Deloitte's 2014 Global Powers of Retailing details the impact global retailers will have on local players - and what they can do to fight back.
2014 will see two giants of the global fashion retail world opening their first stores in Australia.
H&M is due to open its flagship store in the iconic GPO building in Melbourne, whilst Melbourne will also be the location of Fast Retailing’s (Uniqlo) first store in Australia.
Both retailers rank in the top 100 global retailers.
The splash created by the introduction of the Zara brand to the shores of Australia by the Spanish retailer Inditex is evidence of the impact major global retailers can have as they enter the Australian market.
What does this mean for Australian retailers?
The influx of new retailers into the Australian market will undoubtedly continue to add to the already significant pressures faced by Australian retailers.
These pressures have likely helped resurrect the debate around lowering or abolishing the GST threshold on imported goods worth less than $1,000, although the decision has now been delayed until March 2014.
Whilst this exemption may be seen to give some overseas retailers an unfair advantage, the debate masks the real issue – Australian retailers’ competitiveness relative to overseas retailers.
So how do Australian retailers compete against these new entrants?
Firstly, it’s important to remember that Australian retailers have a number of advantages over new players to Australia. These advantages need to be maximised:
Store Locations – many of the best retail locations are held by Australian companies. The increased competition in the market will continue to put pressure on lease prices and availability, but local retailers have the advantage of being here first.
Customer knowledge – building up an understanding of your customers takes time, and there is a significant competitive advantage to those retailers which can design, price and deliver products specific to their customers’ needs.
Customer and brand loyalty – Just as it takes time to build an understanding of your customer, so too does it take time to build loyalty for your product or service offering. Certain overseas brands will always have an instant appeal when they first hit the Australian market, but sustaining that brand loyalty over a period of time can be more challenging.
Local knowledge and contacts – Networks and contacts in the community and in government are invaluable and again it takes time to build and nurture such relationships.
Market knowledge – every market is different and Australia is no exception. Some of Australia’s structures are fundamentally different to other countries. For example wage rates for retail workers in Australia are significantly higher than many other developed countries in the world. Likewise property lease costs in the main metropolitan areas of Australia are some of the highest in the world. As a consequence the cost base of operating in Australia differs significantly to say that of the UK or US.
Whilst Australian retailers will be very familiar these structures, if overseas competitors haven’t adapted their business model accordingly their returns in Australia will be significantly below their initial expectations.
Choosing the right strategy
With so many competing priorities, choosing the key areas of the business to focus on is critical to remain competitive in this environment. From our global retail experience there are 4 key areas some of the most successful retailers are currently focussed on:
Cost rationalisation – whilst many retailers have taken significant costs out of their business, the competitive environment faced by suppliers means that in many cases there is further scope to take costs out of the business
Direct sourcing – a growing trend amongst retailers is to source products directly from the manufacturer. Not only does this reduce a layer of costs, it also gives the retailer greater control over the quality of goods and timing of receipt
Pricing – the ability to analyse and understand the impact of changes in prices through data analytics techniques can bring significant benefits. It can be used to determine optimal pricing, vary prices on products by store/region to tailor to local customers and grow sales and basket size through targeted pricing and discounting
Customer experience – a key differentiator continues to be customer experience. A number of major retailers are now re-allocating resources back into customer service in order to differentiate themselves and increase the perception of value to the customer. Likewise many retailers are investing in different store formats to attract customers away from online shopping and back into stores.
Australian retailers shouldn’t be afraid of new entrants to the market.
Instead, they should be embracing the new ideas and offerings they bring with them but adapt them to their own business model.
Australian retailers have many strengths and advantages when it comes to competing with new market entrants, but they must be willing to evolve to meet the challenges of an ever more competitive market.