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Wednesday, 17 July 2013

The retailer and the lethal battle for margin: is there a solution?!

Yesterday, the Dutch Central Bureau of Statistics showed yet again disappointing figures on the Dutch retail market for May 2013:

According to the latest figures released by Statistics Netherlands, May’s retail turnover was 0.6% down from May 2012. Retail volume shrank by 3.0%, while retail prices were 2.5% higher.

The shopping-day pattern was more favourable in May 2013 than in the same month last year. The positive effect of the shopping-day pattern on total retail turnover is estimated at approximately 2%.

Turnover generated by the non-food sector was nearly 4% down in May. Retail volume fell by more than 5%. Turnover declined across all branches in the non-food sector. Consumer electronics shops and DIY shops suffered most.

Food, drinks and tobacco shops realised a 5% turnover growth relative to May 2012. The growth was largely due to an average price increase by more than 4%. Volume growth was nearly 1%. Supermarkets entirely accounted for the growth in this branch.

With 11%, mail-order firms and online shops generated a turnover growth in the double digits in May compared to the same month last year.

These data don’t show any economic improvement whatsoever and that is worrisome, as it shows that the economic crisis continues in The Netherlands. 

However, there is a much bigger problem, which is haunting many retail shops in The Netherlands, selling all kinds of products: the battle for margin with their competitors starts to look like a ‘cockfight until death’.

Symptoms of this cannibalistic battle until ‘the last rooster standing’ are for instance: 
  • Independent and brand-connected dealers of cars, which are only earning ‘a few hundred bucks’ on small / mid-size new cars of at least €10,000 in sales price;
    • These dealers hardly have a chance of earning more money on (un)planned service, as the service intervals of modern cars get longer and longer, while the break down ratio gets smaller and smaller;
    • Numerous car dealers have perished over the last few years and many more will perish in years to come;
  • Sellers of home electronics (computer appliances, TV sets, hifi equipment etc.) and small household appliances feel often forced to sell their products at costprice or sometimes even below it, due to the murderous competition with the national electronics chains and internet sellers;
    • During the last few years a number of electronics stores chains (a.o. It’s, Harense Smid etc.) with sometimes hundreds of stores simply faded away, because they couldn’t survive the battle for margin with their more powerful German peers;
    • The whole production and sales column of television sets is loss-bearing for the lion share of the electronics brands. Only Samsung manages to make some profit on the production and sales of TV's;
    • In 2012, Philips, a brand with a history in television-manufacturing of many decades, sold its whole television manufacturing division to the Chinese company TPV Technology;
  • Independent, unbound opticians are a dying race in The Netherlands, as they can’t win the battle against the optician stores chains, which give away:
    • Free service and repairs;
    • Free cleansing fluids for contact lenses;
    • Contact lenses at absolute bottom prices;
    • Free sunglasses;
    • Free second pairs of glasses;
    • Free frames with only the glasses to be paid for;
    • Free glasses with only the frames to be paid for;
  • Shoe stores and clothing stores are in a ‘permanent state of sales’, as their collections need to be sold ever quicker and at ever higher discounts, to win the competition with chains, like Hennes & Mauritz, C&A, Primark or Vögele;
  • Book stores all sell the same, ‘boring’ list of best-sellers: J. K. Rowling, David Baldacci and their likes, a few local heroes and some management books with ‘down-trodden’ subjects and boring advices.
    • Selexyz, a chain of book stores, whose book collection was somewhat bigger and more interesting than average, defaulted a few months ago and made a wobbly go-around with De Slegte, a chain in very cheap, slightly outdated books;
  • Audio and video stores lost the battle against the (almost) free downloads from the internet and the streamed audio and video services and vanished from the earth;
    • Free Record Shop, a chain with more than 200 stores in The Netherlands and Belgium, was the last victim in this gruesome series. Especially in The Netherlands only a minority of the shops will make a go-around. All others are closed. 
And so there are many, many more examples of store chains, which are annihilating themselves and their competition, in a battle with almost no survivors. 

You might ask: ‘So what?! What’s the problem?! Things are getting cheaper. That’s cool!’ and from your point of view, you have definitely a point.

On the other hand, there are a view setbacks from this development:
  • The independent specialty stores, that have distinctive and surprising things to sell and who ‘make a difference’ in the cities and shopping malls, are vanishing: they simply can’t carry their losses and low sales anymore. Shopping malls and city centers are getting more uniform and more boring, as every surprise has faded away;
  • Many stores and store chains hire ever younger and less qualified personnel, in order to minimalize their expenses. This causes their service to drop to intolerable levels in the process, which might lead to bad advice, dissatisfied customers and – in the worst case scenario – dangerous situations, due to unsafe usage of products by customers;
  • The quality and life expectancy of many ‘expensive’ products for sale has dropped dramatically, as these are manufactured and sold for absolute bottom prices. Household electronics and appliances with a life expectancy of more than ten years seem like dinosaurs: destined to be extinct;
  • Overly cheap products can only be manufactured under the poorest labour and safety circumstances, leading to humiliating, dehumanizing situations for millions of workers in the low-wage countries and even to massive loss of life (read the gruesome stories here, here and here);
  • The stockpiles of badly manufactured and quickly replaced products lead to ever bigger mountains of waste and plastic, which pollute the air, the environment in all country and the oceans of the world.

When local municipalities don't stop with their brainless delivery of millions of square meters in new shopping space and when the current economic crisis and the cannibalism among stores and store chains last, it is my prediction that at least 50% of stores and store chains will default within the next five years.

This prediction is - of course – based on my personal gutfeeling, but nevertheless, I expect to be right about this. The only things that can be done about this development are:
  • The amount of available shopping space should drop by at least 50% in the coming years, in order to diminish the murderous, cannibalistic competition between shops, store chains and shopping malls;
  • Store chains should try to stop their race-to-the-bottom(-price) too and they should find a means of cohabitation with their competitors: live and let live, instead of live and let die. This might sound overly utopian to you, but it’s the only way for most players in the retail industry to survive and for shopowners to earn a fair margin and thus a solid income;
  • Stores and manufacturers should focus on better-made and more energy-efficient products, with a much longer life-expectancy. This is better for the environment and – in the end - much better for the consumer. 

Finally, it is my prediction that the 'shopaholic' consumer, who is quickly bored with things and who wants to replace his cellphone and his television set once or twice a year, is a dying race too. 

Middle class people live much more frugal nowadays and they don’t want to spend their hard-earned money on products of bad quality, which harm the environment.

You could call me a dreamer, of course, but I’m convinced I am right about these developments.

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