As online retail breaks down geographical barriers, increasing competitiveness in the local retail market – Michael Fox, Shoes of Prey Co-Founder, discusses the importance for retailers to differentiate their product offering in order to sustain business, especially within the online space.
The growth of online retail is making business much more difficult for retailers who sell branded products that aren’t their own. It’s very hard for a retailer selling say a Canon camera to differentiate themselves. Yes, they can offer better service or in store experience, however for a $1000+ product, those differentiators are minor compared with the actual cost of the product itself.
Why would I pay $1349 for a digital camera at Harvey Norman (which I have to go in store to purchase), when I can purchase it from an online retailer based in Hong Kong for $570* (inc shipping)? Even if the Australian government charged me 10% GST for importing it, Harvey Norman is still more than double the price!
Harvey Norman, Myer and many other Australian retailers are experiencing this exact issue at the moment. They’ve decided to blame this on the government for not charging GST on sub-$1000 online retail purchases made overseas.
As can be seen from the above example, that’s just a red herring and isn’t the real issue. A historical lack of competition in the Australian retail market has meant local retailers are used to operating on considerably higher gross margins than their foreign counterparts and now that online retail is opening up the local retail market to foreign competitors, Australian retailers are suffering.
This is the danger of retailing someone else’s product – when the end product can be purchased from many different retailers, margins are going to be squeezed. This is great for the consumer and generally positive for the owner of the branded product, but bad for retailers.
There are two solutions to this:
1. Differentiate Your Retail Offer
Zappos, Amazon and Net-a-Porter are all great examples of this. They mostly sell other people’s products but have been able to build strong points of difference between themselves and other retailers. For Zappos, it’s their extraordinary customer service, for Amazon it’s convenience, fast shipping and through their operations the ability to be the lowest cost retailer and Net-a-Porter it’s their online shopping experience and packaging.
2. Differentiate Your Product Offer
Apple is arguably the best example of this. I’ve not looked at figures, but given their rapid roll out and the number of fanatical customers constantly in their stores, Apple’s retail stores must be a very profitable part of their business. Apple products are available in other stores but the company can essentially control the retail pricing through its wholesale pricing. The company doesn’t need to be pushed on margins to compete, if I want to buy an Apple product I can’t get it for half the price by shopping around.
Australian retailers are generally poor at differentiating their retail offer but are getting better at differentiating their product offer. Woolworths and Coles have done big pushes with their house brands ‘Select’ and ‘You’ll Love Coles’ in recent years. Supercheap Auto had a similar roll out of house brands while I worked there.
That said, the goal of these house brands is generally to just match the quality of the major national brands but gain more control over the pricing and the brand. Because the product is not significantly differentiated Woolworths or Coles can’t charge a premium on their house-branded corn flakes over Kelloggs corn flakes, they actually have to charge less because it’s a very similar product minus the well known and trusted brand.
We’re in the good position at Shoes of Prey where we only sell our own product, and it’s significantly differentiated from nearly every other women’s fashion shoe sold on the market in that customers can design it themselves. While we can’t price our products ridiculously, we’re not pushed on margins in the same way that a retailer selling a well known branded shoe can be. If a customer wants to design their own shoe there aren’t a myriad of options available to them. Ideally we’ll also build Shoes of Prey into a well known, trusted, iconic brand so even if other companies enter the custom shoe market we’re still in a strongly differentiated position as the only retailers of ‘Shoes of Prey shoes’.
Hopefully other Australian retailers will start to move in the direction of differentiating either their retail or product offer. The issue for retailers having their margins squeezed on products that aren’t their own is only going to increase over the coming years as Australians get more and more used to shopping online.
Michael Fox also has his own blog 22 Michaels, which is a diary of the adventures, successes, failures and everything he has learnt, in the attempt to start his online retail business.
*The Canon 550D and Kissx4 are identical cameras, the Kiss x4 is just the Japanese version.