Why the future of retail is about being small and Australian

I’m not a tall man, and I’ve called Australia home for almost 20 years. Over the past three weeks I’ve had the opportunity to talk first hand with three tall investment analysts on the medium term future of Australian retail. Two are Australian based and one is New York based. They have a fairly consistent view of “what” is likely to play out in our Australian Stock Exchange-listed major retailers. Where they differ is the “depth and speed” of the decline.

Firstly what do investment analysts do? These three work in the public equities arm of major investment banks or hedge funds — the big investors in stockmarkets investing their own and their clients’ money in publicly traded shares, or ‘stocks’ to use the American term. They advise their own company’s clients and sometimes release their reports to the wider investment community (that’s mum and dad investors via their super funds or own share portfolios).

Importantly, they don’t only advise us what to buy, hold or sell. They also take “short” positions on companies they think are about to decline. They do this to make money from falling share prices based on the declining performance of those companies. Don’t ask me to explain how — I’m just a humble buy, hold, sell investor. But I do have shares in most of our major retailers, so these investment analysts’ views matter to me.

So what’s the story, and what does it matter to readers of SmartCompany? Three reasons:

  1. Most readers are small to medium business owners. Many are local suppliers to our largest retailers, including: Woolworths, Coles, Big W, Kmart, Target, JB Hi-Fi and Harvey Norman. Add in the Super Retail Group, Aldi and Costco and we’ve got a lazy $100 billion of annual sales out of the door and $70 billion into those stores from suppliers of products and services. That’s what referred to as a “meaningful” number in any economy. In ours, it’s huge!
  2. Many business owners manage their own SMSFs with many of these ASX companies in their retirement portfolio. The share price and dividend stream features in their future post work income. I have to declare that I own shares in Wesfarmers and Woolworths.
  3. There is a large amount of change coming that readers, as both suppliers and investors, need to be prepared for.

So back to the analysts’ views. Points one and two are common on both sides of the Pacific. Point three is the kicker.

  1. The continuing growth of Costco and Aldi (now a combined $9 billion in annual sales), plus the arrival of Amazon with conservative revenue estimates of $4 billion by 2020, will force our major retailers to invest in wider retail technology and online capability, cut internal costs, and directly import and partner with local and international product and service suppliers. That’s without German grocery brands Lidl or Kaufland entering our market, or Alibaba taking another $2 billion by 2020.
  2. As the result of this need for increased investment in technology capability at a time of lower volume and lower margin sales, our major Australian retailers’ profitably and share price will be negatively impacted over that three year period.

And point three?

Well over in the US, Amazon has been taking sales growth and margin away from Walmart, Kroger, Sears, Macy’s, JC Penney, Target and Kmart for a decade. They were part of reason that Circuit City died, and that Best Buy’s growth has been crimped. And Amazon’s rise has accelerated over the past six months in the US, forcing Macy’s and JC Penney to close more than 200 large format discount department stores in the past 90 days, and Walmart to invest $4 billion in building additional online capacity to compete with Amazon.

So with the experience of watching Amazon slowly eat the mainstream US retailers’ revenue growth and margins, the US analysts believe all our little Australian retailers will succumb more quickly. They don’t want to buy, sell or hold our retailers — they want to “short” them.

So what does that mean to suppliers and investors in Australian retailers?

Well I can’t give you advice on your share portfolio as an investor, but I can advise you as the owner of a business supplying retailers to do the following:

  1. Work as closely as you can with your traditional Australian retailers to deliver innovative new products or re-invent the products you have. The buying office needs your help;
  2. Focus all you product development and communication on millennial shoppers;
  3. Invest in your own technology and partnerships, including with Amazon, eBay and Alibaba, to go direct to shoppers; and
  4. Partner with and sell to every retailer who is selling your type of product in Australia. As the pie grows with new entrants you need to find ways to grow with them.

I finished a presentation to a group of local and international suppliers to Australian retailers at the Macquarie Graduate School of Management this week with the phrase: “There’s never been a tougher time to be a major international supplier to retail. And there’s never been a better time to be a small to medium sized, Australian-owned supplier to retail”.

It’s true. The opportunities are real. Our ability and energy to innovate, invest, take risks and capitalise upon this opportunity is our only self-imposed barrier.

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5 years ago

In theory partnering with Australian retailers sounds great, but when you consider that they discount your product, ask for rebates and contributions to markdowns, send back to you anything they have not sold, and generally treat even premium brands like dirt, all it does is erodes brand value. Direct distribution (ecommerce) combined with an Amazon marketplace shopfront (where you control your prices and positioning) is a much better alternative, thanks very much. Australian retailers have left their run a little late and most still don’t get it…many are doomed to extinction, and deservedly so.

5 years ago

Retail ASX shorts have actually been declining over the last year, although WES and WOW are high by historic measures, and I agree that MYR & MTS high by any measure. Some degree of shorting is always to be expected as it forms a part of any competent hedge fund manager’s strategy.

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