125th Anniversary – Big and agile, the paradox of retail store size

Size has become a central consideration for retailers in the Australian hardware market — size in several senses: the size of each retail outlet, the size of the overall network of outlets, and the total size of individual enterprises.
Half the history of Australian hardware retail over the past 25 years could be written as an analysis of how a few retail chains used network effects to gain a dominant competitive advantage. Network effects are most commonly considered in relation to technical and social media uses, but apply just as well to retail operations. The core equation at the heart of networks is that their value increases exponentially in relation to the number of nodes/edges (participants) in the graph (network). For convenience sake, the exponential value relationship is typically regarded as varying to the square of participants (a relationship also known as ‘Metcalfe’s Law’, after the ‘inventor’ of Ethernet computer networking). So a network with six participants is regarded as having four times the value of a network with three participants. For the early hardware chains, each additional branded store added to the effectiveness of their networks, and each individual store benefited itself from network membership. This mutual benefit led to widespread organic growth, and a ‘colonisation’ of the market by these networks, making it more difficult for non-affiliated retailers to survive. Over time this trend reduced the areas of real competition, a consequence of the chains adopting near-duplicate growth models, while also increasing the intensity of competition in these limited areas. This shift also gave rise to new opportunities. Educated to prefer retail effectiveness — low prices, wide product range, customer service — over loyalty and relationship, the customer market was prepared for a rapid migration to new retail opportunities. This resulted in the entry into the market of external enterprises with experience in retail and supply-chain operations.

Enter Bunnings

Bunnings, through launching its ‘big store’ model in Australia, effectively exploited a ‘second mover’ advantage in a market already educated and patterned on branded store chains — a market which had also, arguably, settled into near-ritualistic patterns of competition. Early success had locked existing network players into a pattern of continued network acquisition, and partially blinded them to the potential of high-capacity nodes in the network. So when it launched, Bunnings effectively made use of inter-network effects as much as it did pure network effects. Customers still relied on the widely dispersed retail chains for day-to-day purchases, but sought out Bunnings for their big, project-oriented purchases — which are (not by coincidence at all) the higher margin goods to sell. This model has evolved, but Bunnings still remains more project-focused than maintenance-focused.

The big store solution

The rise of the big store forms the second half of the history of modern hardware retailing, and it remains, to the present day, one of the most active principles behind retail strategy in this sector. Bigger stores have a number of native advantages. The bigger an individual outlet, the larger the geographic market area it can cover. So bigger stores means fewer stores to cover the same market area. This geographic spread is partly a result of a larger store’s ability to provide more lines of goods, and for those lines to be deeper than in smaller stores, which can have additional advantages. Bunnings, for example, will typically sell not only a typical array of consumer-grade products, but also a single, top-end product as well. Not only does this mean that Bunnings can be a source for more large-scale users, but these upscale models have the effect of creating a ‘price reset’ for their customers, encouraging them to spend more as the scope of comparison has been widened.

Equally, larger stores benefit from a range of logistic efficiencies. Fewer, more efficient deliveries are possible for single large stores than for multiple smaller ones. Stock is consolidated, and available reserves can be increased, decreasing the frequency of final link deliveries. Aside from this immediate efficiency in store size, there are other, hidden efficiencies that are just as important. In fact, hardware retail companies are able to deploy size not only as a means of attracting customers, but also, almost paradoxically, as a means of increasing their agility, especially as that agility applies to the essential business of all businesses, knowledge.

The knowledge advantage

As discussed in the previous article in this series, one way of viewing an enterprise is to see that the essence of its business is not really selling products of different types, but is really based on the provision of different kinds of knowledge to the customer. Customers don’t want to buy drills and drill bits, they want to create holes for a range of uses, and hardware stores are, in this sense, in the business of providing the knowledge of how to go about creating those holes.

This kind of knowledge base is constantly changing. Though new product development in the hardware industry has not kept pace with that in general consumer products, there have been some developments. As importantly, there is a considerable evolution underway in terms of the Australian customer’s needs and wants. Renovation activities have become smaller-scale in general, and there has been an increase in maintenance activities, both of which reflect short-term shifts in housing valuations, and longer-term shifts in living preferences marked by an increase in smaller, higher-density dwellings.

Changing product lines to accommodate these shifts is not too hard to do. However, changing a retail operation’s knowledge base can be quite difficult. When standard power drills are supplemented with rechargeable, battery-powered drills, for example, a whole new field of knowledge is required to help customers make the right choice. It is here that an unexpected – and perhaps determinate – advantage of the big store solutions such as those of Bunnings begins to take effect. In networks of smaller stores, the cost of training is often so high that it can cause these operations to forego introducing new products. Groups of staff have to be gathered into one central location, or training has to be repeated across a number of locations. What expertise there is remains diffuse. However, in a big store situation, a large number of staff are gathered together in a single space. Training costs are substantially lowered, and there is also an opportunity to create areas of expertise in the larger staff body, with certain individuals having more in-depth knowledge about particular areas.

In addition to specialist training, general training in areas such as customer service is also more effective in a big store, not only due to lowered costs, but also the feedback and help that comes from being surrounded by a number of similarly trained staff. Not that this is a ‘game over’ story. New technologies are in the offing that could, if applied effectively, negate the knowledge advantage of the big stores. The real question now is whether hardware retail operations, which have traditionally been somewhat technology averse, will be able to adopt them.

In the next edition, we will explore the competitive advantages of independent stores. For more information about the 125th edition or feedback on these articles, please contact Managing Editor – Projects, Betty Tanddo on 0411 431 832 or email: betty @glenv.com.au.