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RBA Finance

Competition can be good for business

Competition should be viewed as essential; otherwise there is no case for a viable market.

Looking at the destruction of value in the share price of our major department stores is a bit like watching a slow motion train wreck. Each year their revenue line is hit by competitive pressures with both top line revenues being crushed and margins eroded. Competition exists in all established industries.

So how do you compete other than by discounting and cost reduction? Do you go:

  • Cheaper?
  • Offer better service?
  • Faster?

Conventional wisdom says that to beat your competition, you need to one-up them. If they have five features, you need six (or ten or twelve). If they have 20 employees, you need fifty. If they’re spending $500,000 on marketing, you need to spend $1 million. But this is a never-ending battle that costs you massive amounts of money, time and drive. Solve simple problems.

The bicycle world provides a great example. For years, major brands focused on the latest in high-tech equipment: mountain bikes with suspension and ultra-strong disc brakes, or lightweight titanium road bikes with carbon-fiber everything. And it was a given that bikes should have multiple gears, three, ten, or twenty one. But how many people are going to spend $6000 for a bicycle? More recently; fixed-gear bicycles have boomed in popularity, despite being as low-tech as you can get. These bikes have just one gear. The selling feature? They’re simpler, lighter, and cheaper.

Don’t shy away from competition because your product or service does less or offers fewer features. Highlight it and sell as aggressively as competitors sell their products.

In retail the internet is stealing from top line revenues. Around 7 percent of retail sales are now done over the internet and, finally, the major retailers are clawing back revenue by have an online channel.

Will large floor space department stores survive over the long term? Already fashion sensitive retailers in major shopping centers are adjusting their retail footprint in terms of floor space. Many too are seeking more accessible pricing, hence the success of Zara. Business initiatives that are emerging include:

  • Multi channeling (online and offline)
  • and offline)Reducing footprint
  • Outsourcing manufacturing

The SMB sector is being hit hard as the supply chain to retail (as well as to the automotive manufacturers) is extensive. Will this impact on the banks and their lending policies to the SMBs? In this most immediate past reporting season the banks appear to have reduced their provisions for business and property related bad debt. Another season of discounting in the department store sector may see a few more business casualties and the ripple effect may well impact on bank lending policies to the SMB sector.

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