Digital merchandising
Can digital lift performance in physical stores?
Digital tracking can help create customer profiles
Digital tracking can help create customer profiles
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Online stores have the advantage of monitoring customer behaviour, and designing offers to suit them. Independent hardware stores could equal this advantage, if they worked together to develop community-oriented solutions.
HI News 4.6
The next two to three years could be some of the most transformative for independent hardware retailers since the 1980s. Just as the first point of sale (POS) systems and barcodes changed forever the operational aspects of retail, so now there is an informational change under way.

On the face of it, however, there has seldom been a time when things have looked tougher for non-corporate independents (NCIs) in hardware retail than today. The rise of Metcash's Independent Hardware Group (IHG) has created a division within independent retail itself, and one that is set to get wider over the next couple of years. Wesfarmers is backing a strong push by Bunnings, with the trade sector as its main target. All that adds up to a lot of internal industry stress on the NCIs that are outside of those groups.

Added to this is the more general stress from the current Australian economy that is affecting all of retail. Even as the numbers we currently use to measure the economy are pointing up, the economy itself has been very slow to respond. Business investment remains low, growth in wages is low, and this has been generally reflected in low growth for most sectors of retail. As HNN has suggested in the economics part of this series on the Future of Retail, it's very possible Australia has just barely escaped from entering a deflationary spiral. It is a close call that has come with some costs, and will take the economy some time to fully recover from.

Where hardware retail has been partially shielded from factors that affect retail in general over the five years from FY2011/12 to FY2016/17, buoyed by rising dwelling prices, which have driven the increase home-building and renovation activities, that is set to end, and the market will likely go slightly negative during calendar 2019.

Just to add to all of this, recent changes in retail technology also seem set to advantage larger retail operations over smaller ones. Data analytics, which makes use of broad and deep datasets to deliver market and customer insights which can drive bigger profits and increased customer engagements, requires size, which smaller retailers cannot deliver. Also, though the costs of these techniques have fallen steeply over the past 10 years, they require specialised knowledge, and remain relatively pricey for smaller companies.
The upside

Yet, despite all of these seeming difficulties, HNN remains very optimistic about the prospects for most NCI hardware retailers. It is our belief that both the economy and retail itself are undergoing transitions, and that what emerges will rebalance a part of the market in favour of NCIs.

One key factor in this is that HNN sees the Australian government as being forced into making some kind of economic stimulus spending in FY2019/20. This will follow on from some of the usual pre-election populist stimulus spending, which will likely land in February/March 2019.

Given that small businesses - and especially retail businesses - have tended to miss out on most government stimulus packages, there is a special obligation on the hardware retail industry, and particularly its NCI sector, to present the best possible target for any stimulus spending that might come along.

The key to garnering a deservedly large share of this likely stimulus boost is the combination of a "heartland", high-employing industry (such as retail) with technologies which are at least as much about software as they are about hardware. This can create what we might call a really enticing "three-fer", in terms of representing overlapping business minorities: the type of business the Reserve Bank of Australia (RBA) has identified as being in the highest growth category; a boost to a "traditional" business (as opposed to "scarier" high-tech software development); and a way to deliver funding in a visible, accountable, results-oriented way directly to a large number of small businesses.
Under investment

Of course, making these technological changes is not just about seeking government funding. Few sectors of Australian business have underinvested in the technological opportunities of the past 15 years as much as "traditional", physical retail. It's an area which is ripe for improvement, and where investment is likely to deliver immediate rewards.

This lag in development is a little surprising, as retail in general (and hardware retail in particular) made significant investments and undertook major risks during the 1980s and 1990s as they first adopted barcodes and basic POS cash-register based systems, then switched to complex retail software which, at the upper end, is really a form of enterprise resource planning (ERP).

One big difference is simply that the previous systems that were implemented were very much "replacement" technologies. Just as the spreadsheet was the technology that really encouraged the revolution in personal computing, because it represented simply an electronic form of the familiar ledger, so barcodes and POS systems were a way of doing something familiar faster and better.

The other problem is simply that most of the tech solutions being offered today are the same solutions offered four or five years ago, warmed over to make them look new. Even as part of the tech world (especially anything related to mobile, but cloud computing as well) has accelerated its development, retail technology has pretty much stayed the same.

What is especially lacking is any kind of "architecture" to the solutions, a commonality of purpose and implementation that ties together the many possibilities. However, at the present time that commonality is beginning to emerge, and at its heart is the need and the possibility of moving beyond what has come to be called the "omnichannel" strategy - as the blending of ecommerce and physical retail is often called - to a more unified approach.
The situation

Before we start to look at these new potentials, it is a good idea to get a better idea of the forces that are coming to bear on retailers today. While these are familiar, what is less familiar is how they combine to produce the modern industry.

The most recent industry change has been the combination of Mitre 10 and the Home Timber & Hardware Group (HTH) into the Metcash-owned IHG at the end of 2016. This has created a market that consists - broadly - of three groups: Bunnings, which has majority control over some sectors such as DIY power tools, and a strong influence in many other sectors; IHG, which is using a combination of corporate-owned and independently-owned stores to try to gain control over the "local" hardware market; and stores that are unaffiliated, which we might call the non-corporate independents (NCIs).

IHG has plans to expand both its trade and DIY businesses, primarily by providing unique tools and other products at low price points, driven by higher volumes and the use of its centralised warehouse distribution platform. Even those members of IHG not directly part-owned by Metcash will find benefits in more closely integrating - through data exchange and product lines - with the company's corporate-owned stores. This is turn should, according to the company's strategy, lead to more stores joining IHG, expanding its market reach.

Over the coming three years, Bunnings intends to grow its share of the trade-based market on top of its already high growth rate in DIY. It will do this by expanding the range of services and products aimed at trades, possibly including the introduction of more Bunnings Trade stores across Australia. HNN projects that Bunnings could take as much as $2 billion out of the trade market over the next three years.

As a result of this market consolidation, NCIs stand to come under pressure by the combined forces of Bunnings and Mitre 10 on at least four different fronts.
Retail brand promotions

Both Bunnings and IHG's Mitre 10 brand have the advantage of a strongly identifiable brand name that is backed by a range of advertising, including TV commercials, print ads, regular catalogues, electronic direct marketing (emails), online marketing, and outdoor advertising.
Brand product pricing

Bunnings and IHG pursue a similar strategy based on suppliers lowering their wholesale prices in exchange for guaranteed volumes. Bunnings, of course, has a considerable advantage in this area, both because it has higher volumes, and because it has complete control over its entire store network.
Home and captive brands

Allied with lower brand prices, both Bunnings and IHG continue to expand their offering of home and captive brands. The partnership between Bunnings and Stanley Black & Decker to redevelop the Irwin brand as a captive brand for Bunnings is a good example of this. Irwin is at a near-perfect price/quality/reputation point to aid Bunnings in growing its marketshare for trades.

Meanwhile, IHG continues to produce home-brand items. While these are at the moment, in general, at the lower end of the DIY market with offerings such as its Buy Right brand, there's little doubt that over the coming years these home brands will enter the low-end of the trade market as well.

One of the big changes in recent years has been IHG's revitalising of its Mitre 10 Sapphire store program. While early Sapphire stores were not very good from a customer perspective, more recent efforts have introduced new and innovative merchandising solutions. The Sapphire team now works closely with store owners, is flexible about requirements, and keen to learn and improve how best to equip stores.

The result is not only stores which deliver superior customer experience, but also stores that are clearly similar, making it easier for customers to identify with the brand, and to shop more conveniently at a range of stores.

Bunnings, of course, has long been a quiet master at merchandising. While their stores can seem almost causally laid-out, there is a lot of experimentation and expertise behind what they do. To name just one simple element, the dark-red base colour of their shelving creates a slightly festive and welcoming element to their stores (something that became evident when contrasted the colder blue of the warehouse stores built by Masters Home Improvement).

The drop palettes in the the broad aisles, and the seemingly accidental kick-boxes of helpful products that intrude into product category aisles, are all merchandising fine-tuning techniques that many other retailers have yet to really understand.
Digital transformation

Up until recently, digital has seemed to many Australian retailers to be as much a problem as it is a solution. That is in contrast to the US hardware retail market, where retailers have advanced quite far ahead of the Australian market in terms of digital experimentation and development. The Home Depot stopped building physical stores for a number of years, concentrating instead on building out the technical and logistical infrastructure needed to make online/digital work well for it.

Lowe's Companies has similarly invested in digital, including headline-grabbing store "robots" and virtual reality (VR) active displays. Nonetheless, Lowe's new CEO, Marvin Ellison, who comes from turning around discount clothing retailer JC Penney, after a history as a top executive at Home Depot, is expected to further boost the company's online presence.

Ace Hardware, which relies on independent member stores, has made strong moves into online, most recently through its acquisition of The Grommet. This company operates an e-commerce website that markets and sells new and innovative products created by independent entrepreneurs. Brands it has helped to launch include FitBit, IdeaPaint, OtterBox, SimpliSafe and SodaStream. Ace has taken The Grommet's online presence, and brought that into the physical stores of Ace members.

While it is true that going online is a good strategy in the US (and even the EU) hardware retail sector, it's probably right to be a bit doubtful about duplicating this in Australia. As Wesfarmers so recently found out when it attempted to export the Bunnings business model directly into remodelled UK Homebase stores, Australian hardware retail is something quite unique in the world, and deserves its own strategies.

To read the rest of this article, please download the free, complete edition of HI News at:
HI News 4.6: Digital merchandising
HI News 4.6

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