Traditional bricks-and-mortar retailers may secretly wish the Internet didn't exist, but uncertainty about interest rates, rising utility costs, consumer caution, global recession and other financial issues are also contributing to the grim offline retail scene. Sector disruption has been a consistent state of affairs since the Internet spread its influence from the late 1990s. Some sectors have adjusted successfully, for example recruitment which has migrated online and, while it partially was ruinous for the classifieds of newspapers such as The Age and the Sydney Morning Herald, new growth opportunities have opened up. Now however given the confluence of the Internet and a high Australian dollar, it is retailing’s turn to face the effects of destructive capitalism. It is providing finance chiefs in other sectors some salient lessons.
If we take a supply chain view of business then it is clear that businesses with low value-add are most vulnerable to disruptive forces as well as events such as currency adjustments. But currency adjustment alone will not terminally affect a business model. After all, Switzerland’s currency has appreciated many-fold over the past few decades and its exporters – such as Nestle and Roche - remain hugely profitable. As any CFO will tell us, you can manage currency fluctuations and margins by ensuring that the value chain is bountiful enough not to affect the bottom line. In the retail sector, the response (to the Internet) has been to multi-channel and while many traditional retailers have established an online presence and employ a multi-channel strategy, there still is a sense that online retail is permanently changing the playing field. With growing access to high-speed Internet and a proliferation of mobile devices, consumers are shopping differently than they once did -- and for good reason.
According to "The Connected Continent", a recent Deloitte report, the economic impact the Internet is having in Australia is huge. People are able to save time by quickly finding what they are looking for. Online shoppers also have access to a wider variety of goods and services as well as a comparative ability (both in quality and price) that is unheard of in the offline environment. And not only can they shop in Australia, they currently can freely shop internationally, often finding that even with shipping costs, overseas retailers offer more for their Australian dollar than domestic vendors. The lesson for finance chiefs is stark: online has massively eroded the retailer’s value. So much so that the business models of very large retailers such as Harvey Norman, Myer and David Jones are being questioned, in some quarters.
Building a value chain that has barriers against such forces as the Internet, currency is no mean feat but it can be achieved
There are many events to the value chain and warehousing and retail space costs have come under the microscope. Retail could certainly be singled out as an exceptional situation but are they really all that different from other companies? In retail the tension between shop owners and landlords, in particular shopping malls has risen higher than summer temperatures in Queensland. Traditionally the relationship between the shop owners (often a multi strong chain) is inextricably (and contractually) to fixed rate floor area plus a CPI-index factor plus a turnover accelerator. In other words rents go up not just with inflation but also with rising turnover. When times are tough turnover can be maintained (sales, aggressive marketing) but margins are often eroded. The same applies to for example logistics and bulky goods where inflation indexation is the norm.
When tensions rise to breaking point – that is when the landlord is making more money and the tenant less - then there is a case to negotiate from in the interests of long term sustainability of tenancy – if not the business itself. Re-negotiating leases tenancy is mandatory at times when uncertainty is heightened and when business models are being threatened. Who better than the CFO to bring out the imbalances.
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