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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.

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.