Retailers facing crunch

December 30, 2011
The Age

WITH Australia’s boardrooms a day away from closing the financial accounts for the 2011 year, listed retail companies including Myer, David Jones and Harvey Norman, have become sharemarket pariahs.

They have also become the talk of some hedge funds who are punting that something radical will need to be done to arrest their falling share prices. In the case of Harvey Norman, its plunging share price will no doubt hit the screens of private equity and one or two big international retailers, looking to break up the company. With a market capitalisation of $1.9 billion, and an investment property portfolio valued in the books at more than $1.6 billion, Harvey Norman has reached the point where it is worth more broken up, with the property business spun out, leaving management to focus on the retail and franchise business.

Not surprisingly, the market is questioning founder Gerry Harvey’s strategy, which includes a grab-bag of overseas operations, a massive property business and a questionable online strategy.

While Harvey remains the major shareholder of the company, it will be a struggle between what he wants to do versus the wishes of investors. While he can block change, investors can continue to dump the stock until he has little option but to do something to arrest the share price slide – and his massive erosion in wealth.

It is a similar story of woe for Myer shareholders after the company hit a record low yesterday of $1.93 a share, as fear gripped investors that the department store giant was on the verge of announcing another profit downgrade. Myer listed at $4.10 a share in 2010.

Earlier this month Billabong and Kathmandu fessed up to profit downgrades and the clock is now ticking for others to follow suit once they tally the numbers and close their books.

It is not hard to see why. November and December are the most important time of the year for retailers, traditionally accounting for more than 20 per cent of annual sales, but as they continue to cling to outdated models, limited product ranges and inferior online shopping sites, investors are becoming increasingly worried that the fall in customer spending is because the consumers are bored with Australian shopping.

While there is little doubt that macro-economic factors, such as weak consumer spending, the crisis in Europe, cold weather and the internet, are challenging the entire retail sector, the reaction of most companies to the negative retail climate through discounting has become a race to the bottom.

Put simply, companies such as Myer, David Jones and Noni B have become addicted to discounting. The decision to buy sales by heavily discounting and leaning on suppliers to fund promotional activity is a vicious circle as it trains consumers to wait for sales. The rest of the sector is then forced to follow, and so it goes on.
The knock-on effect of weak retail sales is that it leads to a build-up of inventory, which becomes a profit killer and results in tighter margins.

Retailers have blamed everything but themselves for the reduced retail spending that is plaguing Australian retail outlets. For instance, Myer boss Bernie Brookes has blamed a shock profit downgrade earlier this year on floods, rate rises, price deflation and a particularly horrendous January.

David Jones chief executive Paul Zahra partly blamed the department store chain’s last profit downgrade on concerns about the carbon tax, while Just Jeans boss Mark McInnes pointed the finger for his company’s big profit downgrade at the government’s decision to leave untouched the present GST-free threshold on internet purchases, which allows shoppers to buy overseas goods under $1000 in value with no GST charged.

Others have blamed it on the uncertain economic outlook, which has made Australians more conservative, the high Australian dollar, which makes imported goods cheaper, and the addiction of Australians to sales.

None of these excuses explain why people are spending as never before on restaurants and services, at supermarkets and Bunnings, or the surge in the number of Australians flying overseas – and shopping.

Until retailers understand there is a shift taking place in consumer behaviour between online retail and bricks and mortar, their companies will continue to suffer.

In the past year the retail sector has been littered with profit downgrades and a number of collapses, including Borders and Angus & Robertson, Colorado and Fletcher Jones. There will be more in 2012 as conditions remain tough.

It has happened in the media and book industries, and it is now gathering momentum in retail. But it involves pain. The knock-on effect of weak retail sales is profound across the supply chain. It can lead to a build-up of inventory, a profit killer for retailers, and results in tighter margins and potential redundancies.

There is an estimated $12 billion a year spent in online retail, and domestic online sales are growing at 5 per cent to 10 per cent, while overseas online sales are growing at 20 per cent to 25 per cent.

The threat of the internet to department stores and fashion outlets has been around for more than a decade. Now it’s a reality.

A confluence of factors including a strong currency, more choice available from overseas online sites, increased broadband penetration, continuing comfort in relation to online payment, and relatively cheaper products are all contributing to the migration to online shopping.

The decision by big US department stores to start selling their products online to non-US shoppers will only increase the pressure on local department stores and speciality retailers.

The categories most exposed are books, electronics, cosmetics, department stores, clothing and footwear.
Traditional retailers need to get their act together and focus on merchandising, cost controls and margin expansion. They need to clean out their inventories rather than bringing in cheap products during the sales and in some cases trying to dupe their customers into thinking they have been discounted. Shoppers are getting smart. They want good quality at reasonable prices.

It is no longer just about creating efficiencies. It is also about product range, product quality and a lack of magic in much of Australia’s retail.

The huge success of supermarket group Costco and Zara proves there is still room for innovative bricks and mortar retailers. What there isn’t room for is mediocrity.

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