Smaller stores, faster consumers: how Australian retail is adapting to the new consumer world

Crowds wait in line for the Australian release of the iPhone X. James D. Morgan/Getty Images

Australian retailers are focusing on costs and looking to build volume in a tough operating environment.

And that’s giving rise to some fundamental strategic shifts in the sector, according to ANZ senior economist Jo Masters.

Given the recent challenges facing the industry, it’s perhaps not surprising that Masters noted a “general unease” in discussions with multiple retailers at various industry forums.

But while retail consistently lags other sectors in NAB’s monthly business survey, Masters also highlighted Australian retailers are trying to adapt to the fundamental changes facing the industry.

On the bricks-and-mortar side, there’s room for innovative thinking to improve the customer experience. Masters highlighted the example of a Macy’s store in the US that rolled out a pop-up movie cinema.

“There’s certainly massive potential in Australia for stores to think beyond basic service to how they can make the physical component of contemporary shopping an event that consumers look forward to and talk about,” Masters said.

However, exciting in-store ideas are made difficult by the prohibitive rents charged by Australian landlords. Myer is a classic example, with around $1.7 billion of onerous long-term lease contracts sitting on its books.

“Vacancy rates suggest that rental cost pressures are unlikely to ease, at least in the near future; so retailers will need to reduce their footprint or look elsewhere for savings,” Masters said.

And it’s going to be a key theme in the sector over the coming years, according to the Australian Retail Association’s (ARA) Russell Zimmerman.

“Why do you need 120 or 130 square metre stores? I think we’re going to see some really big structural changes and I don’t think that the landlords have really come to grips with it,” Zimmerman said.

That downsizing coincides with a steady shift towards online sales in recent years:

Source: ANZ, Roy Morgan

A key driver of the shift to online will be Amazon’s entry into the Australian market, but Masters highlighted opportunities as well as the obvious competitive threat.

“Many retailers also believe Amazon’s presence will boost online sales,” Masters said, citing Amazon’s market-place model which gives business-to-business opportunities to other retailers — and not just small players.

“Several large retailers are already using Amazon Australia as a distribution channel for sub-sections of their ranges.”

The next challenge for retailers is how to leverage the benefits of online into a successful omni-channel strategy.

“Retailers suggest that over 60% of in-store customers have had an online touch point prior to shopping,” Masters said.

Investing in online infrastructure is also “critical to capturing the value of internal data – often seen as the jewel in the crown – which can yield significant information about what consumers are doing”.

Online sales still only make up around 7% of total retail spend in Australia — well below the 12-14% in US and UK markets, although the ARA expect domestic online sales to rise to those levels over the next five years.

So it’s equally important that retailers look at how to use technology to improve their in-store offering.

“One of the great benefits of technology is the real-time feedback loop, sometimes called the ‘quick consumer’,” Masters said.

“This is a major shift in thinking about how to generate volume growth in a low growth world.”

The ARA’s Zimmerman said Australian retailers are now aiming to turn around requests from the shop-floor to the manufacturing operations within a four-to-six week time frame.

“So we’re seeing more and more retailers creating a demand by changing their product and instilling some new additions to their product.”

It all adds up to an intriguing outlook for an industry in transition.

“There are clearly challenges ahead and we don’t expect retail spending to drive overall economic growth,” Masters said.

“However, we think there are also opportunities, particularly given that volume is growing, even if prices are falling.”

“In our discussions, there was a keen focus on costs and strategic discussion about how to capture volume.”