Regular research papers and articles
providing sector specific insights and
issues analysis – Retail sector.
April edition 2008 – Retail
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
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 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.
Retail spending seems to have peaked.
There has been a decline in the trend
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
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
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
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 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
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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