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Rebalancing physical stores and e-commerce

Bloomberg View published an interesting article pointing out that brick-and-mortar retailers may be gaining an advantage over e-commerce players, as retail rents dip and online advertising and shipping rates rise, quite substantially. Facebook's ad rates soared last year, and higher shipping costs lead Amazon to raise its Prime membership fee.

Could Walmart buy Coles?

The Australians Financial Review posed an interesting question, whether Walmart will use the proceeds from the Asda sales to Sainsburys to acquire the demerged Coles supermarkets.  Apparently, some analysts have suggested that this as a possibility.  We don’t think so, for three reasons: 60% of the sale price will be covered by Sainsburys’ stock, Coles Supermarkets are too similar to Asda, and Walmart have their own impressive store format anyway – why not use it and grab a part of the market, without spending billions on an acquisition?

The other side of static interest rates

The Reserve Bank of Australia has left interest rates unchanged at 1.5%.  Most commentators viewed it as a positive sign and attributed it to a relatively steady economic environment – in terms of unemployment, inflation, and moderate housing market activity.  We see it a bit differently: low interest rates also reflect the general lack of positive economic expectations about the medium to long-term future.  Businesses are reluctant to borrow, because they don’t see opportunites for solid returns.  Every coin has two sides…

Walmart sells Asda to Sainsbury in the UK

Walmart has announced the details of the deal which will create Britain’s largest grocer with revenue of around $70 billion.  Walmart will sell Asda to Sainsbury for $10 billion, of which close to 60% will be paid in stock, making Walmart a major shareholder in Sainsbury.  The newly merged business will surpass Tesco as the largest grocery chain in the UK, as Tesco turns over around $50 billion.  The Australian Financial Review commented that Sainsbury will gain more clout with suppliers, which is true, but to make matters substantially worse for some of the suppliers, Sainsbury will now go to every supplier that ever gave better deals to Asda and will apply pressure to reclaim the differential.

'Buy Local' an unrealised ideal

The Wall Street Journal pointed out an interesting trend in international shipping.  Refrigerated containers currently make up about 7% of total container volumes and the demand has been growing in excess of 5% per annum over the last five years, well ahead of shipping in general (around 2%).  Fresh produce, orange juice, pharmaceuticals and confectionery shipments are on the rise due to the growing affluence of the global population, especially in Asia.  The ‘Buy Local’ slogan doesn’t seem to be working that well.

The UK grocery wars

Reuters reported that Sainsbury and Walmart, the world’s largest retailer, were in advanced discussions regarding a combination of Sainsbury’s and Asda, the UK’s No. 2 and 3 UK grocers. Asda is owned by Walmart.  Tesco occupies the number one position in the UK market.  Britain’s big grocers, including No. 4 player Morrisons, have been losing share to German discounters Aldi and Lidl, reminiscent of the Australian grocery market shifts.  The structure of the deal remains a mystery, but it looks like a new holding company will be created, partially owned by Walmart.

GNC store closures in 2018

According to CNBC, GNC (vitamins/supplements chain) intends to close 200 stores in 2018.  GNC operates more than 8,000 locations globally, about 3,300 of which are corporately held. The business is not doing that well, but it remains profitable, with the first quarter of fiscal 2018 delivering net income of $6.2 million, or 7 cents per share, compared with $24.7 million, or 36 cents a share, a year ago. The company is negotiating an external investment and wants to improve its lease terms. In our assessment, the formula of GNC is a bit too clinical and rigid, making it difficult for international franchisees to adjust to local market requirements.

Coles uninspiring results

Inside Retail reported that Coles’ top line revenue grew by 0.3% to $9.04 billion for the three months ending 31 March.  Coles’ managing director commented that both comparable sales and sales per square metre were on an improving trend.  Given its destruction of branded groceries and attempts to compete with ALDI on price, our view is that these results need to be viewed quite soberly - Coles will likely struggle to maintain any revenue growth in the long-term without serious structural changes. 

How smart retailers are redefining the c-store

The Wall Street Journal reported that some US convenience store operators are redefining the retail niche by combining c-store staples with fresh food options. Stores such as Denver's Choice Market and Chicago's Foxtrot are catering to growing consumer demand for fast-casual quality in a grab-and-go setting.  Apparently, they generate 8% of sales from fresh produce.  This is possibly something Coles should look at, given that their convenience segment has declined by 8% during the last quarter.

Steinhoff problems escalate

Reuters reported from Johannesburg that businessman Christo Wiese hit Steinhoff with a $5 billion lawsuit, sending shares of the South African multinational down 17%.  Wiese was chairman and the biggest shareholder until December last year. The claim related to the 2016 capital injection by Wiese to help Steinhoff pay its debt and fund the acquisition of the US company Mattress Firm.

Chinese to gain control over UK House of Fraser

The London Telegraph reported that the Hong Kong-based parent of UK toy retailer Hamleys (C.banner International), has signed a memorandum of understanding to acquire a 51% share in House of Fraser. The deal is with China's Nanjing Xinjiekou Department Store, which owns an 89% interest in the UK department store.

Gap betting on Old Navy

CNBC reported that the discounted apparel brand will add 60 more stores across North America this year, pushing its total to more than 1,000 Old Navy locations in the US by the summer. Gap, which also owns the flagship Gap banner, Banana Republic and Athleta, currently operates more than 3,500 stores globally.  Gap is meanwhile trimming back its fleet of Gap and Banana Republic stores, which haven't performed as well as Old Navy and Athleta of late. This demonstrates that a brick and mortar fleet can be profitable, but its offer and brand mix must be morphed in line with evolving markets.