The behavioural economics of discounting, and why Kogan would profit from discount deception



The consumer watchdog has accused Kogan Australia of misleading customers, by touting discounts on more than 600 items it had previously raised the price of.
http://www.shutterstock.com

Ralph-Christopher Bayer, University of Adelaide

Kogan Australia has grown from a garage to an online retail giant in a little more than a decade. Key to its success have been its discount prices.

But apparently not all of those discounts have been legit, according to the Australian Competition and Consumer Commission.

The consumer watchdog has accused the home electronics and appliances retailer of misleading customers, by touting discounts on more than 600 items whose prices it had sneakily raised by at least the same percentage.

Kogan is yet to have its day in court, so we won’t dwell on its case specifically.

The ACCC alleges Kogan’s ‘TAXTIME’ promotion offered a 10% discount on items whose prices had all been raised by the equivalent percentage.
ACCC

But the scenario does raise an interesting question. How effective are these types of price manipulation? After all, checking and comparing prices is dead easy online. So what could a retailer possibly gain?

Well, as it happens, potentially quite a lot.

Because consumers are human beings, our actions aren’t necessarily rational. We have strong emotional reactions to price signals. The sheer ubiquity of discounts demonstrate they must work.

Lets review a couple of findings from behavioural (and traditional) economics that help explain why discounting – both real and fake – is such an effective marketing ploy.

Save! Save! Save!

In standard economics, consumers are assumed to base their purchasing decisions on absolute prices. They make “rational” decisions, and the “framing” of the price does not matter.

Psychologists Daniel Kahneman and Amos Tversky challenged this assumption with their insights into consumer behaviour. Their best-known contribution to behavioural economics is “prospect theory” – a psychologically more realistic alternative to the classical theory of rational choice.

Kahneman and Tversky argued that behaviour is based on changes, which were relative. Framing a price as involving a discount therefore influences our perception of its value.

The prospect of buying something leads us to compare two different changes: the positive change in perceived value from taking ownership of a good (the gain); and the negative change experienced from handing over money (the loss). We buy if we perceive the gain to outweigh the loss.

Suppose you are looking to buy a toaster. You see one for $99. Another is $110, with a 10% discount – making it $99. Which one would you choose?

Evaluating the first toaster’s value to you is reasonably straightforward. You will consider the item’s attributes against other toasters and how much you like toast versus some other benefit you might attain for $99.

Standard economics says your emotional response involves weighing the loss of $99 against the gain of owning the toaster.

For the second toaster you might do all the same calculations about features and value for money. But behavioural economics tells us the discount will provoke a more complex emotional reaction than the first toaster.

Research shows most of us will tend to “segregate” the price from the discount; we will feel separately the emotion from the loss of spending $99 and the gain of “saving” $11.

Economist Richard Thaler demonstrated this in a study involving 87 undergraduate students at Cornell University. He quizzed them on a series of scenarios like the following:

Mr A’s car was damaged in a parking lot. He had to spend $200 to repair the damage. The same day the car was damaged, he won $25 in the office football pool.
Mr B’s car was damaged in a parking lot. He had to spend $175 to repair the damage.
Who was more upset?

Just five students said both would be equally upset, while 63 (more than 72%) said Mr B. Similar hypotheticals elicited equally emphatic results.

Economists now refer to this as the “silver lining effect” – segregating a small gain from a larger loss results in greater psychological value than integrating the gain into a smaller loss.

The result is we feel better handing over money for a discounted item than the same amount for a non-discounted item.

Must end soon!

Another behavioural trick associated with discounts is creating a sense of urgency, by emphasising the discount period will end soon.

Again, the fact people typically evaluate prospects as changes from a reference point comes into play.

The seller’s strategy is to shift our reference points so we compare the current price with a higher price in the future. This makes not buying feel like a future loss. Since most humans are loss-averse, we may be nudged to avoid that loss by buying before the discount expires.

Expiry warnings also work through a second behavioural channel: anticipated regret.

Some of us are greatly influenced to behave according to whether we think we will regret it in the future.

Economic psychologist Marcel Zeelenberg and colleagues demonstrated this in experiments with students at the University of Amsterdam. Their conclusion: regret-aversion better explains choices than risk-aversion, because anticipation of regret can promote both risk-averse and risk-seeking choices.

Depending to what extent we have this trait, an expiry warning can compel us to buy now, in case we need that item in the future and will regret not having taken the opportunity to buy it when discounted.

Discounting is thus an effective strategy to get us to buy products we actually don’t need.

Look no further!

But what about the fact that it is so easy to compare prices online? Why doesn’t this fact nullify the two effects we’ve just discussed?

Here the standard economics of consumer search would agree that consumers might be misled despite being perfectly rational.

If a consumer judges a discount promotion is genuine, they have a tendency to assume it is less likely they will find a lower price elsewhere. This belief makes them less likely to continue searching.

In experiments on this topic, my colleague Changxia Ke and I have found a discernible “discount bias”. The effect is not necessarily large, depending on circumstances, but even a small nudge towards choosing a retailer with discounted items over another could end up being worth millions.




Read more:
Why consumers fall for ‘sales’, but companies may be using them too much


Once a consumer has made a decision and bought an item, they are even less likely to search for prices. They therefore may never learn a discount was fake.

There are entire industries where it is general practice to frame prices this way. Paradoxically, because this makes consumers search less for better deals, it allows all sellers to charge higher prices.

The bottom line: beware the emotional appeal of the discount. Whether real or fake, the human tendency is to overrate them.The Conversation

Ralph-Christopher Bayer, Professor of Economics , University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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The trouble with Big W: don’t blame online for killing discount department stores


Gary Mortimer, Queensland University of Technology

After weeks of speculation, Woolworths has confirmed it will close 30 of its Big W stores in Australia, as well as two distribution centres. This represents about 16% of its 183-strong network.

The obvious culprit, and the one identified by many analysts, is online shopping.

As one industry analyst explained: “The physical department store footprint is likely to continue to shrink as online sales penetration increases further.”

Online shopping is certainly a factor, but it is not the primary reason for Big W’s troubles.

Though online shopping in the department and variety stores category is growing fast (by 29.6% in 2018 according to the NAB Online Retail Sales Index, the total amount of money spent online by Australian shoppers – A$28.8 billion – is still only about about 9% of what is spent in traditional bricks-and-mortar stores.


Online retail sales growth by industry in the 12 months to December 2018,
NAB Online Retail Sales Index

More important to Big W’s woes is the growth of the so-called category killers, which are disrupting the entire discount department store business model. It a threat to which Big W has failed to respond with the same agility of rival Kmart.

Departed departments

If you’re old enough you may remember getting your wall paint mixed in the Big W hardware department, or buying car accessories from its automotive department. There was also a large “sight and sound” department filled with televisions, sound systems, videos and CDs. Discount department stores truly lived up to the idea of a variety store.

‘You know the price is low, everyday’: A television advertisement for Big W in 1994.

But the profitability of all these market segments for department stores has been eroded by the growth of “category killers” – retailers specialising in the same product categories.

Examples include Office Works for office supplies, Rebel for sports equipment, JB Hi-Fi for audiovisual, Super Cheap Auto for car parts, and Bunnings for hardware. All have taken market share from the discounters. These stores compete on price and have superior range, and shoppers trust the expertise of staff working in a specialist shop.

Speed of change

The popularity of category killers explains in large part the stagnant sales and talk of store closures throughout the department store segment.

Harris Scarfe and Best and Less are reportedly struggling. The Reject Shop’s net profit for the first half fell from an expected A$17 million to less than A$11 million.
David Jones’ half-year profit fell 39% to A$36 million. Myer reported a 2.8% drop in total sales for the same time frame.




Read more:
What does the future hold for our traditional department stores?


Wesfarmers expects earnings from its department store brands Kmart and Target to fall about 8% this financial year. Eight Target stores closed during the first half of the financial year, with another six closures expected by the end of June.

Cutting losses

Kmart is considered Australia’s discount department store “darling”. A decade ago it was on life support. Under the direction of chief executive Guy Russo it doubled it profits by 2015.

A key to the turnaround was recognition it needed to quickly reduce or exit categories it could not compete in, such as hardware, automotive, fishing, consumer electronics and sporting goods. It has turned to homeware, soft furnishings, manchester and kitchenware.

There appears no such swiftness in Big W’s moves.

Big W’s chief executive from January to November 2016, Sally MacDonald, reportedly wanted to closes stores and make other major changes but was thwarted by the board of Woolworths Group, owner of Big W.

Such differences in strategic vision explain why MacDonald left the role within the year.

This process of “right-sizing” therefore seems long overdue. To what extent it makes Woolworths a sustainable business, however, will depend on future response to changing circumstances.

What is certain is that discount department stores aren’t what they used to be; and if they want to be around in future, they probably can’t be what they are now.The Conversation

Gary Mortimer, Associate Professor in Marketing and Consumer Behaviour, Queensland University of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Love them or loathe them, private label products are taking over supermarket shelves



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Supermarkets are stocking more of their own brands even as they shrink stores.
Shutterstock

Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

Coles is aiming to have private label products make up 40% of its product range over the next five years. This increase will apply across multiple tiers of products, with a focus on quality, innovation and new strategic global relationships.

More supermarket-owned brands will mean lower prices for consumers and greater margins for the retailer. But the move could significantly impact Australian suppliers as their branded products are delisted and supermarkets seek out cheaper manufacturers overseas.




Read more:
Phantom brands haunting our supermarket shelves as home brand in disguise


In Australia, private label products currently account for 18.1% of all retail dollar sales. The proportion is similar in North America (17.7%).

This is significantly less than supermarkets in other countries. Private label products account for 41% of supermarket sales in the UK, 42% in Spain, 36% in Germany and between 27 and 32% in most other European countries.

Why private labels?

In one academic study, 85% of the retailers surveyed said “improved margins” was their main reason for investing in private label products.

A private label product with features and quality parity with national brands may cost retailers 40% to 50% less to manufacture and distribute to customers.

Some American convenience stores claim gross margins of up to 72% on private label bottled water, for instance, compared to 45% on branded alternatives.




Read more:
Woolies private label strategy will play directly into the hands of Aldi


Overall, supermarkets see an 8-10% premium on margins for private label products over branded ones.

Private label products also help retailers differentiate themselves from competitors by giving them unique products.

Private labels have increased their footprint across many retailers, including discount department stores, liquor and convenience stores and traditional full-line department stores like Myer.

The flipside of private label expansion

The main fears about the continued growth of private label brands are that it could discourage suppliers from innovating with their products, jeopardise the livelihoods of smaller, independent suppliers, and ultimately result in less choice for consumers.

Consumers are currently benefiting from increased competition. Progressively higher-quality private label products are available at much lower prices than branded products.

Just a few years ago then Woolworths CEO Grant O’Brien said the company would put customers “before” suppliers.

Some researchers suggest that increasing private label ranges could impede innovation in the food industry. This is largely because branded manufacturers will have less incentive to invest in new products only to have them copied by the contract manufacturers who produce private label goods.

But a recent report from the European Commission actually found innovation in the food supply chain is not under pressure. And a quick wander through any major supermarket will illustrate the effort supermarkets are making to improve quality and introduce new product lines.




Read more:
Woolworths and Coles should heed simplicity lesson from Aldi


Smaller, local independent brand manufacturers and wholesalers could be exposed to “delisting” – where a supermarket does not renew a supply contract in order to free up shelf space for its own private label alternatives.

Naturally, if Coles is aiming to increase the proportion of its own branded products, minor brands will be the ones to disappear from shelves, not major brands like Coke, Cadbury or Nescafe.

As for less choice, most shoppers will not notice the difference, or may enjoy the shopping experience more.

Supermarket shopping is notoriously a low-involvement, mundane and habitual task. Shoppers often visit the same supermarkets, buy the same products and browse the same aisle. In fact, studies continue to demonstrate that the “abundance of choice” is problematic for many shoppers, who simply seek an “optimal choice”.

Research shows that when faced with a “good, better and best” option, people choose the one in the middle. This is why we see supermarkets offering very basic generic private label products all the way through to “select” and “finest” options.

Accordingly, a successful private label strategy hinges on leveraging perceptions of both price and value. Private label products are a key weapon for Coles and Woolworths to compete with Aldi and Kaufland for price-sensitive customers.




Read more:
House-brand push boils down to capitalism’s crisis


Australian supermarkets previously looked to local manufacturers to produce their private label ranges. However, Aldi, Kaufland, Costco and Lidl have found success by leveraging their global sourcing strategies, providing both quality and economies of scale, and so lower prices.

This appears to be on the cards for Coles. It has also announced a wish to develop new strategic global relationships to realise its 40% private label target.

This suggests that Coles may overlook local manufacturers, instead seeking out international manufacturers to produce some ranges.




Read more:
‘Honey, I shrunk the store’: Why your local supermarket is getting smaller


Coles’s announcement comes as supermarkets are getting smaller in the face of rising costs. Together, these trends could have long-term implications for the Australian grocery industry.

The ConversationThe presence of more private label goods will likely require domestic manufacturers to themselves produce more private label goods to minimise offshoring. But, in doing so, manufactuers will commoditise themselves, thereby giving retailers even more power.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.

Fear not, shoppers: Amazon’s Australian geoblock won’t cramp your style



File 20180601 142102 1owy6g4.jpg?ixlib=rb 1.1
Will there be fewer of these on Australian doorsteps?
Ink Drop/Shutterstock.com

Gary Mortimer, Queensland University of Technology

Online retail giant Amazon’s decision to block Australian shoppers from its US website has prompted an outpouring of anger from its customers. However, economic statistics indicate the actual value of online purchased products entering Australia from international marketplaces is relatively low. While some shoppers will be disappointed by Amazon’s decision, others will simply find ways around the geoblock.

The federal government has been under pressure from legacy retailers like Gerry Harvey, who have called for an end to the GST exemption on overseas online purchases worth less than A$1,000.

Federal Treasurer Scott Morrison last year introduced legislation for this measure, arguing it will “establish a level playing field for our domestic retailers”. From July 1, 2018, GST will apply to all overseas online purchases.

The Australian Retailers Association has proposed a “vendor collection model” under which foreign retailers would collect the GST at the time of purchase and then pay it to the Australian Taxation Office.

But the fact is that these measures won’t level the playing field. Overseas online prices for many items are so low that that even if GST were added, they would still be far cheaper than they are in Australia. For example, a recent search showed Levi’s 510 jeans for A$115 at Myer, compared with A$74.85 in the United States; and a Uniqlo Women’s ultralight down jacket for A$200 here, versus A$154.10 over there.




Read more:
Three holes in Hockey’s plan to levy GST on overseas purchases


In 2017 Australians spent an estimated A$24.2 billion online. Yet this is just 7.8% of the amount spent at bricks-and-mortar shops. And more than 80% of online spending was through domestic retailers, which are subject to GST.

With only A$4.84 billion spent via overseas retailers, a quick calculation indicates that adding 10% GST to those purchases would have added A$484 million to the government’s coffers last year.

Why has Amazon blocked Australia?

Amazon has blamed the new GST rules for its decision to bar Australian shoppers, arguing that the vendor collection model would create significant operational difficulties:

While we regret any inconvenience this may cause customers, we have had to assess the workability of the legislation as a global business with multiple international sites.

Yet rival online seller eBay seems to have managed to implement the vendor collection model without undue trouble. It looks as if Amazon, which generated almost US$180 billion in sales last year, views the Australian market as just too small to justify the hassle. In fact, one study has estimated that Amazon will only gain a 16% share of Australian online retail sales by 2025.

Amazon’s view on Australia’s red tape may well be right. Modelling by Australia Post suggests that if the postal service were tasked with assessing and collecting the GST on international deliveries, it would cost almost A$900 million to collect A$300 million in revenue.

Who are the winners and losers?

As mentioned above, Amazon probably won’t suffer much from cutting loose its relatively small Australian customer base. But what about the customers themselves, and Amazon’s competitors?

When Amazon Australia (not to be confused with the now geoblocked US site) launched in December 2017, just in time for the Christmas rush, 3.8 million Australians visited the site during that month alone. But this is well short of the 11 million Australian shoppers who visit eBay each month.

Amazon’s withdrawal will undoubtedly benefit eBay and other sites such as Alibaba, which look set to attract shoppers who are still hungry for an international bargain.

While some dedicated fans of Amazon’s US site are understandably annoyed, most customers simply won’t notice the difference. Customers will be automatically directed to Amazon’s domestic offering, which claims to stock more than 60 million products.




Read more:
Amazon in Australia might not be the end of retail as we know it


For Australia’s traditional retailers, the playing field still isn’t really “level”, even without access to Amazon US. Don’t expect everyone to suddenly start banging down Harvey Norman’s doors come July 1. In reality the impact will be minimal.

How to get around the geoblock

For the very determined shopper who demands access to Amazon US, there are naturally ways around geoblocking technology, such as re-shipping services, freight forwarders, and VPNs.

The ConversationBut given that the average online shopping basket was worth A$145 in 2017, it seems like a lot of trouble to go to just to avoid paying A$14.50.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology

This article was originally published on The Conversation. Read the original article.

Explainer: why Wesfarmers is ditching Coles



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Whoever buys Coles will have a huge store network.
Shutterstock

Gary Mortimer, Queensland University of Technology

Coles will soon be an independent company again, with more than 800 supermarkets, nearly 900 liquor stores, 700 service stations, and 88 hotels.

Spinning off Coles is a great example of how good Wesfarmers is at entering and exiting markets. Buying the ailing Coles in 2007 was a smart move.

But the supermarket sector has changed dramatically in the past decade in relation to intense competition, with the growth of discounters like Aldi and the emergence of price-conscious shoppers who simply shop across multiple brands of supermarket each week.

Customers have benefited from price deflation, but it is a different story for suppliers.

The nature of these relationships has regularly been criticised and investigated.

A new owner will bring these matters back to the forefront. Ultimately, private equity firms and global businesses only purchase companies and enter markets where considerable return on investments can be made.




Read more:
Why Australian supermarkets continue to look to the UK for leadership


Cash cows and dogs

Most first-year business students deal with these conundrums and often rely on simple models like the classic Boston Consulting Group’s Matrix.

Boston Consulting Group’s growth share matrix.
CC BY

Businesses move around in these quadrants, depending upon external, macro-level impacts. A stronger Kmart will push Target from a “Star” into the “Dog” category very quickly.

Wesfarmers has successfully moved Coles from “Dog” status 10 years ago to “Cash Cow”, but profits have slid in recent years.

Coles also accounts for a staggering 61% of the capital deployed in Wesfarmers’ entire portfolio (which includes other retail brands, industrial, mining and energy businesses), but contributes just 34% of earnings before interest and tax.

The supermarket sector has seen a huge increase in competition in recent years, with the growth of discounters like Aldi. There is also a possibility of more international competition from the German discounters Kaufland and Lidl.

This month, Fred Harrison, chief executive of Ritchies, Australia’s largest chain of independent supermarkets, called for an end to the “price wars”. Metcash, a wholesaler for independent supermarkets, recently delivered a loss in its food and grocery business.

Coles itself has signalled a move away from its strategy of slashing prices.




Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom


Other than putting cash back on Wesfarmers’ balance sheet, spinning off Coles creates two long-term revenue streams for Wesfarmers.

To begin with, Wesfarmers will aim to a hold 20% stake in Coles. So some profits will continue to flow back to Wesfarmers.

More importantly, Wesfarmers intends to retain “substantial” ownership in Flybuys, Coles’ loyalty program.

The value of loyalty programs is best highlighted by Woolworths’ purchase of Quantium in 2013 for almost A$20 million.

These programs hold a vast amount of data, giving Wesfarmers huge customer analytics capabilities with which to tailor promotions, product ranges and store layouts across all of its other retail businesses.

The new owners of Coles will also be eager to access this data.

Who will buy Coles?

While Wesfarmers will remain a minor shareholder, there will be plenty of interest in the majority share among private equity investors and international players (such as Walmart and Carrefour).

Walmart entered Canada through an acquisition, Mexico through a 50-50 joint venture with Cifra (Mexico’s largest retailer), and Brazil through a joint 60-40 (in favour of Walmart) with Lojas Americana.

Likewise, French retail giant Carrefour has adopted a range of approaches to international expansion, including joint ventures and acquisitions.




Read more:
Can Coles (Fly) buy shopper loyalty?


Ultimately, private equity investors and global businesses will only buy companies and enter markets where they can make a considerable return on investment.

Considering the declining margins in supermarkets, driven by low-cost operators like Aldi, it is likely that this will be done by squeezing suppliers.

On the other hand, a new Coles will no longer be constrained by Wesfarmers’ conglomerate ownership model. One of the challenges faced by large conglomerates is “strategic inertia”.

The ConversationA separate business will lead to faster innovation, greater investment and potentially another battle for market share between Australia’s two big supermarkets.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology

This article was originally published on The Conversation. Read the original article.

‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price



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Coles was once the market leader thanks to its ‘down down’ low pricing marketing.
http://www.shutterstock.com

Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

On January 26, 2011, Coles fired the first shot in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition.

But now Coles has waved the white flag, indicating a move away from price-based marketing, to a focus on other attributes, such as sustainability, local produce and community.

Coles’ new ad campaign.

Research shows if price is the main selling point, shopper loyalty decreases and customers become more conscious of price. Price wars are also costly for retailers.

While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.

Coles recent half yearly results reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million.

In contrast, Woolworths announced an 11.1% increase in earnings for their supermarket business. But Woolworths dropped their “cheap, cheap” price cutting campaign nearly two years ago.




Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom


Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week saying they were:

…no longer able to compete against the domination of the major two supermarkets.

While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed.

How this strategy came about

Supermarkets are now looking beyond price to stand out.

Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain.

So, rather than price, the focus has shifted to service quality, social programs and connecting with the community.




Read more:
Unit pricing saves money but is the forgotten shopping tool


Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called “habituation”.

What these new strategies are trying to sell

So, if Coles are no longer selling themselves on price, what are they selling?

Coles’ new approach is more subtle, selling themselves through aspirational stories and employing classic advertising techniques to do it.

These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week.

Woolworths ad campaign.

With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths new campaign features athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.

Meanwhile, Coles have partnered with Uncle Toby’s for their Sports for Schools campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.

By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.

Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect.

While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes.

The ConversationFaced with the expansion of Aldi across South Australia and Western Australia and the entry of German supermarket Kaufland, Coles has recognised they can’t keep fighting a battle on price alone.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.

Amazon poses a double threat to Australian retailers



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Amazon is a low-margin retailer sitting on other higher-margin businesses.
shutterstock

David Bond, University of Technology Sydney

E-commerce giant Amazon has struck a deal to acquire Whole Foods Market, an American supermarket chain with more than 400 stores. The move has put even more pressure on Australian retailers as Amazon sets up shop in Australia.

But the real threat to Australian retail lies in Amazon’s business model. It is a low-margin retailer that owns several other highly profitable and fast-growing businesses, such as cloud services. These other businesses can and do cross-subsidise its retail operations.

JB Hi-Fi and Harvey Norman have suggested they will compete with Amazon on price, but given the cost structure of Australian retailers this may not be possible.

Amazon is very lean

While Amazon is extremely large, it is very lean. In 2016 alone, Amazon sold US$94.7 billion of product globally. But the cost of buying (or manufacturing) these products was US$88.3 billion, leading to a gross profit of just US$6.4 billion.

This means the mark-up Amazon puts on its products is very small. For example, in 2016 Amazon’s gross profit margin (gross profit divided by sales revenue) was just 6.8%. JB Hi-Fi had a margin of 21.9%, Woolworths 26.8%, Wesfarmers 31.0%, Harvey Norman 31.4%, Myer 42.1% and Super Retail Group a whopping 43.4%.

But Australian retailers also face high operational costs (wages, advertising, marketing and leases). The two largest, Wesfarmers and Woolworths, both have operating expenses in excess of 24.0% of sales revenue, while Myer, Super Retail Group and Harvey Norman are all around 40.0%. JB Hi-Fi is an outlier at just 16.3%.

Another important measure to consider is the net profit margin. This shows what percentage of each dollar of sales the company ultimately earns after all costs (including tax) are factored in. Net margin is calculated by dividing net profit after tax by sales revenue.

The net profit margins for Australian retailers are, for the most part, quite low – around 2-3%. This means they don’t have much room to move on price. If they drop prices, many will become unprofitable. So even if Amazon doesn’t start a price war in Australia, its business model is such that prices will be extremely competitive.

Amazon has other businesses

Most Australian retailers are only retailers. Some of the larger groups, such as Myer and Wesfarmers, operate across a few industries. But they ultimately still earn nearly all their revenue from buying and then re-selling physical products.

Amazon, on the other hand, has a profitable and booming services business. Its “services sales” represents about US$41.3 billion in sales, or 30% of its revenue. This covers third-party seller fees (Amazon charges other companies for access to its marketplace and warehouses), Amazon Web Services (a fast-growing provider of cloud services), digital subscriptions, advertising services and co-branded credit card fees.

In its 2016 annual report, Amazon reported US$12.2 billion in revenue from Amazon Web Services alone. The scariest thing for Australian retailers is that this has increased four-fold since 2013, and is responsible for nearly 75% of Amazon’s operating profit.

Amazon, then, not only has a large, low-margin online retail offering, but is supported by a fast-growing, high-margin cloud service.

Finding new ways to compete

Most Australian retailers will need to look at other ways of saving costs if they are to remain competitive with Amazon. For example, Coles and Woolworths can put even more pressure on suppliers to reduce their costs. Coles has recently signalled that it will pursue this strategy. And all of our retailers can try to reduce the cost of leases, and shift or reduce staff.

The small margins of most Australian retailers mean reducing prices alone isn’t a viable long-term strategy, especially as Amazon Web Services gains steam and Amazon is profitable in other countries.

Not every retailer will come under the same pressure, though. In the short term at least, groceries are still likely to be purchased in stores. But the same can’t be said of clothing and electronics. This means Woolworths and Wesfarmers should not be as concerned as Myer, Super Retail Group and JB Hi-Fi.

The ConversationThe answer for retailers may be to look past price and compete on other aspects of the shopping experience, such as convenience or customer service. But only time will tell if that’s what the Australian public wants.

David Bond, Senior Lecturer, Accounting Discipline Group, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Titanic Violin Fetches $1.6M at Auction


NewsFeed

A violin thought to have belonged to Titanic bandmaster Wallace Hartley and played while the ship sank was auctioned Saturday for more than 1 million pounds ($1.6 million), the Associated Press reports.

The record-making price tag for a Titanic artifact “may never get beaten,” said a Titanic memorabilia collector at the auction in England.

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The German-made violin, now corroded and unplayable, was a gift from Hartley’s fiancee and was engraved with the words: “For Wallace on the occasion of our engagement from Maria.” The buyer, who called in the bid, wishes to remain anonymous.

[Associated Press]

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Meet the man behind New York’s other billion dollar internet company. This one makes money


Gigaom

The technology industry these days has taken on the veneer of a glam-rock festival — lots of venture capitalists, founders and executives taking center stage and enjoying the bright lights — or quips on social media and hamming it up on video shows. And perhaps that’s why someone like Chad Dickerson, chief executive officer of Etsy, a Brooklyn, New York-based global marketplace for arts and crafts goods, is a breath of fresh air. A quiet man who speaks very softly, Dickerson is an unlikely success story in the razzle-dazzle world of ecommerce.

Dickerson, who started his life in the media world (he worked for Salon), and spent time at Yahoo, ended up joining Etsy in 2008 as its chief technology officer. Etsy, which was started in 2005 by Jared Tarbell and Rob Kalin, had gone through a series of management upheavals and from the outside felt like a temperamental…

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