shareholders in late June. Woolworths has been assessing opportunities in Australia since Ian Moir, the former head of Country Road, took up the CEO position for the Cape Town-based retailer, and could just as easily have made a bid for Myer as for David Jones. Moir opted for David Jones as the better positioned department store group for future growth, and that option has been vindicated by recent financial results which have David Jones outpointing, Myer albeit with modest gains. The caution reflected in the results is not about the figures themselves, but the strategies that Woolworths adopts in pursuing growth in the years ahead. Moir has indicated that Woolworths’ successful private label program will be one of the key elements of the growth strategy. Store network expansion is also part of the growth strategy, including a rollout of more Village format small footprint concepts, such as those at Toowong in Queensland and  Malvern, Melbourne. Both strategies would boost sales, and have been part of the blueprint for David Jones developed by Paul Zahra, which financial half year and third quarter results would suggest is starting to gain some traction. The caution for Woolworths, however, is not to chase growth by trying to out-Myer Myer. Indeed, a key reason why David Jones was a better takeover target than Myer for Woolworths is the fact Myer has expanded its store network in the past five years without any gain in revenue, but with higher operating costs. The Myer exclusive brands or private label program has been growing as a proportion of total sales and is yielding higher margins, but is creating cultural problems with concessions and, despite some notable gains in the brand wars between the two department store chains, is generating confusion for customers about what Myer stands for and its positioning. The prospective gains for David Jones under Woolworths’ ownership are generated by the scale that will be achieved as a multi-national department store retailer, but in the Australian market, will also rely on David Jones securing a distinctive market positioning that enables it to compete effectively with Myer and other retail chains, including new international entrants Performance David Jones posted a 4.1 per cent increase in total sales to $407.2 million for the third quarter of the 2014 financial year. The like for like sales gained 2.4 per cent, including one and a half months of trade in the company’s new Highpoint, Melbourne, store which opened in mid-March 2013, but excluding the new Malvern store which opened in September. The like for like sales calculation also excludes electronic category sales, which are subject to a brand management agreement signed with Dick Smith last October. The David Jones third quarter result continued the half year trend in which David Jones posted total sales of $1.04 billion, representing a 3.8 per cent increase on the corresponding period in the 2013 financial year, and a 1.1 per cent like for like lift in revenues. Online sales continued to grow quarter on quarter, delivering 190 per cent growth in the latest. “We are pleased to report that we continued to see sales growth momentum in the quarter,” said Zahra. “We experienced our third consecutive quarter of total sales growth and our second consecutive quarter of like for like sales growth this financial year.” David Jones’ key categories of womenswear, menswear, beauty, shoes, accessories, and homewares all delivered positive sales growth in the quarter, and all states increased sales, with the exception of South Australia, which was adversely impacted by the refurbishment of the Adelaide Central Plaza store, and Queensland, which was impacted by centre refurbishments at Garden City and Toowong Village. In comparison, Myer third quarter sales fell by 0.93 per cent to $646.5 million, with like for like revenue growth a very modest 0.24 per cent. Myer blames the impact of significant refurbishments on the weak sales performance, but the reality for the department store chain is that its new store rollout and the refurbishment of key stores has not boosted revenues. Half year sales for Myer were up just 0.3 per cent to $1.74 billion. Bernie Brookes, Myer CEO, said it was encouraging to achieve another quarter of comparable store sales growth, an achievement in seven of the past eight quarters, despite the closure of two smaller stores and the refurbishment disruption. Brookes expects fourth quarter sales to be boosted by the completion of refurbishments at its Adelaide store this month and Indooroopilly in Queensland in June. As with David Jones’ experience, Brookes says there was continued strong growth in online sales during the third quarter, and Myer’s online range has been expanded with in SKUs now sitting at more than 119,000. “Importantly, there was further growth in key customer metrics, with over nine million visits to the online store during the quarter,” Brookes said. The acquisition Woolworths is proceeding with planning for the acquisition of David Jones despite concerns in South Africa about the deal, which provide DJs shareholders with a handsome 25 per cent premium on prices prior to the bid last month. The concerns are related to the surprise factor of the bid, the knockout premium price offered, and queries about Woolworths’ intentions for the ongoing expansion of its existing African retail networks. Support for the takeover locally remains strong, and the forthcoming David Jones shareholders meeting is expected to approve the takeover bid and allow Woolworths to acquire all of the issued scrip in David Jones, avoiding the distraction Moir endured at Country Road, where minority shareholder, Solomon Lew, consistently criticised management and board decisions. Moir argues the David Jones takeover will create create one of the world’s 10 largest department store groups and will provide scale to allow Woolworths’ retail brands to compete with global competitors. Moir has already endorsed Zahra’s growth strategy at David Jones, indicating Woolworths will add extra capability and financial strength. David Jones posted an annual profit of $95.2 million in the last financial year, and Moir believes Woolworths can lift earnings to at least $130 million within five years. Woolworths African continental business outside South Africa is currently posting annual revenue gains of more than 20 per cent, albeit off a small base. The company has the capability to continue developing the African business at the same time as David Jones and Country Road in Australia. While David Jones will be strengthened as part of a retail business with $5 billion in annual sales, provided shareholders tick off the takeover offer, Myer faces a challenging future as a standalone business unless it can find another viable merger partner. One possibility is the reunification of an old stablemate – Target discount department stores – with Myer. Wesfarmers has previously mulled the divestment of Kmart, but would now be more likely to part with the underperforming Target chain in the discount department store category where it would seem inevitable that something has to give, with the major chains struggling for growth. Myer could continue to bolt on smaller chains like Sass & Bide, but its failed David Jones merger strategy was all about gaining greater scale, the same objective as the Woolworths bid it flushed out. Target would be hard work, but its current performance makes it a feasible option for Myer to achieve an operational scale and synergies that might underpin a brighter future. This story first appeared in Inside Retail PREMIUM issue 1997.