Defining the 'next normal': retail in the post-COVID environment

With the Australian economy starting on the long road to recovery, we need to identify the retail strategies required to ensure that our jewellery businesses will not only survive but prosper.

In order to develop appropriate strategies, we need to have a comprehensive understanding of how the economy, consumer trends, and other factors impact the jewellery industry.

Prior to COVID-19, retailing in general – and in particular specialty retailing – experienced a decade of difficult trading conditions, which I outlined in a 2017 article, ‘Prospering in the new normal’.

The key issues identified then are still having an impact, and should be considered alongside the new challenges caused by COVID-19.

Revisiting the trends in time

Following a sustained period of industry growth from 2002–2010, along with a substantial increase in diamond sales, specialty retailing worldwide was subject to many challenges following the 2009 Global Financial Crisis (GFC).

These structural issues are:

• Internationally, gross domestic product (GDP) growth has halved since the GFC – This is a result of lower population growth, the retirement of Baby Boomers, a decline in labour force participation and the fact that technology and innovation have primarily been used to steal market share, rather than drive an increase in jobs – thus failing to add wealth to economies.

• In 2017, Australia had the second-highest ratio of household debt to GDP in the G20 group of countries – In 2019, we still held second place behind Switzerland, with a ratio of 120 per cent.

• In 2017 the unemployment rate in Australia was 5.7 per cent, and there was a significant rate of underemployment – Underemployment refers to people with part-time or casual jobs who are not rostered a sufficient number of hours in a week to cover their living costs.

Figures from the Australian Bureau of Statistics (ABS) show that in May 2019 unemployment was 5.1 per cent and 8.5 per cent of the population was underemployed (they wanted more working hours). However, many economists believe that a large proportion of underemployment is not measured.

• Interest rates have been low for many years – There is widespread concern among economic experts as to what will happen when interest rates rise, which they inevitably will at some point.

An interest rate increase from 4 per cent to 5 per cent might not seem much – it’s only 1 per cent – but that means a 10 per cent increase in repayments to the bank each month.

• Australian online sales in the year ended 2015/2016 stood at approximately $20 billion, or 6.7 per cent of total retail sales – In the calendar year to December 2019, online retail sales had increased to 7.9 per cent of total sales. An analysis by Australia Post estimated the value of online retail sales at $27.5 billion in 2018.

So, while 92 per cent of sales are from bricks-and-mortar stores, that 7.9 per cent figure represents a lot of trips that people aren’t making to a shopping centre.

This is one of the reasons why shopping centre foot traffic has been falling for the past few years and why many jewellery stores have been able to renew leases at equal – or even lower – rental rates.

• The world economy is currently going through another ‘revolution’ – We’ve had the agricultural revolution, the first industrial revolution, the digital revolution and now we have the technological revolution. This is affecting or disrupting almost every industry and there are more changes in the years ahead, such as artificial intelligence.

• Australia’s national accounts indicate that roughly 80 per cent of the average spending by population is on essentials – Consumers are spending the vast majority of their income on rent, debt repayments, food, health, electricity, and so on. That leaves about 20 per cent for ‘non-essentials’ such as jewellery.

In my 2017 article, I noted that there had been negative wage growth in real terms since 2012. So, at the same time the cost of ‘essentials’ increased, real income for the average person descreased by about 1-2 per cent. Therefore, the amount of money spent – or available to spend – on non-essentials decreased by about 15 per cent.

Since 2017, wage growth has remained flat at 2–2.5 per cent, roughly in line with inflation.

• In addition to pressures in the local economy, the consumer is also stressed by international events – World unrest and globalisation had an impact on consumer attitudes in the past; now COVID-19 has added to this stress.

In the 2017 article, I also listed five ‘megatrends’ driving retail disruption.

The first is rapid urbanisation – 60 per cent of the world’s population will live  in one of 60 megacities around the world by 2025, including Sydney, Melbourne and Brisbane.

At the same time, there will be 80 billion communication devices in the world and the average person will own five, which means that shopping will be further digitally driven than it is now.

Resource scarcity is another megatrend, where energy prices will continue to increase.

There will be a shift in economic power as India will be the next country to see its economy grow rapidly, with the third-largest GDP. Asia and Africa will also expand quickly. A demographic change is at play as well. People will live longer and have fewer children.

A few years ago, there were four workers in Australia for each retiree but by 2050 it is predicted that the ratio will be 1.5 workers per retiree.

Then we come to the retail disruptors. Large e-commerce businesses that have entered Australia, like Amazon and Alibaba, are agile, innovative competitors.

They have found clever ways to gain market share and the jewellery industry has to do the same  – it has to be smarter.
The market changes and disruptors have affected the average fine jewellery store over the past four years, contributing to the closure of approximately 300 stores – or 10 per cent of all jewellers.

Difficult trading over the past ten years has resulted in some early retirements – with jewellers deciding to close the store rather than risk renewing a long-term lease – or in some cases because of insolvency.

Looking into the crystal ball
By examining the previous trends, the future of retail can be predicted to some degree. For example, in 2017 around 35 per cent of all online purchases by Australian consumers were for goods from overseas websites.

Globally, it is likely there will be even more cross-border business-to-consumer commerce – although COVID-19 will dampen international transactions for a period of time, due to worsening economic conditions and less international transport available.

In addition, there are already signs that many Australians are endeavoring to support local businesses and Australian-made products, where possible. This may present marketing opportunities for many retailers to promote local manufacturing and sourcing of raw materials.

Several years ago, the standard model involved manufacturers in Asia employing an agent to work with a local importer, wholesaler and retailer in order to deliver the final product to a consumer.

That model is now changing, with more producers finding ways to sell directly to consumers and ‘cut out the middlemen’.

The other important trend for retailers to consider in the future is social proofing – that is, social media reviews and third-party ratings that influence buying decisions. This is more powerful than traditional mainstream media, which reaches less than half of the people it did 10 or 15 years ago.

Finally, the growth in consumer demand for custom designed jewellery will continue and provide substantial turnover for bricks-and-mortar stores as consumers search for something ‘different’.

There is still a huge opportunity for further growth in custom sales, particularly as bricks-and-mortar store sales are more profitable than online sales.

That is because, on average, most products sold online are at a lower price point than those sold in-store as the vast majority of consumers buying online are searching for the lowest price available.

It’s not good business sense to transfer a profitable sale from a bricks-and-mortar store to an unprofitable, or less profitable, sale in an online environment.

So now we come to 2020 and beyond and the impact of COVID-19.

As the various government health restrictions ease, we need to find ways to restore trading to pre COVID-19 levels, despite increased unemployment, underemployment and considerable consumer concern.

Real time, real-talk solutions

A webinar series created for Nationwide members focused on key retail strategies that address all of the changes over the past 10 years, as well as disruptors, and COVID-19. The webinars focused on three topics: preparation, maximising stock performance, and marketing.

In the preparation topic, we outline the financial support schemes that are available from the federal and state governments.

It is important that all businesses take advantage of everything available, including rent relief under the Mandatory National Commercial Leasing Code (“Code”); however, the legislation varies by state, which makes negotiating the best outcome difficult in some circumstances.

The next step is to ensure that businesses have a sound financial structure going forward, based on a realistic sales forecast.

The three key elements are: gross profit percentage, rent and labour costs – the latter two being the major expenses in retail jewellery.

Some stores may not need as many hours of labour per week in the months ahead, while shopping centre rentals are likely to continue to fall over the next few years. Logic states that empty shops and reduced consumer spending will lower the market values of commercial property.

Ideally, labour costs should be 18–22 per cent of sales and rent no more than 15 per cent in shopping centres and no more than 10 per cent in other locations.

Set to Rise INDUSTRY PREDICTIONS

The financial structure of the business must give a high probability of achieving profit of at least 10 per cent of sales – hopefully more – before tax.

The last step in preparation for the immediate future of retail is the most important, namely, ensuring a COVID-safe environment for staff and customers.

The topic of maximising stock performance required two webinars, because this is a critical issue for the jewellery retail industry.

Simply put, an average stock turn rate of one – the average item on the shelf takes a year to sell – will not result in the required profitability, cash flow or return on investment in the retail environment that we face.

For example, a store with sales of $500,000 a year and stock on hand of $500,000 at retail has a stock turn rate of 1.0 (sales divided by stock).

If that store can increase its stock turn rate by just 0.1 in the first year, and then by another 0.1 in the next year, then they will have an extra $50,000 cash in their hand each year.

That is an extra $250,000 over five years and it can be achieved through a combination of sales increases and reduction in stock levels.

Our webinars cover the detailed steps needed to improve stock turn rates, starting with space allocation, which means ensuring that the lineal space allocated to each merchandise department and range in the store relates to its sales performance.

“The next step is to ensure that businesses have a sound financial structure going forward, based on a realistic sales forecast. The three key elements are: gross profit percentage, rent and labour costs – the latter two being the major expenses in retail jewellery”

It is critical to identify poor performing ranges that are dragging down overall stock performance. A comparison of the average retail price of items in stock to the average price of items sold is also useful in measuring stock performance.

For example, if the average price of items on the shelf are far greater than the average sale price, it is likely that purchases and stock on hand is misaligned with what customers are buying – and the result is lost sales.

Most retailers understand that old stock is not providing the return that it should, however few realise the extent to which old stock results in lost sales.

The change in consumer spending habits towards custom design makes it necessary for jewellers to change their stock profile.

For many years, most jewellers have carried large ranges of finished diamond and coloured gemstone jewellery in their windows, yet to cater to changing consumer tastes, it is now preferable to reduce the investment in finished diamond jewellery.

With an average stock turn rate of 0.4 – meaning the average item takes two-and-a-half years to sell – it is difficult, if not impossible, to make an adequate return on the stock levels held in the past.

Store marketing must be a major focus given that jewellery is a high margin and very low stock-turn product category. In difficult trading periods, the goal of marketing is to maintain and increase sales and increase market share.

With less foot traffic, retailers have to find a way to increase their ‘hit rate’ for the customers that do visit the store. For example, if the business is achieving four sales out of 10 visits, then it needs to increase that to five or more sales out of 10.

The fourth Nationwide webinar focuses on marketing and includes an annual marketing calendar template, as planning ahead is important.

The first step in marketing is to understand your customer profile, and to identify the strengths of your business.

It is essential that you market to your strengths, which may be an extensive range, convenient location, the brands you carry, your expertise, or the services that you provide.

Due to the shift toward custom design and consumer personalisation, we advise stores to promote custom design as well as repair services.

Jewellers need to use as many marketing channels as possible, keeping in mind that most mainstream media has a reduced reach and is expensive.

While digital marketing is now the most popular and cost-effective means of marketing, it is essential to not simply assume an online campaign will be effective.

Rather, business owners must measure results and continue to test different marketing channels and methods.

Marketing starts with the store. Visual merchandising and signage are essential, alongside a factor that can add as much as 20 per cent to a jewellery store’s sales: price tickets on all merchandise.

Next, every business needs a quality website that is mobile-friendly.

It goes without saying that websites are the modern Yellow Pages listing, with 87 per cent of consumers researching online before shopping in a bricks-and-mortar store.

While overall online purchases are increasing – and will continue to do so – it is important to recognise that the vast majority of jewellery purchases take place in bricks-and-mortar stores.

Jewellery was the 21st most popular online shopping category in a 2017 survey conducted by KPMG, and that trend holds true today.

The lower proportion of total jewellery sales conducted online is evidenced when we look at Michael Hill International; in the six months to December 2019, online sales accounted for $10 million, or 3 per cent of the company’s total sales.

Therefore, the main purpose of jewellery store websites, social media and digital advertising is to attract customers into stores.

Consumers want and appreciate a seamless shopping experience both offline and online.

Retailer’s COVID-19 priority checklist 

Given the economic conditions that we face, the important areas of focus for retail jewellers now should be:

• Ensure that you have a quality mobile-friendly website, featuring a representation of your merchandise range and the services you provide
• A well-presented store that reflects the image you are seeking to portray, with visual merchandising that attracts and appeals to your target audience
• Engage several channels of digital media marketing – Training in effective selling skills and product knowledge, ensuring that both you and your staff are experts in all product areas
• Effective stock management strategies that maximise sales, thereby improving your stock turn rate and return on investment
• Construct a financial structure – gross profit percentage less labour, rent and other expense percentages – that results in a profit before tax of at least 10 per cent of sales

These ‘retail science’ business strategies that we are introducing to Nationwide members through our Business Management Course and webinars are critical retail tools needed to survive and prosper in the years ahead.

Sadly, some businesses won’t get through the next 12 to 18 months; however, those that implement the strategies above will survive, and come out a lot stronger and more prepared for the future on the other side.

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