‘Worrying’ warning sign for Kmart

 

Australia's population is booming. Australian prices keep getting higher. Australia's economy is in its third decade of continuous recession-free growth. But there's one thing that's not keeping up with all this growth. The grand old institutions of Australian retail.

Department stores are some of the oldest businesses in Australia. Myer was born in 1900. David Jones in 1838. Even Target (1926) and Kmart (1968) are old compared to Uniqlo and other recent arrivals. But those department stores are now struggling. Discount ones and fancy ones alike.

Just last week David Jones' new owner wrote down its value by $437 million, admitting the business is not worth as much as they thought.

"The retail sector in Australia is currently in recession," said a spokesman for Woolworths South Africa, which bought David Jones in 2014.

The writedown in David Jones sent a shiver through Myer shareholders, who also moved to sell the stock, causing Myer's share price to fall, further reversing what looked like some promising rises earlier in the year.

WHAT WENT WRONG?

Australia-wide, department stores are selling about the same volume of goods as they did 10 years ago. Looking at the next graph you can see that something happened in 2009. Sales growth gave up one day and never came back

One day, sales stopped growing and they haven’t picked up again since.
One day, sales stopped growing and they haven’t picked up again since.

Was it the internet? Perhaps department stores made most sense in another era - one where researching products was more difficult so shoppers favoured a single shop with immense range.

Certainly, if you look at retail these days, retailers with well-defined offerings are often going well - for example, JB Hi-Fi for electronics, Aldi for cheap groceries, Bunnings for things you put in the shed, etc.

In this era it is hard for department stores to stay relevant. That's not to say department store brands are going to disappear.

An end to growth doesn't necessarily mean an end to department stores. Unlike in the USA, where, just last week, iconic department stores Barney's announced it was considering declaring bankruptcy, our department stores are hanging on.

Department stores will still exist, but not necessarily as we know them today. Picture: Stewart McLean
Department stores will still exist, but not necessarily as we know them today. Picture: Stewart McLean

Department stores are still selling $1.5 billion worth of stuff each month. It's just that seeing as how the country is much bigger and richer, that represents a smaller and smaller amount sold to each of us.

Myer's sales from the first half of the financial year are 7 per cent lower than they were in the same period 10 years ago. They are still making profit on those sales. The only problem is the profit is 65 per cent lower.

EMPTY SHOPFRONTS

While we can expect department stores to continue as an idea, that does not mean each individual department store will hang on. You may find a vacant space appearing at your local mall soon.

Take Big W for example. Big W is owned by Woolworths, the same company that owns Woolworths supermarkets and until recently, owned Dan Murphy's. (This is not the same South African Woolworths that owns David Jones. At some point in ancient history both companies apparently took the name of a well-known US retailer, itself called Woolworths, and then both separately went on to become retail behemoths.)

Former Big W store in Broken Hill. Picture: Benedict Brook
Former Big W store in Broken Hill. Picture: Benedict Brook

Big W is not going perfectly just now. It is expected to report a loss before interest and tax of $80-$100 million this financial year, and Woolworths is starting to shut down some stores. Plans are for 30 Big W stores to close over the next three years. That said, comparable sales were up 6 per cent in the most recent quarter, so there may be life in the discount retailer yet.

KMART

The story of Kmart is the most important one in all of department stores. It was the one bright shining light for a long time. Kmart sales surged as people went Kmart crazy. There were whole ecosystems of Facebook groups full of competing Kmart hacks.

Kmart has been retail’s shining light — but not anymore.
Kmart has been retail’s shining light — but not anymore.

And then the growth stopped. In the most recent trading update, Kmart's comparable sales fell 0.2 per cent. Kmart is still opening new stores but not getting much more magic from them.

If Kmart is going to follow the rest of the pack, that could be the new normal, which will be worrying a lot of people. Sales not going up much, but not going down either.

Jason Murphy is an economist. He is the author of the new book Incentivology. Continue the conversation @jasemurphy


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