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Smiggle a potential spin-off

The AFR reported that ten years after opening its first international store in New Zealand, the children's stationery brand Smiggle is undoubtedly Australia's most successful international retailer. Now, all signs point to Smiggle becoming a separate listed company. According to AFR, such a move would "give fund managers a global growth option without the noise of other brands in Solomon Lew's Premier Investments". Smiggle's first global flagship store was opened in Oxford Street in London in May this year and is on track to become its largest British store. The retailer also opened its first global concession outlet in Selfridges in Oxford Street.  Smiggle has a product mix that is not available anywhere else, which has insulated the business from on-line threats such as Amazon. Retail Directions is proud to support Smiggle's remarkable international success with our technology.  

Amazon considers opening up to 3,000 cashier-less stores by 2021

Bloomberg reported that Amazon plans to open as many as 3,000 of its cashier-less Amazon Go convenience stores by 2021. It would be Amazon’s most aggressive move in the brick-and-mortar space since its purchase of Whole Foods in 2016. It would also significantly alter the company’s market positioning, to compete with grocery stores brands like Kroger, convenience and liquor stores like CVS and 7-Eleven, and big-box retailers like Walmart and Target. Stocks for big-box retailers like Walmart and Target began sliding following the news. We see it in a slightly different way - the more physical locations Amazon opens, the more it becomes a traditional retailer.  This will subject Amazon to all the same pressures faced by its competition, and, dare we say, it will lead to a more sober market capitialisation.

Supermarkets increase milk prices

The AFR reported that Woolworths and Coles have bowed to pressure to help drought-stricken dairy farmers, raising the price of a litre of house brand milk from $3 to $3.30. Several processors have also taken action, announcing a temporary 10c-a-litre increase in October to their wholesale price. The situation raises a number of questions - what went wrong with the normal market mechanism, forcing such invasive price changes?  How was it possible for Coles and Woolworths to force their milk supply chain to operate under continuing duress, making the industry non viable?  In our assessment, the recent drought only exposed deeper, systemic issues and we suspect that the milk category is not the only one being pushed towards extinction.  

Bunnings to open online store

The AFR reported that Bunnings has accelerated its investment in digital, data analytics and e-commerce, noting that the retailer's customers will be able to purchase standard products such as hammers, nails, etc online within two years. Earlier this year, Bunnings started selling around 20,000 "special orders" online - mostly bulky goods such as sheds, play equipment, and mature trees. While the special order e-commerce offering makes good sense, given the cost of online order infrastructure and fulfilment on regular products, the question must be asked: is Bunnings mistakenly following the crowd to the detriment of its bottom line?

Milk prices: processors and retailers must step up for farmers

The AFR reported that dairy farmers are urging supermarket giants to show leadership on milk prices and not to hide behind the Australian Competition and Consumer Commission after it put processors on notice. In the wake of drought-related cost increases for farmers, the ACCC has warned diary processors not to mislead farmers about milk prices. But, it's not just about a single point in the supply chain, both processors and retailers have a pivotal role to play in minimising the pain being suffered by farmers at the moment.

Kaufland full frontal attack

SmartCompany reported that global hypermarket chain Kaufland has started to recruit managers and other staff in Melbourne, Adelaide and Brisbane. Kaufland has already secured locations in Adelaide and Melbourne. The business has more than 1,200 locations in Europe, generally in a large 3,000-4,000 square metre format. So, soon Coles and Woolworths will have another world-class retailer to measure up to.

Department store beauty war

The Australian Financial Review reported that Sephora will be running shop-in-shop operations within David Jones. The first outlet will operate in DJ's Bourke Street store in Melbourne. More stores will follow in 2019.  Sephora already operates 14 stand-alone stores in Australia. Apparently the discussions between DJ and Sephora have been underway for the last four years. It is worth noting that this month Myer will become the exclusive department store stockist in Australia for Aesop, meaning the Aesop will exit DJ. According to the AFR, beauty and cosmetics category represents 20% of turnover at DJ and Myer, generating about 25% of gross profits.

Coles continues to test its customers

The Age reported that Coles has now banned trolleys from being used at some of its self-service checkouts. The ban, 'trialled' at about 20 stores, has apparently sparked an outcry from shoppers on social media. Coles claims that this move will improve customer service. We think that much better results would have been achieved if Coles focused on running an operationally excellent business rather than on testing how much inconvenience its customers can accept. Some examples: brands eliminated to make space for 'home' brand products, thin plastic bags replaced with much worse 'reusable' ones, use of customer's bags which slows down checkouts, number of checkouts replaced with much slower self-checkouts, and now people need to carry their groceries within the store as well. No doubt Aldi and Costco are rubbing their hands with glee.

Instagram ups its shopping game

Social media platform, Instagram has announced two fundamental updates to its e-commerce capabilities: shoppable posts in Stories and its Explore tab will get dedicated shopping channels. The new features give brands significantly more ways to get their products in front of users. With more than a billion users and 25 million business profiles, Instagram has emerged as a critical platform for consumer engagement in the Digital Path to Purchase funnel.

Officeworks posts solid results

The AFR reported on Officeworks' impressive performance. The office product retailer's sales grew 9.1% to $2.14 billion and earnings rose 8.3% to $156 million. Return on capital rose 13% to a record 16.6% and has almost tripled since 2009, underpinned by 10% compound annual earnings growth and better inventory management. Supported by investments in digital initiatives, data analysis, and services, as well as plans to continue to open four to eight stores annually, the business is confident it can continue to deliver above-market growth.

How to prevent a self-fulfilling prophecy

Bloomberg reported that RH (formerly known as Restoration Hardware, a California-based furniture retailer), opened its 19th store, a 9,000 sqm RH Gallery in New York.  The project took five years to complete at a cost of $50 million. RH's CEO says that the location will produce $100 million pa.  The CEO opposes the notion that physical retailing is dying due to e-commerce, and he has no interest in the “follow the herd” mentality that focuses on online while allowing retail and catalogue arms to wither.  “There’s been a lack of capital allocation and investment into physical retailing,” he said to Bloomberg. “It’s just rotted and died. Anything that you don’t invest in will atrophy.”  We think that his comments have merit – retailers who spend money on e-commerce to the detriment to their core operations tend to suffer the consequences.

The Coles delusion

The AFR published commentary on Coles, pondering on its positioning to "take on Woolworths and Aldi".  We think that this narrative doesn't recognise some of the fundamental characteristics of the supermarket segment in Australia. Coles cannot compete with Aldi, unless it opens a new line of business (they used to have it, called Bi-Lo), which operates on a very low-cost basis. As it is, Coles must recognise that Aldi will continue to expand until it fills in its niche in Australia. Fighting this tide amounts to mere delay tactics and lost gross profit in the meantime.