Several pressures are emerging in the Australian economy that is making business competition more unpredictable and challenging. Three examples in the retail sector, as evidenced by recent half-year financial results, are the emergence of new competitors, Australia’s changing tastes, and disruptive technologies.
Competition and consumer choice
The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market. Since it’s a repeat purchase, active engagement means ongoing effort. Even customers with the necessary skills seem to often conclude they have better things to do with their time, as evidenced by switching rates. Pervasive advertising and the profitability of the commercial switching websites provides additional evidence of the challenge new entrant retailers face in acquiring customers.
Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits. The issue is non-trivial: in its cost of living surveys, customer advocate Choice has found that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems are understood to now be costing state governments several hundreds of millions of dollars each year.
More investment extending over capacity
Incumbent firms, when confronted by agile new entrants, face some tough choices. In some respects, the best way to counter new entrants with better business models is to change and expand the way you operate. For myriad reasons, this is usually impossible.What firms generally do is try to replicate the new entrants’ approaches within their own business. This is a classic economic imbroglio: firms see such innovative expansions as a means to solve their problems, but in many ways, it makes those problems worse.
Changing tastes upend value chain arrangements
Changes in what Australians are buying at the checkout is impacting supply chain arrangements significantly, and tilting profits to producers of higher quality and more healthy foods and away from retailers. As the national average girth expands, there is evidence that Australians are starting to change their ways in relation to heavily sugared grocery mainstays like soft drinks, sweet biscuits and the like. While better-quality and healthier food is great news for Australia’s health, it is not so great for our grocery retailers. The decline of high volume consumer staples like chips and soft drinks is bad news for retailers, which use such products to draw in customers. This means retailers have to be more cost competitive and margin-sensitive across the complete business, not just in the drawcard products.
Increased choice of home care provider is undoubtedly a positive development for aged care consumers. Sector reforms are already driving existing providers to refresh their service offerings, while new providers are bringing innovative ideas and service offerings. Niche providers (e.g. for people with the disability or culturally and linguistically diverse backgrounds) are also emerging that can potentially deliver better services to those with specific needs. Nonetheless, the new provider landscape also carries risks and challenges for consumers that providers need to be aware of. Consumers often face a bewildering array of choices, a labyrinthine pathway to care, unfamiliar terminology, and dubious claims from some providers (not everyone can be Australia’s premier aged care provider!). Consumers are becoming more sophisticated buyers and will shop around in an increasingly competitive market. They are looking for clear and simple descriptions of services, a sense of the provider’s values and a positive customer experience. Some providers coming from adjacent markets have a very straightforward value proposition that will appeal to the modern consumer. Providers that confuse the market – either intentionally or otherwise – risk alienating their potential consumers and will lose out.
Innovations are disrupting business models
Technological innovation drives waves of creative destruction in economies, allowing firms to continually revolutionize and competitively recreate themselves. Economist Joseph Schumpeter noted that economies progress through such innovation, albeit at the expense of firms left behind by the new innovators. In terms of technology-based disruption, more is on the way. Innovators like Amazon have signaled an interest in moving heavily into the Australian economy, expanding its e-commerce model into groceries.
Threat or opportunity?
While this is a dramatic shift in the market, most of the new providers only have a very small footprint with few or no Home Care Packages and also face the challenges of establishing themselves against established brands. Nonetheless, their entry into the Home Care Package market highlights the dangers of complacency for existing providers.
Home Care Package providers are still adapting to the new, consumer-led market and increased competition certainly adds to their pressures. It is essential that providers respond to these changes in a sustainable way by understanding their market in more detail, engaging their consumers in new and innovative ways, and developing new services. Competition is healthy and providers that embrace the challenge will be able to thrive.
Taken together, the retail sector will continue to be a tough place for incumbents to thrive. Innovators entering without the legacies of outmoded business models and with the benefit of new technology will continue to usurp incumbent firms. For consumers, choice and convenience will continue to emerge. For incumbents unable to deliver on these outcomes, the future is bleak. Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure.
The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.