[LINK] Kogan on Online Retail....

[Frank O'Connor]

At 5:32 PM +1100 on 10/1/11 you wrote:
>Frank,
>
>I'm still interested in why *all* the blame for price differential is
>laid at the feet of the retailers. Why do we let the vendors /
>manufacturers off the hook?

It isn't Rich ... but the retailers were the ones who decided to run 
the PR campaign, and avoid the Productivity Commission oversight 
(which I think will find a few interesting things if they dig down 
enough).

If the retailers don't value add. If they don't serve a purpose at 
their point of the supply chain viz-a-viz the customer, they they are 
simply parasites on the supply chain. Now that comes down to customer 
service. That comes down to backing what they sell ... I mean why 
else would they choose to stock items? That comes down to obviating 
the customer aggravation when returning defective items, and using 
their market power to force the manufacturers/vendors to refund to 
them. That comes down to a bit of attention to people when they are 
buying major items. That comes down to having experts on hand to 
answer customer questions and resolve technical problems, That comes 
down to making the buying experience pleasant and rewarding and 
reassuring. And backing what they sell ... to the hilt.

I can't think of any of the major retailers (the movers and shakers 
behind this campaign) who provide any of this, and if the retailers 
don't do this, then they serve no purpose in the supply chain, other 
than to feather their nests. If I can buy straight from the 
manufacturer/overseas vendor at a reduced price and take the 
responsibility for enforcing the product's worth for purpose (a 
responsibility which which the major retailers like HN have already 
abrogated)  then why do I a need a retailer that refuses to do this. 
What possible purpose would such a retailer serve except to stock 
items for display and sale in geographic proximity so I can view 
them. (I've lost count of the number of times major retail chains 
have told me that I couldn't take the item on the floor and would 
have to wait for delivery ... sometime in the foreseeable future.)

>
>According to HN's annual report, the franchisee's margin is about 6%. If
>I add franchisee sales ($5.2 billion) to HN-owned stores' revenue ($1.3
>billion), I get sales revenue of $6.5 billion. HN's profit is $420
>million - a margin (not mark-up since this includes outgoings like rent
>and salaries, etc) of about 6.5%. This margin would, I would suppose, be
>much higher if all of the "padding" of product pricing were taking place
>in Harvey Norman rather than among the vendors.

Perhaps... because the vertically integrated HN controls franchise 
fees, licensing, exorbitant rents and a host of other charges to 
franchisees before they even shift stock of the floor. And then the 
franchisee has to pay HN a percentage of the sale ... before they 
even look at paying their fixed costs, stock providers (from whom HN 
also gets a cut), financial institutions  and services (contracted by 
HN from which HN also gets a cut) power and utilities, employees and 
the like. What's left couldn't be much ... but that's not the fault 
of e-commerce.

(That said, I was a tax auditor in my distant past ... and can tell 
you that the accounting vagaries associated with Balance Sheets and 
Profit and Loss Statements more often than not don't represent the 
financial situation as it really is.)

But the bottom line is that that franchise business model is 
inherently flawed, and excessively favours the franchisor (HN).

Finally. small retailers in this country are trapped in the hands of 
Coles, Woolworths, Westfield having to pay exorbitant rents and 
charges to set up shop in the malls, shopping centres and the like 
that the big boys run. Their real estate and other overheads are high 
(they even have to pay costs that one would think would be the 
responsibility of the big boys ... advertising levies, building 
insurance etc), forcing them to pad the prices to redeem the costs. 
That works fine in a booming economy, but when Joe Blow is struggling 
to pay interest rate increments of an added .25% on his $500,000 
mortgage as well as deal with huge increases in utility bills, and 
continue feeding the family ... well, he looks to budget then. And 
that's what's happening now. People are so heavily geared at the 
moment that they simply don't have the bucks for indulgences ... and 
that's what the mall shopping centre with its various economic 
vagaries was created to serve.

The el cheapo corner store, or more reasonably priced local 
neighbourhood shopping centre may may a comeback.

Many may be better off renting a warehouse in an industrial district 
and going on-line for a shop-front. The rents on virtual real estate 
are so much more reasonable.       :)

>
>None of this excuses our retailers from their part in being
>uncompetitive - I would particularly mention crappy customer service as
>a sore point (I find smaller retailers beat larger hands-down in terms
>of customer service) - but I don't think it hurts to try and understand
>the whole of a problem rather than one bit of it.

Ditto. Small retailers tend to go the extra yard, be amenable to 
price bargaining. Will take defective returns and give you a refund. 
Won't place obstacles in the way. Will add value by bundling small 
items with major purchases. Will deliver. Know their products really 
well, Are expert in the products various vagaries, and have an 
interest in being straight with you when you make the purchase.

They also have to fight off the predatory big guys, and cut off arms 
and legs to get approvals under the attention of major retailer who 
dominate decision-makers on councils and governments (e.g. .... here 
in Rye, Woolworths has successfully stopped an Aldi store being built 
for more than two years now ... but we're sure they have our best 
interest at heart.   :(     There are countless examples of this ... 
and when the big guy takes over the little guy's patch by hook or by 
crook ... hey, that's healthy competition, Man. But when another big 
guy want's to move in ... a host of planning and other objections 
appear and competition goes by the board. It's all so damned 
hypocritical.)

That said, during the good years (prior to 2008) the little guys also 
lost the plot in the hunt for the buck. I'm pleased to say many have 
seen the error of their ways and gone back to the service ethic of 
yore.

Rich, I understand the various parts of the sector fairly well ... 
started off auditing small retailers, and moved accidentally into 
auditing the larger ones because of my IT skills. I'm familiar with 
the economics of the business model and how they can be manipulated, 
and am intimately aware of the propensity of business to present 
different financial pictures (and books of account) dependant on 
their audience. All business does it ... the shareholders get a 
different view from the franchisees, who get a different view from 
major investors, who get a different view from the ATO or creditors. 
What they loosely call 'accounting standards' ensures this.

The major retailers decided to make a mountain out of a molehill 
(e-commerce represents less than 5% of all sales for God's sake!), to 
institute a PR campaign to blackmail the government into doing 
something that wasn't in anyone's interests other than the major 
retailers. They elected to lie and alarm. To try and shore up a tired 
and failing business model.

They don't add value ... they subtract it.

That's my problem with the major retailers, Rich.

Again ... just my 2 cents worth ...