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Costco’s wage decision

Various media reported Costco’s intention to increase wages for its 130,000 US staff, with a new US$14.00 per hour minimum.  This will still be less than the recently increased minimum wage in Australia. Unlike Australian retailers, Costco can afford the increase for two reasons: a generally low-cost (i.e. well run) business, and the recent corporate tax reductions in the US.  Furthermore, Costco’s decision has been driven by commercial reality rather than a ‘needs-based’ approach to the economy. With the US unemployment rate at 3.8%, employers must compete strongly to attract and retain talent. More proof that in a successful economy, workers are well protected by the demand for their services – without tons of regulations and government interference.

Australia ‘leads’ the world

The ‘Fair’ Work Commission announced that by mere virtue of being employed, 2.3 million Australians will be paid $1,263 extra each year. With the new minimum hourly rate of $18.93, Australia has the MOST expensive labour on the planet and we certainly don’t have the levels of productivity to warrant this. Retailers will be hit hard by this extra cost, which will push some of them across the threshold of viability.  Just for comparison, the hourly minimum wages in Germany are $13.40, $11.35 in Canada and $9.75 in the US. Australians should be concerned about living beyond our means – in the longer term, this never ends well.

Who said that brick & mortar retail is in trouble?

The AFR published an article about Australian retailer Mecca Brands. The business has been growing at a rate of about 45% (yes, correct, 45, not 4.5) a year between 2011 and 2016. Today it is estimated to be turning over around $500 million, within the $4 billion cosmetics market in Australia. So, when department stores complain about difficult market conditions and online competition to justify their declining sales, we just wanted to point out that Mecca operates within precisely the same market, under the same conditions. They do it exceptionally well, and that’s the difference.

Amazon tricks

The AFR commented extensively on Amazon’s decision to stop shipping to Australia. Apparently, social media has been fuming with complaints about Amazon and the Australian Government, for finally imposing GST on all imports. It looks to us like Amazon is trying to manipulate the Australian public, to force the Australian government to back down. We hope that the public will see it for what it is: a cynical attempt to retain a massive competitive advantage over Australian retailers, which don’t have the option to sell goods without GST. In the medium, to longer term, Australians will be better off, as more local retailers will be able to compete and avoid bankruptcy.

Sears decline

USA Today reported that Sears Holdings in the US, which owns Sears and Target, will be closing another 60+ stores.  The company has failed to generate profit since 2010, and it closed 580 locations the year prior.  Currently, it operates around 900 stores.  We don’t necessarily share the opinion that the problems at Sears have been caused by Amazon and Walmart.  In 2010, Amazon was only a fraction of what it is today, yet Sears were still running at a loss.  Walmart has been around for many years too.

GST tantrum: to block shipping to AU

The AFR reported that Amazon will block shipping from its international websites to Australians from 1 July, when the new rules applying 10% GST to all online purchases being shipped to Australia from overseas come into effect. Previously all online purchases under $1,000 from offshore retailers were exempt from GST. While Amazon's decision will no doubt cause short-term inconvenience for Australian consumers, in the medium to long-term both shoppers and retailers down under can only benefit from Amazon's decision and the level playing field the new GST rules creates.

Bunnings' UK soul search

The AFR published an article about Wesfarmers' ill-fated Bunnings UK Homebase venture. Apparently, Wesfarmers studied the UK market for two years and then as one of the first moves post-acquisition, sacked nearly 150 staff from the Homebase head office, losing local expertise.  This wouldn't have happened if Wesfarmers' decision makers took a few hours to study Warren Buffet.  The message from the master of big deals has always been clear: when you buy a business, it must come with an excellent management team. If you think that the team is lacking, don't buy the business.


The Wall Street Journal commented on Italy's political crisis, which is reigniting the debate over Europe’s future, including the question whether the Eurozone’s third-largest economy should remain in the currency union.  According to WSJ, Italy is burdened by US$2.7 trillion in debt and a perennially sick economy.  The Italian parties likely to form the government want to spend more, making things worse.  We commented before that a monetary union without a financial union must fail, sooner or later.  By introducing a shared currency, the membership countries lost their ability to make their citizens pay for government economic mismanagement through high inflation. No wonder some politicians are so keen to bring back the Lira and ‘solve’ the problem.

Digital Path to Purchase can start online

CNBC published an article about eight pure-play online retailers expanding into the brick and mortar space.  The list included brands such as Untuckit (planning 50 stores by the end of 2018), Adore Me (planning to open 300 stores) and Thredup (planning 100 stores).  The article also mentioned Suit Supply, which started expansion into the store space seven years ago and now runs about 100 stores globally.  More stores are planned.  We keep appealing to brick and mortar retailers who expanded into the online space to regroup and put in place a homogenous digital model aimed at selling, not just online selling.  Without a doubt, the brands mentioned by CNBC are moving into the physical (over the counter) retailing with the Digital Path to Purchase paradigm already in place.

Drakes will leave Metcash

The AFR published more information about Drakes supermarkets walking away from Metcash.  Drakes plan to set up their own distribution centre in South Australia and switch away from Metcash in mid-2019.  Metcash downplayed the possibility of other large independent chains leaving, but we wonder whether Drakes will try to make their independent supply chain more viable by offering to act as a wholesaler for smaller independents?  This would hurt Metcash even more.  Drakes operates 50 supermarkets and turn over around $1 billion per annum.  We have repetitively expressed concerns about the future of independent supermarkets operating under the IGA banner, due to increasing pressure from Aldi, Costco and soon Kaufland / Lidl.

Metcash and Drakes at odds

In our assessment, Metcash never liked large independent chains, due to the strength of their negotiating power.  In a recent example, Inside Retail reported that Drakes (who operate 50 supermarkets in SA and QLD) decided against using Metcash’s new DC in South Australia.  This could simply be negotiating tactics, as Drakes will struggle to find an alternative wholesale supplier.  But with 50 stores, Drakes may be able to create a viable alternative supply chain.  It is worth watching, as there are a few more large groups in the Metcash stable who could follow Drakes.Drakes buy about $270 million annually from Metcash, still a sizeable volume, which would have to flow directly to stores or through Drakes's warehouses.

Flipkart's returns under the spotlight

The India Times published an article about Indian online retailer Flipkart (recently bought by Walmart) and its problems with high returns.  The author commented that in India return rates are ‘high’ i.e. around 30%.  In our view, such figure is mostly irrelevant from the statistical perspective, as the key factor in the online returns rate is the type of merchandise.  Flipkart thinks that the returns are the fault of its suppliers, so it will start auditing them, to “reduce returns by 10-15% in the next 12 months”.  Our learnings from Total Quality Management tell us that such arbitrary targets make little sense.  Flipkart would be better off analysing return rates by category and then consider eliminating some of the categories from its range.  Some products were never meant to be sold online.