David Jones takeover: Australia's rubbish at retail

ANALYSIS

You've been told it was the internet, that it was the economy, it was high wages, the government, the consumer, that it was the strong Australian dollar or maybe the weak Australian dollar.

It was anything but second-rate management and dull boards that were responsible for Australian retail's poor performance - yet it turns out it was poor management all along.

As South Africa's Woolworths joins the push of international shopkeepers into the Australian market with its David Jones takeover bid, it's another indication of outsiders seeing value and opportunity that the locals had missed.

Marked down

Most obviously in fashion, a wave of luxury brands have set up shop and pushed DJs down to mid-market status. Zara and now H&M are raking the money in with fast fashion – in Zara's case, at a better margin than it achieves internationally. And more foreigners are on the way, seeing this market with fresh eyes.

And it's not just fashion. The two big retail turnaround success stories here have been thanks to outsiders. Wesfarmers had to bring in the Brits to fix Coles and someone with no retail experience – MacDonalds' Guy Russo – to save Kmart.

And Wesfarmers itself wasn't exactly an Australian retailer beyond its hardware operation.

There are exceptions – Australia's Woolworths has grown its own – but broadly speaking, it's the outsiders who have been making the most of their opportunities while the more prominent local whingers try to blame somebody, anybody else.

New normal

Yes, overall retail sales numbers were down for a while from the boom-time levels local retailers had mistakenly thought were normal.

Yes, the internet has changed the game, more because of the information it provides for consumers than through the ability to buy directly overseas.

And Australian retail wages are relatively high by international standards, though generally not high by our own standards.

These are all givens, the ground conditions for all players.

It's been up to management to make the best of those conditions and succeed – a task that's been beyond some of them.

It's been up to their boards to have an eye to the future, to see and enforce the need for change and renewal, instead of hoping to just keep doing what they had always done, traipsing along a season behind overseas leaders, a decade behind the leading edge of retailing.

Lower prices

It's a sad reflection of the fate of David Jones, Australia's oldest department store, trading since 1838, that the board now welcomes a takeover offer of $4 a share – what the place was worth three years ago.

It's sadder that, since it was re-floated out of the Adsteam wreckage in 1994, it's lacked boards with much in the way of retail vision.

I have some sympathy for the current management.

Paul Zahra is taking over a company that had drastically underinvested in its future, concentrating on immediate profits using a dying formula while persevering with a steam-powered point of sale system.

That can happen when the board lacks retail experience, as was the David Jones case. That the board could then be capable of amateur hour governance standards is merely an indication of a longer-lasting malaise.

In my opinion, Zahra's (and Myers') online plan still looks like a cut-and-paste job from Nordstrom's annual report and has poor prospects, but they have been trying.

South Africa's Woolworths will have to try harder, but if the takeover succeeds, DJs will have removed the uncertainty created by its boardroom failures and secured a focussed parent with broader retailing experience and ambition than just South Africa.

The South Africans' move comes at an interesting time when the Australian consumer has indeed stirred with overall retail sales for the past six months again bubbling incredibly strongly – but while the department store sector of our retail environment still lags, losing market share and recording lower revenue than it did two years ago.

Michael Pascoe is a BusinessDay contributing editor.

Woolworths SA has big plans for David Jones

South African retail giant Woolworths Holdings will use its acquisition of David Jones to create the second largest department store in the southern hemisphere and one of the biggest retailers in the world.

Woolworths chief executive Ian Moir said this afternoon he believed he could add at least $130 million per annum to David Jones bottom line within five years.

He said he believed there was a strong future for department stores in Australia.

''The department store isn't dead, mediocrity is dead, poor retail is dead, but what is alive is a great department store that can give a great product range, great service, product that is on trend fashionable, great value and experience in stores that you love and that engages you online as well.''

Woolworths has lobbed an offer of $4 per share which has been unanimously accepted by the David Jones board, valuing it at $2.1 billion.

Brand heritage

The South African business understood and respected David Jones' historic Australian roots and its heritage would be protected by the new owners, he said.

''Don't be despondent,'' Mr Moir said this afternoon.

'We are not taking David Jones anywhere, we have just paid $2.1 billion for it and we love it to death.

''So we will be looking after it like it's our own, we will be caring for it just as we cared for the Country Road brand, also a proud Australian business that we have had for 15 years now

''We understand brands, we get brands," he said.

"Woolies [South Africa] is an iconic, well-loved and historic retail brand in South Africa. We understand what that means and what that means to our customers. The David Jones customer will not be disappointed with what we do and we will always have their interest at heart."

Lifting the bottom line

Mr Moir said he believed Woolworths could add $130 million per year to David Jones bottom line, a vast improvement on the full-year net profit of $95 million the upmarket department store recorded for fiscal 2013.

His plan for achieving this includes ramping up the proportion and quality of private label apparel in the stores, a better product mix, an improved customer relationship program that anticipates shopper behaviour as well as better service from in-store staff.

The penetration of private label sales in David Jones will jump from their current "tiny" level of around 3 per cent to more than 20 per cent, Mr Moir said.

He is also aiming to generate a greater proportion of sales via the retailer's online presence, aiming for online to make up 10 per cent of sales.

Mr Moir previously ran clothing retailer Country Road in Australia on behalf of Woolworths, which controls the chain.

''This is a natural progression of what we have been doing," Mr Moir said.

"We have got Country Road, we've had Witchery and mimco and we are adding David Jones again because we want to be one of the biggest retailers in the southern hemisphere.''

Thinking big

Mr Moir said combining all of Woolworths' businesses, including David Jones, it would make the group the second largest department store in the southern hemisphere and one of the top 10 department stores in the world.

David Jones private label penetration would be increased through Woolworths' existing private label portfolio and supply chain, with margins also set to improve.

The Woolworths private label business was 25 times the size of David Jones, he said.

A customer relationship management system would be bolted on to David Jones to help better track and anticipate shopper behaviour and tastes.

Mr Moir said currently Woolworths could track more than 70 per cent of sales through its customer cards and internal programs, with the level more than 85 per cent at Country Road. He wanted David Jones to match that.

smh.com.au, Eli Greenblat

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