It has been apparent as this year developed that conditions within the discount end of department store retailing have become increasingly torrid and volatile.
While some of that could be attributed to the difficulty in “cycling” last year’s stimulus-inflated sales numbers – the impact of the stimulus was peaking around the middle quarters of last calendar year – and there would also be some negative effects of higher interest rates and some economic uncertainty, the sales numbers for Big W, Target, Kmart and Myer would suggest that there is also a significant competitive dynamic at play.
Big W, which had hoovered up a lot of the stimulus dollars last year, suffered a 10.2% decline in comparable store sales in the final quarter of the year to June. Today’s Wesfarmers group sales results showed that fourth quarter sales for Target were down 4.4% while Kmart’s essentially flat-lined. Myer’s final quarter numbers haven’t been revealed yet but the continuing aggressive levels of discounting would suggest it is struggling to hold up its sales.
While there has been considerable curiosity about the collision between the ”new” Myer and its former sibling Target and the flow-on effects of Myer’s more aggressive pricing of its lower value offers on Big W, there has been less focus on the radical re-positioning of Kmart and the broader competitive effects of what Guy Russo and his team are doing.
Russo has dramatically slashed Kmart’s range of products and has been very aggressive in using price to drive volume through the much more focused offering. That strategy, and the volumes Kmart is now doing in apparel in particular, has been sending ripples throughout the more price-sensitive end of general merchandise retailing. Suppliers and competitors say the Russo strategy is causing structural changes within their sectors.
Earlier this year Wesfarmers, presumably concerned about the potential for cannibalisation between its own brands, established a management committee, chaired by Target’s Launa Inman, to ensure co-ordination between Target and Kmart on strategic issues.
Kmart is still a work in progress. It is still exiting unprofitable lines and categories, which would create some disruption both within its own numbers and those of its competitors. Until it has completed its repositioning its strategies are likely to be another disrupting influence among a range of adverse issues the sector is grappling with as it trades through the final periods where comparisons are affected by last year’s stimulus.
While the discount department stores are struggling for momentum, the Coles food and liquor division continues its steady improvement, with full-year sales growth of 5.6% (five% on a comparable stores basis) and final quarter sales growth of 5.5%, despite significant price deflation (whereas Woolworths experienced modest inflation).
The deflation was a function of both external factors – prices for fresh products declined – and also Coles’ own far more aggressive and more targeted pricing strategies as it repositions its brand and offer. Without profit numbers, it isn’t possible to determine whether Coles’ sales growth is being achieved at a cost to margin or whether volume gains are offsetting the price reductions.
The Coles’ sales performance compares more than favourably with its main competitor, Woolworths, but the direct comparisons are still less significant during what is still a rebuilding phase than the fact that since Ian McLeod and his new team established themselves, the business has demonstrated consistent and solid improvement.
Given the raft of changes made or planned that are yet to have a material impact on the business, that would be very reassuring and encouraging for Wesfarmers’ Richard Goyder and his board.
The other, predictable, element of the Wesfarmers’ numbers was another year of double-digit sales growth from the Bunnings hardware chain. While the growth rate fell away in the final quarter, that was to be expected given the stimulus-inflated sales generated in the fourth quarter last year.
It will be quite some time before the rival Woolworths/Lowe’s big box network is properly up and running and has any potential to impact Bunnings. In the meantime John Gillam is continuing to drive rapid growth and is improving and shoring up the competitive position of his already formidable business in the process.
This article first appeared on Business Spectator
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