Big retail fattens up on the small guys

This is one of the regular insightful articles in ‘The Age by Michael Baker.
We are very pleased that Michael will be one of the excellent speakers at our ‘Convenience Leaders Summit’ on the 29/30 November. More details to come.

Michael Baker
August 7, 2012
The Age

A new report by retail analysts Thomas Kierath and Crystal Wang at Morgan Stanley carries a title that many small shopkeepers will find a little dark: ‘Big retail getting bigger’.

The analysts used data from the Australian Bureau of Statistics’ Retail Trade survey to draw two important conclusions: first, and not surprisingly, that small retailers have lost a significant amount of market share over the past four years.

The second conclusion is slightly more jarring: that the market share small retailers have lost is not likely to be coming back.

This latter conclusion is based on an analysis of retail trade cycles during the 1990s. Essentially, independent retailers lose share during a downturn but then, instead of regaining it during the ensuing upturn, they tend to stabilise at approximately the existing level.

According to the report, the nation’s largest 500 retailers have taken 300 basis points (3 percentage points) of market share from the remaining pool of retailers over the past four years, corresponding roughly to the period since the global economy began to tip downward.

Most damage has been done in two sectors – food and clothing/accessories.

In the latter sector particularly the change has been tectonic, with small retailers conceding about 900 basis points of market share to their competitors since early 2008.

The shift occurs for a number of reasons that revolve around price advantage for larger retailers. Buying in large volumes enables the bigger retailers to cut out the middle-man and direct source from manufacturers. They can also create and expand private label brands with a lower cost structure.

Retail chains also use their more robust marketing budgets to promote heavily during downturns and they can move inventory around from stores that aren’t doing as well to stores that are. Small retailers don’t have these luxuries to fall back on.

When the market share shifts get as large as the Morgan Stanley report suggests – particularly in the case of the clothing sector – it means a genuine structural shift has occurred in the industry away from independent retailing.

Complicating matters going forward will be e-commerce, coupled with the arrival of more international fashion brands in Australia and the impending expansion of those already in the market. The sharp pricing and trendy merchandise offered through these channels cannot fail to have an impact on domestic retail chains across the board. Will they further depress the prospect of small retailers in the sector?

The experience in other countries has been that internationalisation was a net negative for small retailers in a previously insulated market. The foreign interlopers hunt in packs, following each other not only into a market but into the same strips and shopping centres, creating high-rent enclaves that drive out independent boutiques.

Now, more than ever, small clothing retailers need an independent fashion viewpoint, strong customer relationships, a willingness to exploit technology and a hell of a good location strategy.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.

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