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24
May-18
Thursday

Marks & Spencer store closures

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Inside Retail reported that Marks & Spencer will close 100 stores over the next 4 years, which is about 10% of their current portfolio.   The most affected verticals will be clothing and home, with one in three stores disappearing.  Interestingly, about 18% of clothing and homewares sales are transacted online and none in the grocery space (over 600 M&S stores just sell food), and groceries are doing just fine.   This reinforces our view that retailers have to be very careful about moving their brick & mortar sales online.  Unless such a move substantially increases the overall market share, it could undermine and damage the core business.

Not even a bronze medal for global competitiveness

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The AFR reported that Australia has risen to position number 19 in terms of global competitiveness, from our previous rank of 21st.  The top five countries, which also happen to be richer (per capita) than Australia are the US, Hong Kong, Singapore, the Netherlands, and Switzerland.  What dragged Australia down were all kinds of high taxes and labour regulations.  We think that it is important to appreciate that there are two sides to being globally uncompetitive: foreign enterprises are reluctant to come to Australia, and Australians live and work in an uncompetitive environment.  The latter is responsible for our lower per capita income, the former tells us that it will stay that way.

Stopping food waste

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According to The Telegraph, Tesco decided to remove "Best Before" dates from most of its fresh fruit and vegetable packs, leaving consumers to use common sense to decide when they are no longer fit to eat.  The average UK home throws away £700 of food every year, with fresh fruit and vegetables among the most commonly thrown in the bin.  "Best Before" labels indicate that the food is no longer at its best but is still good to eat. "Use by" dates are used to show consumers when perishable foods like meats and dairy items are no longer safe to eat.  Research has shown that less than half of consumers understood the meaning of "Best Before" dates and thought that they were the same as “Use by” dates.  Interesting, more general phenomenon is worth noting here: it is a mistake to assume that words and slogans that retailers are fluent with are also obvious to the consumers.
23
May-18
Wednesday

Online causing cracks in US logistics

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Contrary to popular belief, the world doesn’t behave in a linear fashion.  If a car keeps accelerating, it will reach its engine capacity and, unless it slows down, at some point, it will have to crash. The Washington Post reported that the same pattern is now emerging in logistical systems in the US, which have reached their capacity - shipping costs have skyrocketed in the United States this year. Higher transportation costs are beginning to cause the price of anything that spends time on a truck to rise. Amazon, for example, just implemented a 20 percent hike for its Prime program that delivers goods to customers in two days, and General Mills, the maker of Cheerios and Betty Crocker, said prices of some of its cereals and snacks are going up because of an "unprecedented" rise in freight costs.

Beauty story from the US

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The Chicago Tribune published an article about Ulta Beauty, previously known as Ulta Salon, Cosmetics & Fragrance.  Based in the US, Ulta has made it to the Fortune 500 list.  The company demonstrates that successful retail is about good retailing, rather than about competition between online and brick & mortar. Ulta continues adding roughly 100 stores each year and now operates close to 1,100 stores.  The company’s revenue has increased 20% compared to the year before and annual revenue is close to U$6 billion.  Ulta Beauty offers both high-end and drugstore cosmetics, skincare, and fragrances, in addition to its own brand of makeup, bath and body products, skincare, haircare, nail polish, and fragrances.
22
May-18
Tuesday

Toys "R" Us demise continues

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Various media outlets reported that following the collapse of their parent company in the US, Toys "R" Us Australia and their baby goods offshoot Babies "R" Us also went into administration.  The chain operates 44 stores in Australia and employs around 2,000 people, 700 of them on a permanent basis.  The business hoped to find a buyer, but according to the AFR the final bidder has withdrawn the offer, forcing the business into voluntary administration.

Burberry’s strategic thinking

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The NRA pointed us to an article in Glossy, explaining Burberry’s strategy of selling directly rather than through their wholesale channel.  Direct sales lifted from 75% last year to 80% and Burberry's overall sales went up by 3% to nearly A$5 billion.  Part of the strategy includes reduced promotions, which wholesale partnerships overused, undermining the brand.  Another driver behind the shift to direct selling was the declining traffic in department stores.  The business is revising its approach to all the core areas, including product, employee, operations and customer engagement.
21
May-18
Monday

Mixed reaction to Nordstrom’s results

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According to the NRF, Nordstrom booked a 38% jump in first-quarter profits.  Yet, the market reacted in a strange way – Nordstrom shares dropped by 9% on Friday.  Market Watch attributed this to weakness in same-store sales growth, which has been less than 1%.  Interestingly, Nordstrom now publishes a figure for “digitally-enabled sales”, which went up 29%.  Digital Path to Purchase seems to be gaining momentum.

The other side of the coin

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 The Wall Street Journal reported that hundreds of technology firms raising money for cryptocurrencies are using deceptive or even fraudulent tactics to lure investors. The  Journal reviewed documents produced for 1,450 digital coin offerings and found 271 with red flags. Warning signs included plagiarised investor documents, promises of guaranteed returns and missing or fake executive teams. In total, more than $1 billion has been poured into those 271 coin offerings, and investors have so far claimed losses of up to $273 million in the projects.  We have warned in the past that without inherent value and without backing by a state, such 'currencies' are not real.
18
May-18
Friday

Sadly, no tax reform in Australia

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According to Reuters, based on data from S&P 500 companies, first-quarter capital expenditure in the US totalled around U$160 billion, up more than 21% from a year ago.  This has been attributed to the US tax reform and it would be good if people in Canberra paid attention to the movements in the US economy resulting from a comprehensive tax restructure.  Wouldn’t we want similar statistics in Australia?  Focus on cutting a pie rather than making it bigger never pays off in the long-term.

Myer speculation continues

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The AFR commented on Myer’s evolving situation. The position of the business is difficult and some changes are unavoidable.  Apparently, Myer has been in talks with its banking syndicate since March, to renegotiate bank covenants.  The business has many constraints, limiting its options – the most onerous one being lease liabilities of $2.7 billion.  Myer has previously ruled out voluntary administration as a means to resolve the lease issue.  One option would be to raise capital, but we think that this won’t be easy in Myer’s current situation.

Technology is not enough

26
The AFR published an article about iRexchange, “the digital start-up threatening Metcash’s dominance of the $18 billion wholesale grocery market”.  iRexchange operates a supplier-retailer portal and two years ago claimed that it would be turning over $8 billion by 2018.  Predictably, this did not eventuate, because order taking and processing is only a minute part of what Metcash does.  The most important part in the iRexchange business model, the logistics, had to be handled by DHL and Emergent and we can’t see how distribution companies can compete with a specialist grocery wholesaler at their core game.  Also, the only way an independent grocer can have a meaningful relationship with a supplier is via volume.  So, groups such as Ritchies in Victoria or Drake in South Australia can source directly and they have the infrastructure to do so.  They don’t need a third party portal, so we think that iRexchange is overly optimistic thinking that they will still get to $8 billion in the future.