The recent proclamation by David Jones CEO Paul Zahra that traditional department stores are likely to become smaller, fashion-focused and devoid of low-margin items reflects the various competitive influences helping to shape the retailing sector.
It also implies that those innovative Australian retailers prepared to make changes to their operations - whether onshore or offshore - are likely to be in an optimal position to gain a strategic competitive edge.
With the development of village-format retail stores, David Jones illustrates its belief that this innovative approach is the best mechanism for yielding superior customer and retailer outcomes in the face of such sector pressures.
The effect of online retail
Forces driving competition are not idiosyncratic to the Australian marketplace as our retailers also operate in the global economy.
Myer chief executive Bernie Brookes recently claimed that the retailer’s reduced profits were a function, among others, of GST exemptions on overseas purchases under A$1000. This claim contains elements of truth.
Local retailers are rightly alarmed that this loophole has cultivated a rising consumer preference towards purchasing products from retailers located overseas. The Australian Retailers Association estimates that around 40% of online retail purchases by Australian consumers are from retailers located overseas.
Thanks to the internet, Australian consumers can now more conveniently access such retailers and compare prices. This has pushed prices down in stores like Myer and David Jones, causing them to re-think operations.
As internet sales have become more mainstream across an ever-widening range of product and service categories, this trend is unlikely to abate.
In fact, it is highly conceivable that Australian consumer purchasing patterns, and perhaps more importantly their attitudes towards overseas retailers, will eventually result in Australian retailers relocating overseas.
This is even more probable if the new Abbott government’s attitude towards this uneven GST impost remains unchanged – forcing Australian retailers to consider alternative avenues to help take advantage of this loophole in our federal tax system.
The new strategy
The response by retailers will depend on how they think to best create customer value - either by locating parts of their operations overseas or by making structural amendments to their onshore modus operandi.
However, it is clear that the customer is ‘king’ in this equation and will dictate what retail firms must do in order to retain their continued loyalty.
With its initiative, David Jones has decided to reinforce its commitment to the Australian marketplace, rather than attempting to exploit any direct cost advantages associated with operating from an overseas base. This approach seems to best fit their current high-end position.
Under this model, it is anticipated that David Jones will stock a reduced scope of merchandise comprising mostly quality (fashion) brands, and it will support this by offering the best possible service to their customers.
Will it work?
The only question that remains unanswered is whether this new strategy is going to be successful in the context of a price-motivated customer. This is a complex question and, without the benefit of hindsight, is even more difficult to answer.
However, we can say with great certainty that David Jones is high-end, has a well-known and established brand name, and has attracted a loyal customer base.
Its strategy change promises to continue offering the finest brands and a high level of service. And given its long-standing history as one of Australia’s premium department stores, this strategy can only help to consolidate its current position in the Australian marketplace, by re-emphasising previously held consumer views about the retailer.
Continual reinforcement of ones ‘place’ in the market is a critical element of retailing. So, in that regard, DJs has got it right.
However, one of the dangers associated with this new approach is that this action potentially exposes the retailer to further competition from high-end European, as well as boutique Australian, fashion retailers.
David Jones’ success will depend on the company positioning itself well in this cut-throat area of the retail sector. The retailer must ensure its offerings are distinctively different from similar fashion-based retailers.
This can only be attained if the company adheres to the basic principles of the retailing concept: being value laden, being goal-orientated, effectively coordinating the value chain, and, perhaps most importantly, remaining entirely customer focused.
While only time will reveal the success or failure of this new direction, David Jones has once again shown that innovation in retailing is tantamount to securing its future.