New ways to make a profit

You cannot bank on old realities of the market

REMEMBER when Toys R Us was first launched in Australia? It was massive news. The US giant was set to disrupt the toy retailing sector forever.

Last week the Australian arm of Toys R Us, 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 is high, consumers have moved online or to discount department stores.

Toy retailers have long been warned that being a 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 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 its own productions.

At the other end of the scale, large retail department stores haven’t reinvented themselves enough to fight online shopping and are floundering.

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 threats.

Or, as an alternative, to shift the weighting of their portfolio to investing in disrupters and away from their victims.

So which sectorsof the share market are most at risk of disruption?

RETAIL

It’s pretty obvious that the traditional “bricks and mortar” retail model has been devastated by online shopping.

We’ve had a spate of specialty retailers go into administration or liquidation over the past two years while the share prices of Myer and JB Hi-Fi have recently been under enormous pressure.

The convenience and value of shopping online has seen a massive change of habits.

Retailers who have catered to this change have reaped the rewards … those who 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.

Online retailer and disrupter, Kogan, has seen its share price rise from $1.40 to $10 in the past year to reflect how getting it right can pay off.

The Afterpay Group reinvented lay-by, 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 past year.

BIG BANKING

The big four banks are being disrupted both by digital competitors and government regulation.

Having said that, our major banks are behemoths and unlikely to come under the same pressure as, say, the department stores.

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 is 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 loans, and there are a huge number of platforms offering home loans.

But the market dominance of the major banks, and the fact they have developed their own global best practice online banking platforms, means they are disrupting their own businesses. Many of the major banks are themselves investing in Fintech disrupters.

MEDIA

Newspapers have been challenged by disrupters seek-ing revenue and readership.

The major newspaper groups have responded with their own 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 Illustration: John Tiedemann marketing them to their massive audience. It has been a tough period of transition for our major media companies and it appears the share price falls may have stabilised.

INSURANCE

Insurance policies are now more of a commodity than a tailored financial deal.

Comparison websites have enabled consumers to build their knowledge and make their own decisions.

Often, 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.