The Real Reasons Why Brick & Mortar Retail is Struggling

By Andrew Gorecki | 04 Sep 2019

Many retail industry insiders, along with the media and external observers, believe that the rise of e-commerce signals the demise of traditional retail.

The coinciding growth of online sales and big retail brand bankruptcies makes for an intoxicating digital disruption narrative. Yet, deeper inquest reveals a serious gap between reality and popular opinion.

First of all, industry-wide statistics about sales moving online are of little use as every retail vertical is different. For example, CD and DVD stores have no future, as near to 100 per cent of all video and music content will drift towards ever-available online download and consumption.

However, if you sell low-cost groceries, an e-commerce presence may not even be relevant, let alone necessary. Think about the success of Aldi here, which is 100 per cent focused on getting customer traffic through the door.

Consumer behaviour and the nature of the merchandise aside, the root of the problem for Australian brick and mortar retailers goes far beyond the overhyped online vs physical retail question.

To explore the topic, I have selected three distinct retail verticals for closer scrutiny: supermarkets, apparel and high-end cosmetics. But, let me start by reflecting on the general conditions affecting the industry.

All brick and mortar retailers in Australia are brutally squeezed by three forces: exorbitant rents, the highest labour costs in the world, and biased workforce laws and regulations.

The combined weight of these commercial and regulatory handicaps causes the primary structural pressure that forces retailers to close stores and run them understaffed. As a secondary factor, e-commerce agitates the situation further, but only in some verticals.

In terms of addressing the commercial and regulatory pains, the only advice I can offer here is to support local retail advocacy bodies such as the Australian Retailers Association, stand up to the landlords by refusing excessive rents and 5 per cent annual increases. But, realistically, our hands are mostly tied. The only consolation is that this pain is shared by all Australian retailers.

The only real escape is to expand your physical and digital footprints to other countries with a more business-friendly climate – don’t keep all your eggs in one basket.

Debunking the digital charade – the three verticals

Let’s start with supermarkets.

One should be forgiven for believing that the Australian supermarket sector is in crisis. For a few years now Coles and Woolworths have been struggling to return decent profits and match last year’s sales. Media chatter on the topic reinforces the perception that this retail sector has significant problems in general. Even as I’m writing this article, Woolworths yet again complained about tough retail conditions.

Yet, in reality, the Australian supermarket sector continues to grow, quite solidly. Costco keeps opening new hyper-stores and Aldi has opened 500 supermarkets over the last 12 years. As mentioned earlier, Aldi doesn’t sell online.

Coles and Woolworths are trying to fight Aldi and Costco by shedding brand names and offering home-label products. Soon, most of the duopoly’s range will be generic, taking them back to 1920s. At that point in time, no more blood will come out of the stone. Coles actually lost its battle against Aldi many years ago when it decided to kill its low-cost brand Bi-Lo.

Regardless of any strategy, their bloated underlying cost structure means that they can never match Aldi’s pricing model. Their only hope is that Aldi will ultimately slow down, as they approach saturation in their market segment.

Note that Coles and Woolworths are expanding their online businesses, but this is mostly useful to undermine the remaining IGA stores that have no local competitors. Once you add the cost of picking, packing and delivery, I can’t see how a mid-market supermarket can make money selling online?

Aldi, Costco and soon Kaufland will eventually claim close to 20 per cent of the Australian supermarket market, most likely more. This will have nothing to do with ‘digital disruption’ – they are just better operators.

Next, let’s look at apparel.

Again, generalised statistics can be deceptive. Some of the notable bankruptcies over the last few years have been caused by a cultural shift rather than e-commerce. For example, Man-to-Man and Ed Harry, both selling formal men’s apparel, have disappeared because men no longer universally wear suits for work, funerals and weddings.

Other players in the apparel game have suffered for a number of years due to the government-imposed 10 per cent price penalty for selling stock in stores. I’m referring here to the GST-free threshold for goods purchased online from international sellers. The madness stopped recently, but the damage was already done.

International brands entering the Australian market have also taken their toll on local operators, but they too have learned a hard lesson: doing business down under is not cheap. A few international raiders have already abandoned the country, and many are having second thoughts.

The key strategy for succeeding in this market segment is endurance, combined with operational excellence. The only way to survive the cyclical market conditions and increased competition is to run a lean, focused concern.

A well-structured business will still break-even during difficult times and will then flourish once conditions improve. A bloated business will run at loss during the next downturn and this may not be sustainable. Sure, e-commerce has an important place in this scene, but only as one part of a savvy all-channel strategy.

Finally, let’s look at high-end cosmetics retailers, who operate high-touch businesses.

In this vertical, customers are unlikely to drift online in a material way, because the in-store experience is sensory, necessary and exceptional. The CX simply cannot be replicated online.

With the emergence of category killers in the beauty sector (and they are growing), the biggest losers are department stores, which somehow still manage to survive (just) by relying on two core categories: lingerie and cosmetics.

With rising competition from specialist retailers in these two segments, we will most likely see a repeat of the past assault by category killers selling furniture and appliances, which removed these lines of business from department stores. The horizon looks dire for the likes of Myer and David Jones.

Regulatory bypass

In discussing e-commerce and how technology disrupts traditional businesses, I would be amiss if I didn’t highlight an important factor that has little to do with technology.

It’s easy to think about digital disruption from the perspective that technological innovation alone prompts shifts in the ways society behaves. However, the runaway success stories of businesses such as Uber, Amazon, Facebook and Afterpay have been greatly boosted by regulatory rather than digital disruption, or regulatory bypass to be more precise. The GST-free imports that caused so much grief for Australian retailers is a pertinent example.

If you look at Uber, it uses its stock market valuation to massively fund subsidies for their drivers, and Australian authorities have let Uber start a taxi-like business without taxi licenses, dramatically destroying the value of taxi number plates. Technology obviously plays a role in this raid against existing regulation, but subsidised, substantially lower fares is Uber’s key weapon.

Amazon benefited for years selling online without sales taxes and GST (and still making no profit). At one point the online behemoth attained such a critical mass that it no longer needed any extra government help. Interestingly, Amazon makes more profit from its technology division and advertising than it makes from being an online retailer – again leveraging other profit centres to undercut brick and mortar operators.

Social networks also ride on bypassing regulations. If social networks were recognised by governments for what they really are – broadcasting platforms – and regulated accordingly, their popularity would plummet. There would be much stricter controls around the content users could publish, as the networks would be responsible for user-generated content.

Interestingly, unfair and dishonest comments have recently being banned in Singapore, but only if the victim is … the Singaporean government. Everybody else is still fair game.

Afterpay is a prime example of a regulatory bypass in retail. The buy now, pay later service side-stepped existing lending rules and now dominates a previously un-serviced niche in the market. It has become such a runaway success, sparking a long list of competitors, that regulators are now left scratching their heads about how to reign in the entire deferred payment sector.

There is absolutely no question that the rapid evolution of technology is impacting all facets of our lives. But the often-missed foundational reason is because it enables businesses to sneak through the cracks within the old-style laws and regulations. And, once ‘innovation’ becomes entrenched in social behaviour it’s too late to stop it – even if the impact is dire.

As far as brick and mortar retail is concerned, if what you offer can be delivered digitally, you need to change your operations accordingly or get out business before it is too late. On the other hand, if you sell tactile products, you don’t need to worry – online won’t hurt you. Furthermore, if used well, it will significantly boost your offer.

Andrew Gorecki is the Managing Director of Retail Directions, a customer-centric POS & ERP platform that helps modern retailers realise their business potential.

Like this story? Sign-up for the free Pulse Weekly Newsletter for more essential online retail content.