Recent figures have inspired investor confidence, with yields on government bonds returning to pre SGF levels suggesting the crisis may be ending. However, such enthusiasm may be premature, as the harsh austerity programs enacted to regain such results have escalated already high unemployment rates and deep recessions across Southern Europe. Australia however, despite the global economic climate has enjoyed a relatively strong economic stance, historically evident in its GAP Annual Growth Rate averaging 3. 8% from 1960 to 201 3 according to the Australian Bureau of Statistics. Meyer Holdings Ltd has reaped the benefits of Australia’s strong financial performance, recording a growth in sales of $2. 5657 billion from 2006 to 2012. However, despite such success, the retail industry, which significantly contributes to GAP at approximately 4. 1%, has endured both domestic and international challenges. Historical Performance The pre-SGF retail industry was an environment characterized by significantly less volatility than what is prevalent today.
Prior to the Global Financial Crisis, consumer spending patterns were driven by: 1 ) Thriving domestic spending; ) Low household savings ratios (-2% in 2003); 3) Record low unemployment figures of 4% in 2008 and; 4) Rising interest rates growing to 7% in 2008 in order to burgeon inflation figures to 5% in September of 2007. Meyer flourished during this period, posting an increase in profit of 40% for the period ranging from 2007 to 2008. An comparison, following the SGF, consumer spending plummeted and sparked a record increase in the household savings ratio to 10. 1%, exceeding the 20 year average by more than double.
Current patterns of spending are characterized by: 1 )The introduction of the Carbon Tax; 2) Rising unemployment levels and; 3) uncertainty surrounding the rising cost of living with particular respect to housing prices. These changes in the market have led to a decline in consumer confidence and a shift away from discretionary spending,which has seen a negative impact on the retail industry, with retail spending in Australia at historically low levels and saving levels continually growing as seen in Figure 3. The subdued economic outlook post SGF is evident through Emery’s slowed growth as well as a decline in retail sales of 3. % between 2010 and 2011. Interest rate cuts down to 2. 5% by the Reserve Bank of Australia (ARAB) have en made in an attempt to aid consumer confidence, however spending remains stagnant today, with inflation sitting at 2. 7%. Meyer is particularly sensitive to discretionary spending, with the retail industry accounting for 30% of average household consumption. The correlation between these two variables is evident in Figure 4. GAP is expected to be slightly below trend over 2013 at approximately 1. 5% (ARAB), before returning to pace this year (2014).
The outlook over the coming year remains passive, reflecting ongoing fiscal consolidation, a shift in the retail industry’ towards e-commerce, the approaching peak in mining investment and the high Australian dollar. Consequently, Meyer will likely experience continued economic uncertainty; full year profit fell nearly 9% in 2013 and is further expected to slide in 2014. Exponentially increasing technological advancements mean that Emery’s future success is dependent on its ability to adapt to the shift in shopping culture created and minimize the threat of international competitors.
As such, it is imperative that Meyer initiate new strategies relating to distribution and e- commerce. It is anticipated that the retail sector will face further uncertainty n the coming years relating to volatile economic conditions as well as record high levels of consumer uncertainty. Industry Analysis: Porter’s 5 Forces 1. Rivalry between existing firms: Moderate-High Driver Degree of Driver Industry growth rate Moderate In recent times it has become evident that department stores within the retail industry are facing significant hardships, which have resulted in lowering profits following the SGF.
This is characterized by consumer confidence and interest rates at an historic low. Thereby indicative of both global and local market uncertainty. This is particularly an issue at the forefront of a nonuser driven business, which relies heavily on consumer confidence. However, there exists opportunities for firms within the retail sector to expand and develop through the adoption of innovative distribution platforms such as online and Omni-channel, with industry sales expected to increase by 0. 9% in the current year to total $1 21. 1 billion.
In addition to this, industry revenue is expected to contract -3. 0% in 2014, suggesting that Meyer will continue to experience volatile earnings growth. Market Saturation High Over the last decade the retail industry has become increasingly more treated avenues. This includes: 1) Domestic competitors such as David Jones and Target; 2) International competitors including Asks Fifth Avenues, Barneys New York, Sears and Macy’s; 3) online stores such as SASS, Bestsellers and Boohoo; and 4) bricks and mortar stores including other fashion retailers.
Together with Meyer, these firms account for over 80% of the retail industry’s revenue (IBIS World, 2013). However, with over 300 players in the industry the market is highly saturated with growing numbers of online and international retailers increasing competition in Australia. It is also important to note Emery’s recent attempted takeover of David Jones, which highlights the industry high levels of market concentration and evidences Emery’s desire to expand amidst this challenging environment.
Differentiation & Switching Costs Low Given the level Of intense competition within the retail industry, Emery’s customers face very low switching costs especially with the ease of online shopping. In addition, currently Meyer stocks brands that do not offer consumers exclusivity. This low level of product differentiation is consistent with the industry, as most fashion retailers stock the same seasonal trends. Further, over 80% of Emery’s sales are in goods that are not exclusive to Meyer. This has resulted in low switching costs and low levels of brand loyalty for consumers.
Economies of Scale and Learning Meyer like many other large department stores have significant economies of scale and can leverage off continued expansion of its network of 67 stores nationally, and sourcing contracts with over 800 suppliers. Due to its size, many competitors cannot compete with Meyer on purchasing and bargaining power, however with large levels of fixed overheads it is incredibly difficult for Meyer to compete with retailers that operate solely online. As such, optimizing us apply chains and adopting a cost leadership strategy will be important for Meyer in order to stay competitive against its online competitors.
Therefore Myers strategy of sourcing offices in Hong Kong and Shanghai will continue to promote economies of scale and reduce purchasing costs. Barriers to Exit & Capacity Unlike online retailers, bricks and mortar stores, face significant exit barriers due to their high overheads and other fixed costs including established partnerships and contracts with both employees and suppliers. As such, Emery’s strategy Of selling on consignment has assisted with the reduction Of outdated inventory, which is sold at a loss rather than being wasted.
In addition, retailers face higher levels of demand than supply. Therefore, Meyer with its network of suppliers is likely to have excess capacity, while online retailers are highly likely to face stock shortages. 2. Threat of new entrants: Moderate First Mover Advantage Due to majority of retailer within the industry offering similar products, it is challenging for companies such as Meyer to possess a first mover advantage. Notwithstanding, Myers strong focus on customer satisfaction in recent times, may enable the firm to achieve the first mover advantage with regards to customer choice.
Distribution Channels argue retailers such as Meyer and David Jones have established distribution channels and contracts with their suppliers, however the rise of e-commerce and the growing digital era has placed a significant strain on these traditional methodologies which are particularly capital intensive due to high overhead costs. As such, retailers and particularly Meyer have had to invest heavily into evolving their Omni-channel distribution to both maximize their sales and provide a competitive offering to consumers.
Legal barriers Australian regulatory bodies including the Australian Consumer and Competition Commission (ACE), Australian Retailers Association (ERA), and legislation (Trade Practices Act) have created strong legal barriers to entry for new entrants within the retail industry. This is evidenced through legal compliance requirements regarding minimum conditions of employment, such as paying 25% loading for casual wages, holiday loadings and designated trading hours (IBIS World, 2013).
As such, this has, and will continue to ensure existing retailers and new entrants are closely monitored for compliance with industry standards and regulations. 3. Threat of substitute products: Low Mascots hierarchy of needs illustrates that many of the products sold in the retail industry fall under the category of “safety. ” This ultimately suggests that there are no substitute products or alternatives to satisfy these basic human needs, as evidenced through products such as clothing apparel and household goods such as bedding and television sets, which are necessary to both men and women within a contemporary context. . Bargaining power of buyers: High Price Sensitivity The majority of products offered within the retail industry are largely undifferentiated, characterized by low switching costs and high price sensitivity. Therefore, companies such as Meyer are able to differentiate themselves through offering consumers convenient access to various brands within one location. However, ultimately clothing itself is a standardized product, with most consumers willing to explore various retailers in order to satisfy their needs. N addition due to changes in consumer spending habits (despite household disposable income currently growing at 6. %), increased competition from online retailers and low levels of consumer confidence due to both the SGF and European Sovereign Debt Crisis, has seen both existing products and previously price insensitive goods become increasingly price sensitive. As such, in order to combat this, retailers have adopted tactics surrounding heavy discounting and reinvestment to differentiate their product offering within the retail industry.
Bargaining Power Over time, consumer bargaining power has increased significantly due to increased levels of competition within the retail industry. Typically, consumers dinettes low levels of bargaining power due to dominant industry retailers. However, due to the growth of digital platforms and relatively high Australian Dollar, international department stores are now able to reach consumers across geographical barriers, thereby giving consumers more alternatives than ever before.
Due to the pressure placed on the Australian retail industry particularly from overseas firms, revenue has been declining over the last 5 years, falling 3. 0% in 2012-13. As such, large department stores such as Meyer have had to adopt a new approach to customer satisfaction, typified by accounting periods and reinvestment projects that are aimed at developing brand equity, customer loyalty and retention. This included the Meyer Mid Season Sale and constant 30% off statewide promotional offerings.
Therefore through analysis, it has become evident that consumer spending habits and changes in consumer preferences have a significant influence on both industry sales and promotional activity. This ultimately highlights a high level of bargaining power for consumers. 5. Bargaining power of suppliers: Moderate Bargaining Power Over time it has become evident that retailers will only choose to stock reduces that contribute most to profits, with there being a large number of suppliers from which a retailer can choose to engage with.
Therefore many product suppliers of apparel and other goods have low bargaining power due to their products being highly undifferentiated. However, it is important to note that brands with strong reputations are not as easily substitutable. This is evident as the bargaining power of high-end fashion suppliers of brands such as Channel and Michael Koru, are significantly higher than those of local brands such as the Meyer Miss Shop. In addition to this, several suppliers offer nonusers the option to purchase their products online through both agents and company websites, often at cheaper prices.
As such, this has resulted in renegotiation’s with suppliers, as Meyer looks to minimize costs. Further, Meyer invests heavily into the training of its employees to maximize customer satisfaction and employee engagement levels. Thereby highlighting the firm’s employees as an invaluable supplier of human capital, with their skills contributing to Emery’s operational and managerial success. This ultimately suggests that employees possess high levels of bargaining power, which is enforced through the fact that labor costs in the Australian retail industry are among the highest in the world.