This Australian chain of discount department stores, owned by Wesfarmers group and operating across 203 locations, is a story of success as compared to North American Kmart brand owned by Sears. Note that Kmart in Australia has no affiliation with the NA Kmart. It seems the retailer is successful on all aspects: revenues are up, profit margins are up and costs are down. Still, I note one potential problem:
- Kmart’s cannibalization has hurt the parent company earnings significantly with the negatively impacted Target brand. It would seem the recent investment in store transformations in Target to push Target into the middle market while keeping Kmart as the EDLP brand has yet to pay off. Are we yet to see a different strategy that could potentially indicate a Kmart and Target merger even at the risk of consumer drift?
Potential Solutions: I would like to see Kmart provide clearer differentiation strategy & bolder investment in technology now that they have setup strong retail fundamentals (stock management, staffing & merchandising range management)
Combatting likes of Amazon: It’s possible that the success the retailer is currently enjoying is, in part, a result of the non-Amazon effect. If so, that may mean that it could face severe competition and losses if Amazon becomes a major Australian player. As mentioned earlier Kmart needs to shift it’s innovation needle than just focus on retail fundamentals.
Target Australia, also belonging to Wesfarmers group, paints a picture of a retailer in trouble. Like Kmart Australia, Target in Australia has no affiliation to it’s North American counterpart. The two biggest problems they need to address are:
- Stagnant growth in sales ($18m change);
- Severe erosion of margins.
Potential Solutions: Comparable same-store sales growth is unavailable for the newly opened stores to establish if sales and margin from new store openings (at a significant large CAPEX) is profitable. Having this information might help us better understand whether investments (significant at $128m) in new stores are working. Based on revenue stagnation, it would seem Target must focus on growing revenue using the right mix of merchandising and EDLP strategy differentiated from Kmart to maintain cash flow to drive transformation. Margins are more likely to be improved with reduction in impairment expenses (approx. $600m) but likely be impacted across FY17 as this restructuring continues throughout next year as Target looks to get rid of unprofitable sales (e.g., toys sales). Overall a difficult period for Target may lie ahead as the company continues its transformation. The transition to the new William Landing location and incremental technology refreshes (e.g., InComm partnerships on gift card redemption in POS) should help but Target is still a prime brand to fall if Amazon strikes with Apparel launch in Australia. At a tactical level Target, should optimize their operating margin by controlling cost of sales.
Woolworths Limited is a major Australian company with extensive retail interest throughout Australia and New Zealand. It is the second largest company in Australia by revenue, after Perth-based retail-focused conglomerate Wesfarmers. Despite similar names, Woolworths Limited has no affiliation with the F.W. Woolworth Company in the United States, the now-defunct Woolworths Group in the UK or the South African chain of retail stores, Woolworths Holdings Limited.
The two major problems I see facing this company:
- In spite of holding the largest share of the Australian super market, the company’s revenue and profit margins have slumped, primarily due to international competition (Aldi & Costco) who have better labour utilization according to Morgan Stanley Analysts;
- Despite better control of inventory, operating margin declined by 2 percent. The majority of revenue declines came from the petrol sales that slumped at -18 percent compared to -0.2 percent sales growth of core grocery. Petrol equated to 11 percent of the combined grocery and petrol business.
Potential Solutions: Given the situation it would seem apt that Woolworths is under pressure to preserve capital. With an already failed $1.2B loss from Masters, Woolworth seems to be looking to release capital from its sale of petrol business to BP. The much-needed capital will help strengthen its balance sheet. While larger asset optimization continues to occur, Woolworths at a macro level should focus on optimising overall CODB (namely distribution costs and labour costs associated with overtime expenses) and continue their investment with store transformation.
Online (and broadly digital) investment should be increased. Just one look at Coles Online vs Woolworths online is enough to get a comparison. I do, however, like the recent store refurbishments and look forward to seeing the likes of a Jumbo store in Breda, Netherlands (unless David Jones beat you to it)
Combatting likes of Amazon: With 96 percent of its fresh offerings sourced from Australian businesses, it’s time to take a hard look at what impact Amazon Fresh may have on this market mix. Like the Morrison and Ocado partnership, partnering with Amazon through its Fresh offering may be a better strategy for Woolworths than competing against them. After all, we have seen Amazon do this before in partnerships with Tyson Foods and like.
Coles, owned by Wesfarmers, was founded in 1914 and operates across 700+ stores. The retailer shows an increase in profits and revenue, but a decrease in overall margins. The main financial burdens to Coles are:
- The slowdown in fuel sales. This clearly stands out as we see other stores’ sales increasing by at least 6 percent;
- Slower inventory sales and higher personnel costs. These are mainly affecting Wesfarmers as a group, while Coles’ margins are stable. However, these are the largest costs for the business, and therefore they should be monitored closely, as a slowdown or stagnation of revenue growth (already low on average for Coles) could lead to decreasing margins.
Potential Solutions: By far the largest cost for the business is in product purchases, which are included in cost of sales (inventory). If there were one key initiative for Coles that I could suggest, it would be to focus any improvement in this area that will increase margins by a great extent.
Combatting likes of Amazon:Coles should continue to invest in digital growth through its partnership with technology vendors and enter business models such as subscriptions and IoT devices to combat Amazon Pantry and Amazon Dash business models.
While I don’t expect Coles nor Woolworth’s to roll out Amazon’s Go style consumer checkouts or even the likes of Waitrose’s quick check any time soon, it’s time for Australian consumers to demand more interactive shopping experiences (at least in major cities).
Harvey Norman is a large Australian-based retailer operating across 250+ locations, selling furniture, bedding, computers, communications and consumer electrical products. It mainly operates as a franchise. The major problem facing Harvey Norman is:
- Similar to Myer, Harvey Norman’s SG&A expense are significant, likely due to employee and administration costs. However, other home and electronics retailers are dealing with the same labour costs yet maintaining lower SG&A.
I would say that the top priority for Harvey Norman is to optimise SG&A, which would have a positive impact on profit margins. Cash flow improvements are probably feasible given the very high days sales/purchases/inventory outstanding. This could be a consequence of how franchisee sales cycles are managed.
JB HI-FI is an Australian and New Zealand retailer of consumer goods, specialising in video games, Blu-rays, DVDs, CDs, electronics/hardware and home appliances operating across 190+ locations. They have one major, immediate problem to deal with:
- JB-HIFI has the highest COGS as a percent of revenue across any retailer.
Potential Solutions: Given their high inventory to revenue ratio, the elevated COGS are probably a consequence of higher supplier margins. Negotiating supplier margins could be a focus area to improve the gross margin, which will naturally increase EBITDA per store. From its early days of clearing out Vinyl records to closing CD sales, the retailer continues to optimize merchandising mix & should look to provide home transformation experiences in the strore.
Combatting likes of Amazon: Across both Harvey Norman and JB HI-FI, the biggest challenge remains the threat of digital disruptors. Neither Harvey Norman nor JB HI-FI offer immersive store experiences around testing/trying next generation technologies. Instead, they operate more or less in a modus-operandi compared to global peers (e.g., John Lewis’ investment in Smart Home concepts or Nebraska Furniture’s Dallas Store’s investment in aspirational selling environment, price labelling and interactive displays all geared towards increasing the “show rooming” effect). This will become critical to maintaining the edge over Amazon in addition to bringing greater price transparency across online/office and allowing marketplace-based retail sales to beat traditional pure plays like Kogan.