03/04/2017 - 15:07

Myer move a portent of retail change

03/04/2017 - 15:07


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You don’t have to be a retailing expert to sense the sea change under way in shopping, but what you might not appreciate is that the first shots have been fired in what could become one of the great Australian retail mergers, with Myer and David Jones becoming one business.

Myer’s share price lifted 15 per cent after Solomon Lew’s buying spree last week.

You don’t have to be a retailing expert to sense the sea change under way in shopping, but what you might not appreciate is that the first shots have been fired in what could become one of the great Australian retail mergers, with Myer and David Jones becoming one business.

Getting to the point of merging the top two department stores in Australia will be complex, but a number of recent developments point in that direction – one that happened on the stock market and another expected soon in the world of internet shopping.

The first shot last week was a $100 million investment in Myer by Solomon Lew, a man who has forgotten more about retailing than most people will ever know.

For his money, Mr Lew got a 10 per cent stake in Melbourne-based Myer, effectively buying a seat at the table should someone else be interested in the department store, because a 10 per cent holding provides sufficient voting rights to block a full takeover, or force a bidder to pay more.

Interestingly, Mr Lew got his stake in Myer at what already looks like a bargain-basement price, because Myer had been under attack from short-sellers convinced that the business will be a victim of increasingly competitive internet retailers. As soon as his buying was revealed, Myer’s share price rose by 15 per cent (from $1.07 to $1.24).

Mr Lew’s rival in the emerging Myer situation is South Africa’s Woolworths (no relation to Australia’s Woolworths) – an arch rival that previously beat him in a historic battle for the Country Road business before it also bought David Jones.

But there’s much more to what’s happening in the revival of Mr Lew’s rivalry with South Africa’s Woolworths and its pursuit of Country Road and David Jones of more than a decade ago.

Amazon is the added ingredient in this latest game of Australian retail dominance, with its imminent entry as a full-scale competitor in the local internet shopping space likely to be acting as a catalyst to the mergers of long-term rivals.

If, as is expected, Amazon launches a full Australian offering of its internet retailing services, it could quickly capture a significant share of electrical and sporting goods, clothing, children’s toys, and other categories not currently available from its website, which specialises in books and movies.

Analysts at investment bank Macquarie estimate that Amazon could create a business with $14.5 billion in revenue over the next eight years, capturing 25 per cent of all Australian on-line sales and effectively replicating what has been achieved in the US and Britain.

Amazon’s share of the market will have to come from the existing retail sector and not solely from Myer and David Jones. The more likely victims of Amazon’s full-scale entry will be second and third-tier retailers, which face an uncertain future.

But the Amazon effect will be felt all the way to top of the retailing tree, with an obvious defence against the US invader being the consolidation of existing players. Mergers will help cut costs by pooling resources, while also reducing bricks and mortar stores from two to one.

A number of Perth’s big suburban shopping centres currently have both David Jones and Myer stores, a situation likely to change as Amazon catches sales and as investors demand a cost-cutting response to falling market share.

There is a long way to go before any dramatic fallout from a merger of Myer and David Jones becomes apparent, but the seeds of a deal are being sown now on three levels.

• Mr Lew buying his seat at the Myer table in preparation to counter a possible move by SA Woolworths.

• The launch of a full-scale Amazon offering to Australian shoppers.

• Concern about a collapse of the once-mighty Sears retail empire in the US, which has become a victim of an increasingly competitive retail sector caused largely by Amazon.

For anyone who has ever shopped in the US, the death of Sears is almost in the unimaginable category, such is its status as a star of US retailing.

But, last week, Sears said in its annual report that were are “substantial doubt exists related to the company’s ability to continue as a going concern”, which is accounting language for the directors being worried about meeting financial obligations over the next 12 months.

That statement sent shockwaves through US business, though it should not really have been a surprise because Sears hasn’t made a profit for seven years.

Knock-on effects of the crisis at Sears could be profound and serve as a warning for Australian investors about the effect of shifting retail sales from shops to online, a trend that also has an effect on shop owners.

In the US, the company that owns most Sears shops, Seritage Growth Properties, has come under a sustained short-selling attack, with investors selling because of concern the owner of retail property would be badly hurt should the Sears business collapse.

Locally, it would be wise to remember that what happens in the US has a habit of washing up here a year or so later.


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