Franchise Council of Australia on retail lifecycles

According to the Franchise Council of Australia , the specialty retail formula appears simple enough. Sell sufficient volumes of stock that people want to buy at sufficient mark-up to cover all fixed and variable expenses to leave a profit for the effort, and a return for the investment and risk. That is the basic equation used by tens of thousands of specialty retailers in high streets and malls across the length and breadth of the country.

In Australia, more than 900 shopping malls house about 80 percent of approximately 5000 franchised retailers alongside 40,000 state and national chains and independent traders. Since 1992 some 4.7 million square metres of retail space has been added to the national retail property stocks – a 20 percent increase. While the figures can never be totally accurate because they always change, the formula must be successful because all those retailers wouldn’t be doing it, right?

In truth, the answer is yes, no and maybe. Success for some now – but not for all time.

Little shop of horrors

Seasoned specialty retailers know if you delve behind the hype of small business success, you will also find many accounts of disputes, losses, marginal businesses and outright failures, as well as good news stories. Occasionally government reports on the sector, a scandal or a hard luck story makes the local TV or press, but by and large, when a shop goes bust or just closes, it is rarely headline news – the shop simply vanishes, only to be replaced later by something bigger, better or more modern. Or perhaps left vacant with a new ‘For Rent’ sign.

Retail horror stories are not confined to mum and dad operators, and they are certainly not the sole province of the franchise sector. Each success or failure is different and there are numerous reasons why some shops fail and others succeed. The location, property economics, financing arrangements, professionalism and advice, in-store operations, service levels, range on offer or the crush of new competition are chief among many other determining factors, because retailing today is not as simple as it once was. It is a complex and highly competitive industry. If you are seriously contemplating retailing, whether by the franchising route or looking to establish as an independent, protecting yourself to avoid becoming another statistic starts well before you write your business plan or inquire about the hottest new franchise. Like most successful human endeavours, it begins with research and planning.

Retail lifecycles – many faces, many trends

Professional retailers face a barrage of challenges. To assist them to make the right planning choices when addressing retail issues, marketers often ask themselves the question: Where is it in the retail lifecycle?

If ‘retail lifecycle’ sounds like marketing gobbledygook, think again before dismissing it, because thinking ‘lifecycle’ is one of the best ways to manage retail risk. Most of all, it often provides an astonishing way to uncover what others cannot see. The hot ideas in the labs, design studios and test kitchens today will be brought to market to be sold by retailers tomorrow – and new ideas are the stuff to make retail marketers sit up and take notice.

Product lifecycles

The theory of lifecycle always follows a similar bell curve pattern, or a flat hill shape. A new product or service hits the market, usually after a secret pilot period or development or (de)regulation, thereby entering the emergence phase. Retail sales grow and rise up the curve to a point where they really take off, only to mature and flatten out. Months or years later, sales eventually decline and perhaps die off. Initially, hot new items and services are bought by a few (the early adopters and trendsetters who will pay for the privilege of the latest and greatest) then move to a growth stage where the early majority gives way to the mainstream and the price comes down as manufacturing volumes increase. Along the way, just before maturity, wholesale pricing declines, moving to commodity level as copycats and competition hit the market. As more of the same items are sold or services become popular, the move to mass market is on in earnest and the pricing becomes so keen, profits are slashed due to intense competition. Eventually, the goods or services are superceded by better innovations or die out altogether.

Shop lifecycles

There was a time when department stores were king, their aisles packed with Saturday shoppers eager to be home before the noon bell closed the front doors. You shopped them because they offered in-store credit cards and the electrical department stocked a decent range of TVs, video recorders or radios. One floor was likely to be for ladies, another for men, haberdashery, footwear and underwear, next floor for linen, furniture and kitchenware, and so on.

There was also a time when banks closed early except for Friday and shop staff didn’t ask how much petrol you bought with your daily milk, bread, deodorant and vegetables. The newsagent was the only place in town for papers, magazines and greetings cards, bakery and butchery businesses were manned by friendly tradesmen, chemists and pharmacists seemed like high street saints and hardware and mixed businesses were the only shops open on Sunday. Trendy coffee shops were found only in the big cities and there was confusion in the unisex jeans shop because men and women started to share the same brands. Juice, salad and sushi bars were unheard of, food courts were a rare novelty, music stores stocked CDs, vinyl and instruments and supermarkets never sold boxed chocolates, condoms or kettles. I’m sure you get the idea. Things change, slowly at first but then if they’re hot, they explode. Today’s household retail brands and many famous franchised operations have ridden the waves of change and exploited them to benefit both franchisor and franchisee.

Shop lifecycles is not a new concept. Since the turn of last century when many great retail names were founded, the retail industry has always been in a state of flux and it always will be. Success and failure are part of retail because where shops are concerned, change is really the only constant. In fact, as retailers anticipate markets, their shops, their look and feel, their merchandise and their locations spearhead all consumer trends, fads and fashions both long and short-term. Retailers do not follow – they lead shifts in demography, habits and technology. Retailers only follow the ups and downs of macroeconomics, government regulation (and deregulation) and microeconomics at local, regional and state level. And if retailers ignore these trends, they often end in trouble because the movements operate regardless. Besides, successful retailers don’t disregard them – they embrace them. When change is noticed, successful retailers identify at what point it is in the lifecycle, because that is key to knowing when change is coming or has passed you by. More importantly, it’s the clue to the likely impact at the cash register.

Armed with this small, but important knowledge, you’ll avoid ‘shop shock’ – a term describing the sinking feeling you get upon realising the retail venture will fail to live up to expectations – and limit ‘store blindness’, a term describing what happens when long-time retailers can’t see their store as customers really see it. You will be forced to look beyond the normal, the banal, the emotion, hype and hope and see the ‘opportunity’ as it really is. And best of all, if you’re in retail now, thinking ‘lifecycle’ is likely to reveal gaps in the market that you can exploit now, well before your competition does.

Spot a trend

At shop floor level, retail lifecycles govern products. Ask a fashion retailer how important fads and trends in the clothing industry are. The entire industry relies on the quick and the nimble to spot the next ‘big thing’. In fact, as everyone knows, fashionable clothing repeats itself every few years (albeit in a slightly different form) to maintain an edge. But you couldn’t build an entire chain on a fashion fad. In another category, ask an electrical retailer how videotape sales are going now that recordable DVDs have come down in price. What about mobile phones, flat screen TVs, or computers? What about the thousands of mini photo labs? How long do they have before the 35mm industry completely yields to digital photography and they go the way of the dinosaur?

Recognising and acting on trends is now key to a retailer’s survival because change happens at so many levels and at a far quicker pace than ever before. As lifecycles get compressed with shorter times to market, retailers need to know when to innovate, when to make profits, when to exit and when to stare down the competition. With the increase in travel and the globalisation of the internet and telecommunication, ideas can spread almost instantly. No longer can good ideas remain local – the time from market launch to maturity is far shorter and the need to innovate ever more critical. Applying retail lifecycle theory to real world situations is vital. But are tomorrow’s hot retail ideas predictable by looking for the right trends? The answer is yes.

Modern shopping malls

Retail lifecycles govern retail shopping malls and retail concepts. In the mid 80s, ‘niche retailing’ became the watchword as shopping centre floorspace dramatically expanded. We saw the emergence of shops devoted only to socks, or ties, or natural cosmetics, to lingerie, to donuts (and re-emerge again in 2004) and numerous other high-impulse food offers, viable only in high footfall locations. We saw food courts go from add-ons to an integral part of any new retail development as malls got bigger and their owners became global. It is no coincidence Westfield offers annual retail study tours.

And other trends took hold. The local strip shop came back as a place to meet and do coffee or lunch and more. Whole streets emerged to cater not only for the local population, but became destination precincts in their own right. This is a continuing trend, and another phase of the retail lifecycle.

Hot property

Analysing trends is important when assessing a product, but becomes vital when evaluating locations. Stock you can mark down and sell through, however location mistakes can become the stuff of nightmares. Making informed guesses to future-proof your business is an important component of your location due diligence. For instance, there is little point in negotiating a lease contract in a mall if the centre is in decline. The lease contract should reflect the risk in that decline. Is it wise signing up to a rising rent when sales aren’t moving the same way? It’s likely the mall owner will actually know this trend (they collect tenants’ sales figures), but unless you ask the questions, leasing agents are unlikely to volunteer the information.

Many malls and precincts already suffer from too many stores servicing a primary trade area that’s relatively stagnant demographically, or worse, in decline. This is another important trend to check. In such situations, the slice of the sales pie gets smaller and smaller if you’re in the wrong business.

Sign of maturity

In Australia there is often only enough room in a market for two or three major players. Gone are the days when a retailer could be a fourth or fifth-tier player – the top two will likely totally dominate. But herein lies opportunity. If you look hard enough – at your competition, at trade fairs, through industry magazines and networking – you may be able to spot emerging trends in your market that have the potential to be exploited.

Although retail trends can be identified simply through observation, major long-term shifts can also be found in demography, or even climate shift. Think sea-changers, grey power, water restrictions, ozone depletion – they all have a retail spin-off. The Census and publications by the Australian Bureau of Statistics and the various industry associations may also yield clues. Given that the information and cheap travel revolution has been on us for more than a decade now, perhaps get on a plane and see for yourself.

Cash or credit, and any fly-buys with that?

Shifts in human habits and attitudes that are hard to pin down empirically often reveal themselves at the cash register. That is why loyalty programs, customer databases and sophisticated point-of-sale systems are so important. Well set-up, they allow retailers to get very close to their customers to spot trends. That is also how supermarkets stock products and plan shelf layout according to categories in growth and decline and why space is specifically tailored to individual store demographics. Modern retailers can now tell what’s really happening.

The trends are everywhere

Over the years there has been a big shift to healthier eating. In Europe, the sales growth of organic foodstuffs has been exponential and recently, Australian manufactures have grasped the trend. Organics is a small market overall but the trend is likely to continue. And what about genetically modified, fair trade and gluten free? What’s the trend here? Will we see entire organic supermarket chains emerge? Will the concept work its way into organic clothing, linen and mainstream fast foods?

In keeping with the healthier theme, there has been an explosion in the number of fitness solutions, with gyms on every street corner, mega sports shops and the like, but where’s the trend? We are seeing these businesses split into smaller, more finely focused, groups with females only, specific sports, or expectant mothers as their target market. Is this the trend and do the locations truly dovetail to demographic shifts in the target market? Now, more than ever, it is critical to plot fads, fashions and trends so long-term planning takes into account the current market and where the competition will likely be.

Finally, if you are looking to purchase a business or franchise, where is that business in its own lifecycle? Is the business growing, or is it in decline? Where is the franchise network on its lifecycle? If the sales trend shows growth, what products are growing and why, and when will the business reach maturity? Are some product classifications on their way out to be replaced with hot new ones, or has the entire business concept reached its peak? Maybe the owners know something that you don’t? Ask yourself: Where will the business be one, three or five years from now? Is the business a fad business? If so, is there room to manage a new product range in line with projected demographic growth of surrounding districts and existing customers? Does that demographic growth dovetail with your target market?

Simply put, when facing many retail problems, ask yourself: Is the timing right? Try it and see. You may well unlock one of the great success secrets of specialty retail.

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