A Competitive Retail Industry: Is It A Race To The Bottom?
The Australian retail industry is a highly competitive market. It always has been and always will be. As such, it is always destined to change into something new as people enter or exit the market.
Those in the industry are all too aware that growth in the sector as a whole has trended down for a number of years. While traditional business models and bricks-and-mortar stores have started to decline, the shift to digital has intensified competition in the industry.
Now, barriers to entry for new retailers to enter the market are almost non-existent. It is now relatively inexpensive and exceptionally quick to set up an online store and start selling products. Consumers also have more choice at their finger-tips than ever before. Searching the market for the lowest price, without having to physically travel from store to store, makes price comparison a standard part of the buying experience.
Many experts expect this pressure to become intensified with the entrance of Amazon into the Australian market later this year. The retailer’s notorious ability to operate on very small margins, large volumes and absorb large operating losses means that they do have the ability to run many businesses out of the market.
Does this mean retailers are now stuck in a race to the bottom? Are they forced to under-cut each other to offer the lowest price for the ever fickle consumer?
It Sounds Like Armageddon?
Fortunately, it’s not all doom and gloom. Amazon operates in a large number of countries around the world: USA UK, Germany, France, Canada, Netherlands, Brazil, Japan, India… the list goes on.
Yes, Amazon is dominant, but there are still plenty of other thriving retailers achieving success in these markets.
The larger retailers, with a broad range of products such as Harvey Norman, JB HiFi and Myer will be the ones that really struggle against Amazon.
A great way to understand it, is using a model of competition put forward by Michael Porter from Harvard Business School. In very basic terms, there are 3 main strategic ways to compete:
1. Price – being the cheapest product.
2. Differentiation – offering a unique product
3. Focus – marketing towards a target niche
A business may develop a strategy towards one or two of these directions, but not three. Otherwise they will become stuck in the middle with no clear competitive offering.
The large retailers in Australia are not offering unique products, nor operating out of target niches. Therefore, their price becomes a dominant strategy, which will be very difficult against Amazon.
At times like these, it actually pays to be a small business!
So How Do I Succeed At Retail?
Firstly, step away from the catastrophic thinking and focus on what you do best – connecting with customers and delivering the products they want, in the right place, at the right time, with the right price. If you do that better than others, you will have a thriving business.
Online stores, particularly those who carefully curate their product range can follow a strong ‘differentiation’ strategy. This allows the business to be perceived as an expert on a particular good or service in the minds of the consumer. Amazon, has a broad knowledge of a lot of products, but small businesses that become experts on a subject, can be the solution providers of a consumer-need.
Small businesses should also make sure they find a strong target niche. Amazon, for example, will be able to do a lot of things well, but they won’t cover absolutely every aspect of every market. Small businesses are really well placed to find and thrive in target niches.
When I was working in the music industry, I saw the same thing time and again. Old-retailers sticking with old business models… and losing!
When iTunes came along, no one wanted to know about MP3s – CDs were the profitable vehicle of the time. Unsurprisingly, those that wanted to pretend the old ways of business would win out are now out of business. It’s the same thing with Amazon.
Those retailers that accept that change will always occur and take proactive steps to develop strategies for the new market, will be the ones that thrive.
Initiatives, such as personalisation, in-store experiences and meaningful loyalty programs can help retailers maintain a connection with their current customer-base.
And Amazon itself will provide a new avenue for retailers to reach a vast number of customers. A number of tools exist for stores to manage pricing and inventory on the Amazon platform, and make sales through your own shop – it’s just another arm of the all important omni-channel experience.