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18
May-18
Friday

Technology is not enough

26
The AFR published an article about iRexchange, “the digital start-up threatening Metcash’s dominance of the $18 billion wholesale grocery market”.  iRexchange operates a supplier-retailer portal and two years ago claimed that it would be turning over $8 billion by 2018.  Predictably, this did not eventuate, because order taking and processing is only a minute part of what Metcash does.  The most important part in the iRexchange business model, the logistics, had to be handled by DHL and Emergent and we can’t see how distribution companies can compete with a specialist grocery wholesaler at their core game.  Also, the only way an independent grocer can have a meaningful relationship with a supplier is via volume.  So, groups such as Ritchies in Victoria or Drake in South Australia can source directly and they have the infrastructure to do so.  They don’t need a third party portal, so we think that iRexchange is overly optimistic thinking that they will still get to $8 billion in the future.
17
May-18
Thursday

The battle we cannot win

44
We have been pointing out that retail sales statistics compared to the month before makes no sense whatsoever. In retail, the only material measure is year-on-year corresponding period comparison. We can understand when the general media make such mistake, but we have been disappointed by our favourite Inside Retail magazine. It published an article titled “Troubling signs for retail in April” because April sales were 0.2% below March, but at the same time, it also stated that year-on-year growth was 9.3%. If this number is correct, we would suggest a better title: “Extraordinary retail growth in April”.

Walmart’s costly experiment

39
The Chicago Tribune reported that Walmart has ended its Mobile Scan & Go program, which it had running in around 150 locations. Mobile Scan & Go allowed shoppers to scan and pay using a handheld device or smartphone.  There are a few things we don’t get: why are such experiments run in 150 stores rather than one, and why didn't the people in charge see that asking customers to weigh and tag their purchases before scanning them was far-fetched. In our view, the fact that certain technologies exist doesn’t mean that they always make sense in a retail business.
16
May-18
Wednesday

US retail statistics

64
Reuters reported that in April US retail sales went up 4.7%, year on year.  And, they referred to this as a ‘moderate increase’. We remain puzzled why news agencies continue to misunderstand the industry and as a consequence completely misinterpret the figures.  At 4.7% growth, US retail is booming – big time. On a somewhat unrelated matter, but since Reuters mentioned it, the US petrol price in April was AUD1.02 per litre.  Makes you wonder where the 40 cents differential in Australia goes…
 

Mothercare UK woes

33
The Telegraph in the UK reported that the embattled, publicly listed Mothercare chain plans to accelerate store closures and will need a cash injection from its shareholders.  They are likely to enter into a Company Voluntary Arrangement, to gain flexibility in shutting down stores (from about 140 to 80-100) and renegotiating rents.  It looks like Australia is not the only market where this retail segment is under pressure.

Zara’s Australian numbers

35
The AFR reported that the Lew family has divested from Zara Australia. What we found even more interesting in the AFR’s article were the trading numbers released by Zara to ASIC. For the year ending in January 2018, Zara's sales went up to $282 million, i.e. about 10%, but mainly due to new store openings.  Pre-tax profit fell to $12.8 million, so even if the figure represents EBIT rather than EBITDA, at 4.5% this doesn’t qualify as a great outcome.  Apparently, gross profit hovers around 55%, which in our assessment is borderline for an apparel retailer.  One number that must be making other retailers envious is Zara’s per store turnover – close to $15 million.
15
May-18
Tuesday

Noni B expansion

48
More details have emerged about Noni B’s acquisition of the poorly performing brands within the Specialty Fashion Group's portfolio.  The acquired brands will need to be turned around fast, to avoid dragging the whole group’s EBIT below 2%.  Noni B management's Stock Exchange presentation mentions $30 million as the expected synergy from the deal, but we recall Warren Buffet saying that acquisition synergies are usually illusionary.
 
14
May-18
Monday

Supermarket pain update

42
Inside Retail reported that Aldi and Costco are driving down fruit and veg prices in Western Australia at a faster rate than anywhere else in the country.  According to research by Bankwest, Perth shoppers spent about 7% less on fruit and vegetables than the previous year.  Inside Retail commented that this signals a step up in competitive intensity among Australia’s major supermarkets.  We see it a bit differently: the game is one-sided, because for Aldi and Costco this is business as usual – their cost base is low.  They don’t compete – they just run their businesses.  It is the incumbents who feel competitively challenged, but mainly because of their inflated operating costs.  The arrival of operationally excellent competitors just exposed their inefficiencies, many of them deeply ingrained, and likely unfixable.

US economy doing well

36
Reuters reported that the US unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels for the same period.  One of the consequences is the growing demand for housing, in an already tight market, supported by the many millennials seeking to purchase their first home.  The only factor that could slow down this upward spiral are potential increases in US interest rates.  In the meantime, the US economy keeps booming, which continues to have a positive effect on other countries.

Specialty Fashion Group restructure

34
The AFR’s StreetTalk reported that Specialty Fashion Group has recommended a sale of its non-performing brands for about $31 million. The buyer will be Noni B, which intends to raise $40 million from investors to fund the deal. The profitable brand (City Chic) will remain within SFG. A Stock Exchange announcement is expected later today. A month earlier we reported that Anchorage Capital made a $100 million cash offer for the City Chic and Autograph brands, which gives a good measure of the relative value of the brands within the SFG portfolio.
11
May-18
Friday

Walmart now in India

41
Walmart's purchase of a 77% stake in the Indian online retailer Flipkart for US$16 billion has been confirmed. According to the NRF, Walmart’s longer-term intention is to publically list the business. While Walmart remains the giant of the retail world, its actions seem to be lacking strategic focus. Over the last 20 years, Walmart has chased foreign expansion, then started to divest from foreign markets (its exit from Asda is the latest such move) and now it has entered the online business in India. Along the way, in 2011 Walmart bought an online retailer in China but it struggles to compete against Alibaba. According to the AFR, Walmart’s US online business keeps losing money and with rising labour costs, these losses will get worse.  As a public company, Walmart is under pressure to meet market expectations – looks to us like this undermines the retailer's ability to adopt and execute a long-term strategy.

Intriguing alliance between Sears and Amazon

51
The Chicago Tribune published an interesting article about Sears agreeing to supply and install tires sold online by Amazon.  This tells us that Sears has failed to create a successful proprietary 'Digital Path to Purchase' and are now trying to piggyback on Amazon's online presence.  This will help, but it's akin to outsourcing your advertising and parts of your marketing department to a third party.