The power of two

I’ve been thinking a lot about the sale of Dick Smith Electronics in the last few days and I am still not sure if Woolworths will find a buyer for the chain.

Yes, it’s making a small profit, even if Woolworths’ management appears to be working bloody hard to get it. Yes, it’s got a wonderful brand name, even if Dick Smith himself has the power to damage it. And yes, it’s the third biggest player in a category that Australians love – technology.

But buying DSE just doesn’t look like a sensible long-term move. The pressure from competitors within Australia and particularly from internet retailers across the world will only continue to increase. Shrinking the chain will improve its fortunes, but for how long?

News of the DSE sale broke on the same day that it was revealed Coles was launching a new drive to reduce prices in the fresh food category. This sparked the standard calls from organisations including the Council of Small Business Organisations of Australia for regulators to intervene and cut the power of the grocery “duopoly”.

The two bits of news have got me thinking. What if the “duopoly” structure in the grocery sector – where there are two major players and a few smaller ones – became the norm in Australian retail?

What if the structural changes we are seeing left other retail categories with two main national physical retail chains, some other smaller players and an army of online competitors?

Take consumer electronics for example. If Dick Smith wasn’t to find a buyer, that would leave two major physical retail players in Harvey Norman and JB Hi-Fi, with the Good Guys and Retravision as smaller competitors.

In the book sector, the demise of Angus & Robertson and Borders has left Dymocks and Collins Booksellers as the two major physical players, with independent stores underneath that.

When you think about CD and DVD retailers, you think JB Hi-Fi and Sanity, again with independent stores beneath them.

In the camera market, the market is led by Camera House and Ted’s, with a range of independents still active.

Department stores (and even the supermarkets) operate in these three categories of course, but in terms of specialist chains it does appear that the Australian market is struggling to support more than two big players.

There are still plenty of categories where the Australian market supports a number of physical chains – clothing, furniture, homewares – but it could be argued that these sectors are slightly less vulnerable to the internet than easy-to-ship items such as electronics, books and DVDs.

As the physical retail sector goes through a period of structural change, there is no doubt that weaker businesses – even those with brand names as strong as Dick Smith – will be forced to exit.

From the point of view of physical retailing at least, smaller versions of the duopoly we see in our supermarket sector could well be the result.