The Australian retail industry is going through a significant period of consolidation and ownership changes as retailers respond to global competitors, the reduced purchasing power of the Australian dollar, increasing wages costs and tight retail conditions. The Australian retail industry is going through a significant period of consolidation and changes are running through the entire industry, from independents and franchisees through to smaller chains and up to some of the largest retailers. A
As Inside Retail Weekly reported last week, there is a major shakeout in the retail industry with data from the Australian Securities and Investments Commission recording a 6.7 per cent increase to 903 retailers who were placed in insolvency administration in the 12 months to March 2016.
A comprehensive analysis of financial data, including payment records, by SV Partners indicates as many as 1200 retailers in their survey are at high risk of financial failure, many of them in the clothing and supermarket categories.
SV Partners said seven retailers with sales of more than $100 million are sailing close to the wind.
Restructuring and repositioning of retail brands has become a priority for Woolworths as it seeks to jettison the Masters Home Improvement chain, to rejuvenate the Big W chain and refresh its core supermarket business, while Wesfarmers has been forced to address the malaise of the Target discount department store chain while attempting to lift results in its liquor stores.
Myer is pursuing a transformation strategy to lift sales and earnings after growth virtually stalled as consumer spending eased and the novelty of new global brands captured some of the spending that might have boosted department store coffers.
David Jones is continuing to restructure and refine its business model under its new ownership, the South African retail group, Woolworths Holdings, while The Good Guys has bought out its franchisees to prepare the business for either a trade sale or a listing on the Australian Stock Exchange.
Metcash reversed its plans to build an automotive division by selling out to the Burson Group, but is now keen to acquire the Home Timber and Hardware banner from Woolworths as part of the Masters Home Improvement exit.
The Metcash sale of its automotive brands retail and services portfolio bolstered Burson Group soon after it launched on the Australian Stock Exchange.
Franchise groups are also adjusting their business models as lower margins impact on the viability of franchisees and impact on franchisor returns.
Smaller, single brand franchise systems are gradually being mopped up by large multi-brand companies that can reduce operating costs through greater scale, particularly in property, marketing, recruiting and product sourcing.
The changing tack of mid-tier chains
Retail chains are also looking to address a more competitive outlook with listings on the Australian Stock Exchange or takeovers and mergers, with those changes sometimes also providing an exit strategy for long-term owners.
Apart from Burson Group, mid-tier chains that have taken the public listing route include Adairs, Beacon Lighting, Godfreys, Shaver Shop and Baby Bunting.
Each of the chains outlined expansion in the documentation provided to investors and several, such as Beacon Lighting and Godfreys, also indicated they would apply some of the capital raised to buying out franchisees.
While most retail chains are keen to strengthen their financial backing, others like the specialty chains, Australian Geographic and The ABC Shops, have elected to close unless they can find a new owner.
The Myer family is currently looking for a buyer for its 67-store Australian Geographic chain, which at its peak had annual sales of around $50 million but is losing money.
The business is expected to close by March 2017 unless a new owner can be found, ironically winding up another retail venture that was started by entrepreneur, Dick Smith, albeit not on the same scale as the collapse in January of this year of the electronics chain that bore his name.
Consolidation is touching virtually every retail category with the major pharmacy wholesalers and brands snapping up smaller banner groups and a potential merging of the Fantastic Furniture and Super Amart chains.
Done deals in recent weeks have included the acquisition of Hype DC by the listed RCG Corporation, which owns The Athletes Foot, the PAS Group sale of its underperforming Metalicus brand to General Pants and Noni B’s ambitious acquisition of Pretty Girl from Consolidated Press Holdings.
Noni B has emerged from a near death experience two years ago to buy out a fashion brand portfolio and store network larger than itself and, interestingly, Solomon Lew’s Premier Retail has apparently passed another acquisition opportunity despite a healthy cashbox and frequent expressions of interest in buying other businesses.
Lew is probably now more focused on expanding his Smiggle and Peter Alexander chains in overseas markets and in building sales through new partnership deals with Myer for Seed, Nine West and French Connection, after exiting joint ventures in the South African market and stabilising the mid-tier retail fashion brands in Premier Retail.
Noni B’s big play
Noni B has entered a non-binding agreement with James Packer’s Consolidated Press Holdings to acquire the Pretty Girl retail business for at least $75 million.
Noni B will fund the acquisition with $30 million of bank debt, a $40 million rights issue at $1.25 per share and the allocation of a 10 per cent parcel of shares value at $7.5 million to Consolidated Press Holdings.
The Pretty Girl business always seemed an incongruous division of the media and gaming company, but provides Alceon Group, the majority shareholders in Noni B, with an opportunity to develop a much stronger brand portfolio.
Noni B currently has annual sales of around $110 million and 200 stores but will lift revenues to $300 million and expand its store network to 570 stores with the acquisition.
The listed retailer was on its knees two years ago after racking up more than $16 million in losses over three years and earning a qualification on its accounts from auditors.
Phil Green and Trevor Loewnsohn, of Alceon, took control in 2014 for an outlay of $16 million and, after buying out the Kindl family’s 42 per cent shareholding, now have a 77 per cent stake in the listed retailer.
Noni B has recovered and posted a $2.8 million profit in the first half of the 2016 financial year after changes to product ranges and supply chain and an end to discounting.
Retail ripe for consolidation
Despite the apparent recovery, the acquisition of the Pretty Girl, Rockmans, Table 8 and W Lane chains is an ambitious move for Noni B, notwithstanding there will be synergies and cost savings derived from a larger scale business.
The willingness of banks to provide finance to a retailer that was close to collapse and the brashness of Alceon’s proposed capital raising at $1.25 a share, representing a premium over value of Noni B scrip, underlines the banking and finance sectors view that the retail industry needs to consolidate and scale up to compete successfully with global entrants to the Australian market, including online retailers.
RCG Corporation, which is listed on the Australian Stock Exchange, will outlay around $105 million to acquire 100 per cent of the shares in Hype DC, the athletic and leisure footwear chain with 60 stores nationally.
Hype operates 57 Hype DC and three Shubar retail stores across Australia, predominantly in metro and major regional locations, as well as an online retail business under both brands.
The chain has annual sales of around $120 million and RCG Corporation believes the acquisition will be immediately profitable while providing opportunities for scale, cost savings and efficiency improvements and add further diversification to the company’s 12 brands sold through 350 stores nationally.
RCG Corporation also believes the acquisition will support and accelerate a vertical strategy it has been developing and, with the combined stable of brands, existing retail network and management expertise, will make it easier to develop and rollout new retail formats.
RCG Corporation expects to deliver net earnings of around $60 million for FY2016 but is targeting $90 million for the current financial year with Hype DC in its portfolio.
RCG has told the Australian Stock Exchange The Athlete’s Foot delivered like for like sales growth of 3.5 per cent in FY16, while the Accent Group had comparable sales growth of 20 per cent.
In an change of direction for the usually acquisitive PAS Group, the retailer has divested its under-performing Metalicus business, which generated sales of around $25 million in FY16 but struggled in terms of profitability.
PAS Group has sold the business to General Pants for an undisclosed amount.
Metalicus has 25 stores and 12 concession outlets in Myer department stores as well as 350 stockists, but PAS Group said the business had been challenged in recent times and its profitability was disappointing.
PAS Group said the company earnings for 2017 will be improved by the divestment and that the company will now be able to concentrate on core brands within its portfolio, which include Review, Black Pepper, Mooks, Marco Polo, Breakaway, Yarra Trail and the online retailer, White Runway.
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