Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail

 
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
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Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
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Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
30
   CONTENTS
   FOREWORD                                                   4
   STATE OF PLAY                                               5
   2019 AUSTRALIAN RETAIL OUTLOOK SURVEY RESULTS              11

   WINNERS AND LOSERS by Ferrier Hodgson & Azurium
   JB HI-FI: FROM STRENGTH TO STRENGTH                        19
   ACCENT: STEPPING UP IN 2019                                20
   MECCA: A RETAIL MAKEOVER
   MYER: WHO SAID RETAIL IS EASY?
   “JUST AFTERPAY IT”
                                                              21
                                                              22
                                                              23
                                                                     32
   FRANCHISING HEADWINDS                                      24

   RETAIL TRENDS by Ferrier Hodgson & Azurium
   LAST MILE STAND                                            27
   AUSTRALIA’S NEW RETAIL CALENDAR                            28
   THE AGE OF BRANDSPARENCY                                   29
   STAND FOR SOMETHING                                        30
   AMAZON: ONE YEAR ON                                        32

   RETAIL PROFILES
   GREENLIT: HOUSEHOLD NAME TARGETS BIG 2019                  38
   DYMOCKS: PAGING MORE SUCCESS                               42
   ALDI’S ‘ALTERNATIVE’ TREND-FOCUS                           46
   CAMILLA: FASHIONING MORE GROWTH                            48

   EXPERT FORECASTS
   FORTIFYING AGAINST DIGITAL ATTACKS                         53
   RECIPES FOR SUCCESS                                        54
   MANAGING ORGANISATIONAL CHANGE IN RETAIL                   56
   STAYING ONE STEP AHEAD IN FMCG                             57
                                                                     38
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                                                                   Outlook 2019          ®

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Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
FOREWORD

    From the editor
    WELCOME TO THE AUSTRALIAN RETAIL
    Outlook 2019, co-produced by Octomedia –
    publisher of Inside Retail – and Azurium.
      It’s certainly been a big year in Australian retail,
    even by its own lofty and competitive standards.
      Impacted by the effects of e-commerce, the entry
    of international heavyweights and consumers
    benefiting from having more choice than ever,
    retailers certainly have their hands full keeping
    up with the pace of change in today’s business
    landscape. It’s sink or swim for those in retail
    Down Under.
      In this year’s edition we look at the latest trends
    set to take shape in the industry, hear from some of
    the largest local retail names, including the newly
                                                             2018 in review
    formed Greenlit Brands [formerly Steinhoff APAC,         RETAILING ISN’T EASY AND 2018 PROVED
    owner of Freedom Furniture, Harris Scarfe, Best &        to be another challenging year for many retailers.
    Less, Fantastic Furniture] and examine the results          Roger David and Laura Ashley entered
    from our industry-wide survey.                           administration and we saw Esprit announce
      Ferrier Hodgson’s consulting business, Azurium,        the closure of all Australian stores as it exits the
    runs the rule over the winners and losers from the       Australian and New Zealand markets.
    retail scene and provides its                               Department stores continued to feel the
    customary expert forecasts.                              pinch as digitised consumers challenged
      Here’s to another                                      business models. A slew of scandals resulted
    successful year in retail,                               in a parliamentary inquiry into the Australian
    happy reading!                                           franchising industry.
                                                                The year saw a number of changes begin (or
    DIMITRI SOTIROPOULOS                                     continue) to take place. Australia’s traditional
                    Editor                                   retail calendar is being transformed by the
                                                             growing number and size of retail events in
                                                             November placing pressure on traditional
                                                             Christmas trading. In addition, shifts in
                                                             consumer behaviour are placing greater value on
                                                             transparency and demand for retailers to stand
                                                             for something.
                                                                And while broadly the retail market remains
                                                             tough, many retailers made 2018 a year to
                                                             remember. Amazon Australia bolstered its range
                                                             and introduced the highly anticipated Amazon
                                                             Prime, and we saw Afterpay transform (and reap
                                                             the rewards) of the adoption of new payment
                                                             solutions. Retail heavyweight JB Hi-Fi defied its
                                                             critics and continued to perform strongly and the
                                                             digital transformation of Accent Group’s brands
                                                             [Footlocker, Platypus] saw
                                                             it post record profits.
                                                                The stage is set for a big
                                                             2019 for Australian retail.

                                                                   JAMES STEWART,
                                                                Partner, Head of Retail –
                                                              Ferrier Hodgson, Azurium

4 | AUSTRALIAN RETAIL OUTLOOK 2019                                                            www.insideretail.com.au
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
STATE OF PLAY
                          CHANGE IS THE NEW NORMAL IN 2019

www.insideretail.com.au                   2019 AUSTRALIAN RETAIL OUTLOOK | 5
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
STATE OF PLAY

 Retail Down Under

                                    in 2019

                             The pace of change in Australian retail is not
                              slowing down anytime soon – here’s a brief
                                 look at the local business landscape.

 THOUGH THE LAST 12 MONTHS                   (ARO) provides an inside view of those       food/grocery, general consumer goods
 LAID CLAIM TO YET MORE HIGH                 operating across the industry, straight      and automotive accessories.
 profile fashion casualties, with Ed Harry   from the horse’s mouth so to speak             While 2019 will be no less challenging
 joining the list early in 2019, moving      and not those on the outside. The            than previous years for retailers, (has
 forward it’s not all doom and gloom for     results make for interesting reading         there ever been an ‘easy’ year?) this
 retailers operating in Australia.           and show that there’s ‘more than meets       year’s survey is a good indicator of
    The glut of small-middle market          the headline’, when it comes to the art      what those in the game, make of the
 clothing chains entering administration     of retailing.                                market Down Under.
 or winding up is not exactly a new            Of the 427 participants in this year’s
 phenomenon, as consolidation of the         survey, over 22 per cent are C-suite         GOOD WITH THE BAD
 market in this crowded space is never-      executives and more than 10 per cent         Somewhat intriguingly and at odds
 ending. For every headline failure,         are area/store managers. Participants        with the usual catch cry that business
 there’s a matching success story in the     represent small, middle and large-sized      sentiment is low or crashing, this
 fashion world.                              retail firms, across all retail categories   year’s survey found there’s been an
    This year’s Australian Outlook Survey    including fashion, household goods,          increase in respondents that said the

6 | AUSTRALIAN RETAIL OUTLOOK 2019                                                                          www.insideretail.com.au
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
past 12 months were the best trading          both have gargantuan turnaround             November by consumers.
   conditions they’d experienced, while a        tasks on their hands.                          According to data from the
   healthy host think that conditions have         Meanwhile, in a post-Christmas            Australian Bureau of Statistics (ABS),
   been good [page 12].                          trading update, Wesfarmers revealed         Australian retail businesses saw
      In bucking the trend, Azurium              that Kmart’s total sales (excluding         record sales in November 2018, with
   says 2018 was a winner for JB Hi-Fi           Kmart Tyre and Auto Services) rose          turnover increasing 3.6 per cent year-
   [page 19] as it navigated technological       1 per cent in the first-half of financial   over-year. No longer is Christmas the
   transformation through its product            year 2019, while comparable sales           be-all and end-all for businesses bottom
   mix and added whitegoods to its               dropped 0.6 per cent. Citi research         line it seems.
   offering through the acquisition of           analysts have asserted that Kmart’s            The growing importance of retail
   The Good Guys.                                19-quarter run of like-for-like sales       sales events including Black Friday,
       Backed by same-store sales growth         growth had likely come to an end, with      Cyber Monday and Click Frenzy, now
   in its Australian stores rising by 3.4 per    Target and Big W to deliver positive        act as the established prelude to the
   cent and total sales increasing by 5.3        sales in the low single digits.             traditional holiday retail period.
   per cent in the September 2018 quarter,                                                      National Retail Association (NRA)
   JB Hi-Fi’s earnings defy the average          IDES OF NOVEMBER                            deputy chief executive, Lindsay Carroll,
   downturn in discretionary spending.           One of the overwhelming trends              anticipates even stronger figures for
      Equally, success stories can be seen       to note from the end of 2018 and            the month of December as a result of
   in the likes of Accent Group – owner          moving into the current year, is the        November’s strong showing in 2018.

                                                 “
   of The Athlete’s Foot, Hype DC and            embrace of online sales events in              “Retail turnover from online sales ►
   Platypus [page 20] – and Mecca
   [page 21] to name but a few retailers
   successfully plying their trade in the
   current climate.                                     While consumer confidence,
      But it would be remiss to say it’s rosy
   for everyone. The continued struggles         discounting and rental overheads
   across the industry are evident – from
   The Reject Shop to Myer to multiple
                                                 occupied the headline challenges
   fashion firms – 2019 is set to be a
   testing year for several retailers.
                                                 nominated by retailers in this
      Azurium has placed Myer onto its
   list of losers for the third year in a row,
                                                 year’s survey, the threat of offshore
   describing 2018 as arguably its toughest      online retailers has eased slightly,
   year yet [page 22]. 2019 is shaping up
   to be the defining year for department        a reflection of local firm’s rising
   store retailers. It’s hard to argue this
   point, given the continued decline of         confidence against overseas
   Australia’s iconic Myer and David
   Jones department store chains, which          e-commerce players.”

www.insideretail.com.au                                                                 2019 AUSTRALIAN RETAIL OUTLOOK | 7
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
continues to increase at a high rate,      executive director, Russell Zimmerman        increases, over 43 per cent of retailers
 and this can be attributed to the rise     is confident that the industry will          surveyed said the percentage of total
 in popularity of events such as Click      “show its stripes” when December trade       revenue coming from e-commerce
 Frenzy and Cyber Monday, combined          figures are released.                        represented less than five per cent of
 with the fact that buying online is a         “Based on what we have seen and           their total revenue. Just over 5 per cent
 convenient option for many shoppers.”      heard from retailers and our members,        said 100 per cent of their revenue came
   Online retail contributed 6.6 per cent   we believe the overall Christmas trade       from online retailing.
 to total retail turnover for the period,   will indicate secure growth, with many
 compared to 5.9 per cent in October        large retailers noticing growth in-store,”   SPENDING TIMESHIFT
 2018. According to the ABS, this is the    Zimmerman says.                              Azurium says there is an evident shift
 highest level recorded and continues          In this year’s ARO survey, over           in when Australian consumers spend in
 the pattern of increasing online           30 per cent of retailers say they            the critical Christmas quarter [page 28],
 contributions to sales in November.        increased revenue from e-commerce            with movement in consumer spending
   But the NRA says rising online sales     operations ‘significantly’ over the past     in the last few years mirroring the rise of
 need to be viewed in perspective.          12 months, while over 32 per cent            global online retail events.
   “Online turnover still only accounts     enjoyed ‘slight’ increases.                     Meanwhile Greenlit [formerly
 for less than 9 per cent of total retail      Only 4 per cent of participants           Steinhoff APAC] CEO Michael Ford says
 sales and many retailers offer an online   experienced decreases from online            the group’s Fantastic Furniture brand
 channel that complements their physical    revenue last year.                           “generated very strong online sales in
 store,” says Carroll.                         All digital positivity aside, it should   2018 while undergoing a rebranding of
   Australian Retailers Association         be noted that despite the bumper             its own” while the company’s general

8 | AUSTRALIAN RETAIL OUTLOOK 2019                                                                          www.insideretail.com.au
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
merchandise operations performed            delivered a record three million parcels       Amazon’s ‘slow start’ after launching
   solidly with “Harris Scarfe emerging as     across the country on December 17,             in Australia last year. The US giant
   one of the best performing department       representing the busiest day in its history.   continues to invest heavily into the
   store brands in the country” [page 38].       According to Australia Post CEO,             local market and Stewart thinks that
      Dymocks general manager Sophie           Bob Black, 2.7 million parcels were            Australian firms should do the same, by
   Higgins says 2018 was the year that         delivered on Christmas Eve, with               turning defence into attack [page 32].
   Black Friday became a “much bigger          Australians increasingly leaving
   shopping event in Australia” [page 42].     Christmas shopping to the end of               CHALLENGES AND
      Even supermarket giant Woolworths        the month.                                     OPPORTUNITIES
   now participates in Black Friday,                                                          While consumer confidence,
   offering discounts on hundreds of           COME ONE, COME ALL                             discounting and rental overheads
   products online for the second year in      Despite the retail alarms sounded              occupied the headline challenges
   a row.                                      around the influx of international             nominated by retailers in this year’s
      During December, Australia Post          retailers entering Australian shores in        survey, the threat of offshore online
   says it delivered over 40 million parcels   recent years, this year’s survey paints a      retailers eased slightly, a reflection of
   last year, a new record thanks to the       picture of local resilience, with over 45      local firms’ rising confidence against
   growing popularity of online shopping       per cent of respondents claiming they          overseas e-commerce players.
   and sales events. This was 11.7 per cent    are not concerned by overseas firms              Meanwhile entering new markets
   up on the 37 million parcels the delivery   entering the fray.                             [24.8 per cent] remains a significant
   service handled in December 2017.             But Azurium’s James Stewart                  priority for retailers as does expanding
      The nation’s postal company says it      observes that sceptics should beware           product ranges, with over 26 per cent ►

www.insideretail.com.au                                                                2019 AUSTRALIAN RETAIL OUTLOOK | 9
Australian Retail Outlook 2019 - Powered by Ferrier Hodgson & Azurium - Inside Retail
2019 is shaping up to be the defining
  year for Australian department store,
  most notably the iconic Myer and
  David Jones retail chains.

                                          looking to achieve a wider offering.
                                             Azurium notes that fast food franchising is seen as a sector
                                          that is somewhat isolated from the headwinds of online retail
                                          and the digital revolution [page 54].

                                          BUSINESS AS USUAL
                                          As for the year ahead, retailers predominantly believe trading
                                          conditions will either remain the same or slightly change.
                                            Recent Urban Property Australia (UPA) research finds the
                                          Australian retail property investment market had a strong 2018,
                                          despite a pullback from Chinese purchasers, with $9.7 billion
                                          transacted, the second highest annual level on record. The near
                                          record year of transactions was boosted by the sale of several
                                          major regional shopping centres and CBD-based assets.
                                            “In 2019, we expect a bifurcation of the retail investment
                                          market with investor demand for Australian CBD retail assets
                                          and regional shopping centres to remain stable for trophy
                                          assets; whereas demand for neighbourhood and large format
                                          centres will ease, impacted by the challenging retail conditions”
                                          says Sam Tamblyn, UPA founder and managing director.
                                            In looking ahead and with e-commerce expected to continue
                                          increasing its share of the retail pie, Tamblyn expects rental
                                          growth to remain subdued for retail assets, while yields for
                                          retail property will be under upward pressure as investor
                                          demand eases for the asset class.

10 | AUSTRALIAN RETAIL OUTLOOK 2019                                                 www.insideretail.com.au
SURVEY: AUSTRALIAN
                          RETAIL OUTLOOK 2019

www.insideretail.com.au            2019 AUSTRALIAN RETAIL OUTLOOK | 11
AUSTRALIAN RETAIL OUTLOOK SURVEY 2019

         Voices of the industry
       Perennial challenges, relative confidence in the face of international players
       and generally positive sentiment to get on with the job – depending on who
             you ask – are the key findings from the ARO Survey for 2019.

            THIS YEAR’S AUSTRALIAN RETAIL OUTLOOK                and 10 per cent in sales and customer service.
            survey drew responses from 302 local retailers and     All retail categories were healthily represented,
            170 related industry members.                        with 25.9 per cent trading in apparel and accessories,
              Of the survey respondents, 22.9 per cent           12.1 per cent in household goods, 9.1 per cent in
            identified as c-suite executives, owners or board    food and grocery, while 11.2 per cent operate in the
            members and 36 per cent worked at businesses         general consumer goods/variety sector.
            with more than 400 people.                             Pointing to the diverse retail landscape
              The survey includes responses from all sectors     Down Under, 38.1 per cent of respondents
            in the industry, with 10.6 per cent working in       identified in the Other category within sectors
            marketing, 7.2 per cent in buying and merchandise    including travel, pharmacy, and luxury goods. All
            planning, 10.8 per cent in area/store management     data is in percentages.

                        Q.1             How would you describe trading
                                        conditions in the past 12 months?

       5.1%                       38.3%                      36.2%                        12.9%                       6.9%
    Best I have                    Good                     Ordinary                       Poor                  Worst I have
   experienced                                                                                                   experienced

  For the first time in three years, over   indicated that conditions were the worst   while 36.2 per cent indicated ordinary
  five per cent of retailers said that      experienced, representing a rise on last   trading. The number of retailers
  trading conditions were the best they’d   year’s 4 per cent.                         characterising trading conditions as
  experienced, compared with 2.5 per cent     The overwhelming majority of             poor slightly rose on last year’s results,
  last year and 3.4 per cent in 2017.       responses were less extreme, with 38.3     with 12.9 per cent up from 12 per cent
     At the other end, nearly 7 per cent    per cent classifying conditions as good,   in 2018.

12 | AUSTRALIAN RETAIL OUTLOOK 2019                                                                        www.insideretail.com.au
Q.2                                                               Q.3       In the year ahead,
                                                                               how do you expect
   How did your full-year                                            trading conditions to change?
   compare to the previous?
    Significant improvement
    17.4%                                                                                           30.3%
    Slight improvement
    34.5%
    Remained about the same
                                                                                 48.9%
    21.4%                                                                                              20.8%
     Slightly worse
    19.7%
     Significantly worse
    7%
                                                                                        Significant changes
   In a positive sign for the industry, 17.4 per cent of the                            Slight changes
   industry said their full-year results were a significant
                                                                                        Remain about the same
   improvement on the previous year, which compares
   favourably with 10.9 per cent of last year’s respondents
                                                                      Meanwhile, the overwhelming majority of
   providing the same response.
                                                                      respondents expect trading conditions to moderately
      Significantly, 34.5 per cent asserted that there’d been a
                                                                      change, with 48.9 per cent indicating they expect
   slight improvement, up on 31.1 per cent from last year, while
                                                                      slight changes, while 30.3 per cent expect conditions
   the number of respondents indicating their full-year was
                                                                      to remain about the same.
   slightly worse decreased from last year’s 22.3 per cent to
                                                                         Only 20.8 per cent of respondents think there
   19.7 per cent.
                                                                      will be significant changes within the trading
      Somewhat alarmingly, the number of retailers who
                                                                      environment.
   experienced a significantly worse full-year rose to 7 per cent,
   up on last year’s 3.9 per cent.

   Q.4        What
              are the
   biggest challenges
                                            44.5%

                                                                     20.5%
                                                                                                  Rental overheads

                                                                                                  International entrants

   facing the retail
                                                        34.1%                                     Offshore online retailers
   industry in 2019?
                                        48.5%                                                     Discounting
   With respondents asked
   to select the three major          51.3%                                                       Consumer confidence
   challenges facing the
   industry in 2019, the same old
   culprits once again prominently featured.
                                                            33%                                   Labour costs

   The major challenge according to respondents,
   backed by 51.3 per cent, was consumer confidence, closely          18.9%                       Global economic factors
   followed by discounting with 48.5 per cent, mirroring the
   top two threats from last year’s survey.                             16.7%                     Value of Australian dollar
     Respondents said rental overheads remained a
   significant problem, with 44.5 per cent of votes up on last                      5.9%          Taxes
   year’s 36.8 per cent. Despite the influx of international
   e-commerce conglomerates Down Under, the threat of                               5.5%          Private label
   offshore online retailers declined to 34.1 per cent, down
   from 37.7 per cent last year. Labour costs [33 per cent],                     8.5%             Government regulation
   global economic factors [18.9 per cent] and the value of the
   Australian dollar [16.7 per cent] were the other significant
                                                                            12.5%                 Other
   challenges nominated by retailers. ►

www.insideretail.com.au                                                           2019 AUSTRALIAN RETAIL OUTLOOK | 13
Q.5                        What will be the top priorities                                                                             Respondents were once again
                                                                                                                                         given three choices to select
                             for your business this year?                                                                                from and most are keen to
                                                                                                                                         increase margin [56.8 per
                                                                                                                                         cent] and turnover [60.6 per
              Increasing margin                                                                                      56.8%               cent] in 2019, with retailers
                                                                                                                                         (predictably) selecting the
          Increasing turnover                                                                                              60.6%
                                                                                                                                         two key financial elements.
                            E-commerce                                                                        45.1%                        E-commerce [45.1 per cent]
                                                                                                                                         remains an area of focus,
    Omnichannel initiatives                                                                               35.6%                          with over 35 per cent of
                                                                                                                                         retailers looking to prioritise
  Expanding store network                                                        17.4%                                                   omnichannel initiatives.
                                                                                                                                         Entering new markets
     Entering new markets                                                            24.8%                                               [24.8 per cent] remains
                                                                                                                                         a significant priority for
  Expanding product range                                                                   26.1%                                        retailers as does expanding
                                                                                                                                         product ranges, with over 26
                           Closing stores             6.4%                                                                               per cent looking to achieve a
                                                                                                                                         wider offering.
   Reducing product range                                                 9.3%                                                             Other comments included
                                                                                                                                         prioritising the improvement
                             Rebranding                                   9.3%                                                           of personalisation, one-to-
                                                                                                                                         one marketing and seeking
                                     Others                          8.7%                                                                alternate revenue streams.

    Q.6     Do you plan to
            change your
                                                                                                              Q.7        Does the influx
                                                                                                                         of international
                                                                                                              retailers to Australian shores
    number of stores this year?                                                                               worry you?
     In 2019, 28.4 of retailers plan to increase their physical
     presence, while 9.3 per cent of respondents expect to
     reduce the number of stores they operate. The majority
     of respondents [36.9 per cent] expect to keep the same                                                   More concerned
     amount of stores.                                                                                                                               32%
                                                                                                              than last year

                                                     36.9%

                                                                                                              Less concerned
                                YES – DECREASE THE

                                                                                                                                                    22.9%
                                                      NO – STAY ABOUT THE SAME
                                NUMBER OF STORES

                                                                                                              than last year

      28.4%
                                                                                   25.4%
      YES – INCREASE THE
      NUMBER OF STORES

                                                                                    ANY PHYSICAL STORES
                                                                                    WE DO NOT OPERATE

                                                                                                              Not concerned                         45.1%

                                 9.3%                                                                           Respondents remain bullish about the prospect of
                                                                                                              international firms entering Down Under, with over 45
                                                                                                              per cent asserting they are not concerned.
                                                                                                                Meanwhile, those more concerned than last year
                                                                                                              dropped from 54.3 per cent to 32 per cent and those
                                                                                                              less concerned than last year rose from 12.1 per cent to
                                                                                                              22.9 per cent in this year’s survey, reinforcing the local
                                                                                                              confidence from local firms against new competitors.

14 | AUSTRALIAN RETAIL OUTLOOK 2019                                                                                                              www.insideretail.com.au
Q.8                                                              Q.9        Did you
                                  3.5

                                                                               find
   How do you                     3
                                                                    that you received
   believe the                                                      more flexibility and
   Australian                                                       help from landlords
   retail market                  2.5                               last year?
   is placed                                                        In a hotly-debated topic for the
   compared                       2                                 industry, respondents provided
                                                                    some interesting responses to
   to other                                                         what is a contentious issue in
   international                                                    the industry.
                                                                      While the majority of
   markets?                       1.5
                                                                    respondents [65.5 per cent]
                                                                    said they received about the
   The majority of                                                  same flexibility and help from
   respondents indicated          1                 2.7%            landlords, over 19 per cent said
   the local retail market                                          they received more. In contrast,
   is located firmly in                                             over 15 per cent said that they
   the middle-range,                                                received less help and flexibility
   compared with overseas         0.5                               from landlords.
   marketplaces.
      While less than 2 per
                                                                              Significantly more
   cent said the Australian
   market was in the high                                                     Slightly more
   rank, 13.3 per cent            0
                                                                              Remained about the same
   placed Australian retail
   in the lowest-tier.                      WEIGHTED AVERAGE                  Slightly less
                                                                              Significantly less

   Q.10        How do you
               expect leasing
   terms to change this year?                                                         3.6%
                                                                             5.3%
   It’s very much a status-quo, in
   terms of retailer expectations for                            10%
   leasing charges this year. Over                                                                       15.7%
   half [52.7 per cent] expect leasing    REMAIN
   terms to remain the same, while        ABOUT
   nearly 40 per cent anticipate         THE SAME
   slight changes. Only 7.8 per cent
   expect significant changes to
   leasing terms to occur in 2019. ►

                         SLIGHT
                        CHANGES

                                          52.7%

                          39.4%

  SIGNIFICANT                                                           65.5%
    CHANGES

        7.8%

www.insideretail.com.au                                        2019 AUSTRALIAN RETAIL OUTLOOK | 15
Q.11          How will the value of the Australian dollar impact your
                business this year?

    8.3%                                           57%                                                      34.7%

        Positive impact                     Over half [57 per cent] of respondents expect the Aussie dollar to negatively
                                            impact their business this year – a possible indication of the effects from
        Negative impact                     globalisation and political volatility across several continents. While 34.7 per
                                            cent expect no impact on their business, over 8 per cent are more optimistic
        No impact                           about benefits afforded from the value of the dollar.

       30.5%
                      32.8%                32.6%              Q.12       How has your
                                                                         revenue from
                                                              e-commerce changed in the
                                                              past 12 months?
                                                              Reflecting the continued evolution of the industry,
                                                              retailers’ response to e-commerce’s impact was
                                                              predominantly positive. Only 4 per cent said revenue
                                                              from e-commerce operations decreased. Meanwhile, over
                                                              30 per cent said revenue had significantly increased, while
                                                              nearly 33 per cent said revenue had increased slightly.

                                                                                   Increase slightly
                                                                                   Increase significantly
                                                             4%                    Stay about the same
                                                                                   Decrease

  Q.13            What percentage of your total revenue comes from
                  your e-commerce channel?

           Less than 5%            43.2%

           Less than 10%           22.2%

           Less than 25%           18.6%

         Less than 50%             7.2%

           Less than 75%           3.4%

       100% of revenue             5.3%

                               0                    10               20               30                   40               50

                    Though revenue growth has been large for the majority of retailers, it’s
                    interesting to note that most respondents said total revenue from e-commerce
                    represented less than 5 per cent. Only 5.3 per cent of retailers gained all of their
                    earnings through e-commerce.

16 | AUSTRALIAN RETAIL OUTLOOK 2019                                                                        www.insideretail.com.au
Facebook             74.6%

                              Instagram           62.9%

   Q.14
   Which are the most                                                               LinkedIn      23.5%
   effective social media
   channels your retail                                                Blog/native content
                                                                                                        18.2%
   business uses?                                                               on website
   Respondents were asked to select two platforms and the results were                                   Twitter      6.4%
   predictable, with Facebook [74.6 per cent] and Instagram [62.9 per
   cent] clearly on top, mirroring last year’s result albeit with a marked            Don’t use social media           5.5%
   rise of over 10 per cent for Instagram.
     Native content/blog had a solid response, with 18.2 per cent                                            WeChat       3.7%
   nominating their use of this channel.
                                                                                                              Pinterest    2.7%

                                                                                                              Snapchat     2.5%

      Q.15       What areas do you
                 think consumer
      expectations will increase the
      most in?
                                                                      Q.16        What is
                                                                                  the best
                                                                      Australian retail
                                                                                                                   Woolworths
                                                                                                                          Aldi
                                                                                                                    CottonOn
                                                                      brand for 2018?                                   Kmart
          Online delivery options            38.8%
                                                                      Though this question is hardly definitive
                                                                                                                      JB Hi-Fi
                                                                      in its findings, Australia’s typical who’s        Mecca
          Online delivery speed                    41.3%              who came out on top.                              Aesop
                                                                        Interesting to note, was the general
                                                                                                                         Coles
          Price                        32.8%                          commentary offered by many
                                                                      respondents, who claimed it way “far too        Smiggle
                                                                      hard to tell” and that “none stood out".     The Iconic
          Customer service                 34.1%

                       In-store digital
           11%         functionality

                                                                                             2.1%
             13.3%         Product quality
                                                                                     2.1%
          9%         Product variety                                                                           5.7%
                                                                             2.7%
                              Product freshness/
              17.2%           relevance

      2.5%    Other (please specify)
                                                                     2.7%
                                                                                                                              5%
      E-commerce’s impact on the industry can be
      seen in the response to consumer expectations,
      with online delivery options and speed usurping
      customer service [34.1 per cent] and price [32.8                 3.4%
      per cent] as the areas where customers will
      expect more from retailers in 2019.
        Product freshness/relevance [17.16 per cent]                                                                  4.5%
      remains an integral area of customer expectation,
      according to the survey responses.                                            3.4%
                                                                                                    3.3%
www.insideretail.com.au                                                             2019 AUSTRALIAN RETAIL OUTLOOK | 17
WINNERS
AND LOSERS

                                                                     AUTHORS

                                                         James Stewart, Partner,
                                      Head of Retail – Ferrier Hodgson, Azurium

                                           Nicholas Tsaptsalis, Ferrier Hodgson

                                                Philip Muscari, Ferrier Hodgson

                                              Charlie Griffiths, Ferrier Hodgson

                                             Alexandra Askey, Ferrier Hodgson

                                                 David Hacker, Ferrier Hodgson

                                                   Peter Mann, Ferrier Hodgson

18 | AUSTRALIAN RETAIL OUTLOOK 2018
WINNERS AND LOSERS

            From strength to strength
               Despite a raft of new challenges, this electronics powerhouse
                              shows no signs of slowing down.

                           BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                       and CHARLIE GRIFFITHS, Ferrier Hodgson

                                                                                                  “
                                                                                                        ...JBH
                                                                                                  has continued
                                                                                                  to deliver
                                                                                                  on its core
                                                                                                  business by
                                                                                                  leveraging an
                                                                                                  efficient supply
                                                                                                  chain, digital
                                                                                                  capabilities and
                                                                                                  new market
                                                                                                  growth.”
THE RETAIL ICON THAT IS JB HI-FI            sales increasing by 5.3 per cent in the      as the most shorted stock on the ASX
(JBH) HAS BEEN IN EXPANSION                 September 2018 quarter.                      by delivering a strong FY18 full year
since listing in 2003. Its recipe for         Over the same period, The Good Guys        result and confirming its sales guidance
success has largely been driven off a       also reported same-store sales growth of     for FY19. The company reported an
high energy store format, low price         1 per cent and total sales growth of 2.3     increase in its EBIT margin from 6.3
points supported by a strong in-store       per cent.                                    per cent to 6.4 per cent which would
discount ambiance and extensive               While trading conditions softened          suggest that the electronics Goliath
product range.                              for household goods in 2018, The Good        is holding up well in an increasingly
  While JBH’s long-term success is          Guys still outperformed its largest rival,   competitive market.
something to admire, 2018 presented no      Harvey Norman, which reported a 1.1             The US retail market suggests that
shortage of potential challenges for the    per cent fall in same-store sales over the   bricks-and-mortar retailers can compete
brand as Amazon entered the market          same period.                                 with Amazon. Best Buy has been trading
and the online electronics retailer Kogan                                                strongly in recent years, but it took a
went from strength to strength.             A GOOD BUY                                   significant shift in pricing strategies and
  While the impact of Amazon in             The acquisition of The Good Guys             a recalibration of its online offer to move
Australia has been somewhat muted –         arguably provides a more compelling          the dial after poor performance in the
remember it should be compared to a         strategic rationale for the JBH business     years leading up to 2012.
tsunami not an earthquake – JBH             through diversification of the JB brand to      JBH is in an interesting space. On
has continued to deliver on its core        include larger items, typically purchased    the one hand, consumer spending on
business by leveraging an efficient         in-store and difficult to sell online.       tech products is arguably the highest
supply chain, digital capabilities and         The difference in performance             it has ever been, with Quartz reporting
new market growth.                          between The Good Guys and JBH                consumer spending has surpassed
  JBH has also navigated technological      inevitably invites comparisons               spending on apparel in the US market
transformation through its product          between the two, and how JBH will            since 2010.
mix and has added whitegoods to its         replicate its successful model across           On the other hand, spending on
offering through the acquisition of The     two brands with significantly different      household goods is facing significant
Good Guys.                                  product propositions.                        headwinds as consumers tighten their
  As a result, JBH’s earnings defy the         Last year saw The Good Guy’s              belts under pressure from falling house
downturn in discretionary spending          promotional strategies moving closer to      prices, falling equities markets and the
and the broader retail landscape, with      JBH’s, as well as a greater emphasis on      weakening Australian dollar.
same-store sales growth in its Australian   consumer electronics in store.                  The stage is set for an interesting 2019
stores rising by 3.4 per cent and total        In 2018, JBH also defied expectations     for JBH.

                                                                                   2019 AUSTRALIAN RETAIL OUTLOOK | 19
WINNERS AND LOSERS

                           Stepping up in 2019

               With a focus on digital initiatives and backed by retail veterans,
                   this footwear firm has eyes on more growth this year.
                              BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                           and PHILIP MUSCARI, Ferrier Hodgson

  DESPITE AUSTRALIA’S CHALLENGING RETAIL                             and 10 per cent within 2 years. Ultimately, it is expected
  climate, Accent Group (Group), whose brands include The            same day delivery will roll out across all 350 stores with the
  Athlete’s Foot, Platypus and Hype, continued to thrive in 2018.    possibility of 3-hour delivery in the future.
     The Group posted a record net profit of $47.1 million and
  EBITDA of $90.8 million, up 17.9 per cent and 16 per cent          A TOE IN THE MARKETS?
  respectively on the previous year, off the back of $860.8          Other initiatives introduced as part of the businesses
  million in sales.                                                  omnichannel transformation included the introduction of click-
     The Group, formerly RCG Corporation Limited, operates           and-collect and click-and-dispatch.
  420 stores across Australia and New Zealand under 10                 Click-and-collect was introduced across all retail brands and
  retail brands, holding exclusive distribution rights for 10        accounted for more than 5 per cent of digital sales for the Group
  international brands.                                              in FY18. Click-and-dispatch grants an online customer access
     Underpinning these results is a fresh digital strategy          to the catalogue of all stores and accounted for 36 per cent of
  focused on connecting the physical and digital stores to offer a   digital sales in FY18.
  seamless experience to customers. The digital strategy centers       The early results from these digital initiatives have been
  around the Group’s newly created ‘Digital Hub’, a place            promising with a 130 per cent increase in digital sales in FY18.
  where the organisation’s digital talent can connect, collaborate     The digital strategy has been supplemented by investments
  and drive changes.                                                 in brick-and-mortar stores and reduced discounting.
     The Digital Hub has allowed the Group to gather customer          During FY18, 29 stores were refurbished while CEO, Daniel
  data and make substantial changes to the business, which           Agostinelli, banned discounting at all Group stores in late 2017
  have enhanced the in-store and online experience across            deriding it as “lazy retailing” and creating the perception that
  their brands. For example, the Group has created endless isle      the product was substandard.
  capability for their customers, providing access to the entire       Moving forward, the focus shifts to expansion.
  inventory catalogue across all brands. This includes inventory       The Group expects to open 30 new stores in FY19 including
  of all stores and online warehouses.                               a 600 square metre Platypus megastore in Melbourne Central.
     The Group is also focusing heavily on speed-to-market.          There are also plans for an additional 30-40 new stores opening
     Accent already offers next day delivery for online sales,       over the next two-three years.
  however in July 2018, same day delivery commenced in 12              Perhaps the most exciting and ambitious proposal is the
  Platypus stores with a $14 delivery fee.                           planned international expansion of the Platypus brand. The
     After just 10 days of going live, the Group said same day       Group plans to introduce the Platypus model overseas, starting
  delivery accounted for 3 per cent of total orders and this is      in Singapore, by leveraging the experience and knowledge of
  expected to increase to 5 per cent after year one of operating     retail icon, Brett Blundy, the Group’s largest shareholder.

20 | AUSTRALIAN RETAIL OUTLOOK 2019
WINNERS AND LOSERS

                              A retail makeover
There’s seemingly no end in sight for the growth of this cosmetics powerhouse,
      as it continues to delight customers with physical and digital nous.
                             BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                         and ALEXANDRA ASKEY, Ferrier Hodgson

F R U S T R AT E D W I T H I N -S T O R E   four times faster than the legacy brands        YouTube and Instagram now offer
C U S T O M E R S E RV I C E F O R          of the department store era.                 a steady stream of beauty tutorials
cosmetics? Not getting what you               Today, Mecca’s approach to cosmetics       and product reviews that 10 years ago
want online? For those of you looking       has landed itself as a beauty destination,   largely didn’t exist. In 2017, YouTube
for some divine intervention in             offering cutting edge brands side-by-        beauty content videos grew from 55
personal cosmetics...                       side to high-end labels.                     million to 88 million, registering more
  Welcome to Mecca.                                                                      than 700 million views.
   Mecca is arguably the hottest            THE POWER OF THE SELFIE                         Mecca has successfully leveraged
cosmetic retailer in Australia and has      The growth of online engagement in           these platforms developing a loyal
established itself as the place to be for   beauty products has revolutionised the       following of ‘beauty junkies’ who
beauty products, service and knowledge      way major brands engage with their           can access the brand’s online

                                            “
for the Australian customer.                target customer.                             content, top beauty products for the
                                                                                         season and video tutorials for new
CURATE YOUR STYLE                                                                        releases. Thoughtfully curated content
While the traditional beauty market was                                                  creates a sense of community and
being dominated by department stores,
                                                   The growth                            loyalty between the brand and its
with single brand counters operated by      of online engagement                         devotees. Physical and online stores
a brand representative, Mecca’s founder,    in beauty products                           have also been successfully integrated,
Jo Horgan, recognised the desire of                                                      creating a seamless shopping
Australian consumers to try imported,       has revolutionised                           experience across platforms.
high-end labels, that moved away from       the way major brands                             In-store, customers are greeted by
the department store approach.                                                           the physical counter-part of Mecca’s
   Rewind to 1997 and Mecca’s first         engage with their                            ‘Top 5 Products for Summer Skin’ that
store opened in South Yarra, offering       target customer.”                            they may have read about online before
consumers a handful of imported,                                                         going into store.
innovative brands.                                                                           Customers can also use the in-store
   Now Mecca offers over 120 brands                                                      snap-chat decals, studio lights (for
across its physical and online stores,                                                   the ‘perfect camera-ready look’) and
providing consumers the opportunity                                                      even selfie-studios, to create their
to curate their own beauty collection                                                    own online content. Not only does
and style.                                                                               the amalgamation of physical and
   Mecca’s successful expansion has                                                      digital create an enticing experience for
capitalised on the choice that beauty-                                                   customers, but it also furthers Mecca’s
loving customers are after.                                                              online reach through micro-influencers.
   The beauty sector is defined by a                                                         Although the brand is reluctant to
level of customer engagement that                                                        discuss its financials, industry sources
is unique. Beauty customers are                                                          estimate Mecca annual revenues to be
passionate, socially aware and want to                                                   circa AU$350 million and that it holds
understand a beauty brands story, brand                                                  roughly 25 per cent of the market. What
values, its product ingredients and                                                      is most impressive is Mecca’s growth,
expect a commitment to environment                                                       with Horgan on the record in late 2017
and often animal welfare.                                                                stating that the brand had experienced
   At $5 billion in sales a year,                                                        year-on-year growth of 45 per cent for
global brands take notice of what                                                        the previous five years.
the customer wants.                                                                         In the era of choice and instant
   The emergence of challenger                                                           gratification that beauty customers
brands was recognised by Horgan,                                                         desire, Mecca is their match. A
with Mecca’s original store offering a                                                   truly modern Australian brand with
curated sample of these brands, such                                                     a thoughtful digital strategy and
as Nars, Too Faced and Hourglass.                                                        interaction between online
These challenger brands now take up                                                      and physical, we expect Mecca
10 per cent of the beauty market, with                                                   will continue to grow its loyal fan
McKinsey reporting their sales growing                                                   base in 2019.

                                                                                  2019 AUSTRALIAN RETAIL OUTLOOK | 21
WINNERS AND LOSERS

                      Who said retail is easy?
           It’s been 12 tough months for Myer and 2019 is not looking any easier
                              for the department store retailer.
                               BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                             and PETER MANN, Ferrier Hodgson

  O N C E T H E M A I N AT T R A C T I O N      listing on the ASX in 2009, largely due     chief executive of UK retailer House
  OF THE MALLS AND SHOPPING                     to the company’s move to write-down         of Fraser (which itself went through a
  precincts across the country, Australia’s     its brand name and goodwill, but also       performance turnaround), analysts have
  long-standing love of department stores       impacted by a total sales decline of        questioned the appropriateness of this
  is finally fading.                            3.2 per cent and operating gross profit     appointment given his lack of Australian
     Impacted by fast fashion retail            down by 2.9 per cent.                       retail experience and point to the fact that
  chains, online retail models and                 This poor financial result has simply    House of Fraser entered administration
  digitised consumers, across the globe         added fuel to the fire for significant      in the UK shortly after his appointment
  department store heavyweights are             shareholder and retail icon, Solomon        as Myer CEO.
  restructuring their businesses, changing      Lew, who continued to relentlessly attack     As 2018 progressed, more issues arose
  their product mix and closing stores due      Myer’s management for incompetence,         as shares were put into trading halt late
  to poor performance.                          calling for the board to step down.         in November by the ASX compliance unit
     The department store model, a                 Indeed, at Myer’s annual general         in response to reports of falling sales for
  model that is over 100 years old, is under    meeting in November 2018, the               the first quarter of FY19. The share price
  siege as customers lose patience with         retailer’s management team suffered         closed at 45 cents prior to the trading
  substandard service, poor pricing and         a second strike against its board and       halt, almost a tenth of their listing price
  product range parameters that are limited     executive remuneration, however a spill     of $4.10 in 2009.
  by their physical store environment.          motion to declare all director positions
                                                was defeated.                               ACROSS THE SEGMENT
  FROM BAD TO WORSE                                A silver lining to Myer’s 2018 results   Comparatively speaking and less
  Myer has now made its way onto our list       is the increase in online sales, which      publicised than Myer, rival department
  of losers for three consecutive years, with   rose 34.1 per cent to AU$192.5 million in   store David Jones posted a reduction
  2018 arguably its toughest year yet.          FY18, albeit only a small portion (7 per    in same store sales of 0.4 per cent for
     While Myer has become the poster           cent) of total sales.                       the year to June 24, 2018. Like Myer,
  child for the challenging retail landscape       In a performance-driven industry,        David Jones experienced strong online
  retailers now live in, controversy and        Myer’s poor results have inevitably         sales growth (21 per cent) but the online
  ongoing speculation regarding its             seen key leadership changes. John King      channel is currently too small (5.3 per
  financial future have continued to            was brought in from the UK to replace       cent of total sales) to make a meaningful
  embattle the retailer.                        the outgoing Richard Umbers in June         impact on total sales.
     In 2018 Myer posted an annual loss         last year.                                     While key department store players
  of AU$486 million, its first loss since          While King’s CV included a role as       have been challenged, some discount
                                                                                            department stores, which have also
                                                                                            encountered significant headwinds in
                                                                                            recent years, led the way in FY18.
                                                                                               Wesfarmers’ Department Store
                                                                                            Division posted $8.8 billion in revenue
                                                                                            and a record EBIT of $660 million (an
                                                                                            increase of 21 per cent year-on-year) for
                                                                                            FY18. The results of the division, which
                                                                                            is made up of discount department
                                                                                            stores Kmart and Target, offered a
                                                                                            positive story among an industry which
                                                                                            continues to be challenged.
                                                                                               Kmart’s run of success has come
                                                                                            through continued evolution of product
                                                                                            mix, store formats and customer service,
                                                                                            and shows the discount department store
                                                                                            can hold a valuable place in Australian
                                                                                            retail. However, Kmart’s 2018 Christmas
                                                                                            sales failed to meet expectations,
                                                                                            prompting Wesfarmers to flag lower
                                                                                            earnings for the division for the half-year.
                                                                                            2019 looks to be defining year for the
                                                                                            department store model.

22 | AUSTRALIAN RETAIL OUTLOOK 2019
WINNERS AND LOSERS

                                “Just Afterpay it”
       Though regulatory clouds loom ahead, rapid and relentless growth for this
          fintech firm highlights the spending habits of millennial consumers.
                              BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                         and NICHOLAS TSAPTSALIS, Ferrier Hodgson

   Y O U K N O W Y O U ’V E M A D E I T
   A S A S TA R T -U P W H E N Y O U R
   company’s name becomes a verb. We
   “Google” questions to find the answer,
   “Uber it” to get from A to B, and
   “YouTube it” to find out how it’s done.
   So what do millennials call it when they
   want to “buy-now-pay-later”? They
   “Afterpay” it!
      Afterpay, the payment platform
   allowing an immediate purchase that is
   then paid-off in four equal fortnightly
   instalments, went from fintech start-up
   in 2015 to a darling of the ASX worth
   nearly AU$5 billion in 2018.
      In three years, Afterpay has rapidly
   grown to have 2.3 million active
   customers and over 18,000 retailers,
   including Kmart, The Iconic, Rebel
   Sports and Officeworks.
      All this has amounted to
   Afterpay delivering AU$2.2 billion
   in sales for its retail partners and
   processing approximately 25 per
   cent of total online fashion retail sales
   and 8 per cent of total online retail       the payment process, and he’s been           has called a parliamentary inquiry into
   sales in Australia [Australian Financial    proven right so far.                         financial products not subject to scrutiny
   Review, 2018].                                 Afterpay’s business model captures        in the Royal Commission and Afterpay
       Co-founder Nick Molnar came up          the shifting spending behaviour of           appears to be in the firing line.
   with the concept when trying to grow        millennials, which Molnar believes is           While regulatory uncertainty looms,
   basket size and conversion rates in his     increasingly cashless and free of credit.    the changing Australian landscape
   online jewellery business. Molnar was          Afterpay pays the retailer for the        seems unlikely to be stemming
   convinced millennials would be more         customer’s purchase, less a commission       Afterpay’s growth as their venture into
   willing to make purchases if there was      of course, and then assumes the              the USA continues full steam ahead.
                                               risk of recovering this amount from              Since launching in the USA in May

   “
   a service available that could smooth
                                               the customer. However, should the            2018, Afterpay has signed over 900
                                               customer miss a payment, Afterpay            retailers, including Urban Outfitters,
                                               charges a late fee allowing it to            amassing around 300,000 consumers.
           Molnar                              collect revenue from both sides of the       These early signs suggest Afterpay has
   was convinced                               transaction. At last report, customer late   the potential to make a huge splash as
                                               fees account for 24 per cent of Afterpay’s   it took the business nearly 18 months to
   millennials would                           revenue with the remaining 80 per cent       reach similar numbers in Australia.
   be more willing to                          representing retailer commissions.               Considering the size of the US
                                                  As Afterpay doesn’t technically           market, US$450 billion in annual online
   make purchases if                           charge any interest to the customer, it’s    sales vs US$18 billion in Australia, any
                                               avoided being governed by the National       foothold Afterpay can build is likely to
   there was a service                         Consumer Credit Protection Act.              be significant to its overall performance.
   available that could                                                                        2018 has seen Afterpay’s share price
                                                                                            double during some of the toughest
   smooth the payment                          REGULATORY CLOUDS,
                                               INTERNATIONAL GOODS                          retail conditions in recent history
   process, and he’s                           This could all be about to change            making it an unarguable winner. With
                                               due to the growing calls for Afterpay        the potential for global expansion
   been proven right                           to be subject to responsible lending         gaining traction, its winning days may
   so far.”                                    regulations. The Australian Labor Party      continue well into 2019 and beyond.

www.insideretail.com.au                                                              2019 AUSTRALIAN RETAIL OUTLOOK | 23
WINNERS AND LOSERS

                       Franchising headwinds
     A slew of scandals and a parliamentary inquiry dealt a number of blows to
    Australia’s franchise industry in 2018. Is the industry set for a major shakeup?
                              BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                           and DAVID HACKER, Ferrier Hodgson

                                                                                          declining) sales, high franchise licensing
                                                                                          fees and high occupancy and wage
                                                                                          expenses (from trading outside normal
                                                                                          hours).

                                                                                          RETAIL FOOD GROUP
                                                                                          Perhaps the most publicised example of
                                                                                          the franchise industry’s struggles last
                                                                                          year is Retail Food Group (RFG). The
                                                                                          group, whose brands include Gloria
                                                                                          Jeans Coffee, Donut King and Brumby’s
                                                                                          Bakery has been dragged through the
                                                                                          mud in 2018.
                                                                                             RFG has experienced troubles since
                                                                                          a Fairfax Media investigation revealed
                                                                                          the business model had created
                                                                                          financially distressed franchisees. This
                                                                                          prompted questions about the value
                                                                                          of its brands and the quality of the
                                                                                          company’s performance.
                                                                                             Despite a 7.1 per cent increase in
                                                                                          revenue, the group reported a full year
                                                                                          loss of AU$307 million for FY18. The
                                                                                          questions raised from the investigation
                                                                                          severely damaged the brands, which
                                                                                          saw Gloria Jeans Coffee book a AU$90
                                                                                          million goodwill impairment and
                                                                                          Michel’s Patisserie record a AU$59
                                                                                          million impairment for the period.
                                                                                          These were among a total of AU$403
                                                                                          million in impairments across its suite
                                                                                          of brands.
                                                                                             To further RFG’s pain, CEO Richard
                                                                                          Hinson abruptly resigned at the end
                                                                                          of last year, following a management
                                                                  It’s not been a great   restructure outlined at the company’s
                                                                  year for the parent     annual meeting.
                                                                  company of Michel’s
                                                                  Patisserie, Brumby’s
                                                                                          HARVEY NORMAN
                                                                  Bakery, Donut King
                                                                  and Gloria Jeans.       Harvey Norman was dealt several
                                                                                          blows last year after a bumper 2017.
                                                                                          Shareholders voted to reject the
  A FAR CRY FROM THE FRANCHISE                 under the very public microscope           retailer’s remuneration report at its
  BOOM OF PAST DECADES,                        of the parliamentary inquiry into          AGM in November, with the board
  Australia’s franchising industry is facing   the Franchising Code of Conduct,           receiving a first strike. This presents
  some serious headwinds.                      which saw a number of submissions          the challenge of a potential board spill
    The AU$170 billion sector came out         to the enquiry label the franchise         at this year’s meeting should a second
  of 2018 battered and bruised, with           model broken and detail widespread         strike be received.
  several franchise models embroiled in        mistreatment of franchisees.                  Shareholders cited the lack of
  scandals ranging from poor treatment of        The public scrutiny overlays difficult   independent directors on the board,
  franchisees to systemic underpayments        trading circumstances where many           loans made to a franchise and the
  of employees.                                franchisees are struggling to make         businesses risk assessment capabilities
    The industry has faced scrutiny            a buck in the face of flatlining (or       following failed agriculture and

24 | AUSTRALIAN RETAIL OUTLOOK 2019
“      The likes of
                                                                                       Yum Restaurants
                                                                                       Australia (KFC’s
                                                                                       franchisor),
                                                                                       Beacon Lighting
                                                                                       and The Good
                                                                                       Guys have begun
                                                                                       purchasing back
                                                                                       franchises and the
                                                                                       shifting landscape
                                                                                       has raised
                                                                                       questions as to
                                                                                       what the future of
                                                                                       retail franchising
                                                                                       in Australia looks
                                                                                       like.

mining investments. Net profit was        the investigation has been somewhat        Lighting and The Good Guys
down 16.4 per cent in FY18 on the         damaging for the brand’s image.            have begun purchasing back
previous year, underpinned by property      Despite the investigation, financial     franchises and the shifting landscape
revaluations and failed investments.      performance certainly doesn’t appear       has raised questions as to what the
Harvey Norman’s share price dipped        to have been affected, with Domino’s       future of retail franchising in
to four-year lows and the retailer will   posting a record profit after tax of       Australia looks like.
be looking at 2019 as an opportunity to   AU$136 million in FY18, up 15 per cent       The parliamentary inquiry has
bounce back.                              on the previous year. Same store sales     shone a light on deep issues within
                                          are also up across all markets for the     Australian franchising seeking to raise
DOMINO’S AUSTRALIA                        period, including 4.5 per cent growth in   the standard of conduct in the sector.
An 18-month investigation by the Fair     the domestic market.                       The Franchise Council of Australia’s
Work Ombudsman into Domino’s                Time will tell if Domino’s well-         recommendations to the inquiry
Pizza’s practices concluded late in       publicised issues will have an adverse     include mandatory legal and business
2018, handing down a number of            effect on their financial performance.     advice prior to purchasing a franchise
findings, including the discovery of                                                 and the introduction of a mandatory
underpayments, non-payment for work,      OTHERS                                     franchise registration requirement.
leave entitlements and several other      While several franchises’ struggles          As some of the franchising
breaches by franchisees.                  have been highly publicised, changes       heavyweights feel the pressure and the
   Domino’s has said that it is           are also occurring away from the           regulatory setting shifts, the stage is
dedicating resources to achieve full      spotlight. The likes of Yum Restaurants    potentially set for a major shakeup of
compliance in the future, however         Australia (KFC’s franchisor), Beacon       the industry.

                                                                               2019 AUSTRALIAN RETAIL OUTLOOK | 25
RETAIL TRENDS

                                                                     AUTHORS

                                                         James Stewart, Partner,
                                      Head of Retail – Ferrier Hodgson, Azurium

                                           Alexander Burrows, Ferrier Hodgson

                                               Harrison Bailey, Ferrier Hodgson

                                                 David Hacker, Ferrier Hodgson

                                         Christopher Nicolaci, Ferrier Hodgson

26 | AUSTRALIAN RETAIL OUTLOOK 2019                    www.insideretail.com.au
RETAIL TRENDS

                                      Last mile stand
     Australia’s geographical challenges have forced local retailers to rethink how
        they can effectively service consumer’s growing appetite for delivery.
                               BY JAMES STEWART, Partner, Head of Retail – Ferrier Hodgson, Azurium
                                         and ALEXANDER BURROWS, Ferrier Hodgson

   AS RETAILERS COMPETE                          focused on providing multiple delivery       BRINGING DELIVERY IN-STORE
   FOR MARKET SHARE IN AN                        options for customers.                       To avoid issues (and costs) associated
   increasingly saturated market, last mile         These options vary largely, from          with the last mile, retailers are
   delivery and click-and-collect have           third-party delivery (Australia Post),       embracing the click-and-collect model.
   become defining battlegrounds for             to express or couriered packages.            Consumers can ensure that their
   attracting and retaining customers.           Customers can use click-and-collect or       desired products are available before

                                                                       “
      The new age of smart devices and           three-hour rush                                                      leaving the
   other mobile technology has led to a          delivery is offered                                                  house and avoid
   surge in e-commerce and turbo charged         during business                                                      delivery fees.
   customer demand for higher levels of          hours if you live                     ...customers are                 In early 2018,
   service, convenience and speed through        in a major city (or     demanding greater                            Officeworks
   all channels.                                 fringe suburb) and                                                   stated that 20
      Like their global counterparts,            are prepared to         transparency around                          per cent of their
   Australian retailers face the challenge       pay the premium         product tracking                             online orders
   of sustainably servicing the demand for       of $14.99.                                                           were fulfilled
   fast and efficient delivery at price points      Accent Group,
                                                                         through the delivery                         through click-and-
   that customers are willing to pay.            whose brands            cycle…”                                      collect (Channel
      Global retailers have undoubtedly          include Platypus,                                                    News, 2018). Coles
   raised the expectations of customers          Footlocker and Hype – another one of                                 have added 1,200
   and pushed local retailers to assess          our winners of 2018 – launched same day locations across Australia, comprising
   their logistics and fulfilment                delivery across its entire retail network    25 per cent of total online sales
   capabilities in order to stay                 last year. The group, like an increasing     (Australian Financial Review, 2018).
   competitive. Conquering the last mile,        number of retailers, are leveraging their      Adobe’s head of digital
   the final, and most costly, step in the       store network as fulfilment centers to       transformation, Scott Rigby, refers to
   sale of a product is no easy feat.            ship from stores, rather than regional       the latest data from the bumper 2018
      Overseas, retail heavyweights such as      warehouses and as distribution centers       Thanksgiving shopping weekend in
   Amazon, Walmart and Alibaba continue          for collection of purchases.                 the US, which includes Black Friday
   to invest in last mile innovations and           These retailers are among a growing       and Cyber Monday, as a sign of what’s
   acquisitions to bolster their capabilities    number of brands, including The Iconic       to come.
   in this area. These Goliaths are rolling      and Cue, that are building same-day             “Australia can use the US data as a
   out a host of delivery and collection         delivery into their offering. Inside Retail  barometer for trends, where we saw
   options around the world including            reported on Cue becoming a trailblazer       a record 50 per cent increase year-
   24-hour self-service kiosks, delivery         as the first national bricks-and-mortar      over-year for click-and-collect,” he
   ‘robots’ and even couriers unlocking          retailer to launch three-hour delivery       said. “This reinforces the importance
   your door and leaving deliveries in your      nationally last year, joining online         for businesses to have the ability to
   home through Amazon Key.                      marketplace The Iconic.                      orchestrate campaigns across online
      In Australia however, the domestic            Additionally, customers are               and offline retail experiences.”
   market presents challenges less               demanding greater transparency                  The last mile remains one of the
   prevalent in many overseas markets,           around product tracking through the          toughest logistical challenges for
   including consistent delivery                 delivery cycle, seeking features such as     retailers. With these issues comes
   times across all regions due to our           Australia Post’s text message updates        new innovations, startups and more
   geographical spread and lack of               and notifications.                           effective methods to meet customer
   population density, outside the                  While same day delivery is targeted       demands. As customer demands shifts
   major cities.                                 by many retailers, it’s no longer just       to customer expectation, optimising the
      JB-Hi-Fi, listed as one of our winners     the speed of delivery, but also visibility,  last mile will become an even greater
   in 2018, is an Australian retailer that has   transparency and customer control.           focus for retailers in 2019.

www.insideretail.com.au                                                                2019 AUSTRALIAN RETAIL OUTLOOK | 27
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