International retailers like Amazon have arrived in Australia, with smarter methods, cheaper offerings and, in some cases, very deep pockets.
It’s an exhilarating time to be in retail in Australia – if you can survive. Competition is intense but optimism is high. The Deloitte Retailers’ Christmas Survey 2016 found nearly two-thirds of Australia’s retailers expect earnings to grow by 5 per cent or more this year – and that’s in the face of mounting competition from global heavyweights such as German supermarket chain ALDI, e-commerce giant Amazon and UK department store John Lewis.
Australian-grown retailers are also looking to expand, with big name clothing chains Cotton On and Lorna Jane, skincare company Aesop and tea vendor T2 forging ahead with strategies for new markets and growth offshore.
“Retail has become so competitive and market change so fast-paced, it is not a place for the faint-hearted,” says David White, leader of Deloitte’s retail, wholesale and distribution advisory group in Australia.
However, any rose-coloured optimism in the Australian market is tempered not only by the heat from crack global operators but the realities of the macro-economic outlook, including low wage growth, White says.
Customers are driving change
The retail playing field continues to shift, from one where retailers had the power to dictate to consumers to one where the customers are in control. Customers now demand authenticity, newness, convenience and creativity, and if retailers can’t deliver they’ll look elsewhere. “It’s a generational shift; customers are much more demanding and much less loyal,” says White.
While once a department store credit card was a ticket to spend, today fast wi-fi speed is the preferred gateway for shopping. Bricks-and-mortar stores are learning that shoppers are indifferent to whether they shop in-store or online. Consumers care most about product, service and price, says White. “They want the same experience; the same responses.”
Three main trends now define retail spending, according to Deloitte. The first is consumers’ changing preferences, including the trend toward owning less and living in the social media-driven economy – think curated possessions that can be shown off to friends on Facebook.
The second is changing retail formats and the proliferation of on-demand fulfilment avenues, such as the popular click-and-collect option, where buyers shop online, then pick up their purchases in-store.
Third is what Deloitte’s Global Powers of Retail 2017 report calls the “transformative possibilities from living with exponential technologies, both in the store and beyond”. As far as customers are concerned, that means they can shop online at a virtual endless aisle where stock is always available.
1. New foreign contenders
For decades, Coles and Woolworths dominated the Australian supermarket scene, but things began to change in 2001 when German discount supermarket ALDI muscled in. Worldwide, ALDI has more than 10,000 stores in 18 countries and an estimated combined turnover of US$82 billion in 2015. According to Deloitte’s Global Powers of Retail 2017 report, ALDI is now eighth in the list of top 250 retailers globally.
Since its local launch, ALDI says it has snared 10 per cent of the Australian market through its 458 stores. It’s now expanding into South Australia and Western Australia, and has far bigger ambitions, although expansion is being slowed because it can’t find suitably zoned sites.
“We are working with government to overcome these barriers, however progress is slow as it involves local councils, each with their own zoning and planning laws,” an ALDI spokesperson told INTHEBLACK.
A family-owned private business, ALDI runs a decentralised business structure, as each regional business operates independently. The business model is both simple and compelling – high-quality products at low prices.
“We are and will always be the price leader in the market. This is our most fundamental competitive advantage and we will never ever give this away,” says the ALDI spokesperson. “Our logistics and supply chain operates at world-class efficiency, keeping delivery routes short and employing best practice warehouse techniques.
“We concentrate on selling a select range of exclusive brands and do not spend money on customer loyalty programs or expensive point-of-sale displays.”
ALDI is known for its competitive prices but its multi-channel ad campaigns and strong social media presence target not only people on a budget, but also label-conscious middle-class shoppers. ALDI’s ranging is nimble, responding rapidly to changing consumer tastes: for example, it rode the early wave of demand for organic products, and is committed to growing its Just Organic range.
"It's a generational shift; customers are much more demanding and much less loyal." David White, DeLoitte
Its appetite for growth is voracious and extends well beyond Australia. In late 2017, the German chain plans to enter China’s grocery market, a move which Harvard Business Review says has defeated international food retailers such as the UK’s Tesco and German hypermarket Metro.
In the world’s biggest market of 1.4 billion customers, ALDI will sell online and deliver a range of everyday grocery items, with most products sourced from ALDI’s existing Australian suppliers.
If ALDI’s growth has shaken the Coles and Woolworths stranglehold, further rumblings can be expected with the predicted entry of American giant Amazon into the Australian fresh food market. Perhaps the two big Australian supermarket chains can at least take comfort from Deloitte’s report that the arrival Down Under of another big discount grocer, German giant Lidl, is likely to be delayed by its expansion into other markets.
Wearing the crown
Supermarket bestsellers of bread, butter and organic baby food aside, the most robust category among the top 250 retailers operating in Australia remains apparel and footwear.
One newcomer proving a major threat in this category is US retailer TJX Companies. Operating in Australia through its acquisition of 35 Trade Secret stores, to be renamed T.K.Maxx in 2017, the company’s brand strategy is to sell big-name fashion and homewares at up to 60 per cent less than other stores.
How can the locals compete? “It’s really difficult,” says White, who adds that TJX will expand its retail reach significantly within 18 months.
“The lower middle ground is where businesses get destroyed because in the run to the bottom, if you’re not the cheapest, you lose.”
He observes that key advantages for international retailers are their store design and customer experience model. To compete, local retailers must look to their strengths beyond price – a great store location; a good relationship with their customers; a great shopping experience.
Big-name retailers entering the Australian market in 2017 include UK department stores Debenhams and John Lewis. Debenhams is partnering with Harris Scarfe, and John Lewis homewares has moved into Myer in Warringah, Sydney, with a further five locations planned across Melbourne, Sydney and Perth.
The fourth newcomer, Decathlon, one of the world’s largest sporting goods retailers, is still setting up its distribution facilities. Due to its sheer volume and variety of products, it will offer a shopping experience that will be tough for Australian retailers to equal, analysts suggest.
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These retailers join Tokyo-based UNIQLO and global fast-fashion players H&M and Zara, which snared a combined A$600 million in sales in 2016, says Macquarie Wealth Management, although not all turned a profit.
Accounts filed with the Australian Securities and Investments Commission reveal sales at UNIQLO Australia’s 12 stores rose 47 per cent to A$174.5 million in the year ending August 2016. However, UNIQLO Australia, which sells good-quality wardrobe basics, also showed losses of A$15.9 million since opening its first store in Melbourne in 2014.
Sales at H&M, now 20 stores strong in Australia, rose 139 per cent to A$161.9 million in the 12 months to November 2015. Its 2016 figures aren’t released until later this year, but with the retailer opening four new stores, Macquarie analysts expect those figures to be higher again as shoppers look for affordably priced, on-trend items.
The strong results come despite H&M being outed for poor labour practices in Cambodia. In 2015, the Human Rights Watch report Work Faster or Get Out (2015) revealed that H&M could sell its cut-price hoodies for A$25 because Cambodian labourers sew for roughly 50 cents an hour. It wasn’t a good look but it didn’t dent the bottom line.
The retailer insists it’s working on the issue: “In Cambodia, there is an ongoing, constructive dialogue aiming for long-term change in the entire industry. We are happy to be part of this dialogue,” says a H&M spokesperson.
Demand for international brands by consumers continues to make Australia an attractive destination for retailers.
“While the margins [in Australia] are typically higher, so are the costs,” explains White. “It’s a very developed, very wealthy country with high brand awareness because Australians travel a lot. It is also a relatively easy marketplace because its size is not overwhelming.”
2. Amazon – biggest of them all
Amazon’s impending arrival in Australia is fuelling excitement and trepidation. The predicted September launch of Amazon Prime in Australia by the world’s biggest e-commerce retailer – and big disruptor – is expected to generate sales of at least A$4 billion within five years, says Citigroup’s head of research Craig Woolford. That’s 14 per cent of all online spending in Australia and 1.1 per cent of total retail spending, he says.
Insiders say the company will roll out Amazon Prime Now, the shopping app that lets consumers shop for thousands of items and have them delivered free within two hours, seven days a week.
Amazon Fresh bricks-and-mortar stores are also expected in 2018. These Amazon Fresh stores will include what it calls “walk-out” technology, which lets customers enjoy cashless, check-out free shopping.
"When does a consumer ever complain that delivery was too fast, the price was too low, or that all their brands were available?" Jeff Bezos, Amazon
Using computer vision, deep learning algorithms and sensors, this technology allows customers signed up with the Amazon app to pick up what they need as the app records the choices and bills them online. Amazon saves by keeping staffing costs down and customers save on time.
Using its massive data assets and introducing Amazon-branded products, Deloitte’s Global Powers of Retailing 2017 states that the aim is “to create a grocery business with significantly higher margins than the established players.”
“Amazon is aggressively disrupting numerous industries and reducing the profit pool available to traditional competitors,” explains Justin Braitling, chief investment officer at Watermark Funds Management.
Nearly every second dollar of e-commerce growth in the US is captured by Amazon, a feat achieved due to its “infinite shelf-space”, says Braitling in Watermark Funds Management’s Quarterly Report 2016. “Essentially, Amazon has become an ‘everything-store’.”
Amazon’s perspective is different, he says. “A typical retailer is focused on gross profit margin but Amazon focuses on ‘per-unit basis cost’.”
Happy to build scale over immediate profitability, “it has pools of profitability – such as books and electronics – while loss leaders such as fresh food are part of a broader strategy that [it anticipates] will one day become profitable.”
Amazon CEO Jeff Bezos sums up its winning strategy: “When does a consumer ever complain that delivery was too fast, the price was too low, or that all their brands were available?”
However, Amazon has also run the bad PR gauntlet with stories of worker mistreatment. These were not in a third-world sweatshop, but in the US itself. Workers in an Amazon warehouse in a Pennsylvania filed formal complaints in 2011 of unbearable working conditions, limited rest breaks and harassment of those who failed to meet ambitious packaging targets. The revelations prompted more complainants to come forward from other Amazon work sites. Despite the publicity, the company’s relentless growth barely registered a blip.
3. Australian retail’s global stars
You may never have used Aesop’s luxurious Violet Leaf Hair Balm or worked out in a pair of Lorna Jane leggings, but millions of consumers worldwide have.
Aesop was founded by hairdresser Dennis Paphitis in 1987 in Melbourne, with a focus on high-quality, plant-derived products for face and body.
In 2012, Brazilian direct-sales cosmetics company Natura Cosméticos purchased a 65 per cent stake in the business for US$71.6 million (about A$68 million). Aesop’s global expansion has been so successful that Australia now accounts for only 25 per cent of overall sales.
Global sales in 2015 reached A$200 million and they were forecast to rise to A$250 million in 2016, according to Aesop. The brand is now sold in retailers and stand-alone stores across the world, from Tokyo and Hong Kong to New York and Paris, catering to a growing appetite for high-end cosmetics.
"Be open and adaptable with your product offering...your best sellers may surprise you." Nicole Sparshott, T2
Lorna Jane Activewear claims to be the world’s first “athleisure” brand. Its competitive advantage is that it’s fashion-based, with 70 to 100 new products every month, compared with other activewear companies that do seasonal ranges.
It has proven a successful formula, with 150 Lorna Jane stores in Australia and stockists in 54 countries. Lorna Jane declined to discuss sales figures but, in March, SmartCompany reported the group as having estimated annual revenue of A$189 million.
In 2015, Lorna Jane boosted its distribution through US department store Nordstrom to support an ambitious international expansion schedule.
The initial deal was for Lorna Jane clothing to be stocked in 12 Nordstrom stores in the United States, one in Canada and one in Puerto Rico. Lorna Jane’s website now lists 38 outlets in the US.
The Brisbane-based fitness brand is also sold in Paris at upmarket French department store Galeries Lafayette, House of Fraser in the UK, and Breuninger in Germany.
Cottoning on to profits
Another Australian heavyweight is Cotton On, with annual revenue of more than A$2 billion. Started in 1991 by Geelong’s Nigel Austin and co-owned by CFO Michael Hardwick and Ashley Hardwick (Austin’s cousins), its suite of brands includes Cotton On Kids, Cotton On Body, Factorie, Supré and stationery brand Typo.
“Our business has evolved driven by customer demand, rather than what other retailers might be doing,” says Hardwick.
“For example, we know our customers want fast access to the latest trends, so our supply chain operates to allow us to get new products into stores every week, and replenish our stock daily, ensuring our customers are never disappointed.”
Cotton On Group is banking on annual revenue growth of 20 per cent through its 1500 stores worldwide, including outlets in Malaysia, Singapore, Brazil and South Africa.
“The business is now reasonably large and relatively complex … so today one of the most important questions we ask is what’s the scaleability of this market,” Cotton On Group’s CEO Peter Johnson told The Sydney Morning Herald earlier this year. The group has a checklist of about 300 questions it needs answered before it enters a new market.
Cotton On Group is now introducing new store platforms across its brands, designed to engage with customers beyond their purchase. “Features like phone-charging stations, product vending machines, live social media feeds are all designed to give customers a positive, engaging experience every time they shop with us,” says Hardwick.
The right people, an ethical approach to sourcing products and a commitment to philanthropy are also crucial, he says. Since 2007 the Cotton On Foundation has raised nearly A$60 million for education and health projects in Africa, Asia and Australia.
A fresh cup of success
A surprise success among a nation of coffee lovers is T2, started by entrepreneur Maryanne Shearer and sold to Unilever in 2013 for around A$60 million. Shearer stayed on as CEO for two years to drive the company’s global expansion as well as oversee the brand and creative direction. T2 now boasts 91 stores, 63 in Australia and the balance in NZ, the UK, the US and Singapore.
The company’s strategies include in-store experiences where consumers can try different flavours of tea in dozens of combinations; excellent and consistent branding; and premium product at a premium price. T2 deploys an omni-channel market entry strategy that includes retail, online and wholesale.
“Our biggest priority is always making sure we stay true to the brand and its roots, regardless of how much we expand,” says T2 CEO Nicole Sparshott. “We have a unique culture and in-store experience and we’re determined to replicate that, no matter how much we grow. A trip to T2 could see you sipping our latest tea concoctions, marvelling at our towering displays, or catching a live brewing demonstration. We’ve turned tea into a totally sensory experience.”
Sparshott advises other retailers: “Be open and adaptable with your product offering, and show agility in your range as you settle into new countries. Your bestsellers may surprise you.”
Australia's retail giants
Woolworths and Wesfarmers (owner of Coles, Bunnings, Kmart and Target) were the only two Australian retailers listed in Deloitte’s top 250 global retailers in its Global Powers of Retailing 2017 report, at 21st and 24th respectively.
For the full year to 2016, Woolworths posted a loss of A$1.24 billion, on the back of A$2.63 billion in writedowns mostly related to the failure of its Masters Home Improvement chain and weak sales in its Big W variety stores.
At the time the results were released, Woolworths Group chief executive Brad Banducci said the company was already seeing progress in competitiveness and culture in the food sector.
For Wesfarmers, the strong results from Coles supermarkets and Bunnings hardware stores were overshadowed by hefty writedowns, causing profit in the year to June 2016 to plunge 83.3 per cent to A$407 million compared with the previous year. The group recorded A$2.2 billion in pre-tax writedowns from its embattled variety store Target and its Curragh coal mine in central Queensland.
However, earnings from Coles rose 4.3 per cent to A$1.86 billion, with food and liquor sales increasing 5.1 per cent to A$32.6 billion.
While retailers struggle to survive super retail group bucks the trend