Better get used to everyday lower prices
Rivals are forced to come to the table or lose market share.
It might not be evident yet to shoppers, but amid the frenzy of clearance sales at Australia's venerable department stores, David Jones and Myer, prices on a wide range of goods are starting to come down. Permanently.
A quick look at a section of the David Jones website labelled "lower everyday prices" reveals the price cuts on a range of goods from international suppliers ranging from beauty products to ballpoint pens.
It is called price harmonisation, a quaint euphemism for what is effectively a wrestle between the department stores and global brands suppliers to close the price gap between local retailers and their online rivals.
Despite the fact that harmonisation efforts commenced nearly a year ago, David Jones has said the next 12 months will be critical in its battle to get a level playing field on prices.
In his last speech as the chairman of David Jones last year, Bob Savage admitted that only a small percentage of items had been successfully harmonised.
"The issue of price harmonisation will take some time to work its way through all the products in the store," he said.
According to David Jones, some international vendors are merely experimenting with limited price cuts on their ranges to see what the effect is on sales volume. Other suppliers continued to milk higher margins in Australia.
Last May Myer chief executive Bernie Brookes said its process of price harmonisation was 50 per cent complete, but a spokesman told BusinessDay recently, "While we are well progressed, we still have further to go."
Myer is seen to be taking a more hard-nosed approach than DJs, with demands that pricing be within 10 per cent of global rivals, according to retail analysts.
"We have chosen to exit brands where we can't be competitive," said Jo Lynch, the head of corporate affairs at Myer.
Last month, a research report from Macquarie forecast that price deflation - primarily from harmonisation efforts - will continue to crimp any upside department stores may otherwise have got from sales volume growth, which is picking up again after years of stagnation.
"Despite the latent recovery in retail volumes, it is likely in our view to be largely offset by continued price deflation over the 2013 and 2014 financial year as the department stores continue to focus on achieving price harmonisation across its international brand exposure," said Macquarie's retail analyst team.
It underscores the challenges faced by all Australian retailers, but especially the department stores, which are caught between cheap online competition and a cost structure that was built on the golden days of high-margin sales.
Even if they are successful, there is no guarantee the lower prices will do more than lead to a further decline in revenues in an environment of rising costs.
Myer and David Jones have reported that the price cuts are being offset by higher sales volumes across these product lines.
It is this volume increase, and efforts to maintain - or lift - profit margins, that the department stores are counting on to combat price deflation on a significant part of their businesses.
International brands represent almost a third of Myer's brand exposure and this figure is higher for David Jones, but it says 30 per cent of its goods are affected by price harmonisation efforts.
The two companies are also seeking to ensure it is the suppliers who bear the brunt of price cuts.
David Jones has said it will maintain its gross profit margin as a percentage of the sale price, which would still cut its profit margin in dollar terms. Myer claims to be going one better by maintaining the dollar value of its margins when prices are dropped, meaning its profit margins as a percentage of the sales price would increase.
Despite making headway over the last year, David Jones has yet to reach the critical mass needed to force all of its global suppliers into levelling the playing field.
"The initial negotiations are the toughest but once somebody agrees to reduce a price their competitors have to have a look at it because there's a competition shift," said David Jones's general manager of corporate affairs, Helen Karlis.
Rivals are forced to come to the table or lose market share to those who are willing to cut prices.
David Jones says the experience so far suggests shoppers are trading up to those brands offering price cuts and are buying more of the brand.
The company says it does not expect to have to match online prices to compete.
According to David Jones's chief executive, Paul Zahra, the retailer's internal research suggests a cost difference of 10 to 20 per cent is generally considered acceptable by customers given high labour and rent costs in Australia.
"Once you get past that it becomes a little bit harder," he said.
To this end, efforts to lower the $1000 tax free threshold on online purchases will be a significant help, and not just for the seemingly modest 10 per cent GST impost.
Macquarie makes the point that the focus on GST alone is misleading.
"While GST is one added cost, consumers would also be liable for customs duties which would add a further 5 to 10 per cent on goods imported into Australia."
This is especially true for clothing and cosmetics - two of the categories where the department stores face significant online competition.
Applying GST and duties to clothing would raise online prices by 21 per cent and 15.5 per cent for cosmetics, which "eliminates much of the existing price discrimination that exists", according to Macquarie.
But even Macquarie admits that it may be some time before the government manages to collect taxes and duties on goods at the critical sub-$1000 price threshold.