It’s been a bad week for retail alright, what with Topshop Australia going broke and word that Amazon is looking to open here earlier than expected, and is already chatting to grocery suppliers.
Myer ended the week down 11% and Oroton had another shocker, down another 10%, although the grocers weren’t affected that much and JB Hi Fi got some buying yesterday.
Clearly the retail sector is next in line for disruption, not that this is any kind of surprise. Any investors who have been caught have only themselves to blame.
I saw an interesting note this week from a New Zealand broker, First NZ Capital, setting out a way to think about what’s happening – it’s to view the retailer as selling an “entry ticket”. Goods are supplied ex warehouse to a customer who has paid an entry ticket to the shop.
“Take the example of a A$200 purchase – a pair of sports shoes at Rebel, an entry level tablet or pair of speakers at JB Hi-Fi or Harvey Norman, or an item of clothing or beauty products at Myer. At JB Hi-Fi, a customer would be paying, on average, A$45 to enter the store and buy the product at ex warehouse cost. At Harvey Norman, we think the cost would be higher than JB Hi-Fi (not disclosed), but we assume A$50. At Rebel, a customer would be paying A$90 on average. At Myer, a customer would be paying A$70 on average.”
What Amazon represents is centralised distribution and a much lower cost “ticket” for home delivery. The challenge for incumbents is to either add value to the ticket or reduce its cost. There are no alternatives.
Says FNZC: “In our view, SUL and MYR are vulnerable to disruption because of their high cost structures and the relatively low value delivered by the store experience. HVN appears to operate a higher cost model than JBH. JBH operates a relatively low cost structure, to its advantage, but the value of the ticket is relatively low.”
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