Part of the Retravision buying group goes bust, Myer shares slump on a not-unexpected fall in third-quarter sales and a downgrading of full-year profit guidance. JB Hi-Fi and Harvey Norman produce weak sales figures and earnings downgrades as well. You name it, Australian retail is doing it tough at the moment.
Well not all retail. Car groups, Apple and some specialist businesses are doing OK, online retailers are also solid (such as Grays Online). But if you read the media and market commentaries, you wouldn’t be blamed for thinking this retail slide is exclusive to Australia. It isn’t; some of the biggest names in global retail are feeling similar pressures.
The experience reported yesterday by Myer has already been felt by David Jones, which is due to release its sales update next week. Myer said total sales in the 13 weeks to April 28 were $651.1 million, down 0.9% from the same period in the previous year. But on the industry standard of like-for-like sales (or same store or comparable sales), the retailer saw a 2.1% fall in sales. Myer cut its earnings outlook and now expects a 15% fall in net profit compared with the earlier forecast of a 10% drop.
But again, if you look at this morning’s reports, it seems it’s all down to problems in the Australian market, which for Myer it is. But the factors driving it here are also being felt in the US, European, Japanese and UK markets. Even China is proving too difficult for some of the world’s biggest names. That’s no comfort for the locals, especially as they draw so many retailing ideas and formats from offshore rivals, especially Walmart and Tesco.
Retailing across the globe is being hit by a combination of weak consumer demand because of more cautious spending by consumers (and high levels of unemployment) and the rise of the internet. In some markets such as Australia, the high value of the currency is adding pressures, and also helping by cutting import costs. But adding to the price falls is the continuing, intense price deflation globally in consumer electronics, long the mainstay of many retailers. That deflation is coming from weak demand, too much production capacity in the TV, electronics, computer and mobile phone segments, which is causing intense price cutting by the likes of Sony, Panasonic, Sharp, Samsung, LG and a host of white-label producers in China and Taiwan.
If you look offshore you will find some of the biggest names in global retailing are struggling with similar problems, or having to operate in economies that are recessed, saddled with high debt, weak consumer spending, overlain by the internet and the sort of structural changes it is driving. Big-box, large-format stores are out. Too much selling space for too few customers who are using their smartphones to comparison shop and buy at the best deal, which quite often isn’t in the biggest analogue retailer. Store refurbishments, which usually produce a sales spurt, have been tried by some of the largest (think Carrefour and Walmart) and found wanting because there was no sales growth.
Just look at the roll call of major retailers that are struggling to get sales growth and maintain profit margins. They range from the world’s second biggest group, Carrefour of France, which invented the hypermarket concept, but has found that’s no defence in recessed Europe, or help in expanding into Asia. It has abandoned a €400 million plan to revamp its chain of huge outlets in Europe (especially France, its key market) because it found the investment failed to produce a rise in sales and profits. Carrefour has had three CEOs in the past four years and has lost its way as the recession adds to its woes.
Tesco, the world’s third largest retailer has fallen into uncharted waters, weak sales and profits in its key UK market. That forced it to slash its expansion plans this year by 38%, or several hundred million pounds and to invest more in websites and internet fulfillment projects at its 2800 outlets. It’s CEO has seen his pay halved to £1.2 million after the UK business saw a fall in same store sales in the closing months of 2011-12, which forced Tesco (the model for so many other retailers around the world, including Woolworths and Coles in Australia) to issue its first profit warning for 20 years.
Walmart has only seen a recovery in US same store sales; its latest quarter rose 2.6%, the best for well over a year. Walmart has been doing well in the UK, Mexico, Canada and some of its other international markets, but the latest US sales spurt only came after a change in strategy back to an old idea of cramming its US stores with a huge range of products at very low prices. Walmart has moved to try to accommodate its poorest customers who don’t have credit cards: they can order goods online and pay for them when they pick them up. And if you live too far from a Walmart, you can order it online (and pay for it) and then pick it up at the nearest Fed Ex office. Getting deeper into online fulfilment is emerging as a major new strategy for this giant retailer, as well as Tesco. Will Myer and David Jones understand that and follow in Australia?
Best Buy, America’s biggest consumer electricals chain is struggling with falling same store sales as American consumers cut their spending and look for bargains on the internet. Best Buy has closed 42 of the 50 big-box outlets it promised three months ago, and is well into the closure of a further 40 or so small stores.Best Buy, which saw its major competitor Circuit City collapse in the GFC, is also struggling in China and has quit the UK market because it can’t make money in a joint venture with a local retailer in that depressed market. Best Buy is now regarded by more and more shoppers (and by quite a few US analysts and investors) as one giant, US-wide showroom where people can go and do their market research, use their smartphone price comparison and shopping apps and buy cheaper online or elsewhere. Gerry Harvey and his peers in consumer electricals in Australia aren’t so alone, are they?
And J.C. Penny, a big mid-market US department store chain is trying to alter its retailing model much the way that David Jones is doing in Australia. It’s way too early to say whether the DJs turnaround is going to work, but there are some warning bells in the latest quarterly report from J.C. Penny. Same store sales fell 18.9% in the three months to April 28. The group saw earnings become a big loss of $US163 million for the quarter in a $US220 million turnaround as profit margins fell. The shares fell more than 40% following the announcement a week ago. Penny said “lower-than-expected sales” and the impact of taking “deeper seasonal markdowns” (i.e. discounts) were the big factors as the turnaround strategy failed to make a mark on customers.
The group’s CEO is a former head of Apple’s successful retail store and he drove the pricing strategy called “Fair and Square” (started in January) that did away with offering coupons and rebates to focus on three types of prices. Penny is revamping merchandise to focus on 80 to 100 in-store brand shops and feature new brands including Martha Stewart and transform its existing labels, including Liz Claiborne and Izod. And while store sales fell 18.9% (a 12% decline in same store sales had been expected by the market), the company’s online sales fell 28% in the quarter, a mark of how badly the new strategy is being delivered.
There are echoes in these giant retailers experiences for Australia. The structural change we are seeing here is nowhere near as advanced in the US and UK where retailing is much more competitive. The pressures on local groups like Myer, DJs and Harvey Norman are not going to lessen, and for once there are no easy ways out (via a sharp sustained fall in the value of the dollar). That won’t stop the price cutting from Samsung, Sony and their ilk. If the problems in the eurozone see Greece leave the euro and world growth slows further, like it did in 2008-09, then local retailers will feel more pain, regardless of the level of the dollar or the amount of business on the internet. Retailers in Australia were saved in 2008-09 by the multibillion dollar cash splash from the Rudd government, and, should we have a GFC-2, that won’t be repeated and cushion locals against more pain.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.