Retailers' oldest growth strategy isn't working either: Citi

James Thomson
July 27, 2017
AFR 

Australia’s big retailers have limited scope to drive earnings growth by opening new stores, and their strategy of rolling out stores faster than population growth needs to be reconsidered.

That’s the conclusion from a thoughtful piece of work by Citi’s retail team, led by head of research Craig Woolford, which examines the success (or lack of it) that retailers have had with their rapid store openings in recent years.

Woolford says our biggest retailers have, on average, driven a third of their sales growth though new store openings, although this has been as high as 75 per cent in the case of some retailers such as JB Hi-Fi, according to the Citi data.

The data shows 11 of the 19 biggest listed retailers have opened new stores over the past five years at a rate greater than the 7.3 per cent increase in the Australian population over the same period.

This list includes many big names, including JB Hi-Fi (where store numbers have increased 19.6 per cent), Super Retail Group’s sports chains Rebel and Amart Sports (13.8 per cent), Peter Alexander (92.5 per cent), Smiggle (31.6 per cent), Woolworths supermarkets (14.7 per cent), Kmart (15.7 per cent) and even the struggling Big W chain (8.1 per cent).

But the performance of the new stores was decidedly mixed. The Citi team argues that a retailer’s cost per square metre rises about 2.5 per cent when wages and rents are taken into account.

But over five years, a number of retailers – Woolworths supermarkets, Target, Oroton, Myer, Harvey Norman an JB – didn’t generate sales growth above that rate.

“One retailer of note is JB Hi-Fi where sales per square metre have been virtually flat over the past five years,” the report says. “This may reflect lower productivity in new categories such as home appliances, but in our opinion also reflects the challenge of new store dilution as retailers approach a mature store network.

So why have retailers pushed ahead with so many news stores? Woolford and his team argue they are overly optimistic about the return on invested capital, assuming that new stores can achieve similar sales productivity as the rest of their (more established) network.

‘Cannibalisation is a big issue’

But given Citi’s theory that sales growth at a new store is actually hard to generate, the returns are actually much lower. When you take into account the fact that a new store might cannibalise the sales of an existing store nearby, the returns drop around again, to something more like 10 per cent to 30 per cent.

That might be still appealing, but it’s far lower than most retailers assume. 

“For many of the mature guys cannibalisation is a big issue,” Woolford says. “Estimating that is incredibly difficult, but recognising that is incredibly important.”

So if retailers can’t rely on new store openings to drive their growth in the next five years, what can they do?

Online is one option – although strong online sales are probably a reason to reduce store openings even further – and rethinking your offering in existing stores is also important.

Woolford points to Bunnings as an example of how this has been done well.

“They have taken a very clear total customer lens and a very broad definition of the home improvement market,” he says.

But the message for investors is clear – amidst all the angst about Amazon, low consumer spending and low wage growth, the oldest growth strategy retailers have is also losing its power in Australia.

“The focus on new store openings is going to tail off and the growth rates are going to slow,” Woolford says.

“It’s a problem when a retailer is experiencing low single digit like-for-like sales growth and low single digit store growth.”