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Retail rents and e-commerce frenzy

The AFR reported that leading retailers like Premier Investments are threatening an avalanche of store closures unless landlords reduce rents as $2 billion a year in sales shift from bricks and mortar to online. Rents for specialty retailers are still rising an average 4% a year, while same-store sales are growing by less than 2%, increasing margin pressure on retailers. Consequently, major retailers including Premier Investments, Myer, Wesfarmers' Target, Lorna Jane, David Jones, and the Country Road Group are reviewing store networks and stepping up investment in e-commerce. On the other hand, while rents are still rising and vacancy rates remain low, behind the scenes landlords are striking off-lease deals, offering rental concessions and temporary abatements to avoid rows of empty shops. What we are witnessing is not the demise of stores, but a temporary moment of e-commerce frenzy. Huge capital investments are being allocated to online while stores are left to rot. This will level out as stores are here to stay for a plethora of reasons. In our experience: stay frugal and have the right stock, at the right price, in the right location – if you do, you will do exceptionally well.

Michael Kors to acquire Versace

The Hustle reported that US fashion company Michael Kors has agreed to buy Italian brand Versace for US$2.35 billion, positioning the retailer to challenge Europe's big luxury fashion brands. Preluding the Versace deal, Michael Kors also purchased British luxury shoemaker Jimmy Choo last year for US$1.2 billion. The acquisition is one of many in the high fashion space: Luxury Italian suit-maker Ermenegildo Zegna bought American menswear outfit, Thom Browne, last month, and Swiss luxury titan Richemont purchased luxury e-commerce platform Net-a-Porter in May for US$3.3 billion. But, here's the catch, not all investors are convinced Michael Kors can pull off the merger, with the retailer's shares falling more than 9.5% after the deal was announced.

Consumers remain wary of social media commerce

Australia Associated Press reported that new research shows that, despite the exponential growth of businesses selling through Instagram and Facebook, consumers remain wary of retail via social media. The latest PayPal m-Commerce Index revealed that 13% of Australian businesses are already selling via social platforms, with an extra 22% of businesses planning to do so in the next six months. Additionally, one-in-eight Aussies are now shopping on their mobile phone daily, highlighting the increasing importance of mobile-optimised e-commerce. Half of Australians in 2018 are using at least one subscription service and spend an average of $32 per month on subscriptions, with 86% of businesses who offer subscriptions seeing an increase in revenue. However, PayPal Australia's MD warned that one in three buyers remained nervous while buying as the lines between user-generated and advertiser content increasingly blurred.

Universal Store ramps up for growth after buyout

The AFR reported that youth fashion chain Universal Store is ramping up plans for new stores and online retailing following a $100 million management buyout backed by private equity investors Brett Blundy's BB Retail Capital, Trent Peterson's Catalyst Direct Capital Management and Adrian MacKenzie's Five V Capital. The Brisbane-based business has annual sales of more than $100 million and 53 stand-alone stores across Australia. The deal is a major vote of confidence in Universal Store's management team, which has delivered several consecutive years of double-digit same-store sales growth and maintained EBIT margins above 10% despite massive structural change in the clothing sector, including the growth in online and the arrival of global fast-fashion retailers Zara and H&M.

Myer's uncertain future

The AFR reported on Myer's share price rebound driven by the retailer's latest result and strategy reset. However, it remains near impossible to find an analyst with a positive view of the stock. One analyst group said that while Myer's latest results have met "muted expectations" and the revealed financing package provides the business with a stable funding platform. But, they added "we've heard the exclusive brand strategy before; products have not resonated sufficiently with customers in previous attempts. The product doesn't seem any more compelling now."

Shaver Shop expands private label range

The AFR reported that the Shaver Shop is stepping up a push into private label products to try and lift profit margins and attract more female customers. The retailer, which has 115 bricks and mortar outlets, is preparing to introduce a new range of hair dryers, hair straighteners and curlers under the new Flair brand it has set up, mirroring a strategy by big supermarket chains Woolworths and Coles. The goal is to increase private label sales from 2% of total sales to 5-10% to try to drive its share price up from 43c back towards the issue price of $1.05 in 2016. This sounds like a solid strategy for the business, as long as it keeps in mind the rule of thumb that once private label sales increase beyond 30% you can lose the support of your other suppliers.

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.