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Discount variety pain

According to the NRF, Poundworld in the UK intends to close 117 of its 355 stores as a part of its company voluntary arrangement (CVA).  The stores will close by August 31 this year and rent reductions will be sought for the remaining 231 locations.  However, rental costs seem to be just one of Poundworld’s woes.  It lost its credit insurance and suppliers started to demand payments immediately. Then, they complained about the Brexit-hit sterling, stock availability issues during Christmas, rising overheads including business rates and wages, as well as falling consumer spend.  If all these are real, then the business is most likely broken beyond repair.  We often wonder about the challenges faced by large discount variety retailers, who rely heavily on opportunistic purchases.  What if sometimes there is simply not enough such stock around?

Bunnings exits UK

Inside Retail reported that Wesfarmers found a buyer (Hilco Capital) for their Bunnings UK business. Bunnings will lose between A$350 and A$400 million in the process.  A few years down the track, we are still trying to figure out why Bunnings bought the UK Homebase business in the first place.

Tesco closes its online Tesco Direct business, but Amazon carries on

According to Reuters, Tesco, Britain’s biggest retailer, said that it will close its non-food website Tesco Direct in July, having decided it could not make the loss-making business profitable.  Clearly, Amazon doesn't subscribe to such a business model and continues to run its main operations at loss, to the detriment of normal retailers.  We have complained in the past about the US market anomaly, where businesses can run at loss, funding their loses from stock market capital.  Not sustainable in a long run, but in the meantime, it destroys genuine competition.

Counterintuitive strategy at Coles

The AFR reported that Coles intents to spend more on CAPEX in the next few years than it has previously.  Given that a part of Coles’ inability to compete with Aldi, Costco (and soon Kaufland/Lidl) stems from their sunk costs and high past capital expenditure, this won’t help. As a part of their post-demerger strategy, Coles also intends to spend more money on Flybuys. We are yet to see any evidence that the loyalty program has produced any added customer ‘loyalty’.  BTW: Aldi doesn’t have any loyalty programs and each location it opens takes customers away from Coles.  An interesting figure was revealed that Coles’ service level is 91.5% which is a bad news, meaning a lot of lost sales.  At the same time, a statement that they would like this figure to be “closer to 100%” is worrying.  Businesses such as Coles should have precise clarity about their required service levels, which need to differ by category too.  Finally, the outgoing CEO commented about “promotional madness”.  Promotions are a core element of the supermarket game.  The reason Coles lost control in this area seems to come from the decision to use promotions to drive sales.  Promotions in supermarkets must be used to generate a steady flow of customers, not to grab extra cash, with massive gross profit consequences and damage to the brand.

Target’s race to the bottom continues in the US

Bloomberg reported that shares in Target US dropped by nearly 6% after the retailer announced that sales increased (3.7%) but declined in profitability (10% drop). The reason for the profit decline: Target's drive to expand their online business – they recently slashed their next day delivery fees by half, to compete with Amazon – a near impossible task as Amazon has managed to avoid being measured by profitability. Target also expanded promotional activities, eroding their gross margins. As a consequence, Target’s EBIT has dropped from 7.1% (pretty weak anyway) to 6.2%. Our view remains unchanged: good business needs to deliver steady EBIT around 10%. In its current state, Target seems unlikely to get there any time soon.

How to grow your business by being harsh with your customers

The Wall Street Journal reported that Amazon doesn’t shy away from punishing its customers.  Apparently, dozens of people have complained on Twitter, Facebook and other online forums that the e-commerce giant closed their accounts without warning or explanation. The WSJ quoted a former policy-enforcement investigator at the company, who said that this tends to happen when “you’re creating a lot of headaches for Amazon”.  How is this related to exceptional customer service? We hear so much about the importance of customer experience from the media and industry experts, as being the key to retail success. Yet, despite defying "convention", Amazon keeps growing.

The great grocery dance

The AFR reported that Woolworths supermarkets intend to reduce their price discounting and instead focus on convenience.  The overall range will increase by 30%, but this won’t be visible in the stores. Instead, the stores will now have locally-tuned ranges.  Woolworths also stated they will work on ‘reducing friction at transaction points’, by e.g. introducing voice ordering.  In our assessment, Woolworths had no choice but to stop discounting, because their cost base is too high and the business cannot sustain low prices.  The range increase may boost sales, but it will definitely also increase logistics costs.  In terms of the ‘friction reducing’ initiatives, we would suggest replacing them with continuing study of Aldi and adoption of at least some parts of Aldi’s culture and operating principles.  The future in the supermarkets space belongs to retailers who have low operating costs, so they can withstand occasional headwinds and react with agility to ongoing changes in the marketplace.

Marks & Spencer store closures

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

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

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.

Online causing cracks in US logistics

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

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.