RETAILER RINGS CHANGES
Woolworths has a mountain to climb to ditch old-fashioned model
Woolworths, which has parted ways with its Australia CEO and written down the value of its business there by nearly R7bn, still has a monumental task ahead if it is to stop the bleeding at department store chain David Jones, analysts say.
Four months after it wrote down the value of David Jones by A$713m (R6.8bn), Woolworths said this week it had dismissed its CEO in that country, John Dixon, to cut costs. Dixon, a former Marks & Spencer executive, was Woolworths’s regional head for less than a year.
His departure comes months after Woolworths impaired the value of David Jones because of "the cyclical downturn and structural changes" affecting Australia’s retail sector, and "poor or delayed execution" on key projects.
But it plans to continue investing in the business, which it bought for more than R20bn in 2014. David Jones is adding food halls to its stores, and plans to spend almost A$200m on refurbishing its flagship store in Sydney, using funds from the sale of another outlet.
However, some analysts are sceptical about Woolworths’s ability to stabilise David Jones, partly because the traditional department store model is fast becoming outdated.
Daniel Isaacs, an analyst at 36One Asset Management, said the Australian department store market had become "extremely tough" and Woolworths’s initiatives to get David Jones back on track would be difficult to implement.
For instance, Woolworths would find it challenging to replicate its successful South African food offering in Australia. It would have to entice suppliers to set up there or build supplier relationships from scratch, and could encounter heftier competition in the premium food segment than it did in SA, Isaacs said.
Electus Fund Managers equity analyst Damon Buss said while Woolworths was making progress with its other Australian business, Country Road, the same could not be said for David Jones.
"Country Road is a good business and is turning around – the changes to the management team in recent years seem to be working and they seem to be getting the fashion right."
Revenues and margins were expanding and Country Road’s e-commerce strategy had been a success so far, with online sales accounting for more than a quarter of revenues.
"But with David Jones, I’m starting to lose a bit of faith that that business will come right," Buss said.
David Jones’s biggest competitor, Myer, was "under serious pressure" despite numerous management changes. A Myer collapse would provide a short-term shot in the arm for David Jones, although "I think that would just kind of prolong the decline", he said.
Aggressive push online
And while David Jones would benefit from the systems and processes upgrades being implemented by Woolworths, that was unlikely to meaningfully transform the company.
Like Myer, David Jones faces increasing competition from e-commerce businesses, particularly as online retail giant Amazon wades into the market.
Except in the UK, where department stores had pushed aggressively into online sales, traditional department stores in Australia and other markets were struggling, Buss said.
"David Jones doesn’t have a big online presence at the moment. They’re trying to leverage the Country Road knowledge but it’s going to take time to get there."
Another analyst, who asked not to be named, said Woolworths might be fighting a losing battle with David Jones. Rather than putting more money behind it, the group should consider cutting its losses and exiting that business altogether, the analyst said.
"The department store model is dying. The more you get involved in it the more good money you’re throwing away."
Doug Murray, CEO of TFG, whose Australian acquisitions have performed well thus far, also thinks the department store model is becoming outdated.
"I’ve never been in favour of that [model], I don’t think it’s doing well around the world. We’re in speciality store retailing, so the guys know the customer and product.
"And there’s low unemployment in Australia, that’s a key metric for them, so [our] brands have got a lot of rollout potential there," Murray said.
However, Nathan Cloutman, a Melbourne-based senior industry analyst at research group Ibis World, believes the department store model can change with the times.
Despite "fierce competition" from online-only and foreign retailers, "there are growth opportunities for department stores", Cloutman said.
Improving the "in-store experience" — with boutique cafes, health and beauty services and product demonstrations — was one of those opportunities.
"Department stores are expected to create an omni-channel shopping experience for consumers … this means using the online landscape to complement, rather than replace, their physical store operations," Cloutman said.
And if David Jones can strengthen its brand, it should be able to capitalise on the trend where consumers buy most of their clothes and accessories from the fast-fashion segment while complementing this with items from the luxury high-end market.
"David Jones will need to have a strong brand positioning, and a clearly-defined product offering in order to survive in a tough retail market, along with offering consumers more in-store experiences to drive foot traffic," Cloutman said.
There was growing demand for premium private-label convenience food items, which David Jones plans to sell in its food halls, he said.
"This move is a likely strategy to boost competitiveness without being pressured into a price war.
"This will be a key factor as Amazon continues to ramp up its expansion in Australia," Cloutman said.
In the three years after Woolworths bought David Jones — an acquisition that was approved by the retailer’s shareholders— Woolworths CEO Ian Moir’s guaranteed pay more than doubled, from R9m in 2014 to R18.8m in 2017.
But Moir did not receive a performance bonus in 2017 as the group missed profit targets. His total remuneration for 2017 was R34.7m, 26% higher than the R27.5m he earned in 2014.