Cost cutting is not growth

dollar ladder, climb, growThe analogy many Australian retail businesses have trotted out ad infinitum now for two decades, is that “You have to aggressively prune the rose bush to ensure you stimulate new growth and strong flowers.” Unfortunately the Australian retailers who are still clinging to this mode of thinking are the custodians of retail franchises that more closely resemble Morticia Addams flowerless sticks than Graham Ross’ luscious Gold Medal Roses.

A retail business overly pre-occupied with cost cutting has a mindset that also drives price focus and inevitably margin erosion. Once on that slippery slope, the business becomes trapped in the slow death of seeking top line sales growth against a competitive set that includes big scale profit through volume gorillas. Working off thinner and thinner margins, further cost cutting dumbs down the model to survive.

This is what has led to many Australian retail business models being compared to ‘the walking dead’. In their frantic survival mode, they just haven’t realised it yet. There is no doubt that the Australian consumer – if not the global consumer – is not suffering for lack of choice in sources to buy ‘cheap stuff’. In the race to the bottom, cheap stuff is everywhere. What consumers really lack is differentiated choice that gives them a range of options of functionality, quality, design, style, innovation and a myriad of personal preferences mitigated by alternative price points that deliver ‘bang for buck’ value to them.

Like many Australian consumers, I am a bit over being fed the line that the latest price-fighting retailer is good for consumer choice. Because it is a lie. In most categories aggressive price fighting by more than three main players is dumbing down that category, driving out differentiation and increasingly creating a mono-dimensional supply chain that leads to global player dominance and consumer dissatisfaction.

That end game not only changes the dynamism of real consumer choice and vitality, it also decimates local economies because local businesses destroy themselves vainly trying to compete with international behemoths on attributes they simply cannot defend. Time to wake up and smell the roses. Cost cutting is a downward trend unless you are the dominant discount monster.

Growth needs margin gain not decline. And the only way to get margin gain is to value up the only two attributes that matter – product and customer experience. The two areas that drive and sustain the kind of growth that real leaders like Louis Vuitton and Apple and Porsche deliver – every year. No profit through volume retailer on the planet delivers the kind of growth that these brands do over an extended period.

In a world that is driven by demand, not supply and a consumer that dwells more in the realms of Maslow’s “Self Actualisation” strata than basic needs, consumers today seek products and services that turn them on. Yes they have to be able to fund them. But in a country that hasn’t seen a recession for 26 years and has the highest disposable income levels in its history, the thinking that EVERYTHING needs to be cheap and disposable is a massive underestimation of the consumer landscape and will lead to a sea of grey, global mass merchants dominating every category with dumbed down functionality. Growth comes from nurturing up, not cutting down. Every gardener knows that.

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  1. Brad Shefelbine posted on August 9, 2017

    Exactly right Peter and well said. Many, like myself, have seen this in organizations both here and abroad and have argued that cost cutting is not in itself a strategy (and can be a sign of a leadership team bereft of vision). Thanks for giving voice to rational thought. Research from many sources and countries shows that the further removed we are from the GFC, the less important "lowest price" is compared to "value for money" and "customer experience" - your analysis is correct. Now if boards will hold their executives to principles of sustainable growth, rather than short term profit (often to meet equally short CEO contracts), perhaps strategies for long term growth will take hold.

  2. Keith Walters posted on August 9, 2017

    Could not agree more with your summary Peter. Just look at what Sally McDonald did to the struggling Big W. Cost cutting until she realised she was out of control and growth stalled beyond her control. Her serious incompetence and lack of large scale retail understanding nearly wiped out Big W. Cost cutting is a strategy employed by leaders that don't know how to run a business. It's akin to putting up the white flag.

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