Myer and David Jones rush to reinvent themselves before it's too late
By Patrick Hatch and Sumeyya Ilanbey
March 8, 2019 — 4.00pm
If Myer boss John King wanted to point out exactly what's happening to the historic department store group he runs, he needn't have gone further than the entrance to its flagship outlet in Melbourne's Bourke Street Mall.
While King was busy explaining the company's latest accounts to investors on Wednesday morning, loyal Myer customer Jacqueline O'Toole was walking out of the store with some make-up from its Mecca Cosmetica counter but none of the apparel she used to buy regularly.
Myer CEO John King has a big task ahead.
"I often go in, try things on, have a think about it and then buy it online," says O'Toole, who at 50 has been shopping at Myer most of her life. "I probably visit about once a week now. I used to visit it more frequently."
Myer's numbers told the same story. Sales across it 61 bricks-and-mortar stores fell about 5 per cent in the six months to January 26, but sales on its website soared 18 per cent.
Online now accounts for $9 out of every $100 Myer earns and King wants to increase that to $20, but currently it's not growing fast enough to cover the sales it's losing in stores.
Since 2009, Myer's annual revenue has fallen about 20 per cent, from $3.2 billion to $2.5 billion, while its upper-market rival David Jones has fallen closer to 30 per cent.
Myer's crushing $486 million loss last year, driven by balance sheet write-downs, raised questions about whether the group could survive at all, and that was compounded by an insurgency from its largest shareholder, retail veteran Solomon Lew.
But there was a glimmer of hope in this week's results, which showed underlying profit growing 3 per cent, and the fall in sales starting to slow.
David Jones is also under pressure from a collapse in sales and profit, and Ian Moir, boss of its South African owner Woolworths, described the business as a "burning platform" that had to be fixed, and soon.
After churning through its fourth boss in five years with the departure of David Thomas last month, Moir is now running David Jones himself while it looks for a new CEO.
Myer and David Jones are trying frantically to reshape their businesses as they, like department stores worldwide, fall out of favour with shoppers now spoilt for choice by online retailers, specialty stores and international fast-fashion giants such as H&M and Zara.
"Department stores really are very much a house of brands and now consumers are shopping very differently, aided by technology," says retail analyst Brian Walker, of the Retail Doctor Group.
"Myer is kind of like a large steam ship in a harbour, capable of getting from A to B but it's got speed boats zipping all around it."
Australian Bureau of Statistics data released on Thursday illustrates the point. Retail sales grew by a weaker than expected 0.1 per cent month-on-month in January, as cost of living pressures, low wage growth and falling house prices keep a cap on consumer spending.
Department stores fell 2.1 per cent, following a 1.3 per cent decline in December.
But King, who previously led the British store House of Fraser, says claims that department stores are a dead format have been greatly exaggerated.
"There's still a need for department stores, but they have to have a reason to exist," he says.
"The reason for us to exist is that we'll have a fantastic choice and range of brands and products both in store and online," he says. "There's a reason to come to us because there's an experience and a brand offer that you can't get anywhere else."
Shrinking Myer's legacy footprint in suburbs and towns across Australia is a key priority in King's plan to revive the company's fortunes, to reduce the rent it pays in line with the fall in bricks-and-mortar sales.
The reduction will be significant, but King says all but one of its stores are profitable and he would rather return floor space to landlords than close stores outright.
King sees value in keeping a large network of better-run stores that serve customers who want to shop in person or collect the things they buy online.
"In the US and in the UK, some stores have 40 per cent of online orders bought online but picked up in a store," he says. "Currently, over 20 per cent of our online sales are picked up in stores, and then one in five of those customers makes an unplanned purchase in the store. So it's really about how we marry the two [online and offline] together."
Myer expects store sales to be bumpy for a while longer, as a number of concession stores and brands pull out or are booted. Nike is cutting back its presence while Woolworths has yanked brands it owns such as Country Road from Myer shelves to be exclusive to David Jones.
There's still a need for department stores, but they have to have a reason to exist.
John King, Myer CEO
About 20 new brands are coming in to fill that void, including some Australians won't be familiar with, such as British suit maker Twisted Tailor, fashion labels Selected and Girls on Film, and Italian fragrance house Acqua di Parma.
Much is made of the rise of specialty fashion retailers being a threat to department stores, but King sees Myer as a less intimidating and more comfortable environment for customers - particularly older or larger ones who might prefer the anonymity of his large stores to the in-your-face experience of a hip boutique.
And global fast-fashion giants H&M, Zara and Uniqlo, which have colonised Australia's malls and shopping centres, are not direct competitors, he says, even against his lucrative private-label brands such as Piper, Blaq and Basque.
"I'm not going to get into the $10 jeans business," he says.
The new David Jones shoe floor features 85 brands. Credit:Wolter Peeters
He wants to grow Myer's house brands from 17.5 per cent of sales to 20 per cent, improving profit in the process.
David Jones is trying some of the same strategies, shrinking its footprint by about 20 per cent in the medium term, and trying to secure exclusive brands but at a higher price point. Last year, it opened a shoe floor in its mid-renovation flagship store on Sydney's Elizabeth Street, which is stocked with Louis Vuitton, Prada, Gucci and Louboutin.
David Jones is also experimenting with eat-in and ready-to-eat food, which it says emulates some of the world's greatest department stores, such as Le Bon Marche in Paris, and London's Selfridges and Harrods, in mixing food and fashion to drive foot traffic.
Where the two companies diverge is with their price gun. King has sworn to get Myer off the "discounting drug", which drives sales but eats into profitability, while David Jones has continued to run sale-heavy promotions.
It's only a matter of time until the pressure is just too great.
Brian Walker, Retail Doctor Group.
Accordingly, Myer's total sales fell 2.8 per cent in the last half but its underlying profit went up 3 per cent, as its profit margin improved and it cut costs. David Jones grew sales 1 per cent but its profit crashed 29 per cent.
Citi analyst Bryan Raymond says the biggest risk to Myer continuing to improve its profit margin is if David Jones starts to clear stock aggressively, which is a prospect given its current high inventory levels. "If David Jones discounts, Myer has to follow to some extent," Raymond says.
Raymond also thinks Myer's strategy of discounting less and cutting labour will be effective only in the short term, and that it eventually needs to grow sales again to cover increasing costs from things like wages.
"They're still obviously a long way from that," he says.
Anton Tagliaferro, whose fund Investors Mutual is Myer's second-largest shareholder, sitting just behind Lew with about 10 per cent of its stock, is feeling more confident in his investment than he did six months ago.
"There's a long way to go, but it certainly is moving in the right direction," he says.
Tagliaferro has backed Myer's board amid attacks from Lew, the boss of the Just Jeans and Smiggle empires who wanted new directors and has secured two shareholder "strikes" against the company's executive pay in the process.
"As a shareholder hopefully Mr Lew is also satisfied with the company's latest result and with Mr King's performance, and hopefully his deafening silence since the result is a sign of this," Tagliaferro adds.
Retail analyst Walker's view, meanwhile, is that the only viable long-term strategy for both stores is to merge, and then radically shrink their combined footprint. That almost happened five years ago in a $3 billion deal, but Woolworths swept in at the last minute with a superior bid for David Jones.
"There's too many of them," Walker says. "It's only a matter of time until the pressure is just too great."
Myer's long-suffering investors at least are seeing some signs of hope from the early stages of King's turnaround plan. Their shares rose 16 per cent this week to 47¢.
But for the many who bought in during the Myer float for $4.10 just 10 years ago, there is still a long road ahead.
Patrick Hatch
Business reporter at The Age and Sydney Morning Herald.
Sumeyya is state political reporter for The Age.