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SPEND TREND 2013


CONTENTS Is Australia’s retail environment still doing it tough?

1

Our 2013 findings

3

New frontiers in technology

7

About BDO

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IS AUSTRALIA’S RETAIL ENVIRONMENT STILL DOING IT TOUGH? There continues to be much talk of the tough environment in which Australian retailers have been labouring in recent years. This year’s BDO Retail Spend Trend reveals how Australian retailers have performed, compared to some of their well-known international competitors. Several leading retail personalities have expressed their disappointment that the much hoped-for bounce back in consumer spending is not being sustained as economic conditions improve. At BDO, we decided to test the reality behind these sentiments. We have done so by analysing key financial ratios and indicators from the 2012 and 2013 results of 19 retailers listed on the Australian Securities Exchange (ASX), including Wesfarmers and Woolworths. We then compared these with the results for 11 prominent international retailers to gain an understanding of how the performance of our home-grown players compares with that of the competition from overseas.

THE FINANCIAL KPIs MEASURED IN THIS REPORT 1. 2. 3. 4. 5. 6. 7.

SALES REVENUE GROSS PROFIT MARGINS NET PROFIT MARGINS STOCK TURNOVER SALARIES/WAGES, RENTAL AND MARKETING EXPENSES CREDITOR DAYS GEARING

THE THREE RETAIL SEGMENTS ANALYSED IN THIS REPORT • • •

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AUSTRALIAN RETAILERS – 19 Australian retailers including Woolworths and Wesfarmers INTERNATIONAL RETAILERS – 11 US and UK retailers including Target and Macys AUSTRALIAN SPECIALTY RETAILERS – 17 Australian retailers excluding Woolworths and Wesfarmers

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WHAT WE DISCOVERED The 2013 analysis indicates that Australian retailers may have healthier balance sheets, but their overseas competitors experienced better, if not more consistent returns. OUR KEY FINDINGS IMPACT OF THE DOWNTURN IS LESSENING The wide range of performance levels achieved by Australian retailers in 2013 was largely unsurprising, given the contrast between the difficult year faced by some and the significant growth – both organic and through acquisition – achieved by others. However given the pessimistic tone of so much commentary on the state of the Australian retail sector, we were encouraged to find that the economic downturn has had a lesser negative impact on the sector during FY 2013. It was also encouraging to find that Australia’s leading specialty retailers are outperforming their international equivalents across many financial KPIs. AUSTRALIAN RETAILERS NEED TO COMPETE HARDER AND BETTER While some of the headline figures for the sector are promising not all our findings were so positive.

HOW WE DEVELOPED THIS REPORT The retailers we selected for review are highly varied in terms of their size and the products they sell. For this reason, we calculated a weighted average for each of the seven KPIs we measured. In addition, the size of Woolworths and Wesfarmers means that together they represent close to 90% of the revenues of all the 19 Australian retailers we studied. Therefore, to gain a clearer picture of the smaller companies in the sample, we calculated and measured the weighted average for the sample twice – once including the two giants and once excluding them. Similarly, to prevent the whole sample from being skewed by exceptional factors such as Billabong’s $750 million write-off, we measured average net profit margin twice (with and without Billabong), and twice again (with and without the Premier Investments very large accounting gain that followed the acquisition of Breville). We took the same approach to Country Road Group’s stock turnover performance, which was artificially boosted between 2012 and 2013 by the acquisition of the Witchery Group.

In comparison to international retailers in comparable markets, we found that Australian retailers are not performing as strongly in the key area of sales revenue growth. Likewise, the international group also recorded better improvement in net profit margins. To improve these metrics, Australian retailers need to look at smart ways to compete harder and better. In the second half of this report, we look at how high-performing retailers overseas are embracing a myriad of available retail technologies to achieve new efficiencies and sources of competitive advantage. Although companies such as David Jones and Myer have reported massive investments in technology, Australia’s retailers in general lag far behind the US and key European and Asian markets in terms of technological implementation.

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OUR 2013 FINDINGS 2. GROSS PROFIT MARGINS

OVERSEAS RETAILERS GROWING FASTER

AUSTRALIANS LEAD IN MARGIN GROWTH 2.7% $

$9.9 bn $6.1 bn

$

$0.7 bn

5.6%

4.7%

$

4.2%

$

FY12–FY13

Australian specialty retailers grew their sales revenue by 4.2% ($0.7 billion) between 2012 and 2013, led by the strong performance of retailers such as Country Road, JB Hi Fi and Super Retail. The nonspecialist giants, Woolworths and Wesfarmers, grew by an average 4.7% between 2012 and 2013, which equates to $6.1 billion. However, the sales revenue of the international comparison group grew faster during this period, by 5.6% ($9.9 billion). Over half (53%) of this growth was delivered by Target and Macys, with an aggregate increase of $5.2 billion.

$ $

$

$

0.9%

$ Sales revenue growth

$

$

$

$

$

$

$

$

$

$

$

Movement in gross profit margins

$

$

$ $

$

$

$

0.9% $ $

DISCOUNT PRICE WARS

1. SALES REVENUE

$ $

FY12–FY13 $

Despite their slower revenue growth, Australian specialty retailers posted a substantially higher weighted average gross margin (43.7%) for 2013 than the international players we looked at (35.8%). On first sight this can be somewhat misleading as many of the US retailers reviewed include expenses such as occupancy costs in their gross margin calculation, whereas for the Australian retailers, it is calculated using predominantly the cost of the inventory purchased including freight and other incidental costs. Given this, it is expected that Australian retailers would have a higher gross margin. Of more interest is that the gap between Australian and international retailers increased during the year, as the Australian specialists grew their margins by 2.7% compared with just 0.9% for the international players. This growth is largely down to retailers successfully increasing their revenue without impacting on their costs, a significant achievement in the face of ongoing discounting to attract customers.

AUSTRALIAN RETAILERS INTERNATIONAL RETAILERS AUSTRALIAN SPECIALTY RETAILERS

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8.00% 7.00%

3. NET PROFIT MARGINS

4. STOCK TURNOVER

3.00% BOTTOM-LINE PROFITS CONSISTENT 2.00% ACROSS THE SECTOR 1.00%

STOCK TURNOVER IMPROVED BUT IS STILL BEHIND

6.00% 5.00%

4.00%

0.00%

40 Excluding Billabong 35

8

FY13 FY12

FY13 FY12

40 35

45

45

7 6 5

12.0%

30

30

50

50

% 4 3 2

Billabong $750 mil

1 0

25

FY11 FY12 FY13 Excluding Billabong

Shift in net profit margins

Movement in gearing

FY11–FY13

When the Australian retail market is considered as a whole, Billabong’s performance was clearly an anomaly. The surf company’s $750 million write-off and -64.2% collapse in Net Profit Margin (NPM) was in stark contrast to the rest of the Australian speciality retailing sector, where the underlying trend was stable. This remains the case even when Premier Investments’ one-off accounting gain from the Breville acquisition is also excluded. This shows a constant 5.4% NPM from 2012 to 2013 – coincidentally, exactly the same as what was delivered by the international group. However, the international retailers showed a 4.1% improvement to deliver the same figure, suggesting they are on a positive roll that is not being matched by the Australian retailers.

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1.7% 25

55

Average number of days - stock turnover

4.1% 55

FY12–FY13

Unlike the international competition, Australian retailers improved their stock turnover ratio in 2013, bringing it down by 4.1% from 53 to 51 days. But, in absolute terms, even that performance leaves them off the pace – although the international players showed a significant 12.0% decline in performance, they are still turning over their stock eight days faster. While this slight Australian improvement might suggest a positive trend that will eventually see the gap being closed, there is still a long way to go that can only be driven through better forecasting of volumes and accelerated sales.

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5. SALARIES/WAGES, 6. CREDITOR DAYS RENTAL AND MARKETING APPROPRIATE CAPITAL MANAGEMENT? EXPENSES 99.3

days FY12 93.2 days FY13

LITTLE MOVEMENT IN COSTS 65.3 days FY12

42.0%

1.0%

41.0%

51.4 days FY12 49.1 days FY11

FY12 FY13 Salaries, rent and marketing expenses percentage of sales FY11–FY13 Movementasinagearing

There was little change in the cost of salaries, rental and marketing as a percentage of sales in 2013 from the previous year, sliding by just 1% to 41%. However in the face of increasing costs of employment, property and traditional media, this performance reflects the success of efforts to close unprofitable stores and drive sales through lower-cost digital channels. It is not possible to make international comparisons for this metric, as salaries, occupancy costs and marketing expenses are not disclosed in the same manner for the US retailers, as occupancy costs and even store wages in some cases, are included in cost of sales.

63.5 days FY13

52.2 days FY13 62.6 days FY11

Movement in creditor days

FY11–FY13

Australian retailers on average pay their trade creditors a whole month earlier than their international equivalents – a factor that suggests not only the health of their cashflows but also flexibility that their low levels of debt enables (see 7. Gearing). While the gap closed slightly in 2013, with the Australian specialists reducing this metric by just under two days compared with the close to six-day reduction delivered by the international players, a massive gulf remains in place. Perhaps Australian retailers need to ask themselves whether they are managing their working capital well enough?

AUSTRALIAN RETAILERS INTERNATIONAL RETAILERS AUSTRALIAN SPECIALTY RETAILERS

2013 SPEND TREND

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7. GEARING THE GEARING ADVANTAGE NEEDS TO BE LEVERAGED 80

% 40

2.5x less than international retailers

0

FY11 FY12 FY13 Movement in gearing

FY11–FY13

The average Australian retailer is around 2.5 times less geared than its international equivalent, a source of advantage that enables them to stimulate good supplier relationships through early payment. Even more important, it gives them the financial flexibility that is needed to make and act on investment decisions to support their future competitiveness and greater opportunity to be able to pay a return on shareholder investments. The question facing many Australian retailers is this: where to make those investments that will do most to accelerate revenue growth, boost bottom-line profitability and protect them against the incursion of increased overseas competition?

AUSTRALIAN RETAILERS INTERNATIONAL RETAILERS AUSTRALIAN SPECIALTY RETAILERS

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2013 SPEND TREND


NEW FRONTIERS IN TECHNOLOGY Failure to harness the full capabilities of technology will threaten the long-term viability of many Australian retailers. While the BDO Retail Spend Trend analysis reveals many positive signs for the Australian retail sector, there are clearly some critical areas – such as bottom-line profit margins and revenue growth – that need to be improved. The question is, how are the major international retailers improving these metrics in the face of massive global competition, high debt levels and comparatively slow (although improving) stock turnover? We believe the answer is that international retailers have been far more active in harnessing the power of new smart technologies.

INSIGHT, LOYALTY AND CUSTOMER ACQUISITION The rapid growth of e-commerce has changed the traditional model of retailing where revenue growth was closely linked to the rate at which a retailer opened new outlets. Over the past decade, bricks-and-mortar retailing has been characterised by store closures and rationalisation. However, as reducing costs is only one component of achieving better profit margins, the challenge today is to increase revenue. We believe the way forward is to drive new sales opportunities out of existing customers through deepening engagement and achieving a larger share of wallet. High-performing overseas retailers have shown how this can be achieved by embracing technologies that improve customer insights, enhance loyalty, attract prospects from brand-aligned demographics, and gain valuable information as to consumer habits and trends. At the same time, these technologies are also able to drive efficiencies (and reduce costs) across areas such as logistics and inventory. However Australia is a long way behind in terms of technology implementation, and we need to compete in this area now while we are in a position of relative strength. Without such investments, BDO anticipates that the revenues and margins of Australian retailers will continue to suffer in comparison to the international benchmark.

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SOLUTIONS FOR SUCCESS In comparable US, European and Asian markets, leading traditional and multi-channel retailers have for many years been making the technological investments that have prepared them to compete within a global, omni-channel retail market. This has not always been the case in Australia, where some retailers remain primarily focused on the home market and have not been driven by external competitive pressures to make such investments. A case in point is a major national retailer which has only replaced its 17-year-old Point Of Sale (POS) system and 10-year-old e-commerce platform over the past three years. Australian retailers are now becoming fully integrated into the global market, meaning they face new competition – both online and potentially in the shape of overseas companies also targeting their bricks-and-mortar markets. Today, Australian retailers need to grasp every opportunity to improve their insights into customer behaviour and motivation. This will enable them to remain relevant to their customers and provide superior customer service that drives strong revenues and profits.

THE CONVERGENCE OF PHYSICAL AND DIGITAL RETAILING The most immediate overseas challenge to the Australian home market is online, as a multi-channel approach increasingly becomes the norm for international retailers. UK-based premium department store John Lewis, for example, has just seen a 23.7% year-on-year increase in its online business which now represents more than 30% of its total sales. With a dedicated international website John Lewis has the world in its sights, and is clearly poised to drive further value from markets outside the UK. Like most other members of its elite peer group, John Lewis has spent the last decade refining its service infrastructure to streamline its delivery and returns processes in a way that few Australian retailers have even started to address. We believe that this is a genuine and fast-growing threat that demands a rapid response if home-grown players are going to successfully defend their existing positions, let alone compete effectively abroad. With digital savvy consumers increasingly using both mobile apps and mobile websites to inform their retail purchase decisions, the smartphone is also playing a central role in the in-store shopping experience.

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Combining mobile telephony and the physical shopping experience opens a world of exciting opportunities for retailers. Today, 60% of online devices and a fifth of internet traffic are already mobile1 and with research showing that nearly 80% of US teenagers prefer the mall experience to online shopping2, it is quite likely that Australian teenagers have similar preferences. Likewise, research by Columbia Business School identifying a ‘growing appetite’ for in-store shopping, is confirmed by the increasing number of hitherto pure-play online retailers opening physical showrooms and pop-up shops. This is particularly the case with online fashion retailers, where examples include the Piperlime (owned by GAP) store in New York and the Bonobos e-commerce showroom or Guide Shop (also in New York), which carries no inventory but offers 45-minute personalised consultations. While for some consumers convenience is the key to their retail behaviour, for others – or at least for certain types or purchases – the need to touch, feel and experience the physical product is of paramount concern. So while currently retailing seems to be divided into those offering digital and those providing physical experiences, the future of retail is more likely to be a convergence of both.

TECHNOLOGIES THAT DELIVER A BETTER RETAIL EXPERIENCE Many of the most efficient and top-performing international retailers are using technology to provide better customer service, better products and better stores. These include price-matching, loyalty programes, free home delivery, free samples and more. The following outlines some of these technologies and the benefits they can deliver to Australian retailers. Mobile-enabled rewards and loyalty programs not only help reduce churn by offering incentives to customers for repeat purchases, they are also capable of providing retailers with insights into customer-behaviour – something not possible with analogue equivalents such as punch cards. One example close to home is Australian company PointPal, whose app platform enables a range of solutions that reward and communicate with customers’ mobiles by using a smartphone’s GPS functionality to draw people in-store with price offers and promotions and provide insights into each customer.

2013 SPEND TREND


Other technology solutions enable retailers to measure conversion levels within their stores by accurately counting customer flow and linking it to store-specific POS data. This information can be shared in real-time across store and group management to optimise staff rostering, refine commission structures, support individual improvement measures and gain insight into the effectiveness of marketing initiatives. It also enables retailers to create new campaigns to reward the most loyal customers or persuade others to commit. One tactic that is becoming increasingly central to many loyalty schemes is the digital gift card, available through providers including Australian specialist, Edge Loyalty. Delivered by email or text with an embedded award code, this solution is used in particular to target teenagers and young adults, enabling them to spend immediately in-store. Ideally, they are channel-agnostic, by-passing the organisation’s interior silos to give the consumer total flexibility and the instant gratification that is widely sought by this demographic. The digital gift card can also be used in conjunction with a suite of further smartphone and tablet apps, such as those from Australian company Black Label Solutions, whose digital price labels enable variable pricing. The move to variable or dynamic is an increasingly regular outcome of the digital revolution, first pioneered online by the car rental and airline industries to the extent that most passengers on a given flight have actually paid different prices to be there.

TRACKING YOUR PERFORMANCE AGAINST THE MARKET Currently in Australia it is only possible to track competitive sales performance over a month after the event – and as prediction increasingly becomes the new reality, this is less and less useful to retailers. This is set to change, however, with the forthcoming Australian launch of the High Street Sales Tracker service, which has operated in the UK since 2006. This will give retailers access to weekly comparative data, providing a platform of information on which to base the competitive and customer strategies that will put them on a level playing field with international competitors. We believe that the uptake of such developments will help Australian retailers make up ground in the areas where they are lagging behind, enabling them to extend their lead in many key areas while catching up in terms of revenues and bottom-line margins. Action is required now. 1. Business Insider (The Future of Retail report) http://www.businessinsider.com.au/the-future-of-digital-2013-2013-11#-1 2. LIM College http://www.limcollege.edu/news/11266.aspx

This approach is now also infiltrating the in-store environment, insofar as prices can be changed on a weekly or even daily basis to maximise the overall margin achieved by balancing sales volumes with the amount actually charged. For example, prices can be kept at a competitive level during a weekend period to maximise volumes, before increasing on a Monday to maximise the margin achieved per individual sale (or vice versa, depending on specific product and customer priorities). All such approaches contribute to a retailer’s ability to actively leverage the insights they gain through a deeper understanding of their customers, to personalise their relationships based on better predictive modelling.

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ABOUT BDO

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Countries

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BDO was established as an association of firms in Australia in 1975. Today we are one of Australia’s largest associations of independently owned audit, tax and advisory practices, with offices in Adelaide, Brisbane, Cairns, Darwin, Hobart, Melbourne, Perth and Sydney.

BDO PRESENCE

Nationally we have around 161 partners and more than 1,261 people providing audit, tax and advisory services to clients throughout Australia. As one of the largest full service audit, tax and advisory firms in Australia, we excel at creating strong relationships with clients who are seeking a combination of technical excellence with a specialised range of services and a desire for outstanding client relationships. Our ability to create and maintain outstanding relationships is based on our understanding that each of our clients is distinctively different, and it is their unique needs that drive our approach.

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BDO’S RETAIL EXPERTISE

BDO has significant experience working with retail organisations of all sizes throughout Australia and globally.

We have a dedicated national Retail team that harnesses the combined knowledge and experience of all our staff and partners to provide audit, tax and advisory services to clients across Australia. Our client base spans across all growth phases, from successful family nts owned and managed age businesses, larger private businesses, franchises, s m ASX listed stocompanies through to international corporations. Cu SPECIALIST SECTORS Our retail experts provide specialist audit, tax and advisory services to a broad range of large and small retail clients across a range of sub-sectors including:

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2013 SPEND TREND

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This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. BDO is the brand name for the BDO network and for each of the BDO member firms. © 2013 BDO Australia Ltd. All rights reserved. RT 13-008

Spend Trend 2013  

BDO’s Spend Trend 2013 report reveals that as the economy improves, Australian retailers are outperforming their international competition i...

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