Toys ‘R’ Bust: A lesson in disruption
REMEMBER when Toys 'R' Us first launched into Australia? It was massive news. The American giant was set to disrupt the toy retailing sector forever.
Last week the Australian arm of the disrupter, despite a 20 per cent market share, was placed into administration … a victim of the new wave of disrupters.
While demand for toys and games remains high, consumers have moved online or to discount department stores.
Toy and game retailers have long been warned that being a simple shop for toys would not be enough to compete, and Toys 'R' Us was not able to adapt fast enough to changing market conditions.
It's just the latest example for investors of how they need to stress test their share portfolio from the threat of disruption and the ability of individual companies to continually reinvent themselves to fight the threats.
Streaming service, Netflix is a classic example of continual reinvention to stay a disrupter.
It started with a business model to avoid video late fees, then to hire videos online, then to a streaming service and now to doing it's own productions.
At the other end of the scale, large retail department stores haven't reinvented themselves sufficiently to fight the trend toward online shopping and are floundering.
It's fair to say every business sector is susceptible to disruption … it's just a matter of to what degree.
So investors then need to assess the ability of a company's management to meet those threats.
Or, as an alternative, to shift the weighting of their portfolio to investing in disrupters and away from their victims.
So which sectors of the sharemarket are most at risk of disruption;
It's pretty obvious to everyone that the traditional "bricks and mortar" retail model has been devastated by online shopping.
We've had a spate of speciality retailers go into administration or liquidation over the last two years while the share prices of Myer, Harvey Norman and JB Hi-Fi have been under enormous pressure.
The convenience and value from shopping online has seen customers drive a massive change in their habits.
Retailers who have catered for this change have reaped the rewards … those which haven't are feeling the blowtorch.
Supermarkets have adapted to the change better than department stores as the likes of Woolworths and Coles have developed slick digital divisions and benefited.
Online retailer, and disrupter, Kogan has seen its share price rise from $1.40 to $10 in the last year to reflect how getting it right can pay off big time.
The Afterpay Group reinvented using lay-by for shopping except the customer now receives the goods upfront rather than wait until they've paid it off.
Its share price has risen from $2.65 to $8 in the last year.
The Big Four banks are being disrupted both by digital competitors and Government regulation which changing the level of their power.
Having said that, our major banks are behemoths and unlikely to come under the same pressure as, say, the department store business model just yet.
The current Banking Royal Commission is likely to spark a new era of extra regulation on the Big Four which is expected to reduce their profitability.
From a digital point of view, a herd of Fintechs are focusing on specific sections of the banking industry.
Peer-to-peer lenders like Society One are offering low interest loans, Prospa and Moula offer small business loan, and there are a huge number of platforms offering home loans.
But the market dominance of the Big Banks, and the fact they have developed their own global best practise online banking platforms, means they are disrupting their own businesses. Also, many of the major banks are themselves investing in Fintech disrupters as a bit of an insurance policy.
Newspapers have been challenged by disrupters attempting to take a share of revenue and readership.
The major newspaper groups have responded with their own successful digital publications and advertising platforms.
Now these digital divisions are often more valuable than the print products.
The same with television networks which have been challenged by subscription television and overseas streaming services.
Like newspapers, the television networks have developed their own digital platforms and streaming services to protect their patch.
They are also investing in smaller disrupters and marketing them to their massive audience to market.
There has obviously been a lot of sharemarket pain for our major media companies and it has been a tough period of transition, it appears the share price falls may have stabilised at these lower levels.
Similar to banks, insurance policies are now more of a commodity than a tailored financial deal.
Comparison websites have enabled onsumers to build their knowledge and make their own decisions on the right policies for them.
Often, these online platforms will link digital customers to the insurance company's own website so, rather than a threat, they become a cheap referral.
Insurance companies are also benefiting from disrupters making them more efficient by developing better back end systems for administration and management.
This also applies to their wealth managements divisions as well.
It's guaranteed that every sector and every company will face disruption.
It can provide opportunities for those nimble enough to identify them and can also be a serious challenge for those scared to change.
INVESTING IN LISTED DISRUPTERS
Prominent disrupters which are listed on the sharemarket;
- Live Hire
- The Afterpay Touch Group