Why 2017 is Australia’s retail tipping point

Australia will go through the same pain as the US and UK as it transitions into a new more globally competitive retail sector - and that will happen over the coming 18 months. Not three years

This year will go down as the year when Australian retail hit what author Malcolm Gladwell calls “The Tipping Point”.  Or in a more Australian way, as a mate of mine who has built several large Australian businesses says, “it’s all good until it isn’t”.

We’re faced with: anaemic gross domestic product (GDP) and productivity growth; $1.6 billion of discounting to fund falling product prices at shelf in grocery alone; slowing new car and motorbike sales; the whole discount department store sector combined (Big W, Kmart, Target) effectively breaking even; the impending market entry of Amazon and Kaufland; 35 new TK Maxx stores open and trading nationally; the Fair Work Commission handing down a 3.3% hourly award rate increase when prices are falling and average salary increases are only 2%; high household debt levels due to the high cost of homes; rising interest rates for property investors; slowing property price growth; and slowing economic immigration from amendments to 457 visas. 

That’s a pretty challenging little list of “stuff” going on in the Australian economy and affecting the core Australian shopper and traditional Australian retailer. So, will the Australian retail sector collapse in a heap? Nope. But it will go through the same pain as the US and UK as it transitions into a new more globally competitive retail sector. And that will happen over the coming 18 months. Not three years.

What will that 18 months’ transition look like? Well I’m not going to do the doom and gloom of the numbers behind the transition. Job losses, store closures, falling share prices and more. I’d rather focus on the things that have to start or finish in the next 12 months to be able to stabilise the decline and then grow out again in this new more competitive world.

1. Technology

In retail, all non-shopper facing, labour-based tasks need to be minimised or removed to be able to deliver low prices profitably. Anybody can cut prices and lower profit. This means: self-scan checkouts; centralised price ticketing software; digital dynamic in-store pricing; shelf-ready packaging; trolley and bagging co-opted to the shopper; cashless payments; click and collect; no store phone numbers; omni channel pricing; and choice. All these things are the bare minimum required to bring in-store labour costs in line with the cost base of international best of breed online and physical retailers to profitably deliver low prices and good service. If you check off Aldi, Kaufland, Amazon and TK Maxx against this list, they do 80% of these.

2. Innovation/reinvention

Brad Banducci at Woolworths has been an entrepreneur, a consultant and now a corporate chief executive. Innovation and reinvention are the by-products of an active entrepreneurial personality. Hire people to lead and drive change in the key parts of the business who have lived part of their life as an entrepreneur.

3. Millennials, mums and mobile

Millennials are making babies. They are digital natives who live mobile. The fun things they used to buy for themselves (clothes, wine and holidays) are now surpassed by the mundane things they need to shop for their new families: groceries, nappies, medical, cars, houses and life insurance. Put millennial mums at the centre of your digital and mobile communication and delivery strategy.

4. Partnering

Amazon sent me an email last week saying that I can now pick up my online order from 2,500 locations across Australia. Newsagencies, pharmacists, service stations and corner stores. They’ve built a “partner retail store network” by contacting, promoting and harnessing 2,500 individual and privately owned small retailers at Amazon’s expense, and they will share their low margin with these small retailers.

Partnering is the toughest of the four things on this list. It’s tough because to truly make it work, both parties have to give more than they take at various times in the relationship. In Australia, we don’t have a good record of partnering. We are very competitive and adversarial in sport and business, and usually have personal knowledge and views of others in our business eco-systems. That needs to change with gender, chronological and ethnic diversity playing an important part.

It’s all doable but we have left our run late. The speed of change now required means it’s become a burning platform. That’ll help focus minds in the board room and executive suite in major retailers. Then it’s all about driving change.