| In a changing economy, some companies thrive, while others fail. It’s not a phenomenon isolated to any particular industry, rather it’s just a part of doing business. Recently, many businesses have felt the impact of the GFC, increases to online shopping, and a decline in consumer spending. However, there are many other factors that can affect a company’s performance, even in good times.
Many businesses, taking the view that changes are short-term, make the mistake of waiting for market conditions to improve. Those that achieve longevity are the ones that make adjustments to the way they work. For many, a strategic review of the cost of doing business (CODB), and subsequent reduction of non-core costs, has been a large part of a successful strategy.
Airline Blues
One company that is currently facing financial challenges is Virgin Blue. In the wake of the GFC, the leisure travellers Virgin Blue was accustomed to dropped dramatically in numbers.
Media reports have made is clear for some months that Virgin Blue has been facing a bumpy ride (pun intended). Forecasts predict the airline losing between $100 million and $150 million for the 2010/11 year.
Whilst Virgin Blue have attempted to lure away some of Qantas’ business clientele, the operation hasn’t been much of a success. The recent hikes in jet fuel prices haven’t helped, with airlines across the board being forced to increase ticket prices. While Qantas’ clientele don’t notice an extra $10 on their flight cost, the budget-savvy discount fliers most certainly do. New planes and staff uniforms, as well as upgrades to airport lounges have also been implemented.
Additional measures such as decreasing their own CODB, alongside the new directions in marketing and product development, could have significantly improved the bottom line.
Red Bubble
In February, the bubble for Borders finally burst, with the REDgroup of companies going into voluntary administration.
Book retailing has been turbulent territory for some time, with online competitors like Amazon offering cheaper prices that Australian retailers have struggled to compete with. In October of last year, REDgroup reported a full year loss of $43 million. While the company blamed its bust on the high price of retail selling in Australia, market commentators have also pointed to the group’s business model.
While the threat lingered for some time, REDgroup did little to combat the onslaught of online competition. In an effort to shift their focus, Borders announced later last year that they were to reduce their stock in books and move to offer more gift products. They also made concessions that costs needed to be cut, but by then it was a case of too little, too late.
Hi-Fiving the Market
A positive example of how cost reduction can improve a business is found in entertainment retailer, JB Hi-Fi. Recently, the company announced a profit up 15.6 per cent for the first half of the 2010/11 year, in comparison to the first half of the 2009/10 year. While less than many market commentators anticipated, the result is still greater than many other comparable companies within the retail sector. They expect profits for the full year to be between $134 million and $139 million.
In their half yearly report to shareholders, JB Hi-Fi reiterated their support a low CODB with a ‘low cost culture, operating leverage, labour productivity and marketing economies of sale.’ JB Hi-Fi quotes its CODB at 13.2 per cent for the first half of the 2010/11 year, which is the lowest of all comparable retail chains.
A low cost philosophy is nothing new to the JB Hi-Fi business model, but has proved to serve the company well time and time again. In periods of hardship to the retail sector (the last six months serve as prime example of this) it has seen them still post profits and prosper in an environment where others may perish. As the retail sector stalls, JB Hi-Fi continues to reach profit forecasts, as well as opening 13 new stores with plans for five more.
And remember the store that increased its profit in the last six months by 5.2% whilst sales remained flat… Is there no other business like David Jones?
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