Relationships for a retail renewal

Australian retailers complain to anyone who cares to listen about the impact of online sales, but their problems have nothing to do with the Internet. Unlike some of their overseas counterparts, they have failed to innovate. They've been stuck in their comfort zones and old business models for too long.

Retail might well head back to its roots, to the days when it was about connection and conversation between buyers and sellers at bazaars and markets.

Witness for example the growth of Farmers' Markets in Melbourne and Sydney where customers meet and talk to the producers of apples from Wandin, olives from the Mornington Peninsula and red organic potatoes from Warrnambool. It's an old style connection. Retail is not dying there.

While other booksellers have been closing down, Readings has been thriving after reconfiguring its strategy. The book chain focuses now more on connecting with its customers through social media, providing it with valuable intelligence on customer preferences. It also keeps in touch with them through email. Readings has 40,000 customers on its email data base. That's a lot of connections. While this is all high tech, it's an old fashioned approach that you would find in a bazaar. Readings managing director Mark Rubbo says the aim is to connect with the community. "It's more about community than customers I guess,'' he said.

The same happens when you walk into an Apple store with its array of web-connected computers that anyone can use, gadgets that you can try out and sales staff who don't work on commission and who are there to help when needed. Walk into an Apple store on a Saturday morning and it's packed, so much for a retail sector that's going to the dogs. You have to book to get assistance. When you walk in, you're greeted by a concierge with an iPad who directs you to a spot and then contacts someone from the Genius Bar, Apple's expert assistance service, telling them you've arrived. The geeks will fix your product and answer any questions, no matter how dorky. Unlike what you experience at other stores, Apple sales staff, some with piercings and tattoos, will help but otherwise hang back, no pressure at all. According to Apple's official data, its 375 outlets had 300 million visitors in 2012, with 50,000 a day dropping into the Genius bar. The annual retention rate for Geniuses is almost 90 per cent. That's unheard of in the retail industry.

Compare that experience to shopping at Myer or Harvey Norman where you have to go through several Gen Y sales staff to find the whereabouts of certain products, let alone find your way around the place. Is it any wonder people are buying online?

The numbers tell the story. In the 12 months to June 30, Myer posted a net profit of $139.365 million, a 12.7 per cent fall on the previous corresponding period. Total sales in the period sank 1.3 per cent to $3.119 billion. Harvey Norman suffered one of its worst years when it reported a 32 per cent fall in full-year net profit to $172.5 million. For the 52 weeks to July, David Jones posted a net profit of $101.3 million, down 40 per cent.

This is not saying retailers need to create an atmosphere like a bazaar or market. But it does mean they have to be innovative.

Myer chief Bernie Brookes, for example, talks about increasing online sales from one per cent to 10 per cent. But putting more products online will not help Myer. He will have to approach it as a whole new business opportunity if he wants Myer to become a force again.

Audi, for example, has a new touchscreen based showroom in London where customers can choose the model, colour engine, accessories, and other vehicle specifications via touchscreen. The information is then put on a USB stick, and taken to a conventional Audi dealership for payment. No sales staff but Audi still needs people to work the systems and connect with customers. Retail of the future is likely to be less mass-consumer driven, more tailored to the individual. The technology does that to a point but it still needs a connection. You need people to do that, and many local retailers don't seem to realise that.

Similarly, UK retail giant Tesco is now getting into digital publishing and has picked up e-book distribution platform, Mobcast. The strategy is obvious: Tesco is positioning itself to become the next Amazon. Could anyone see Myer or
Harvey Norman doing something like that?

The prime purpose of any business, as noted management thinker Peter Drucker famously said, is to create a customer. You wonder whether some of the big Australian retailers remember that.

In a sense, what's happened to Australian retail is similar to what happened to the media. With the Internet, the writing has been on the wall since the 1990s but most retailers here, like the Fairfaxes and News Corporations of the world, did nothing about it.

Company director and entrepreneur Carol Schwartz, one of the better known members of the Besen dynasty which developed major shopping centres in Melbourne and Sydney, says many Australian retailers have been complacent. "The Australian retailers when the tech bubble burst wiped the sweat off their brow and thought ‘Now we can just go back to our high margin businesses and not have to change anything,” Schwartz says.

Retail managers should look at a Harvard Business Review study published earlier this year by MIT professor Zeynep Ton who found in research conducted over 10 years that investing in sales staff increased profit margins with more sales per employee, per square foot. Conversely, reducing staff resulted in their customer service, which is usually their primary competitive advantage, to suffer. He found that while successful retailers have relatively higher labour costs, they are still more profitable than most of their competitors.

Of course, hiring more workers will eventually lead to diminishing returns. But Ton says it's about finding the right balance. Customer service levels are the best measurement for that.

Ton writes: "Operational execution requires people. So stores with a gap in people – too few employees or unmotivated or incapable employees – will have a gap in operational execution. But few retailers realise the seriousness of operational problems and how much money they lose by underinvesting in employees.”

The smart retailers will be the ones who can harness technology to innovate and create new business models, much like the Audis and Tescos of this world. To do that, they will need to control the messaging and design, innovate and connect with customers. They need to stop selling and start buying the customer. Much like retail, at its best, has always been.