For several years now, the general view was that bricks and mortar retailing in Australia was headed for the scrapheap and then Myer came back by turning a $500 million annual loss into a $24.5 million profit in the latest year.
Myer’s long been regarded as the local basket case, not helped by substantial shareholder (just over 10%) Solly Lew explaining to everyone who’ll listen that he knows how to do things better. He may well know but at least he seems to have gone quiet for the moment. His comments tend to send a dire message to investors.
What’s clear is that things aren’t as simple as the pessimists thought. Both Myer and rival David Jones (now owned by the South African Woolworths group) have adopted the sensible tactic of shrinking the amount of floor space they’re renting and locking horns with landlords over possible rent reductions on what’s left. They’re both talking about cutting space by 20%.
They call that shrinking your way to profitability but in Myer’s case it’s clearly starting to work.
But the quirk seems to be that they’re not ditching the most expensive floor space, they’re cutting back in regional cities where the floor traffic has never been comparably high. So they can’t just blame rents for their struggles.
A gloomy thought is that according to the Australian Bureau of Statistics, the cost of necessities, such as electricity and groceries, has been rising faster than the cost of discretionary purchases, such as clothing and electronics, so you could posit the notion that the people out in regional areas are now going to be even worse served on the low-inflation goods than they were before, while no doubt paying up further for necessities.
The sense of humour of the people living in drought affected areas must now be even more sorely stretched: gadgets are comparatively cheaper than necessities.
No wonder so many of them wear flannies and Blunnies.
Of course, we all need clothes but there’s another quirk happening: international luxury brands are expanding their premises in the big cities while a number of local clothing and footwear businesses are closing their doors. For instance Tiffany, Gucci and Chanel are either taking or planning to have extra space in Sydney’s CBD while local retailers Roger David, Napoleon Perdis Cosmetics, Ed Harry, Shoes of Prey and Beds R Us have all closed down this year.
There’s always going to be turnover in the retail space, partly because there’s often more enthusiasm than retail savvy being brought to bear. I’m not aiming here at the outfits that have closed. How many coffee shops and restaurants have you seen open and then close in relatively short order, even in the well frequented bits of the major cities? Yes, it must be a nightmare worrying about rents and wages but might it not just also be that there are too many of them?
What’s clear is that the old line about Australia being “Treasure Island” for UK based retailers simply doesn’t work any more. There was a time maybe 10-15 years ago when those retailers could expect to pick up double the margin in Australia on approximately the same goods than they were netting at home.
But with international airfares being as cheap as they are, Australia’s no longer a captive market for clothing retailers, for instance. Young upwardly mobile types are of course the leaders in that area, some of them taking near-empty suitcases on leaving Australia.
They also seem to be the ones buying most goods online, to the quiet despair of the bricks and mortar brigade, although Myer has been serious about adopting the old “If you can’t beat ‘em” strategy. In its latest earnings report, it noted online sales of just over $262 million amid total revenue of $2.99 billion, so it’s close to 10% of the total.
Note also that Myer is aiming to push private label sales up from 17.8 to 20% of sales and that, most importantly, in the last year they cut $33 million out of their costs. This new CEO John King, a UK retailing veteran, is clearly making his presence felt, even if some measures are one-offs
But at the moment everyone’s talking about the Economy, which in itself is a bit of disincentive to consumers to go out and spend. Very clearly, there’s a lot of nervousness about, and quite rightly so. Just domestically, we’re being pulled in two directions.
We’ve never seen interest rates this low, which means the Reserve Bank’s got minimal wriggle room to stimulate the economy, at the same time as Treasurer Josh Frydenberg is trying to balance the books. There are tax cuts coming down the pipe but they’re not vast and their effect, while just around the corner, has yet to hit the numbers.
People with mortgages are very aware there’s much more likelihood in the long run of their repayments going up than down. Valuations are another issue: in most cities they have picked up in recent moths but they are still almost 10% below where they were a year ago.
That’s no big drama for people who bought more than a couple of years ago but it puts some recent purchasers in danger of having negative equity in their homes. There’s nothing like an attack of negative equity for cooling consumers’ spending urges.
In Australia, we’re almost all one of three types of householder, and two of them are being very careful. People who’ve paid off their mortgages are in the clear but some people are retiring with mortgages still around their necks.
Borrowers are pleased with low interest rates, which have cut the standard mortgage rate to around 4.95% but worried that the Reserve Bank has put them in place to avoid a serious slowdown in the economy. For slowdown, read job losses.
Most renters, meanwhile, would like nothing better than to save up a deposit and buy a place, which ought to mean they go carefully on discretionary spending.
Conclusion? Tightly run retailers can still surprise on the upside but we’ll need a significant lift in consumer confidence (and maybe even some wage growth!) before they can really get the wind in their sails.
With Myer shares at around the 60 cent mark, they’re at least looking like the beginnings of a turnaround story.