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Aug 18, 2011

Retail 2: why it's not as bad as we're told

It's not just foreign competition and the strong dollar -- other factors are important in retail, and explain why some retailers are succeeding when others aren't.


Newspaper and TV readers and viewers could be excused for thinking that the likes of David Jones and to a lesser extent, Myer make up the Australian retail sector, so dominant has the coverage of their recent sales reports been. Commentators and analysts, not to mention “experts”, have extrapolated their weak sales efforts to the rest of the retail sector. But on the most recent retail sales data, department stores account for under 8% of turnover in the sector.

And why do some retailers strike trouble when some battle through with their sales lowered, but reputations intact? Consider two stories this week from small retailers that not only coped with cautious consumers, but the floods in January in Queensland and NSW.

Retail Food Group (RFG) dominates the shopping centre food court business through chains such as Michel’s Patisserie, Brumby’s Bakers and Donut King. It is positioned centrally in the restaurant, cafe and takeaway food sector. Yesterday we showed that until last year that was one of the strongest performers in retailing, but since then it has flatlined as interest rates headed up. And RFG had the added problem of many of its outlets in southern and central Queensland and northern NSW were closed earlier this year as shopping centres and other retail zones were flooded for several days. It was a similar story for The Reject Shop, one of the better performing retailers because of its pioneering work at the bottom of the discount pile, the so-called “$2 shops”. Like RFG, it was hit by that slowdown late last year and then its new multimillion-dollar distribution centre at Ipswich, west of Brisbane, was flooded in the January floods, a disaster that knocked the company sideways.

Both groups survived. Why? Good management  and working with staff and franchisees, got them through. There was very little publicity for both groups and yet their performance is arguably better than anything else from the retail sector — not in absolute sales of profits, but keeping going through  adversity.

That’s because in retail, the quality of management is critical.

The Wesfarmers-owned Coles Group has picked up its game in the past year or so with higher sales growth than Woolies, and rapidly improving profitability. The major reason is the better quality senior managers imported from the UK and from other companies (McDonald’s Guy Russo at Kmart).  The UK is a far larger, and therefore more competitive, retail market, and the Brits have sharpened the performance at Coles after years of woeful leadership. It’s no coincidence that Woolies this week chose a European executive with experience in Holland, the UK and Asia, as its new supermarkets head. It says more about the weak quality of management and the failure of the retailer’s board to maintain internal continuity than any other decision to emerge from the retailing giant in recent years.

JB Hi-Fi had a solid 2010-11 with higher profits and sales, even if electronic and electrical sales have slowed dramatically in the past 12 months (and CD and DVD sales aren’t a growth market either anymore). The company kept on the right side of the ledger and went through a change of CEO, while Harvey Norman, its big rival, has struggled, despite operating across a wider range of products. But Harvey Norman is a very different retailer to JB Hi-Fi. It’s better understood as a property company that rents space in its shopping centres to franchisees. Its retail performance and structure really doesn’t allow it to be a good guide for the Australian consumer products sector.

JB Hi-Fi is busily killing off its weak Clive Anthony’s chain name and other shutting stores or converting them to the JB Hi-Fi name. Harvey Norman paid $55 million for the failed Clive Peeters chain a year ago and killed it off last week in a similar announcement. Both of these decisions flowed from poor management: JB Hi-Fi should have folded Clive Anthony’s into the stronger brand straight away and Harvey Norman shouldn’t have bought a company that had failed. At least Gerry Harvey readily admits to the mistake — a frankness unusual in retail circles.

These corporate and management differences are rarely mentioned by economists, some analysts or media writers, and yet they can be the most important factor of all in retail, especially in a sluggish environment. Red Group, which controlled Borders and the Angus & Robertson bookshops, failed because of a poor model: it was owned by private equity, which got rid of many of the staff who knew how to sell books, and a lot of debt was loaded on the group. So when sales weakened under pressure from online retailers, it was not in a position to withstand the damage. Colorado Group was another private equity-owned retailer crushed by a poor model and huge pre-GFC debt. It wasn’t given the financial room to adapt to a slowdown in clothing and footwear sales.

There’s another key factor: many retailers and commentators have been slow to understand there is a major demographic change under way: the baby boomers are starting to retire. Consumers, as they age, don’t consume as much, and when they retire they consume even less. The push to retain would-be retirees in the workforce might delay actual retirement, but it won’t mean more money being spent and products consumed by boomers — only more savings and spending on services such as travel, eating out and books and entertainment.

For this reason alone, the days of broad retail sales growth are probably over. Consumers in succeeding generations are more used to buying online and trying before buying. They will need food, liquor, cars, clothing and footwear as they form relationships and build families, but retailers shouldn’t depend on old strategies such as sales to sell to them. Why buy at a David Jones or Myer sale when you can buy it online?

Online retailing, too, is more complex than acknowledged by commentators. GraysOnline, StrawberryNet or Appliances Australia are very successful Australian online sites — no sales going offshore, all GST paid, no advantage from a strong dollar. Appliances Australia is owned by the Winnings Appliances group in Sydney, and its online performance shames whatever level of service Gerry Harvey can offer at Harvey Norman.

Quality of management, relations with franchisees, local online retailers, demographics — all key reasons why the retail picture is far more complex than you’ve been told, and certainly more complex than some retailers would like you to think.


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3 thoughts on “Retail 2: why it’s not as bad as we’re told

  1. Malcolm Street

    A couple of weeks ago we went into Myer in the local mall (first time in months) and it suddenly struck me that there was something quaint and old-fashioned about the idea of a department store – it was just a mall within a mall but one with less opportunity for specialised expertise. Just what is a department store supposed to provide that the mall that (in most cases) surrounds it can’t do better?

    It’s a variation on a question that every retail operation has to ask itself – what value am I adding?

    I have a casual job in a toy and hobby shop. We have extensive on-line competition in radio control in particular. However, we have a niche with people getting their first R/C plane/car etc who need a lot of hand-holding and support. We regularly get people in who’ve bought a first glow plug/”nitro” R/C car online, and rather than telling them to p*ss off are quite happy to provide them with the bits they didn’t get such as tools and fuel, which we make a higher margin on anyway. While there we show them our bigger, better supported, brands, our parts backup, our servicing capability and customer support program – all value adds relative to on-line.

    Mind you, being a local family company helps, with very quick response possible to market changes.

    Once again, retailers’ mantra in the new world: “What value am I adding, what value am I adding?…”

  2. crikey david

    StrawberryNet is actually Hong Kong based.

    It’s not easy to compete with an overseas based company, specialising in large items with expensive international delivery seems like the most reliable way of doing it.

  3. cannedheat

    I’m a big fan of Winnings – nice to hear they ‘get it’ with respect to on-line retail.

    The UK is resisting the move to malls and has retained it’s High Streets. Perhaps its cultural or simply too hard to acquire and clobber four city blocks and build a Westfield style monstrosity in London. However most UK retailers from you local Chinese Takeaway to Dwell, Currys, John Lewis etc have a proper equivalent online presence. Australia is WAY behind the curve here.

    One thing worth pointing out is Australian companies are wedded to the concept of a salesman. Online makes this position very different (often redundant). If you google almost anything from pipe to flower pots in Australia you’ll be led to a basic web page with an email address and/or a phone number so a salesman can ‘assist’ you part with your money.

    In addition on-line sales makes the distributor/retailer split look a bit artificial. Golly what will become of all those warehouses where folks shave off a 25-50% markup for taking a container of stuff in one side and driving a delivery van out the other?


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