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The Fall of the House of Fraser

The BBC reported that the House of Fraser plans to close 31 of its 59 stores by the end of the year, including its flagship Oxford Street store.  House of Fraser needs approval from at least 75% of its creditors to go ahead with its rescue plan.  Established in 1849, House of Fraser became a national chain after World War II, through multiple acquisitions.  In 1948 the company was publically listed, but in 2006 it was acquired by a private consortium of investors.  In 2014 the chain was sold to a Chinese department store chain, and it now needs to handle voluntary administration.  Multiple other attempts were made along the way to acquire the business.  We have always held a view that multiple ownership changes will eventually destroy any business.

The Bitcoin saga continues

We have commented on a few occasions about the Bitcoin bubble (and we are not alone – Warren Buffet recently characterised it as “rat poison squared”). Reuters reported that today Bitcoin traded at US$6,763, down 65% from its December 2017 peak.  This is also an 11% drop since Friday, after the South Korean Coinrail Bitcoin exchange was hacked and apparently lost about 30% of its accounts.  If you ask us, we think that US$6,763 is still a stiff price for something that is virtually worthless.  Warren Buffet said that “buyers of bitcoin thrive on the hope they’ll find other people who will pay more for it.”  We couldn’t agree more.  Like all other bubbles, this too will come to an end when the majority of people will no longer be willing to pay more for it.

The Illusion of Free Trade

This is the title of the recent analysis from the Geopolitical Futures team. With the ongoing media debate about the risks posed by the US to free trade, GF pointed out that even with zero tariffs, free trade cannot be achieved. States use a wide range of vehicles to restrict trade and defend their interests.  These include ‘compliance’ regulations, deliberate delays in processing certain goods through customs, antitrust regulations to restrict large companies, etc.  Such obstacles may not stop the flow of goods, but they could massively escalate exporters' costs.  The exporting countries use a different set of tricks to abuse the system by e.g. enacting looser labour laws or by offering outright export subsidies.  Bottom line, increases in customs duties are just a one piece of the puzzle in international trade.

Target on target

Inside Retail commented on Guy Russo’s progress in fixing Target.  The decline in earnings evident over the last several years has been arrested and sales have started to grow in several key categories.  The aim is to create a smaller and more profitable Target.  We think that this is a robust, pragmatic and brave strategy (for a publicly listed company) that will help to secure Target’s future.  Target aims to reduce its real estate footprint by 20%.  We also like Target’s strategy to boost new fashion, better differentiate products, and most importantly – to adopt the Digital Path to Purchase approach – “increasing exposure to online” in the words of Mr. Russo.

Godfreys downward spiral

The AFR reported that Godfreys has warned of a serious cash squeeze in early July and the need for emergency financing.  A new management team has been appointed following John Johnston’s increase of his stake in the business to 80%. As the new management takes over, an ever bleaker picture continues to emerge.  Godfreys operates 200 stores in Australia and New Zealand. The new CEO expressed hope that the business can be repaired, but it looks to us like a monumental task.

The next nail in the coffin?

On 25 May, we reported on the counterintuitive strategies currently employed by Coles. More details have now emerged. The key problems within the business seem to be caused by high-cost infrastructure and a drift towards home brands, progressively destroying local suppliers and reducing customer choice. The Age reported on Coles' latest plans, which in our assessment will generate short-term gains, but medium-to-long term serious loses, due to further weakening of the brand and an increase in the underlying cost structure. Coles now intends to expand its generics range from 20% to 40%, which will lead to the destruction of more local suppliers. In addition, Coles will expand its online business, adding $1 billion in capital expenditure. But, don't worry, because it will concurrently deploy an "advanced analytics centre, to solve problems". None of these initiatives will improve the customer offer and day-to-day prices.  Aldi and Costco must have been pleased to learn about all this.

Shrinkage update

According to an annual survey conducted by the NRF and the University of Florida, shrink in the US averaged 1.33% of sales, down from 1.44% the year before.  Shoplifting and organised retail crime were the most frequent causes, accounting for 36% of losses, followed by internal employee theft (33%), administrative paperwork errors (19%) and vendor fraud or mistake (6%).  The most substantial losses per incident came from retail robberies, at an average around U$4,250 each, down from U$5,300 the year before.  We attribute the decline to the continuing shift from cash to electronic forms of payment.

Interesting US job statistics

According to the Wall Street Journal, US job openings this spring (6.7 million at the end of April), outnumbered unemployed Americans (6.3 million) for the first time since such record-keeping began in 2000.  The figures are the latest sign the US is facing a historically tight labour market, confirming that a 3.8% unemployment rate in effect means full employment. For workers, that’s good news; for businesses, a real challenge.

White death?

Media reported that Kogan announced an expansion of their range to include white goods.  For those who remember the demise of the Brashs chain in 1998, an early warning about their looming trouble was, similarly, the addition of white goods to their range. When a retailer expands into such a low margin category, they are most likely chasing store revenue growth at the expense of net profits. This may placate the stock market, but analysts should be wary. Particularly, given that Kogan himself apparently attempted to sell 10% of his holdings.

Australian online sales

The Age commented that the Australian Bureau of Statistics (ABS) reported online sales reached $1.3 billion in April, up from $510 million at the same time last year.  It is encouraging to see that at least in some areas the ABS discovered the virtue of reporting retail figures against the previous year rather than the previous month. The dollar numbers translate to 5.4% of all sales in April 2018 going through online, up from 3.4% a year ago and 2.6% in July 2014. In comparison, last year online sales in the US totalled 7.5%, 14.5% in the UK, 5.4% in Japan, and 8.4% in Germany.

Myer’s new, old focus

According to the AFR, the new CEO of Myer stated that the company must put its customers first, “in every decision we make and every action we take”.  Sounds good, but our suggestion would be to start with the basics: making sure that someone is available to take money from customers who have found something they want to buy. We have heard repeated complaints that Myer doesn’t have enough staff on the floor and customers must search to locate someone willing to take their cash.