind-boggling problems to solve for merchants.

However, we all know it's not cheap to move anything from point A to B, even driving across the other side of Melbourne can cost $25 in your car. This is where various "smoke & mirror" games are played by sellers to give false impressions that orders can be delivered free of charge.

In fact, for many resellers of another manufacturer's item, free shipping is about the only attractive element of their entire offer - often waived in the pursuit of chasing false $$ without care of the long term implications.

Even the grocery giants give incentives of free home deliveries but they are not being transparent in admitting that home delivery is costing them huge $$ and eroding their margins. They are of course playing this game for the long run as a strategy to "freeze out" competitors and protect their investments, not because it's cheaper for them to deliver rather than have you attend their stores.

Generally, sellers do this free shipping thing with bulk orders as it creates a psychological value-trap, but the reality is freight is charged by the greater of weight or cubic volume so sellers never actually realize any real business benefits of free shipping for bulk orders unless they function in an industry operating on 100%+ margins that can sustain freight imposts. For the majority though, it's only a matter of time before the business implodes from haemorrhaging freight costs and eroding margins required to support the company's longer term future. Marketing is after all marketing and shipping is just another lever.

One of the key reason sellers promote "free shipping" is due to a mindset that some consumers refuse to pay for freight, believing it's a "sense of entitlement" in ordering from you in the first place.

Free shipping is a gimmick that removes a barrier to purchase and it's generally prevalent when a business is in start-up or "investment stage" trying to build up customers. Again, it's important to put this into the right context that when businesses are in "growth" mode, they tend to care less about making the sort of returns in the long run to maintain their business sustainably. Some companies stay in "growth" mode forever which means their future is marginal at best.

So let's take a look at what free shipping does for the retail market.

With all the pressure to drive down freight costs and compete with "bricks and mortar", the companies actually carrying the goods are doing everything in their power to operate as efficiently as possible because they are in fact exposed to some of the harsh conditions of fast rising costs of any industry - new and increasing tolls, fuel price spikes, incredible road congestion, lack of convenient parking, 20+% annual increases in running costs such a servicing, rego, insurance and compliance.

All these costs are driving up the prices of freight faster than the downwards pressures applied by market pricing, so something must give....... or bust.

In response, freight companies target franchising as a means to cut costs and transfer the responsibility of survival onto an owner-operator and it's here that this multi-party transaction becomes "race to the bottom".

Since introducing Sendle a couple of months ago we have yet again hit a few speed bumps. We knew this would happen as it has been seen before in our trials over the years when piloting various freight alternatives. The service is sometimes incredibly fast and yet at other times frustratingly slow. When you average it out, it's probably on part with the AusPost equivalent.

Our analysis seems to highlight that some regional areas are poorly serviced by courier companies (I guess that should not come as a surprise). The local delivery agent, likely to be a franchisee with a defined geographical area, is driving around with parcels in the back of their van for days waiting for enough volume to justify a trip to deliver if the address is even a little bit remote from their normal daily run.

Imagine for a moment, the owner of the delivery franchise is getting barely $2 to deliver a parcel that may require a 45+ minute round trip, so they wait for enough parcels and completely ignore or disregard the service charter responsibility of delivering within defined timeframes.

You see, they have the contract for the area so they are not really answerable to anyone except themselves and some don't care about reputations as it's purely a cost survival exercise.

In case you missed it - here's what just happened to retail transactions.

Freight company outsources the delivery to a network of owner-operator agents. The agents wait for enough parcels to justify delivery runs which may take days, despite merchants busting their butts to get parcels out immediately.

In the meantime, customers with transparent visibility of tracking get angry waiting for the parcel, customer complains to the merchant threatening to never buy from them again, thinking it's all the merchants fault despite efforts to get the parcel underway in record time.

The merchant gets upset as they, like every other merchant, remains powerless to control or influence freight company performance and then undertake endless loops of raising complaints to the freight companies. The result is everyone is angry and upset because of a simple case of screwed-over economics.  

Customers desire free and fast, however, the established infrastructure cannot support those outcomes and hence the major disconnect exists in retail expectations and why it's tougher in Australia than just about anywhere.

Probably goes some way towards explaining why retail in Australia is generally now regarded as "too difficult".