Cotton On’s big move?

It’s unlikely 2012 will be remembered fondly by retailers. Collapses, confidence-sapping problems overseas and the unrelenting march of online players from abroad have all conspired to dampen sales and crimp margins.

Will Christmas ease the pain? The best most retailers can hope for is that the festive season acts as a soothing balm, because there is little chance that it will cure their ills.

Indeed, we may well see more bad news before the calendar turns to 2013. The collapse on Friday of two wholesale gift firms – who appear to have been caught with too much stock after Christmas orders were worse than expected – does not bode well.

There’s also bad news at the big end of the retail market, with a report in The Australian Financial Review suggesting that Speciality Fashion Group has decided to ditch its lingerie chain La Senza, which is not performing as hoped.

SFG, which also operates chains including women’s fashion brands Millers and Katie’s, brought La Senza to Australia in 2010. The brand, which was started in Canada, was trumped by SFG management as an exciting growth opportunity and a chance to break into a $2 billion market.

It hasn’t worked out like that. Perhaps SFG thought that following the trend of bringing international brands to the market would give it a good chance of success. Instead, the episode suggests that you’ve got to bring the right brands to Australia – preferably one that has at least a bit of brand recognition before you arrive.

The decision to dump La Senza also reminds us of a lesson learnt by Jan Cameron in the collapse of Retail Adventures – carrying underperforming chains or even stores is just not an option in this market.

As the AFR report points out, SFG’s struggles could make it vulnerable to some sort of approach from another retailer, with the most likely candidate sitting on its share registry with a stake of more than 20% – privately-held retailer Cotton On.

In a world of retail pain, Cotton On appears to have held up extremely well (I say “appears to” because Cotton On’s chief Nigel Austin is fiercely private and few financial details are available) in the last 12 months.

In October, the group – which includes the chains Cotton On, Cotton On Kids, Cotton On Body, Typo, Factorie, T-Bar and Rubi Shoes – celebrated the opening of its 1000th store in a retail empire that takes in Australia, New Zealand and 10 other countries including Singapore, Hong Kong, Germany, South Africa and the United States.

Last month, Victorian Premier Ted Baillieu announced that Cotton On would build a $500 million distribution and warehousing centre in its home base, the regional Victorian city of Geelong.

Both moves suggest that Cotton On’s focus is very much on growth – a rarity in a sector where protecting your market share and holding on for grim life is the order of the day.

Buying the 80% of SFG that Cotton On does not already own would cost around $100 million, including a small takeover premium. That’s no small bite, but Austin could be keen to get his hands on chains such as Millers and Katie’s and diversify his youth-focused portfolio.

Just don’t expect Austin to merge the two businesses into an ASX vehicle. Based on his track record, Cotton on will remain a very private business.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.