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Discount chains feeling the heat


CNN reported that discount chain Fred's will close 104 more stores by the end of June, in addition to the 159 stores it said in April it would shut. Between the two waves of closures, Fred's is reducing its store count by nearly half. Once completed, Fred's will have roughly 300 stores left. Earlier this year it had 557 stores, primarily across the southeastern United States. The 72-year-old company, which sells items like food and household cleaning supplies, is struggling to find a working strategy, which includes trying to get out of the pharmacy business. Given the struggles of similar retailers down under, it looks to us like people are their losing appetite for buying obnoxicals (trinkets).

H&M's new loyalty program

Business Insider reported on H&M's new loyalty shopping program, which includes discounts on H&M products, access to exclusive events, free shipping on orders over US$40, and 20% off a blowout at Drybar. H&M joins a long list of retailers that have turned to membership programs to drum up loyalty among shoppers. Macy’s, Lululemon, Nordstrom, and Nike are among them. And it seems to be working for some of them. In a recent earnings call, Macy’s CEO said that its “Star Rewards” program was “outperforming” expectations, citing it as a key reason for the retailer’s growth during the previous quarter. Lululemon, which recently rolled out an Amazon Prime-style membership, also seems to be having success.  

RM Williams on the market

The Australian Financial Review reported that L Catterton, the US-based private equity firm that owns RMS Williams, has put the business on the market.  Goldman Sachs were appointed to handle the sale.  The business has been turned around over the last few years and it is expanding internationally.  In 2018 it turned over $143 million ($6 million operating profit), compared to 2017, when it turned over $127 million and generated only $1 million profit.  RM Williams was established in 1932 and it is based in Adelaide - it is an iconic Australian brand.  In addition to its manufacturing operations, the business operates 50 retail stores and more than 500 multi-brand retail locations. It is expected that RM Williams will be sold for around $500 million.

Stores give Walmart its advantage over Amazon

The AFR reported that Walmart keeps pressing its advantages over Amazon, and it keeps getting results. The big-box giant said comparable sales at its US business rose 3.4% in the first quarter from a year earlier, its strongest performance on that metric in the period in nine years. The gain reflected both an increase in traffic as well as shoppers spending more per transaction. Online sales rose 37% from a year ago. Fitting a recent pattern, a significant contributor to the online growth was its click-and-collect grocery service. This is a sweet spot for Walmart: The service is currently in 2450 US stores - coverage that Amazon will be hard-pressed to match, given its far smaller lineup of brick-and-mortar stores. And it allows Walmart to make an early land grab in the Wild West that is digital grocery shopping.

Zara Australia still claiming marketshare

The AFR reported that global fast-fashion retailer Zara is still taking market share in Australia despite rising consumer awareness about the environmental cost of disposable fashion. Sales at Inditex’s Australian business,  Group Zara Australia, rose  10.5% to $311.8 million in the year ending January 31, almost five times the growth in the overall clothing footwear and accessories market. Zara’s profits rose at an even faster rate, with operating profit up 32.4% to $18.4 million and net profit rising 35.3%t to $12.04 million. Earnings before interest and taxation margins rose to 5.9% from 5%, reflecting positive operating leverage, exceeding EBIT margins at retailers such as Myer (1.8%) and Premier Investment brands such as Dotti, Portmans and Jacqui E (4.5%). However, Zara’s EBIT margins were much higher (10.6%) three years ago.

AI sharecroppers earn as little as US$2.50 ph

The Hustle reported that Artificial intelligence is driving some of the biggest technological advancements of our time, from self-driving cars to facial recognition. However, the technology is reliant on a growing, often low-paid sector of human workers, or “AI sharecroppers.” Before an AI system can identify images on its own (a process called deep learning), it must be “trained” with millions of hand-labeled images. This so-called “AI labeling” industry is projected to grow from US$150m globally in 2018 to US$1B by 2023 - and like many booming industries, it’s largely dependent on tedious, cheap labor. Many of these jobs are outsourced to Southeast Asia and Kenya, where workers sit at computers labeling millions of images (stop signs, animals, vehicles) for as little as US$2.50 per hour. We've long held the view that AI has nothing to with intelligence, but rather 'trained' instinct.

Google to help tackle the environmental impact of fashion

The Independent reported that Google and Stella McCartney are teaming up to help reduce the environmental footprint of the fashion industry. At the Copenhagen Fashion Summit this week, Google announced that it is building a Google Cloud data analytics and machine learning service that will “give brands a more comprehensive view into their supply chain,” particularly at the level of raw production. The machine learning technology will be used to help brands estimate the environmental impact of particular items of clothing at the sourcing and design stages, and use this data to help companies take action. The pilot has been launched in response to the growing environmental impact of the fashion industry. According to Google, the fashion industry accounts for 20% of wastewater and 10% of carbon emissions globally.

Investors sour on UK's megamalls

The Business of Fashion reported that prime shopping venues across the UK have mostly avoided symptoms of retail decline, but that hasn’t stopped their values plummeting. Smaller malls and retail parks have been battered by the sluggish economy and fierce online competition from companies like Inc., resulting in vacant stores and slumping rents. Despite mostly avoiding a similar fate, the value of UK's megamalls has taken a knock due to investor skepticism. For example, British Land, a real estate investment trust, wrote down the value of its top five malls including Meadowhall in Sheffield by about 8% even though rents mostly held steady. Another retail landlord, Land Securities Group Plc cut the value of its malls by 11.7% in the year through March 31. At least landlords with a mixed property portfolio have options, unfortunately, pure retail landlords have fewer options.

Walmart mulling IPO for Asda

The AFR reported that Walmart has confirmed it is considering an initial public offering for its British supermarket unit Asda after British anti-trust regulators blocked a planned merger with rival chain J Sainsbury. The US retail giant could also revisit a sale of Asda, although interest from private-equity firms has been lukewarm. Walmart planned to take its time to analyse the most feasible strategy for Asda and could decide to keep the business. Walmart has revamped its international portfolio by selling a majority stake in its Brazilian business and acquiring a majority interest in Indian e-commerce leader Flipkart Group, in its biggest ever deal. A deal with Sainsbury would have allowed Walmart to keep a foot in the UK through a minority holding in the combined company, without the headaches of managing day-to-day operations in one of the world's most competitive markets. An Asda IPO could give the unit a similar structure to Walmart's separately listed Mexico and Central America business.

Costco store managers take home six-figure salaries

Fox Business reported on the take-home salaries of US store managers at Costo. Roughly a week after Walmart shared in a new report that its US store managers are taking home an average of US$175,000 a year, Reader's Digest resurfaced just how much Costco is shelling out in comparison. According to Glassdoor general managers at the chain get an average base pay of over US$106,000. Overall, their salaries range from nearly $50,000 to $180,000. But, as Reader's Digest points out, these totals don't even include the various benefits the employees enjoy throughout the year including bonuses, stocks, and commission which can tack on an additional $8,000 or so annually. In Australian terms, a US$180,000 salary translates to AU$260,000. At this same rate of pay, after tax, a US manager will take home roughly US$10,000 per month (~AU$14,500), while down under you would pocket AU$12,500. That's a 13%+ delta, interesting isn't it.

Retail revival, but what does the long-term hold?

An article in the AFR noted that retailers and other discretionary consumer plays are the surprising heroes of the ASX this year but fund managers are divided on whether the stellar performance can continue. The broader market has had one of the best starts to the year in its history, jumping 11.3% with consumer discretionary stocks putting in an even better performance, jumping 13.6%. However, consumer confidence has plunged along with property prices. Sydney property prices are down 14.5% and Melbourne prices are down 10.9% as at the start of May, with the drop from 2017 peak worse than the decline during the global financial crisis. In response, markets are expecting the central bank to lower its official cash rate to support economic growth, with a cut from 1.5% to 1.25% by August now fully priced in.

Woolies rekindles the discounting war

The AFR reported that Woolworths has slashed the prices of more than 1000 products by as much as 50% in an online super sale, opening a new front in the supermarket wars. The two-day sale is aimed at reprising the success of Woolworths’ online-only frozen food sale in March, which was taken up by social media and helped boost sales in the quarter. Woolworths is offering 50% discounts on only 76 food and grocery products in stores this week, according to its catalogue. Coles is offering 50% off about 64 food and grocery products. It appears Woolworths is offering deeper discounts on a wider range of products online to encourage customers to use its e-commerce site, which accounts for 3.7% of food and grocery sales, up from 2.87% a year ago. Yet, it wasn't that long ago when both grocers claimed that major discounting was over...