Bold Moves: five radical changes to thrive in a changing retail environment

The Australian retail sector is facing seismic changes as global competitors enter the local market. This radical change of landscape requires an equally radical response.

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Operating on a world stage

Chris PaxtonPwC National Retail and Consumer Lead Partner

Paul ZahraPwC’s Global Retail Advisor

Australian retailers have always faced tough competition with retail brands fighting head-to-head. Not only is the Australian retail sector recording limited growth, but many domestic retailers are now losing share to international competition. This includes both the entrance of new players with a ‘bricks and mortar’ presence (for example, H&M, Zara and Uniqlo) as well as pressure from ‘pure play’ online-only retailers.

In the US market, where retailers have been combatting these new entrants for a number of years, sales have actually grown during the last several years. However, essentially all of the inflation-adjusted gains in retailer revenue have been attributed to online channels which enjoy growth rates as much as seven times greater than retail sector growth as a whole.

As globalisation gains momentum, the Australian market is increasingly attractive to international retailers, many of whom see Australia as the ‘last frontier’.

Our research suggests that there are still approximately 200 international brands with the potential to set up shop in this country in the next few years.

The threat is exacerbated by the fact that newly liberated Australian consumers now demand lower prices, more choice, greater quality and a seamless customer experience. For Australian retailers, giving the customer what they want while maintaining profitability remains their greatest and most urgent challenge.

Until now, the Australian consumer model has been fundamentally based on a ‘shopping centre’ driven consumer, but this is about to change. Agility around price, service experience and speed of customer delivery provides these global players with a significant advantage. Additionally, these new businesses are not hamstrung by legacy issues around staffing agreements, bureaucratic processes and antiquated systems, or a heritage of physical locations.

It’s time for Australian retailers to tackle the threat head on. What are you doing to combat this? You need to be bold if you want to be competitive. You’re now operating on the world stage and you can no longer afford to rely solely on your brand’s heritage on an island nation to survive.

PwC have developed five bold moves Australian retailers can adopt immediately not only to survive, but to thrive.

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Cut your range by 25 per cent

Start a price war and beat global players

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Refocus on core activities to reduce operating costs

Shut down 25 per cent of your store network

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Join forces with your rivals by partnering

with a ‘frenemy’

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The Australian retail sector is set to be shaken up in a way it’s never been before. The competition will become even fiercer and, in many cases, it will be brutal as some brands find they are simply unable to compete.

In the last five years, many local retailers including iconic brands such as Dick Smith, Pumpkin Patch and Payless Shoes have closed, and many more will disappear in the next five.

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According to PwC’s 2016 Total retail survey, price still motivates 40 per cent of customers.i Now that consumers can shop anywhere, anytime with price transparency, price is even more of a motivator.

When the options are either to lose market share to an international retailer or fight them head on, it’s an easy choice to make.

But it’s not about dropping prices across the board. You need to be strategic about the areas of your business where you face the most serious competition in order to start a price war you can win. Focus on value perception – it's not necessarily about being cheaper on every item. For example, focus on key items that are most price sensitive. The idea is to take the customer concern of price out of the equation.

For premium brands, there are still opportunities to improve price perception across specific parts of your business. Experiment with innovative pricing models such as introducing more entry level price points.

Where to start …

1. Understand your business so you can choose your battles in a price war.

2. For premium brands, look at innovative pricing models to change the perception of price positioning.

Bold Move 1: Start a price war and beat global players

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Bold Move 2: Cut your range by 25%

Use customer demand and insights to reduce your range by one-quarter then negotiate better pricing for the remaining products.

Differentiating your brand and being focused is key. Unless you are a leading global retailer, providing an all-encompassing brand is business suicide. Customers expect you to curate, so applying a ‘good, better, best’ strategy is vital to reducing costs while still satisfying customers.

Cutting your range by 25 per cent will streamline your inventory while also reducing in-store stocking, picking and ticketing costs, resulting in improvements in inventory and labour productivity. To be sure you are cutting back in the right areas, use customer data to fine-tune your offering so it is consistent with the demands of your core and emerging customers.

Where to start …

1. Too much inventory bears too much cost, so differentiate your brand by streamlining your range.

2. Apply a ‘good, better, best’ strategy to cut costs without alienating customers.

3. Be driven by customer data when it comes to reviewing your range

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Bold Move 3: Refocus on core activities operating costs

Non-core activities can soak up precious funds and resources that could be better invested in product innovation or omnichannel experiences – initiatives that will reap immediate rewards.

Any non-core aspect of your business should be assessed. What are you doing that is peripheral to serving the customer? Can this be outsourced or, better still, eliminated?

All back-of-house costs need to be thought of in terms of a zero-cost base. Can these be removed or reduced with a technology investment (for example automated centralised telephony, automated receiving offices, centralised warehouses with robotics)?

There are significant marketing cost savings to be made in moving your business and your customers to a digital base. Research by analytics and optimisation agency, Seriously Simple Marketing, suggests that targeting 2000 customers through social media costs $75 versus direct postal mail costing $900.ii The shift from traditional to digital media can save millions of dollars for mid-tier retailers over time.

Where to start …

1. Focus on core activities and stop doing the things that don’t pay their way

2. It’s not just about operating costs – outsource non-core tasks that can’t be eliminated to increase efficiency.

3. Use technology to streamline back-of-house operations.

4. Move away from traditional marketing methods and embrace digital marketing to lower costs and improve results.

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Bold Move 4 : Shut down 25 per cent of your store network

Identifying the worst performing stores in your network and closing these down enables you to invest more money and resources in digital. Serving fewer locations can also improve productivity and the customer experience.

In 2016, large retailers such as Macy’s, JC Penney, Gap and Walmart shut down stores while at the same time investing heavily in flagship locations and their digital presence. By embracing omni-channel concepts retailers can offer consumers a seamless in-store and online experience.

Conventional wisdom suggests Australian retailers need a presence in every region or location, however, a wide store network is no longer a determinate of profitability or future growth. Instead, retailers are better off focusing their resources and effort on shifting the same volume from fewer shopfronts. Flagship stores can double as customer experience centres that convey brand values and are equipped to offer omni-channel customer experiences.

The omni-channel experience also creates strong brand advocacy and leads to customer retention, with some reports suggesting that an omni-channel approach can result in an 89 per cent customer retention rate compared with 33 per cent for a traditional approach.iii

Showrooms are most efficient for differentiated goods and can complement the broader sales approach by offering customers the opportunity to physically experience products as well as seek out expert advice and place follow-up orders. PwC’s Total retail survey 2016 found that 59 per cent of global shoppers surveyed want an inviting ambiance when they shop, so investing in showrooms to enhance this experience, rather than the whole network, is paramount. iv

The store network of the future has flagship store locations with key satellites that offer an omnichannel experience, ensuring customers can shop anywhere, anytime, any way they want – and all of it seamlessly.

Where to start …

1. Reduce your ‘bricks and mortar’ footprint to increase profitability and customer satisfaction.

2. Invest in flagship stores rather than a national network that is spread too thin.

3. Invest in digital and specifically achieving a seamless omni-channel experience to enable customers to choose how, when and where they shop.

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Bold Move 5 : Join forces with your rivals by partnering with a ‘frenemy’

Practically speaking, a retailer can’t afford to invest in every customer-centric capability at the one time. Instead, identifying gaps in the customer experience – across anything from logistics and fulfilment to personalisation – and collaborate with a competitor or technology provider to address this gap, even if this goes against conventional retail wisdom.

eBay’s launch in Australia is the perfect example – retailers initially saw them as a competitor, but now, for many they are a valued partner, helping brands reach a wider audience.

If it’s cost-prohibitive to invest in a new technology that enhances service or customer experience, then collaborate with a potential competitor. For example, UberEATS is providing restaurants with an alternative means of distributing meals to customers, and expanding their customer base in the process. In the changing world of retail, transparency can be an asset and collaboration will become the new normal.

Naturally, all collaborative arrangements with competitors need to be reviewed for compliance with competition laws before being consummated.

Where to start …

1. Collaboration is the new normal. Form strategic partnerships to reach a larger customer base.

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Where to from here?Digital is one of the most important tools for any retailer because although 90 per cent of sales in Australia still go through a store, approximately 80 per cent of those sales start with an online experience. Digital is also shifting power from retailers to consumers. Yet brands are still as important as ever, with 61 per cent of 24,000 shoppers from PwC’s global Total Retail Survey 2016 saying they remain loyal to brands.v

This means a truly differentiated and unique product and customer experience is needed to improve a retailer’s brand. Following the five bold actions will help you to provide this differentiated experience and create ‘brand advocates’.

These advocates are more powerful than ever with 39 per cent of shoppers saying they rely on their social network to help them buy a product or service.vi When you consider the rise of multiple social media platforms and the significantly lower cost of digital marketing then it is for good reason that Australian retailers need to be using social media for promotions and marketing, providing transparent stock and price availability on their websites and other online stores such as eBay and offering an online experience that is connected to the in-store experience.

While the five recommendations we have listed above may be radical, it is clear that a ‘business as usual’ approach is not sustainable in the face of an unprecedented global onslaught on the Australian retail marketplace. That is why we believe local operators must take a bold approach to meet the new competition head on.

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End Notes

i. PwC, They say they want a revolution – Total retail 2016, PwC 2016. http://www.pwc.com/gx/en/retail-consumer/blications/assets/total-retail-global-report.pdf

ii. Mercer, C, Traditional vs. Online Marketing – The Real Value of Your Online Marketing Efforts, Seriously Simple Marketing, Tomitrader, 2015. https://seriouslysimplemarketing.com/traditional-vs-online-marketing

iii. Cassar, Ken. Echo turns up the volume on Amazon’s ambitions as audacious bets pay off, Slice Intelligence. https://intelligence.slice.com/echo-turns-volume-amazons-ambitions-audacious-bets-pay-off

iv. PwC, They say they want a revolution – Total retail 2016, PwC 2016. http://www.pwc.com/gx/en/retail-consumer/publications/assets/total-retail-global-report.pdf

v. Ibid.

vi. Ibid.

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Chris PaxtonPwC National Retail and Consumer Lead Partner

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Paul Zahra PwC Global Retail Advisor

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