In Australia today consumers are being confronted with one of the most bizarre advertising campaigns run by the retail industry.
Retailers want their customers to pay more for their goods and services when purchased on-line, by requesting the government introduce a goods and service tax (G.S.T.) ! In fact, these same retailers are willing to spend millions of dollars on a media campaign to drive this emotional frenzy.
To the rational bystander this appears to be a non-rational position for a variety of reasons, for example, on-line retail today constitutes approximately 3% of all retail sales. Yet, many of these same retailers have been pushing their brands as the consumer champion, by emphasising the perception that they provide the best deals.
So lets delve into what is potentially underlying this commotion. Retailing is a fixed cost business driven primarily by three key fundamentals Rent, Labour, and the Supply chain.
Retailers now drive the majority of their labour costs on a more variable cost basis as a result of casual labour. In turn, the reduction in labour cost has reduced service levels, with many of the large retailers having less than 1 person per 100 square metres of floor space. This results in the premium large scale retailers providing a service experience no better than one would receive in a supermarket. So why should customers pay more for less?
Furthermore, retailers are arguing without the G.S.T. being applied they will have to reduce labour further. This would potentially drive more customers on-line as service levels would continue to decline.
On-line has efficiencies driven by low levels of labour and rental cost per transaction, supported by central warehousing. However, its economics are impacted by distribution costs although most pass this cost onto the end customer. Most of the major retailers have the ‘Bricks and Click’ model choice, so this is not the major issue.
One of the most important and least discussed factors in this debate is the impact of margins generated by premium brands. Many of these same brands are more than 50% cheaper overseas than comparable products and services in Australia. This is therefore the heart of the issue. Consumers want access to brands like Ralph Lauren, Gucci, Apple, etc at prices that are affordable and comparable to overseas, whereas the local retailers are determined not to lose these big margins and have the consumer pay.
It is estimated that at least 15-20% of consumer sales fall into what some retailers call ‘cream’.
So what is the key driver ? The Australian dollar has appreciated against the $US by 17% since June (2010), however, the average value of the Australian dollar against the $US for 2010 was greater than 90 cents. The retail industry has had more than 12 months to compensate and define an executable strategy based on a high value dollar.
What makes this whole debate so bizarre, is the more the major retailers continue to promote this issue, the greater the consumer awareness, which will result in increased numbers of consumers seeking on-line purchasing as an alternative to physical stores. In the end, the customer is always judge and jury, and it is up to the retail industry to make the step change.
I look to your feedback and comments.