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15
May-18
Tuesday

Noni B expansion

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More details have emerged about Noni B’s acquisition of the poorly performing brands within the Specialty Fashion Group's portfolio.  The acquired brands will need to be turned around fast, to avoid dragging the whole group’s EBIT below 2%.  Noni B management's Stock Exchange presentation mentions $30 million as the expected synergy from the deal, but we recall Warren Buffet saying that acquisition synergies are usually illusionary.
 
14
May-18
Monday

Supermarket pain update

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Inside Retail reported that Aldi and Costco are driving down fruit and veg prices in Western Australia at a faster rate than anywhere else in the country.  According to research by Bankwest, Perth shoppers spent about 7% less on fruit and vegetables than the previous year.  Inside Retail commented that this signals a step up in competitive intensity among Australia’s major supermarkets.  We see it a bit differently: the game is one-sided, because for Aldi and Costco this is business as usual – their cost base is low.  They don’t compete – they just run their businesses.  It is the incumbents who feel competitively challenged, but mainly because of their inflated operating costs.  The arrival of operationally excellent competitors just exposed their inefficiencies, many of them deeply ingrained, and likely unfixable.

US economy doing well

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Reuters reported that the US unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels for the same period.  One of the consequences is the growing demand for housing, in an already tight market, supported by the many millennials seeking to purchase their first home.  The only factor that could slow down this upward spiral are potential increases in US interest rates.  In the meantime, the US economy keeps booming, which continues to have a positive effect on other countries.

Specialty Fashion Group restructure

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The AFR’s StreetTalk reported that Specialty Fashion Group has recommended a sale of its non-performing brands for about $31 million. The buyer will be Noni B, which intends to raise $40 million from investors to fund the deal. The profitable brand (City Chic) will remain within SFG. A Stock Exchange announcement is expected later today. A month earlier we reported that Anchorage Capital made a $100 million cash offer for the City Chic and Autograph brands, which gives a good measure of the relative value of the brands within the SFG portfolio.
11
May-18
Friday

Walmart now in India

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Walmart's purchase of a 77% stake in the Indian online retailer Flipkart for US$16 billion has been confirmed. According to the NRF, Walmart’s longer-term intention is to publically list the business. While Walmart remains the giant of the retail world, its actions seem to be lacking strategic focus. Over the last 20 years, Walmart has chased foreign expansion, then started to divest from foreign markets (its exit from Asda is the latest such move) and now it has entered the online business in India. Along the way, in 2011 Walmart bought an online retailer in China but it struggles to compete against Alibaba. According to the AFR, Walmart’s US online business keeps losing money and with rising labour costs, these losses will get worse.  As a public company, Walmart is under pressure to meet market expectations – looks to us like this undermines the retailer's ability to adopt and execute a long-term strategy.

Intriguing alliance between Sears and Amazon

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The Chicago Tribune published an interesting article about Sears agreeing to supply and install tires sold online by Amazon.  This tells us that Sears has failed to create a successful proprietary 'Digital Path to Purchase' and are now trying to piggyback on Amazon's online presence.  This will help, but it's akin to outsourcing your advertising and parts of your marketing department to a third party.

Musings on retail's environmental footprint

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The NRF has commented that the costs of goods are on the rise as shipping expenses increase.  The NRF’s comment made us reflect on occasional retail initiatives such as ethical sourcing, the abolition of shopping bags or plastic packaging, aimed at protecting the environment.  At the same time, the same retailers keep expanding their home deliveries (now between 5 and 15% of all sales, depending on the country), generating substantial additional traffic on the roads, with all the associated environmental damage.  Conveniently, no one talks about this.
10
May-18
Thursday

Uber will no longer "Rush"

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According to The Dallas Morning News, Uber announced that UberRush (created in 2014) will be shut down and will stop servicing Walmart.  According to Uber, the venture provided lots of lessons for its UberEats business.  This (we think) means that UberRush must have lost some serious money (i.e. it was one of those so-called “learning experiences”).  We keep repeating that delivered sales cost much more and are particularly un-economical in the grocery sector.  We see supermarkets as warehouses open to the public, where customers do their own picking, packing, and shipping.  When you take over these functions from your customers (and you need to in the online + delivery model) you erode your profits.  No wonder Aldi doesn't sell online in Australia.

Something must happen at Godfrey’s

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According to the AFR, sales over the last two weeks dropped by over 25%.  For a publicly listed company, this is certainly not good news.  Godfrey's new approach to marketing, introduced in February, seems to have failed.  The business is now apparently keen to accept John Johnson's Arcade Finance offer to buy the business back. One thing for sure: the business will not be able to continue without a serious change.

Post-budget musings

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Standard & Poor rating agency has warned that Australia’s AAA outlook remains negative, post the budget announcement.  S&P quoted growing global risks, which aligns with our earlier comments about the 2018/19 budget and its future projections – they rely on an overly optimistic assumption that nothing of substance will change in the global economy over the next seven years.
9
May-18
Wednesday

AI at H&M

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According to The Wall Street Journal, Hennes & Mauritz, aka H&M, used AI to tune its range and will now be stocking fewer basics and a wider fashion offer.  This is intended to reverse profit decline (20% down) and overstocks (U$4 billion).  Hopefully, H&M are aware of our earlier revelations that AI stands for ‘Appearance of Intelligence’ rather than for ‘Artificial Intelligence’ and still double-check their computer predictions with experienced merchants. Stockholm based H&M operates 4,500 stores worldwide.

Strong results from Adairs

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Adairs, a publicly listed Australian mid-tier bedding, towels, and linen retailer provided a trading update, with the expected sales for the financial year to be in excess of A$310 million and EBIT of approximately A$45 million, i.e. 14.5%.   The business operates in excess of 160 stores, mainly in Australia, competing against department stores and similar operators such as Bed Bath & Table, Sheridan and Pillow Talk.  The share market responded favourably. A word of caution about businesses that EBIT in excess, while fantastic, it acts like a honeypot, attracting competitors to the market.  So, in the medium to long-term, it is better to spend more on strengthening the business rather than to keep the extra profit.