Retail 101 no longer works for Myer

STEPHEN BARTHOLOMEUSZ
2 JUN, 2015
Business Spectator
Closing an underperforming store, as Myer announced it would yesterday, is an easy decision. If the solution to Myer’s woes were simply to shrink its network to greatness, however, Richard Umbers wouldn’t be spending as much time and thought as he is on its seemingly endless strategic review.
Obviously, having stores in the right places, locations where there is a critical mass of customers relatively loyal to the brand and offering, is an essential element of whatever strategy Myer does develop. Umbers and his team, just like Grant O’Brien and his team at the suddenly-struggling Woolworths, are grappling with a far more fundamental set of issues.
O’Brien actually articulated the core of the challenge in his strategy presentation last month when, in essence, he said that Retail 101 no longer works. What he actually said was that retailing had entered a new era.
If one looks at Myer’s recent history, its new era started virtually from the moment it listed in 2009. Until that point, Bernie Brookes had driven (and indeed continued to drive for another year) significant earnings growth. Ominously, however, its sales had actually peaked in 2008.
The Myer strategy, just like the strategy of Woolworths from where Brookes had been plucked by Myer’s former private equity owners. And just like most big retailers, it was all about driving increasing volumes over a reasonably static (or better still, declining) fixed cost base and ‘fractionalising’ the costs.
Woolworths did it by grabbing slabs of market share from a then floundering Coles as well as by an aggressive acquisition and network expansion program, along with a relentless drive to improve its operational and balance sheet productivity.
Brookes did a terrific job on costs and in modernising Myer’s network and systems and tried to generate the volume growth he needed with an ambitious new store program. Today, having already closed several stores even before this week’s Top Ryde announcement, Myer has 65 stores, well short of the 80 that was Myer’s original goal.
In the meantime Myer sales flat-lined and, in fact, have actually fallen marginally (about 4 per cent) since its listing. Its costs of doing business have, in nominal terms, edged up from just under $1 billion to just over $1bn and in percentage terms have increased from 29.95 per cent of sales in 2009-10 to 32.9 per cent last financial year. Its retail margin has fallen from 8.25 per cent to 5.1 per cent.
In other words, the volume driver of the business strategy wasn’t, in dollar terms, there. Therefore the operating leverage that was the key to the strategy of expanding the store network seems to have worked against the group.
If one goes back to the Woolworths strategy presentation, it provides some colour around what happened to its sector-leading supermarket business that has broader relevance for big retailers like Myer.
In what Woolworths referred to as its earlier ‘eras’, it built its competitive advantage on scaling up its fixed cost base and relying on the fractionalisation of costs within a high-inflation environment, which enabled high levels of growth in retail sales.
Its customer offer was standardised — a ‘one-size-fits-all’ offer — targeted at an homogenous mainstream customer base. Its market was fragmented and its competitors weak, enabling it to win market share and volume growth and it boosted its growth with acquisitions.
It was a model and a retail strategy built, as was Myer’s, on improving efficiency and volume growth. Then something happened — or perhaps several things happened.
One was obviously the global financial crisis, which made consumers more conservative and discerning. Inflation dropped sharply and, as Coles dramatically improved its game and its competitiveness under Wesfarmers’ ownership and the team of talented retailers it imported, price deflation emerged.
In retailing more broadly, online retailing started to have a meaningful impact on customer behaviours and expectations. The mass market began fragmenting into a series of niche markets. Price — low prices — became the starting point for most conversations with customers.
In the post-crisis environment, with most of the major markets offshore recessed, the buoyant Australian market and the strength of the Australian dollar attracted a bevy of big-name offshore retailers, some introducing disruptive retail models.
All of that meant that, even if a retailer could generate growth in unit volumes, it had quite suddenly become difficult to generate real growth in dollar sales and therefore very difficult to make the strategy of using top-line growth to fractionalise costs work.
Woolworths’ conclusion — in fact, a series of conclusions — was that lower price inflation meant there had to be real-dollar cost reductions in both the cost of doing business and the cost of goods sold. The retail offer needed to be more tailored to smaller groups of customers and more choice, value and convenience had to be delivered.
In other words, the new retail model has to be able to respond to an environment of modest growth and more intense and disruptive competition in more fragmented markets. That’s why Grant O’Brien talks about the implementation of his strategic review in a time-frame of years, not months.
Myer, sitting within a more discretionary segment of retailing, faces even tougher challenges in deciding what a 21st century department store group looks like within a relatively small but now intensely competitive market and one in which the online threat is significantly larger and more urgent than it is for supermarkets.
It will have to redefine not just its store network, but its core customer bases and the better-targeted offers it makes across that network.
Costs remain fundamental. Like Woolworths, if costs can’t be fractionalised by top-line growth there have to be cuts in real terms to obtain any operating leverage. But that is the easier part of the conundrum of how Myer should respond to the structural changes in its environment and circumstances.
Umbers has promised an update on Myer’s strategic review “in due course”.
While there is some impatience within the market for that update and an understanding of Myer’s new strategy to be delivered as soon as possible, in the new retail environment the complexity of the challenges confronting the major department store operator addressing what has been a very broad cross-section of customers shouldn’t be underestimated. Retail 101 no longer helps.