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12
Apr-19
Friday

Less Chinese money coming to Australia

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Geopolitical Futures reported that in 2018 Chinese investment in Australia dropped more than 36% year over year, down to AUD 8.2 billion. This follows an earlier report about a decline in Chinese investment in Australian real estate. The latest report indicates that the decline in investment is much broader, covering investments in resources, energy, and infrastructure as well. State-owned enterprises, in particular, saw significant drops. Meanwhile, commodity traders on Tuesday warned that Australia, which accounted for 29% of Chinese coal imports last year, is likely to take the hardest hit from a supply glut of coal in China.

Smartphone purchases decline

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Reuters reported that shipments of mobile phones to China fell 6% in March compared with the corresponding month the last year.  Reuters have drawn a conclusion that this was caused by "slowing economic growth".  We would like to offer an alternative explanation as two other important factors are at play here - (1) the market is becoming saturated i.e. it is switching from a new purchase to a replacement model, as in a number of countries mobile phone ownership has reached 90%, and (2) the technology is flatlining - it is becoming harder to release a materially better new phone. The arrival of 5G will change this, but we are at least 18-24 months away from 5G networks expanding sufficiently to make a 5G phone purchase worthwhile. Finally, it is worth noting that over 28 million units were shipped in March (albeit down from 30 million the year before), so substantial demand is still there.
11
Apr-19
Thursday

Debenhams UK restructure

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Retail Gazette in the UK reported that department store chain Debenhams has fallen under the control of its lenders (a mix of banks and US hedge funds, such as Barclays, Bank of Ireland, Silver Point and GoldenTree). Administrators were appointed, who immediately sold the retailer to a newly incorporated company controlled by secured lenders in a pre-pack administration deal. Debenhams will now have available to it significant additional funding in line with the £200 million new money facilities it had announced on March 29.  Shares in the 240-year-old retailer have been suspended and will be cancelled.  This means that all of Debenhams’ previous shareholders – including Sports Direct, which had a near-30% stake in the department store – will lose their equity.  The company employs about 25,000 people, has 165 stores in its portfolio, and it will continue to operate as per usual i.e. its commercial relationships with suppliers, employees and pension holders will remain unaffected. However, the department store apparently plans to close around 50 under-performing stores in the next three to five years.

Social media fatigue?

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The Cut in the UK reported that Lush UK announced that they “decided it’s time to bid farewell to some of our social channels and open up the conversation between you and us instead. Increasingly, social media is making it harder and harder for us to talk to each other directly.” Lush's announcement also stated that “We are tired of fighting with algorithms, and we do not want to pay to appear in your news feed.⁣” We see Social Media as the new broadcasting model, with content generated by millions of amateurs rather than a few professional media people. Therefore, Lush's decision equates to substantially trimming down their feed through the media in general - this could backfire. Interestingly, in the US Lush is still using Instagram.

10
Apr-19
Wednesday

Amazon beauty drive

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The Australian Financial Review reported that Amazon is stepping up pressure on Australian department stores by expanding its range of mid-market beauty and perfume products.  This targets the department stores' most profitable and defensive categories.  However, when it comes to pricing, it is a mixed bag, with some products more expensive via Amazon. The AFR included some statistics: 21% of beauty products sold in Australia (a $4 billion market) are now purchased online. 26% of women who buy health and beauty products regularly purchase them online, up from 18% four years ago. The AFR quoted an IBISWorld forecast, claiming that online sales will grow 10% per year over the next few years and will reach 33% of the market by 2024.  We are not sure where such numbers come from, particularly when we factor in indications that the online channel is approaching saturation, at least in some categories.

The capital splurge continues

16
The Australian Financial Review reported that Woolworths is issuing AUD 400 million in 'green bonds' to fund the installation of solar panels and LED lighting in their supermarkets.  Given that such investments have a very long payback period, how will this help in the on-going battle with Aldi, Costco and soon Kaufland?  Not to mention that batteries required for such local electrical systems will probably be worn out by the time they are supposed to generate a net return.  We have repetitively expressed our concern about the key supermarket operators in Australia spending ever more capital rather than focusing on operational excellence.  We appreciate that it is hard, but it is also necessary if they want a fighting chance against the international operators.

Premier musings

17
The Australian published commentary about Premier Investments. One of the key messages was the importance of the Smiggle brand in driving the success of Premier - around 30% of the group's earnings came from Smiggle. The brand (operated by the Just Group) generates about two-thirds of Premier's sales internationally. We are pleased to be a part of Smiggle's global success, providing the store systems (including POS) for the entire Just Group.

Whole Foods price cuts disappoint

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The Hustle reported that Amazon wants to copy Costco, but its price cuts aren’t as fresh as they seem. Last week, Amazon and Whole Foods announced a new round of price cuts at Whole Foods stores around the country, saying that prices on 100s of items would drop by 20%. It’s the 3rd time Whole Foods prices have dropped since Amazon acquired the company in 2017. But these price cuts, which primarily cater to Prime members, aren’t as palatable as they appear. Although Amazon has made a big deal about its price cuts, most shoppers haven’t noticed much of a difference. A New York Times report found that average non-Prime shoppers in New York saved just 5 cents after this most recent round of price cuts. With Prime discounts, savings average out to 4% per basket, while Whole Foods is still 15% more expensive than average supermarkets overall.
9
Apr-19
Tuesday

Napoleon Perdis resuscitated

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The Australian Financial Review reported that Napoleon Perdis Cosmetics will continue to trade (albeit reduced to 28 stores), after creditors approved the deed of company arrangements.  But, the creditors are not happy, receiving only a few cents in the dollar, while ATO and staff entitlements will be paid in full.  The business will be controlled by Kuba Investments, but NP's founder will continue as creative director.

Making social media more responsible

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The Wall Street Journal reported that the UK Government intends to create a regulator to force the removal of harmful internet content, from terrorist propaganda to cyberbullying and disinformation. The aim is to legally oblige companies including Facebook and Alphabet’s Google to take “reasonable and proportionate” action, with enforcement authority that may include the power to levy fines. WSJ commented that Governments around the world are forcing companies to take more responsibility for the content they disseminate, which is a shift from the current system that shields companies from liability for content posted by their users. We always wondered why such digital platforms aren't subject to the rules which regulate other broadcasters.
8
Apr-19
Monday

Supermarket shifts

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According to Roy Morgan, there has been some realignment in the grocery market share, with about 1.5% of it shifting from Coles to Woolworths.  This is quite a significant shift, but the most important trend is the expansion of Aldi.  Aldi has grown by another 0.5% to nearly 11.5% share and it seems to be slowing down. In our assessment, this is not a signal of weakness but an indication that Aldi is approaching a saturation point in its market segment. Roy Morgan's CEO believes that Woolworths’ performance places it in a strong position to deal with the entry of German hypermarket Kaufland, but we remain sceptical. Neither Woolworths nor Coles were able to prevent Aldi from completely claiming its chosen market segment, so how can they prevent Kaufland from doing the same?

Debenhams moves in the UK

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Reuters reported that according to the Financial Times, Sports Direct's CEO has offered to underwrite a 150 million pound rights issue at Debenhams, on the condition that he is named CEO of the British department store chain. The owner of the sportswear firm is apparently considering a 60 million pound takeover bid for Debenhams. Debenhams secured 200 million pounds in new funds last week but warned that shareholders still face being wiped out unless it secures financial support from Sports Direct, which holds a near 30% stake in the business. Last year, Sports Direct bought department store chain House of Fraser out of administration and it has been trying to wrest control of Debenhams for months to further beef up its presence in the sector.