Tighter consumer purse strings and the competition of online shopping are challenges facing retailers, but they can be met, writes Gavin Culmsee.
It's a tough time to be in retailing. The latest Westpac Melbourne Institute Index of Consumer Sentiment showed a drop in confidence from the previous period and found people are less optimistic about their financial position over the coming year. This means the purse strings are not likely to loosen.
Interestingly, the picture from Bureau of Statistics figures on retail conditions earlier this year is not so bleak, so someone must be doing OK. Who are they and how are they doing it?
Consider your business model
Franchises do well in an economic downturn. They continue to grow, opening new outlets at a time when few would consider starting a business, because they offer prospective franchisees the safety of a well-known brand and a proven formula.
At Bedshed, we find many are attracted to the idea of being their own boss with the support of an experienced team and a strong network of franchisees. The combined power of a franchisor with three decades of experience and franchisees who are highly motivated are major reasons why Bedshed is defying the odds.
For those considering purchasing a franchise, it's worth taking a close look at the store network and checking the focus is not too heavily on expansion at the risk of cannibalising existing franchisees' market share.
Knowing which costs to cut
Many businesses look to cut costs when times get tough and one of the first things to go is often the marketing budget. This is particularly true of independent small businesses, but also some larger and franchised companies.
We are maintaining marketing activity and increasing media spend to attract customers and reach new audiences. PR and advertising are critical to achieving growth in a depressed market and while cutting costs is important to maintain profit when sales slide, cutting back on marketing initiatives is not the answer.
The rise and rise of online shopping
Bricks and mortar retailers are not only facing customers with tighter budgets and higher living costs, they're also battling greater competition from their online counterparts. Some sectors are more exposed than others.
We have a major advantage in the bedding industry, because customers rely on expert on-the-ground advice and would rarely purchase a bed without lying on it first. In contrast, electrical retailers face intense pricing competition from online sellers, and with slimmer margins, they have to sell more product to earn the same profit revenue.
To stay competitive with online retailers, it is essential to focus marketing efforts on the well-known brands your business stocks and your customer service offer. Efficient after-sales support is another important advantage you can have. Consumers only have to be burnt once trying to return something to an online vendor before the price savings become far less significant.
If you're considering starting a new retail business, be it a franchise or independent store, it is certainly worth considering the impact the mammoth growth of online shopping will have on your chosen sector.
What does it all mean for me?
It's easy to write off retailers with all the doom and gloom we've been hearing lately, yet with the right approach it is possible to weather this severe retail storm. So what does it take to emerge financially robust and prosperous in this climate?
For Bedshed, it's having an experienced network of franchisees, addressing online competition, maintaining marketing activity and drawing on a strong business model that has stood the test of time for 30 years.
Identifying what those winning factors are for your business and maximising their advantage will be the difference between retailers that grow in a depressed market and those that fail.
Frequently Asked Questions about this Article…
Why are consumers tightening their spending and what does that mean for retail investors?
Recent measures such as the Westpac Melbourne Institute Index showed a drop in consumer sentiment and less optimism about personal finances, which means shoppers are likely to hold their purse strings tighter. For retail investors this can translate into slower sales growth for some retailers, making it important to focus on companies with resilient business models and clear strategies for tougher consumer conditions.
Why do franchise retail models often perform well during economic downturns?
Franchises can be more resilient in a downturn because they offer prospective franchisees the safety of a well-known brand and a proven formula. The article highlights Bedshed, where an experienced franchisor, a motivated network of franchisees and decades of operating history have helped the business continue to grow even in tougher times.
What should everyday investors look for when evaluating a retail franchise opportunity?
Investors should closely review the franchise store network and check whether growth prioritises healthy expansion or risks cannibalising existing franchisees. A balance between smart expansion, an experienced support network and motivated franchisees—traits noted at Bedshed—are indicators worth seeking.
Is cutting marketing spend a good way for retailers to protect profits in a weak market?
No — the article warns that cutting marketing is often counterproductive. Bedshed maintains and even increases media spend to attract customers and reach new audiences. PR and advertising are described as critical to achieving growth in a depressed market, even when other costs are being managed.
How is the rise of online shopping affecting different retail sectors?
Online competition affects sectors differently. The bedding sector has an advantage because customers value on-the-ground expertise and typically want to try beds before buying. By contrast, electrical retailers face intense online price competition and slimmer margins, meaning they must sell more volume to earn the same profit.
What competitive advantages can bricks-and-mortar retailers use against online sellers?
Physical retailers can emphasise expert in-store advice, well-known brands they stock, superior customer service and efficient after-sales support. The article notes that consumers who struggle with online returns can quickly find price savings less attractive, so strong service and returns handling can be a real differentiator.
If I'm thinking of starting a new retail business, how should I factor in the growth of online shopping?
Before starting a franchise or independent store, consider how the rapid growth of online shopping will impact your chosen sector. Some categories are less exposed because they rely on in-person advice or trials, while others face intense online price competition—this should shape your business model and marketing plans.
What lessons from Bedshed can everyday investors apply when choosing retail stocks?
Key lessons include favouring retailers with an experienced network or management team, a business model proven over time (Bedshed has around 30 years of history), proactive marketing to defend and grow market share, and clear strategies to address online competition. Identifying and backing businesses that maximise their winning factors can separate retailers that grow from those that struggle.
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