The case against underinvestment

2019 is set to be one of the most challenging years retailers have ever faced. The ABC recently reported that ‘retail sales continues to drag down the economy’ following sales volumes falling 0.1% over the March quarter.* The tougher operating conditions are creating market uncertainty – and
many retailers appear paralysed by indecision. Should the priority remain cost cutting or are there any opportunities for growth? Retailers that continue to innovate, listen to their customers and invest in technology will reap the rewards; but, asks Raghav Sibal, Manhattan Associates’ Managing Director for Australia and New Zealand, what is the cost of doing nothing?

Where is the innovation?

Australian retailers are traditionally conservative when it comes to adopting major system or operational changes. Often the drivers for local retailers undertaking major technological transformation projects is a result of a new global player entering the local market with more advanced systems and local businesses are forced to evolve to preserve market share.

The federal election coupled with falling house prices and weak economic growth (Australia had to revise down its GDP growth in 2018 down form the projected 3% to just 2.3%**) has led to a drop-in consumer confidence and a period of underinvestment from large businesses. Companies are still hiring, but with wage growth stalled, and it appears that many retail businesses take the view that it is more economical to throw bodies at the problem rather than embrace radical and essential technology-led change. However, how much longer can Australian businesses use uncertainty as an excuse to delay investment?

In recent times it is manufacturing that has borne the brunt of negative headlines regarding Australia’s (lack of) productivity and (under) performance. Indeed it was only a few months ago that the media was reporting how activity in the manufacturing sector had fallen to a new two year low. Retailers have escaped much of the media’s attention by hiding behind the admittedly huge challenges created by the fundamentally different dynamics of the online retail model. But issues around how best to address market challenges are the same. While a paper produced by PWC recently estimated IoT could create benefits in the order of 14–25% ($50–88 bn per annum) for Australia’s manufacturing sector, translating that readiness into a willingness to make the investment is likely to remain the major stumbling block if the UK retail market is any indicator.

Just like manufacturers, retailers know that change is essential. Most admit the need for end to end supply chain visibility, for better operational control and enhanced customer experience. The problem is strategic paralysis, delaying essential change and opting, at best, to tinker at the edges of flawed retail models.

Where is the innovation? Where is the proactive response to a disrupted retail model? While many companies have made ‘as good as Amazon one day’ pledges, the reality is that the majority are postponing investment, relying on cost cutting to save the day. Slashing retail stores is a short-term panacea at best. At worst, it fundamentally misses the implications of the technology-driven change in retail models that disruptors such as the Iconic will continue to achieve year on year.

There will always be winners and losers

In any market, any business cycle, there will be winners as well as losers – and in today’s turbulent retail environment, the winners are those companies with a willingness to invest and embrace change. From small independents spotting a gap in the market to deliver highly curated, original content to companies opting to rapidly scale by taking advantage of low retail rents and failing competition, it is the agile and innovative that are gaining marketing share and generating profits.

These winners are expanding – they are adding stores, extending the range, reaching out to new customer bases, expanding internationally. They are exploring technology in a bid to reconsider existing retail models – leveraging real-time, end to end stock visibility to redefine the store estate as mini distribution hubs, for example, to transform the customer promise. They are embracing the flexibility and agility of cloud-based software to embed scale within the business model, driving down capex whilst also creating a business poised to rapidly explore any new opportunity – from trialling new international markets to swooping in when a competitor fails. In contrast, the rest of the retail market appears to be accepting a gentle yet inexorable decline.

Retail requires innovation

To be fair, ten years ago who would have predicted the current state of the Australian retail market? Retail has always been cyclical, and every downturn creates both winners and losers, but the sheer scale of change this time has been unprecedented. The combination of the disruption created by the online revolution and lack of consumer confidence has driven many traditional names to the brink – and beyond.

But an unwillingness to make the big investment decisions has become the default setting for too many Australian businesses. Retail is no exception. It requires innovation, imagination and positivity – and there are many successful and growing companies proving that point. But retailing is fundamentally different – disruption is technology-led and technology driven. The success stories of 2019 will be those retailers that embrace change and actively explore and exploit technology innovation to reach new markets, deliver new experiences and reimagine the product mix.

Manhattan Associates has launched an Omni Fulfilment ROI calculator. The ROI calculator will assist Australian and New Zealand retailers to measure how optimising fulfilment, delivery and store use can help their business maximise margins and profitability in the digital commerce marketplace. To access the omnichannel fulfilment ROI calculator, please click here.

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