Insights

18 March 2011

This is the third in a four part series that looks at four of Australia’s core industries – Mining Services, Transport, Retail and Manufacturing.

Retail is one of Australia’s more sensitive industry sectors, which is not surprising when you consider that sales are driven by consumer sentiment, interest rates, employment and disposable income.

As a result, retailers benefited from the highs of the economic boom during the early to mid 2000s, but they were also hit hard during the GFC with revenue contracting more than $1.3 billion (or 1%).

Post-GFC trading has been particularly volatile, with the government’s $10.4 billion stimulus package providing only short term benefits against continuing consumer uncertainty.

Anyone who regularly watches the news or reads the newspaper will be familiar with statistics such as CPI, employment, GDP, household expenditure, and the impact these have on our macro-economic environment.

But what about the micro-economy?

Although general economic conditions undoubtedly influence the overall success of the retail sector, what are the biggest risks at the micro level, and what can business owners and managers do to safeguard their businesses?

Competition remains the main threat to most retailers, as low barriers to entry and minimal regulations encourage new participants.

These new participants challenge existing businesses by introducing new products, improving marketing techniques and achieving better cost efficiency.

Established retailers (such as Wesfarmers, Harvey Norman, Myer and David Jones) also threaten smaller players as they leverage off buying power to maximise economies of scale.

So what’s the key to success in retail?

Owners and managers of retail businesses need to increase their focus on key success factors such as:

  • A strong balance sheet – Careful management of working capital (particularly stock management and management of each customer’s monthly accounts) is directly related to a business’ ability to absorb operational shocks or interuptions.
  • Effective forecasting – A rolling 13 week cash flow forecast, focusing on daily sales volumes, will assist in assessing a business’ ability to generate cash to fund current working capital requirements.
  • Stock control – Adequate stock monitoring systems and processes will highlight changes in demand in a timely manner so that re-ordering can be increased/decreased as needed. Also, identifying high demand products can significantly increase profits as they can generally be sold at a higher price and therefore achieve greater profit margin.
  • Market position – Market positioning projects a clear and consistent image of the business and enables small and medium sized businesses to compete against larger players.  Retail business owners and managers should consider product branding as well as physical location.
  • Proximity to market – Understanding your target market demographic and ensuring your retail business can be easily accessed by that market will facilitate purchases (e.g. online store versus shopping strip, shopping centre, etc).  It’s worth noting the trend in online shopping and how prominent this has become in other parts of the world, particularly Europe. It’s only a matter of time before Australia follows suit.

Happy strategic planning. In my final blog post in this series, I’ll examine the manufacturing industry.

Elizabeth Mawby is a Client Director at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.

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