Tag: retail

The real e-myth

The Internet is not killing retail, it’s lousy service, poor pricing and 1980s management that digging the incumbents’ graves.

The collective gnashing of cavity filled teeth over the demise of the Darrell Lea confectionery chain has given rise to some interesting commentary. If some pundits are to be believed, the lolly maker’s financial woes were due to the evil interwebs allowing Australians to buy choccies from cheap overseas suppliers.

But if you were to cross the road from Darrell Lea’s flagship Sydney shop you’d be outside one of Apple’s iconic stores that are the most profitable retail outlets on the planet – US Apple stores are 17 times more profitable on a per square foot basis than the average American retailer.

So retail can be successful. It just depends upon how it’s done and the internet has little to do with many of the retail failures we’re seeing at the moment.

Darrell Lea being absorbed into the VIP Pet Foods empire has a lot of lessons about retail but they are more about service and the failure to move out of the Twentieth Century, particularly when new competitors like Haigh’s and multinationals like Lindt are entering the marketplace.

Service is an integral part of this story. While the service at Darrell Lea stores wasn’t terrible it also wasn’t particularly notable and neither was the value of many of the products, leaving the customer underwhelmed.

A similar story of poor service is behind the failure of the Allans Billy Hyde chains – the comments on the Smart Company story about the music stores’ collapse indicate how customers found service lacking while the prices and range were ordinary. There was no real reason to shop there.

The business models of Darrell Lea and Allans Billy Hyde are locked into a 1980s way of doing business where one or two chains dominate a segment and attempt to charge duopoly prices while exercising their market power to screw suppliers.

A duopoly model works for Woolworths and Coles simply because of their scale. If you’re a smaller chain selling non-essential, non-perishable goods then customers will either not buy them or find better deals and service offshore.

Staff, of course, are a nuisance – after all they only serve customers and customers don’t matter when you have the market locked up – so staff are treated as a cost to be ruthlessly minimised while being paid the minimum that the well-paid management can get away with.

That contempt for retail staff is exacerbated by management’s reluctance to train them, which locks the stores into a downward service spiral as knowledgeable and experienced shop assistants find a job where their skills are valued.

Despite the scorn poured on Apple’s staff training policies, the core of their retail success is that you will get a passionate, knowledgeable person helping you at one of their stores while their competitors will leave you wandering the aisles unless they think there’s a fat commission to be had.

This contempt for suppliers, staff and customers is the real malaise for Australian retail and it’s an opportunity for smart new entrants into the marketplace.

While many of those new entrants might be online, the ecommerce side has little to do with the fundamental problems of lousy service and overpriced products.

Interestingly, while Darrell Lea had an online strategy, the new owner doesn’t. Any customer visiting the VIP Pet Foods site has no chance of finding where they can buy the products, let alone order them through the website.

While it would be nice to know where you can buy their products, the owners of VIP probably don’t care as their business model is based upon distributing their products to retailers and those stores can do their own advertising.

So retail still matters and the high hopes we had in the late 1990s that ecommerce would drive the middle man out of business was just as wrong-headed as the old-school managements of our dying retailers.

 

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Goodbye to the electronics store

As the economy and society change, the era of the big box retail store is coming to an end.

“Can Electronics Stores Survive?” asks the Wall Street Journal.

The future doesn’t look good with the liquidation of Circuit City in the United States and the exit of Australian giant Harvey Norman from the electronics markets.

Yet Apple Stores are growing and while it’s tempting to dismiss their sales training as brainwashing the truth is their staff are among the most profitable retail employees on the planet.

The real problem is the Big Box category killer store featuring wide product lines but poorly trained staff motivated only by commissions is a business model whose time has passed.

Customers can now go online, research website that are far more informative and honest than the staff at the megastore then get the appliance delivered and often installed for less than the shelf price at the mall.

The earliest industry this has affected is the computer sector – long ago companies like Dell and Gateway changed how people shopped for PCs.

Given the economics, it’s surprising the low margin big box stores survived as long as they could and the main reason they did was because appliances were an ideal channel for pushing profitable finance plans and extended warranties.

Often the store and sales assistant made more money out of the “interest free 72 months” deal, the three year warranty and the connector cables than they did from selling a top end laptop or plasma TV.

Now the easy credit era is over, those add-ons aren’t so profitable and with Amazon leading an army of e-commerce retailers changing customer expectations, those businesses locked into Big Box, easy credit way of doing things have to rethink how and what they are selling.

Harvey Norman’s founder Gerry Harvey said recently that people would still buy big items from his store. The reality is they are moving across to sites like Winning Appliances where they can choose the items, have them delivered installed and the old appliance taken off, a godsend when you’re dealing with a 50Kg washing machine or fridge.

Apple’s success shows retail does have a future. It just doesn’t lie in the low service, Big Box model that grew out of the easy credit and cheap energy economy of the late twentieth Century.

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Empathy and the genius salesman

Apple’s Genius training manual shows the importance of empathy and investing in staff.

One of Apple’s great successes has been in delivering services through its stores. Tech site Gizmodo managed to get a peak at Apple’s training manual for their in-store ‘Genius’ technicians.

A word that keeps popping up in the manual is ’empathy’ – as Gizmodo says;

The term “empathy” is repeated ad nauseum in the Genius manual. It is the salesman sine qua non at the Apple Store, encouraging Geniuses to “walk a mile in someone else’s shoes,”

While the Gizmodo writers and many of the site’s readers seem surprised or cynical about this, it’s not surprising for anyone who’s worked in sales or tech support, and the Apple Store Geniuses are doing both.

Empathizing with the customer or caller gives them confidence and builds trust. For someone in sales, listening and emphasizing is how one finds out what the customer really want. On the support desk, putting yourself in the customer’s position makes it easier to diagnose the problem.

That empathy a real return on investment – US Apple Stores earn 17 times more per square foot than the average retail store. The next most profitable retailer is Tiffany & Co who only boast have the revenue.

What Apple again show is that training matters. Every surly computer store assistant, every grumpy flight attendant or bored call centre worker can, with the right training and incentives, be just as effective as an Apple Store genius.

Sadly too many businesses, particularly retailers, see training as a cost and their employees as naughty children. Those businesses have a serious problem.

Without empathy – the ability to put yourself in your customers’ shoes – your business is working with a distinct disadvantage.

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Undoing the untrained workforce

The era of skimping on staff training is over

One of the notable things about the 1980s way of doing business was how front line workers weren’t valued for their skills and knowledge.

In call centres, shopping malls and government departments, those who dealt with customers were seen as an unnecessary expense who should be outsourced at the first opportunity or, if it wasn’t possible to hive them off, then encourage them to get more money out of the customer while providing less service.

An example of this was at electronic superstores where sales staff with little product knowledge were given rudimentary training and then encouraged to sell easy payment plans and expensive acccessories – the HDMI cable scam where connectors of dubious quality earned more profit and commission than the HiFi systems or plasma TVs they plugged into illustrated how lousy a deal this way of doing business for the customer.

Much of that mentality has been inherited by web2.0 companies that think customer service is an optional extra.

Some of those companies can’t even be bothered protecting their clients’ data properly, such is their unwillingness to provide service.

The stack ’em high, sell ’em cheap self service culture of the 1950s and 60s reached its limits in the 1980s and was only given a reprieve by the easy credit boom of the 1990s. With the end of the credit boom, electronic or household goods stores that simply sell cheap tat on interest free terms at a fat mark up without adding value now struggle.

Gerry Harvey is getting out of electronics partly for this reason – his business model is dead and it’s been difficult for a decade to make the fat profits on consumer computers or electricals without hooking the customers with interest free deals or expensive and pointless accessories or software.

One of the conceits of management through the last part of the Twentieth Century was the mantra “our greatest asset are our people”, today business have to start valuing the skills, knowledge and corporate memory of their workforces.

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Tracking the end of the consumer society

One statistic illustrates how economies are changing

I’m currently researching a presentation about the retail industry.

One of the things that leaps out when researching consumer behaviour is the savings rate.

For twenty-five years from the early 1980s to mid 2000s, the savings rate collapsed in Western economies; below are the US and Australian rates.

The US Personal savings rate shows the rise of consumerism
US Savings rates 1950 to 2020 – St Louis Federal Reserve
How did the Australian savings rate fall during the consumer boom
Australian Savings Rates 1980 to 2012 – Reserve Bank of Australia

 

The graphs show the same thing; households spent their savings over the 25 years which drove the consumer economy. It’s no accident that period was a good time to be a retailer.

Being on a deadline, I don’t have time to analyse these number further right now, but one thing is clear; most of the consumer boom from the Reagan Years onwards – or the equivalent from Maggie Thatcher or Paul Keating – was driven by households reducing their savings.

That couldn’t last and didn’t. Businesses and governments that are basing their decisions on what worked through the 1980s and 90s are going to struggle in the next decade.

Looking at these figures raises another suspicion – that graphs showing non-real estate investment by businesses and government would show similar declines over the 1980-2005 period.

It might be that golden period of what appeared to economic success was just us living off society’s collective savings.

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Playing with Dragons

We should be careful how we treat our customers.

Chinese manufacturing has been in the news recently with various exposes of factory conditions by the New York Times, the now discredited Mike Daisey and a fascinating look at US store chain Wal-Mart’s supply chain by Mother Jones’ Andy Kroll.

In his examination of Wal-Mart’s Chinese suppliers Andy Kroll interviews factory owners and managers with a common theme, they are all loath to be identified for fear of incurring Wal-Mart’s wrath.

This is wall of silence is familiar in Australia; the reluctance of local suppliers to speak about the conduct of the Coles’ and Woolworths’ policies has hobbled enquiries into the domestic retail market.

Another aspect Chinese and Australian have in common is how the retailers drive down costs with big buyers insist upon regular price reductions from their suppliers.

This is what happens when your business is a price taker that relies on one or two suppliers; you accept what you’re offered or lose a large chunk of your business.

With many of Australia’s industry sectors now dominated by one or two incumbents, this way of doing business is now the norm rather than the exception.

As a nation Australia’s finding itself in that position as well. Now our governments and business leaders have decided Australia will only dig stuff up with a few favoured, uncompetitive industries like car manufacturing being being protected, the entire country is in a position not dissimilar to a Foshan coat hanger manufacturer.

Having that dependency on one or two major customers is a risk and when the commodities boom turns to bust – commodities booms always do – our relationships with these customers will be tested.

When that test comes, the clumsy way the Federal government has banned Chinese companies from tendering to the National Broadband Network or blocked investment in mining projects may turn out to be mistakes.

This is the problem with being a price taker selling a commodity product, you become hostage to fortune and when the market turns against you there isn’t a great deal you can do.

In the early 2000s computer manufacturers like Dell and HP decided to sell commodity products then watched with despair as Apple captured the premium, high margin end of the market. Neither business has truly recovered.

Being trapped at the commodity end of a market is not a comfortable place to be, particularly if you don’t have a plan to move up the value chain.

If your business is currently selling low margin, commodity goods then it’s worthwhile considering what Plan B is should the market turn against you. You might also remember to be nice to your customers

At least you’ll show you have more forethought than our leaders in Canberra who seem to like to play with dragons without thinking through the consequences.

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David Jones’ wasted decade

Poor decisions by unaccountable management are killing industry icons

In 2001 Australian retailer David Jones shut down their website.

Back then, the future was clear; profits were in financial services and certainly not in online sales or investing in improved stores and service.

Today the company released their strategic review that looks forward to financial years 2013 and beyond. You can downloaded it from David Jones’ investor website.

On Page 13, they show just how far David Jones has fallen behind their international competitors. Less that 1% of DJ’s sales are online compared to 4.5% of the UK’s House Of Fraser and 13% of John Lewis.

Australian executives claim they are in a global market for their talents which is why they deserve world standard remuneration. David Jones’ results show how hollow that mantra is.

The problems start with the board, five of the eight current David Jones directors were with the company when that decision was made in 2001.

None of them have been held to account.

David Jones illustrates the weakness in Australia’s business sector – largely unaccountable boards answering only to institutional investors who themselves have grown fat and lazy on clipping the compulsory superannuation ticket.

One hopes the some of the competitors who are displacing flaccid incumbents like David Jones are based in Australia or the locals may soon find that many of these sectors, not just in retail, will go offshore to better run companies.

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