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Retailers facing Afterpay hangover?

The AFR reported that retailers are facing a "buy now, pay later" hangover in 2019 as they cycle a sales boost underpinned by new forms of consumer credit. UBS analysts estimate Afterpay and Zip accounted for at least 15% of sales growth for listed discretionary retailers such as Super Retail Group, Premier Investments, Adairs,, Myer, Kathmandu and Wesfarmers in 2018. This sales boost will be difficult to cycle in 2019, unless thousands of new customers start using short-term credit to fund purchases they would not have otherwise have made. Afterpay and Zip have achieved high customer penetration in a relatively short period of time, with more than 10% of Australians estimated to be using their services. With regulatory scrutiny mounting, they dodged a bullet this month when a report from the ASIC said the National Credit Code would not be extended to the sector. Is it just a matter of time?

Ulta Beauty’s channel-agnostic growth strategy

Glossy reported that when Ulta Beauty credited a 16% increase in year-over-year net sales in the third quarter to an integrated omni-channel approach as the key driver. Ulta’s increasingly channel-agnostic slant is how customers are shopping today, particularly high-spend customers. According to said Ulta's SVP of Digital and E-commerce, Ulta’s omnichannel shoppers spend up to four times more than its single-channel guest, and they frequent stores two-to-four times more. “You would think their extra spend was digital spend, but, ironically, that extra spend is happening in stores,” she said. “Our best customers are omnichannel customers, so we want more of those kind of shoppers and to make our experience better for her,” she said.

Edcon's interesting approach to reducing rent costs

Reuters reported that South African retailer Edcon is in talks with shopping mall owners about a two-year 41% rent reduction in exchange for 5% stake in the company. Edcon has been grappling with an over-leveraged capital structure for several years after troubles in its credit business in 2014 coincided with an economic slowdown and weak consumer spending at home. Edcon, which vies for market share with TFG, Truworths and international chains such as Zara and H&M, is one the biggest names in South African retail, employing more than 14,000 permanent full-time staff in over 1,100 stores.

Retailers hoping for big bang finish to 2018

The AFR reported that retailers that have held off discounting to protect margins are counting on a "big bang" finish to the Christmas shopping season to help meet sales and earnings targets. Shares in most discretionary retailers have fallen sharply in the December quarter in the belief that Christmas 2018 will fall short of expectations. However, analysts and the Australian Retailers Association (ARA) still expect a "decent" festive season, with the ARA sticking to its forecast for a 2.9% increase in Christmas spending. With foot traffic in shopping centres up over last year, the ARA expects consumers to splurge almost $15 billion over the next five days.

US interest rates

Reuters reported that the US Federal Reserve raised interest rates yet again, by 0.25%.  Two more increases are expected next year, so the pace of further rate increases will be slower (there were four increases in 2018).  The stock market reacted by shedding off 1.6% of its value and the US dollar gained ground against most major currencies. The AUD dipped below 71 cents. The Fed Chairman commented that the US economy continues to perform well, so it no longer needs the Fed’s support.  The US economy is expected to grow by 2.3% next year and the unemployment rate will drop to a record low of 3.5%.  Inflation is expected to be 1.9%.  We noted that some commentators tend to view rate increases as something negative, but in reality, it reflects business confidence in the future – if investors expect good returns, they will invest and the rates respond accordingly.

NBN to be made obsolete by 5G

An article in the AFR poses questions regarding the future of 5G, noting that Telstra executives have admitted they don't yet know how 5G mobile technology, which the telco is betting its future growth on, will be used. On the surface, the article throws a bit of shade on the rollout of 5G technology and consumer adoption, but if you read between the lines it's obvious that Telstra's 5G network will sooner rather than later make the NBN obsolete - something we predicted back in 2015.

Future of retail in 2019 and beyond?

Inside Retail published commentary about the ‘future of retail in 2019 and beyond’. It is an interesting read, but we question some of the conclusions. For instance “cloud” doesn’t “effortlessly localise the online user experience” – the cloud is just plumbing. The retailer still needs to rearchitect their systems to achieve cross-channel connectivity, which doesn't necessarily require the cloud. The prediction of 30% growth in online sales in 2019 is not in line with recent industry statistics, and the growth will vary widely depending on the vertical. Certainly, Aldi’s online growth will be zero, as they don’t even sell online, while still causing enough trouble for the online-enabled Woolworths and Coles. In our assessment, the drift from brick & mortar to online is levelling off, as the use of mobile technology saturates, particularly in Australia.  In other words, what was meant to be sold online, has mostly made the move there already.

Brexit fears rattle Premier and Lovisa

The AFR reported that the gloss is coming off Premier Investments and Lovisa's exposure to the British retail market amid growing fears about the impact of Brexit on consumer confidence and the UK economy. Lovisa shares fell 6.2% and Premier shares by 3.4% yesterday, mirroring the decline in UK retail stocks after a shock profit downgrade from once high-flying online fashion retailer shares plunged as much as 41% after it cut profit guidance after worse than expected November-quarter sales and margins. Fund managers and analysts said fears about the impact of Brexit on consumer confidence, the economy, and the pound were compounding growing concerns about consumer spending in Australia as house prices weakened.

Oroton set to return to black

The AFR reported that losses at OrotonGroup more than halved in 2018 after the accessories retailer slashed marketing, sales, and administration costs by about 25% following a $24 million "rescue" by fund manager Will Vicars. As a result, pre-tax losses fell to $6.7 million compared with losses of $17.6 million in 2017. Barring further one-off costs the company, which went into voluntary administration 12 months ago, appears set to return to profitability in 2019 with a significantly stronger balance sheet. Mr Vicars, chief investment officer at Caledonia Funds Management, is hoping to lift sales to $200 million or $300 million in five years by re-invigorating design under creative director Sophie Holt and rebooting marketing and sales with an emphasis on digital.

Costco no frills

CNN Business reported that while retailers are trying to draw holiday shoppers with splashy perks like free shipping, convenient new ways to shop, and mobile checkout in stores, Costco has eschewed that strategy. It focuses instead on the reliable model that has attracted loyal club members to its no-frills warehouses over the years. During its most recent quarter, Costco's (COST) US sales increased 8.3% compared to the same quarter a year ago. In November, Costco reported double-digit increases from last year in categories like sporting goods, electronics, hardware, and appliances, signaling that it was a top destination for big-ticket holiday purchases. Home furnishings, clothes, and small appliances like toasters and blenders grew as well. We have a suspicion that Coles and Woolworths in Australia could only dream about such results.

Amazon's CRaP items

The Wall Street Journal commented how Amazon has trained people to buy nearly everything online and now it is having second thoughts because some items don’t make money - Amazon refers to them as CRaP, short for “Can’t Realize a Profit.” So, Amazon started to push big brands to change how they use its site, to remove unprofitable items or pack them differently to reduce logistics costs. The CRaP products, such as bottled beverages or snack foods, tend to be priced at $15 or less, are sold directly by Amazon and are heavy or bulky and therefore costly to ship. We warned in the past that online business needs to be treated differently depending on the category. The common practice of trying to reach the general ratios (like 10% of all sales in the country are made online) can be quite dangerous.  Some categories are ideal for online sales, some should never go there.

Farfetch acquires Stadium Goods for US$250m

The Hustle reported that online luxury fashion marketplace Farfetch just acquired online sneaker marketplace Stadium Goods for US$250m. Farfetch is one of the biggest online luxury retailers in the game. This year alone, the company went public at a US$6.2B valuation and is on track to hit over a billion in sales. By acquiring Stadium Goods, the company’s diving even further down the sneaker wormhole, blurring the lines between luxury and tennis shoes. According to Farfetch’s CEO, sneakers are already the fastest growing category on the platform.