[LINK] Kogan on Online Retail....

[Richard Chirgwin]

Frank -

It's nice to be corrected by an expert. I'll give some thought to this 
overnight.

RC

On 10/01/11 8:24 PM, Frank O'Connor wrote:
> 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 ...
>