Retail sector feeling the pinch
By Elizabeth Knight | smh.com.au | 28 March
Something happened to Australian retail consumers three weeks ago. In a week where the Reserve Bank moved interest rates up and the sharemarket fell in a hole, shoppers decided it was time to close the purse and batten down the hatches.
At the very top of the food chain, David Jones department stores felt it - but an early Easter still enabled it to call sales growth for the month.
But move down a rung to Myer and the experience was different. In March this year Myer's sales started to go backwards. In April it will need to compare its sales against the April 2007 result that included Easter. It's fair to predict the comparison will not be pretty.
Move further down again to the discount department stores such as Target, Kmart and Big W. Shoppers who walk these aisles will be hit hardest by the combination of a series of interest rate rises and more expensive petrol.
The new owner of Kmart and Target, Wesfarmers, is looking like the victim of a very cruel pincer movement. The debt Wesfarmers took on to fund the acquisition of Coles Group is about to get more expensive - how much more is not yet clear.
It is now faced with a retail environment that has fallen in a hole. Where Coles could normally rely on some resilience from its supermarket group, the competition from Woolworths makes gains harder to achieve.
The test of who comes out of this deteriorating retail environment the least bruised will come down to who has the expertise to manage the low part of the cycle.
Myer's upper level management team has only 22 months of experience in this particular segment of the market (more in other parts of retailing).
The report card on their achievements to date is mixed.
On the sales side Myer hasn't come anywhere near its closest rival, DJs. The Melbourne-based retailer has lost market share to its Sydney rival. Sales grew only 1.8 per cent in the half to end-January 2008.
Myer's chief chief executive, Bernie Brookes, acknowledged this but said he was looking for profitable growth.
His quest is to increase the amount of profit the company makes on every dollar of sales.
But it's also true that until yesterday Myer had made much of its strategy for sales growth.
Meanwhile, gross profit during this period rose by only 1.4 per cent, which suggests that retail productivity is less than fabulous.
But while the new Myer owners may be struggling with some of the variables of department store retailing, they do know how to get a great headline number in net profit.
There are plenty of costs and processes that have been reduced or transformed in the business, from industrial relations to information technology to logistics.
On top of that there are the financial levers such as interest rates and credit card agreements that have been enhanced.
At the end of the period all this progress added up to net profit being up 52 per cent, and in September last year the owners paid themselves - via a capital return - some $560 million.
The management is sticking to its full-year forecasts. But there is a big range. At the bottom end, earnings before interest and tax will be flat to slightly negative on the previous corresponding period, and at the top end the result could be up 30 per cent.
Over at David Jones the management is predicting a pretty slow sales period this winter but robust profit to continue.
DJs chief, Mark McInnes, has outperformed his management forecasts and the market is counting on this to continue.
Woolworths has a depth of management experience that should be able to weather most storms - but Big W will be a test of management's skills.
It's the new retail team in Wesfarmers that will be most tested. The company has said it will not be selling assets so it's a story of revival and one that is facing strong headwinds for what may be a long time.
First published by Smh.com.au on March 28 2008
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