Apparel Retail Industry Research Papers

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issues analysis – Retail sector.
April edition 2008 – Retail




Industry
Intelligence Unit
                              Welcome to our sixth Retail                •	 All	states	and	territories	except	
                                                                            Victoria (-1.6%) and Western
                              IIU. In this edition we focus                 Australia	(-0.6%)	had	increases	in	
                              on one of the most sensitive                  the	seasonally	adjusted	estimate.	
                              sub-sectors of retail, being                  The largest increases occurred in the
                                                                            Northern	Territory,	the	Australian	
                              the “rag trade” which has                     Capital Territory (both +1.2%) and
                              experienced a weak growth                     Queensland (+0.9%).
                              trend in the last six months.              •	 There	has	now	been	a	weak	trend	in	
                                                                            growth for three months. Household
                              We start however, with a
                                                                            goods retailing has experienced a
                              broader industry snapshot.                    decline in the trend estimate for
                                                                            two months. Food retailing (four
                              Retail Industry Snapshot                      months), clothing and soft good
                              •	 Seasonally	adjusted	turnover	              retailing (six months) and hospitality
                                 decreased by 0.1% in February 2008.        and services (three months) have all
                                 This follows a revised decrease of         had weak growth, while recreational
                                 0.1% in January 2008 and a revised         good retailing (nine months) and
                                 increase of 0.3% in December 2007.         other retailing (eight months) have
                                 This decline in February was in            had strong growth.
                                 stark contrast to market expectations
                                 of a rise of 0.3% which failed to
                                 materialise.
                                                                                                                                             State Analysis
                                                                                                                                             New South Wales
                                                                                                                                             There have been two months of weak
                                                                                                                                             trend growth. Food retailing has had a
                                                                                                                                             decline in the trend estimate for three
                                                                                                                                             months, while clothing and soft good
                                                                                                                                             retailing has declined for four months
                                                                                                                                             and recreational good retailing has
                                                                                                                                             declined for eight months.

                                                                                                                                             Victoria
                                                                                                                                             Victoria	had	enjoyed	moderate	
                                                                                                                                             growth over the four months prior
                                                                                                                                             to February 2008. However, it
                                                                                                                                             experienced weak growth in February
                                                                                                                                             2008, with food, recreational and
 •	 The	equity	markets	have	decimated	                                       – JB Hi-Fi announced a record                                   household goods all in decline.
    the share price of many companies                                           half-year profit of $41.9 million                            Department stores have had moderate
    in	2008.		Major	retailers,	even	the	                                        with sales up 50%. This stellar                              growth over the last nine months.
    well performing ones, have not gone                                         performance comes as JB Hi-Fi’s
    unscathed as fearful investors bail                                         share price has fallen to $9.00                              Queensland
    out of retail stocks in anticipation                                        (as	at	close	of	trade	on	14	April	                           Whilst retail turnover is still growing,
    of the impact of a general economic                                         2008), down from $16.25 on 30                                it is doing so at a significantly
    downturn.		Since	30	November	2007:                                          November 2007.                                               reduced rate which seems to suggest
                                                                             – David Jones’ share price has seen                             Queensland is now approaching a
                                                                                a 32% decrease.                                              peak	as	Western	Australia	had	done	so	
                                                                             – Noni B’s share price has seen a                               previously.			All	sub-sectors	have	had	
                                                                                38% decrease.                                                a decline in the trend estimate over the
                                                                             – Harvey Norman’s share price has                               last 4-8 months.
                                                                                seen a 45% decrease.
                                                                             –	 Strathfield’s	share	price	has	seen	a	                        South Australia
                                                                                15% decrease.                                                Still	going	strong.		There	have	been	
                                                                                                                                             seven months of strong trend growth.
                                                                                                                                             Hospitality and services has seen
 Monthly retail turnover, February 2007 - February 2008                                                                  Turnover ($m)
                                                                                                                                             strong growth over the last 13 months
 Source: Australian Bureau of Statistics                                                                                                     and department stores moderate
             25,000                                                                                                                          growth over the last five months.

                                                                                                                                             Western Australia
             20,000
                                                                                                                                             Retail spending seems to have peaked.
                                                                                                                                             There has been a decline in the trend
             15,000
$ Millions




                                                                                                                                             estimate for three months. Food
                                                                                                                                             retailing and clothing and soft goods
             10,000                                                                                                                          have seen a decline in the last two
                                                                                                                                             months. Household goods retailing
              5,000                                                                                                                          has been in decline for the last ten
                                                                                                                                             months.
                 0
                      Feb 07


                               Mar 07


                                        Apr 07


                                                 May 07


                                                          Jun 07


                                                                   Jul 07


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                                                                                     Sep 07


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                                                                                                       Nov 07


                                                                                                                Dec 07


                                                                                                                           Jan 08


                                                                                                                                    Feb 08




                                                                                                                                                                  Industry Intelligence Unit 2
IIU Retail April 2008



The	Analysis:	What	does	this	mean?




Until December 2007, the retail sector     The Governor of the Reserve Bank of                The credit crunch, at least in
was growing at a moderate pace for a       Australia,	Mr	Glenn	Stevens	recently	         Australia,	for	the	most	part	seems	
sustained period of time, buoyed by        stated, “our assessment is that a change in   confined to the financial services
the strong resource rich economies of      trend is occurring and we are hearing that    industry, for now. However, there will
Queensland	and	Western	Australia.	         from businesses we talk to…”.                 inevitably be a knock-on effect to the
    Since	then,	it	appears	that	retail	        Grant Thornton is counselling clients     broader economy in coming months
spending has paused to catch its           to ensure they are prepared for any           as we have already started to witness in
breath with two consecutive months         downturn in business and implement all        the	US	economy.		Combined	with	the	
of declining growth in January and         necessary measures to control costs and       fact that we have experienced several
February 2008. The debate continues as     ensure they have sufficient headroom          interest	rate	rises	in	quick	succession	and	
to whether this is a momentary lapse or    in their banking facilities to negotiate      with no abatement to rising fuel prices,
an inflexion point driven by a change in   through any troubled waters ahead.            these factors will all likely culminate in
consumer behaviour with much worse                                                       a sustained adverse impact on consumer
yet to come.                                                                             spending in the short to medium term.
                                                                                         With the peak cash / profit generation
                                                                                         season (ie Christmas) for most retailers
                                                                                         still a long way away, it will take some
                                                                                         careful planning and foresight from all
                                                                                         retailers to ensure they are not caught
                                                                                         off-guard and are able to achieve their
                                                                                         targets and goals over these challenging
                                                                                         times.




                                                                                                                 Industry Intelligence Unit 3
IIU Retail April 2008



The “Rag Trade”




Overview                                     The Challenges                                 Many of the challenges and opportunities
In this issue, with the assistance of our    Apparel	is	one	of	the	more	challenging	        currently facing the industry emanate
resident expert, Gareth Jude, a retail       areas of retail and the degree of difficulty   from China. The dominance of low cost
industry veteran who has held senior         increases the more fashion orientated a        manufacturing	in	Asia	and	particularly	
management positions (including CEO)         retailer is. The core of the difficulty lies   China has led to a sharp decline in the
with a number of high-profile retailers,     in:                                            local manufacturing sector. While the
we explore the key challenges, responses     •	 the	highly	speculative	nature	of	the	       availability	of	low	cost	stock	from	Asia	
and takeaways for lending to the rag             industry; combined with                    has brought benefits to consumers it
trade.                                       •	 short,	seasonally	driven	product	life	      has put pressure on retail price points
    The	“Rag	Trade”	is	the	colloquial	           cycles; and                                from top to bottom and created new
name for the clothing/apparel/fashion        •	 vulnerability	to	discretionary	             challenges in inventory management
industry and is one of the biggest sectors       spending trends.                           especially in the fashion orientated end of
of the retail industry with combined                                                        the market. The lure of high margins has
turnover of clothing retailers estimated         Each season stock is manufactured          also enticed some premium fashion labels
at around $15 billion per annum. The         in a range of styles, sizes and colours in     to	experiment	with	Asian	production.		In	
clothing and soft goods retail sector as     advance of knowing what consumers              this sector the main challenge has been
measured	by	ABS	grew	by	7%	during	           will be inclined to buy. By the end of         assuring	the	quality	of	garments	despite	
2007 but has since seen a weakening.         the season most of the stock must be           the great distance and cultural differences
    This sub-sector of the retail industry   sold through to make way for next              between	the	Australian	retail	outlet	and	
has and continues to be an extremely         season’s	styles.	Success	or	failure	is	        the Chinese factory.
competitive market with participants         determined by the skill of the buyer in            Premium fashion retailers are also
ranging from large multi-national chains     being able to pick the trends and buy          facing the challenge of piracy. Like some
through to independent single stores.        appropriate	quantities.	This	means	that	       of the other challenges in the industry,
    Over the years we have seen              apparel retailers are excessively reliant      piracy	emanates	mainly	from	Asia	
participants in this sector flourish (Just   on individuals for their success. When         and particularly from China. Easier
Group)	and	flounder	(eg.	Harris	Scarfe)	     key individuals, often the owner, lose         distribution through the internet is
and in some cases both flourish and          enthusiasm or their “touch”, an apparel        making policing this sector more and
flounder	(eg.	Sportsgirl).	                  retailer can be plunged into crisis.           more difficult.
                                                 There is a large degree of vertical
                                             integration in the channel. Most larger
                                             retailers do at least some of their own
                                             manufacturing.	Some	apparel	retailers	
                                             run their own stores as well as distribute
                                             their product in to other chains e.g.
                                             Country	Road,	Sportscraft.	




                                                                                                                   Industry Intelligence Unit 4
The Response                                   Lending or investing in an
QR (Quick Response) is a method of             apparel retailer
inventory management developed in the          Some	key	questions	one	should	consider	
fashion industry. The development of           prior to investing or lending to an apparel
QR methodology has been facilitated by         retailer	include:	
modern	POS	systems	which	can	report	           •	 People	-	who	are	the	key	people	that	
on sales by size, style, colour, outlet etc.       the	business	relies	on	to	pick	trends?	
in real time if necessary. The principle of        Are	they	motivated	and	if	so,	how	
QR is to manufacture small runs of new             are they incentivised and are they “on
fashion lines for sale in company owned            their	game”?	If	not,	what	succession	
outlets, then base longer manufacturing            plans	are	in	place?		
                                               •	 Sales	systems	-	How	good	are	the	
runs on the early sales response. QR
                                                   IT	systems	at	reporting	sales?	As	a	
works well in markets where there is
                                                   minimum, management should be
a strong local manufacturing base that
                                                   able to see sales and margin by style,
can	“respond	quickly”	but	is	harder	to	
                                                   size and colour for each store on the
co-ordinate	in	markets	like	Australia	
                                                   next business day. More sophisticated
whose manufacturing sector is in decline.
                                                   retailers will be able to retrieve
Co-ordination of QR with Chinese
                                                   this information in real time. What        Conclusion
manufacturers is one of the main                   analytical tools are available to make     Over the past few years, retailers
challenges	facing	Australian	fashion	              sense	of	the	data?                         across the board have benefited from
retailers.                                     •	 Stock	systems	-	How	good	are	the	           a	buoyant	economy.		At	a	macro	level	
    To help manage the risk of piracy              IT	systems	at	reporting	on	stock?	As	      we are now starting to see the initial
involved in running an apparel retail              a minimum, management should be            signs of a contraction in retail spending.
business, a number of operators (Just              able to see stock on hand by style,        Consequently,	the	rag	trade	will	be	one	
Group,	Specialty	Fashion	Group,	                   size and colour for each store on the      of the first sub-sectors of retailing to be
Colorado Group, Pretty Girl etc,) manage           next business day as well as the details   impacted due to the discretionary nature
multiple brands. Managing a portfolio of           of stock on order and available OTB
                                                                                              of spending it so heavily relies upon.
brands not only spreads risk it also creates       (buying) funds. More sophisticated
                                                                                                  Retailers cannot afford to be ill-
scale in what is a small market. It also           systems will be integrated with those
                                                                                              prepared for the challenges ahead and
allows a business to maintain tight target         of their suppliers so that progress
                                                                                              will need to ensure that they not only
market positioning which is necessary for          of shipments can be tracked. What
                                                                                              have the appropriate systems in place
success with consumers.                            analytic tools are available to make
                                                                                              but also key people are locked in and
    However managing a brand portfolio             sense of the stock and supply chain
                                                   data?	What	programmes	are	in	place	        appropriately incentivised to act in
brings	other	challenges	with	it:		
                                                   to clear inventory at the end of each      alignment with the retailers goals.
•	 Firstly,	the	management	issues	
                                                   season?		                                      In our next edition of the Retail
    faced by every apparel retailer are
                                               •	 Brand	-	How	well	defined	is	the	            IIU, we will continue with this theme
    multiplied by the number of brands
                                                   brand	being	operated?	Generally	the	       and explore retail tactics to survive a
    in the group.
                                                   tighter the target market positioning      decline in discretionary spending by
•	 Secondly,	there	is	the	new	problem	of	
                                                   the greater are the prospects of           consumers. We will also examine how
    balancing the portfolio. This involves
                                                   success. What competition does the         retailers can manage their store brands
    making sure (in Boston Consulting
                                                   brand	have	in	its	chosen	market?	          in an environment where it is becoming
    Group terms) that there is an
                                                   How are they performing against            increasing difficult to stand out from the
    appropriate balance between, “stars,”
                                                   that	competition?	If	a	portfolio	of	       crowd.
    “cash	cows,”	and	“question	marks”	
                                                   brands is being managed are they
    and that the “dogs” are being dealt            complimentary	or	in	conflict?		Is	
    with. In a business where tight target         proper housekeeping being done on
    market positioning is vital, there is          the portfolio to ensure “dogs” are
    the additional problem of making               identified	and	dealt	with?				
    sure the brands do not collide and         •	 Suppliers	-	How	reliant	is	the	
    cannibalise each other’s sales.                business	on	Asian	supply?	Are	
                                                   the	Asian	suppliers	reliable?	What	
    The apparel sector has experienced             are	the	lead	times?	What	systems	
good growth over a number of years.                does the business have in place to
Declining consumer confidence and                  ensure	quality?	How	quickly	can	
tightened discretionary spending both              they respond if a style exceeds sales
point to a challenging 2008.                       expectations?



                                                                                                                      Industry Intelligence Unit 5
IIU Retail April 2008



Case	study:	
Specialty	Fashion	Group	(“SFG”)


It is useful to focus on the                •	 Sales	revenue	had	fallen	by	2%	on	a	    During	2005	and	2006	SFG	overhauled	
                                               like for like basis during the year;    their brand portfolio. They divested
case	study	of	the	Specialty	                •	 EBITDA	had	fallen	by	24%;               the Discount Variety group and re-
Fashion Group (originally                   •	 Stockturns	were	improving	but	they	                                             	
                                                                                       positioned	the	remaining	Apparel	brands.	
known as Millers Retail                        were still only around 4x;              In 2006, following customer research,
                                            •	 The	stockturn	improvement	had	been	     the name of “1626” was changed to
Limited) which successfully                    achieved by severely constraining       “Autograph”.	The	tight	positioning	of	
implemented turnaround                         buying practices across the             the brands within their target markets
strategies to return the                       organisation; and                       allowed each to flourish and provided
                                            •	 There	was	no	dividend	paid	to	          space for additional brands to be added
business to profitability.
                                               shareholders in 2005.                   to the portfolio. In 2007 “City Chic”
                                                                                       and “Queenspark” were added. The
The	Specialty	Fashion	Group	was	
                                                The board decided to conduct a         brands in the portfolio are now tightly
founded in 1993. By 2005 the group was
                                            strategic review. Two of the issues        positioned:	
operating a portfolio of seven brands
                                            identified by the review were the
comprising Miller’s Fashion Club, Katies,
                                            performance of the portfolio of brands     Millers Fashion Club
Crossroads, 1626, Go-Lo, Crazy Clark’s,
                                            and the management of stock. The board     Everyday fashion essentials targeted at the value
and Chickenfeed.
                                            and the management team set to work.       conscious mother and daughter.
     Whilst	SFG	was	generating	over	a	
                                                The brand portfolio was clearly        Crossroads
billion dollars in sales revenue through
                                            divided into two groups i.e. Discount      Fashionable casual and workwear targeted at the
over a thousand store fronts in 2005, all
                                            Variety (“Go-Lo”, “Crazy Clark’s” and      value conscious woman who is forever 30.
was not well…
                                            ”Chickenfeed”)	and	Apparel	(“Miller’s	     Katies
                                            Fashion Club”, ” Katies”, “Crossroads”     Relaxed, modern, classic, affordable fashion for
                                            and “1626”).                               the late 40 year old ageless woman.

                                                The	Apparel	group	was	smaller	in	      Autograph
                                            terms of sales revenue but was clearly     Plus sized fashion offering sizes 16 to 26, for
                                            outperforming the discount variety         a value conscious working woman or stay at
                                                                                       home mum aged between 30 and 50 wanting a
                                            group	on	other	measures.	Sales	in	the	     fashionable look.
                                            Apparel	group	were	showing	like	           City Chic
                                            for like increases whereas sales in the
                                                                                       Fashion forward plus size womenswear for the
                                            Discount Variety group were showing        18–30 year old. ‘Be bold, be sexy, be sassy, be
                                            decreases.		The	Apparel	group	generated	   chic.’
                                            only 40% of the group’s sales but it       Queenspark
                                            did so with approximately 30% of the       Fashionable casual and classic ranges to the
                                            inventory. Thus buying dollars were far    modern mid to upmarket consumer for both
                                                                                       women and men in the 30 – 45 age group.
                                            better	invested	with	Apparel	than	with	
                                            Discount Variety.




                                                                                                                  Industry Intelligence Unit 6
Funds released by the sale of the         •	 Sales	revenue	began	to	rise	on	a	like	    The acceptance by the Board that a
Discount Variety Group were used to          for like basis (12.5% in 2006);           strategic	review	was	required	to	re-
improve buying and stock management       •	 EBITDA	rose	from	4.5%	of	sales	in	        position the Group was crucial to
practices in a number of ways. More          2005 to 9% of sales in 2007;              its ongoing viability. By focussing
funds were available for the buying       •	 Furthermore	EBITDA	of	$35.9	              on realigning the brands (as well as
of new season ranges. This combined          million was reported for the six          divestments) and stock management, the
with tighter positioning of the brands       months ended 31 December 2007,            Board were able to return the Group to
to their target markets meant more           a 17.8% increase compared to the          profitability.
of	the	right	stock	was	bought.	At	the	       previous corresponding period.
same time an aggressive programme of      •	 It	is	estimated	gross	margins	rose	by	
clearing aged stock was introduced. To       approximately 10 percentage points
take advantage of growing opportunities      while inventory in absolute terms fell;
in China, investments were made in        •	 Stockturns	improved	to	around	7x,	
SFG’s	Shanghai	Buying	office.	These	         which	SFG	claims	is	among	the	best	
investments allowed the group to buy         in the industry;
a bigger proportion of their stock from   •	 RONA,	the	measure	of	return	on	net	
a	lower	cost	source.	At	home,	other	         assets, was under 70% in 2005 but
investments were made in IT systems to       had improved to over 240% by 2007;
aid stock control and forecasting.           and
    The net result of the strategic       •	 A	dividend	was	paid	to	shareholders	
review was a dramatic turnaround in          in 2007 - the first since 2004.
the productivity of the stock and the
performance of whole business.




                                                                                                            Industry Intelligence Unit 7
IIU Retail April 2008



Industry Intelligence Unit
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