Can online retail finally deliver for investors? The next Aldi eyeing off Australia. Gerry Harvey's secret weapon for a retail fight.

This week in The Money Cafe Eli Greenblat and James Kirby discuss the following:

Hello and welcome to The Money Café, I’m James Kirby, Wealth Editor at The Australian and at this point you’re waiting for Alan Kohler to chip in and say who he is but Alan is on a week’s break, folks, he’ll be back next week but I am happy to tell you that we’ve got Eli Greenblatt with us who of course is very popular when he’s been on the show previously.  Eli, welcome again to the show.

Hello, hi James.

Eli works for The Australian, of course, and covers many areas but particularly covers the very large and diverse area of retailing and the many stocks that many people are in from the supermarkets and Woolworths right through to the department stores, the online retailers and of course more recently Amazon, Kogan, the new boys on the block, if you like.  One of the things I was actually looking at, Eli, was it seems to me, tell me if I’m wrong, there’s this promise every year that online is going to take over and Australia is going to change but it seems to me this year it’s really starting to happen.  I think the sales actually doubled over the year online and we’ve had Kogan I suppose possibly being one of the best stocks in the market.

Yes, it’s done very well.  It’s done very well for its shareholders, done very well for the founder, Ruslan Kogan and his partner who, as you know and as our listeners may know, cashed out some of their shares.

In a messy way.

In a messy way, it was a false start, they finally got it and they took home in their swag $10 to $20 million and why not, good luck to them, that’s how the system works.  Kogan.com has done very well for its shareholders, their sellers are going so well.  Amazon too starting off quite small in terms of their initial launch late last year around Christmas but slowly gathering momentum.

How do you read Amazon in Australia now?  I mean look at it primarily as an investor, tell me about Amazon Australia, has it lived up to its expectations?

I think the expectations were so huge for Amazon because it is just such a gigantic company, it’s one of the biggest companies in the world, it’s almost at a trillion dollars US and I think in Australian dollars it’s already worth a trillion dollars.

But we’re not getting the full whack are we?

No.

We’re not getting the Amazon the people know when they’re sitting in Oklahoma.

Yes, and from next week we’re actually getting even less because of the changes to the way that GST is charged on online purchases.  The government, as you may know, decided to push through its tax on things bought on the internet under $1,000, that comes through from July 1^st.

Yes, and this is going to hit the overseas guys.

That’s right.

Amazon, I think in a fairly nasty way, said this is a big problem for us and we’re going to divert our Australian shoppers to an Australian site, not just divert them but they’re going to geo block them.

Geo block them.

They’re going to lock them out of the American, is that right?

I thought it was a bluff to begin with, James, but no they’re blocking us.  Just to cut through some of the techno babble in the past if you wanted to shop on Amazon.com which is the American site, or Amazon.co.uk which is the British site, you could easily do it and it could be shipped to you.  Yes, there was the currency issue but you could translate that no problems and of course the reason for going on the American or the UK website was there was a lot more there on offer, greater number of products, greater ranges.

There was something like three or four times the rate we’re going to have.

Thousands of times more, really.  They estimate that on the American website there’s about 400 million items up for sale.

400 million items?

Yeah, you can imagine on the UK something similar and then from next week if you try to access the American website you’ll be diverted to the Australian website which will have about 4 million items that were on the American website, so 1% really.  The same with the British one, the only way to get around it is if you’ve got an American address that you can get stuff mailed to or maybe family or friends that you can mail it to and who’ll mail it to you.

Let’s turn around and say is it any good, this must be useful for Australian operators like Kogan.

They’ll be cheering this because it effectively then blocks out a huge amount of competition. 

Yeah, Harvey Norman.  Is it good for everyone locally?

I think it would be good for a lot of people although of course there is then 4 million more items available on the Australian website, the Australian Amazon website, so there is that new competition and Amazon is promising all the time to add more products.  Interestingly eBay and JD.com which is the Chinese website, online portal marketplace, they are not doing what Amazon has done, they are not geo blocking Australia.  They’re going to work out some other way to charge GST appropriately.

I noticed eBay were very quick to make the point because I assumed that they would follow and they were very quick to get in touch with me and say hey, you’re wrong, we’re not following.  They’re basically isolating Amazon and saying these guys are carrying on.

Yeah, but I would say just in terms of the first point I think the arrival of Amazon and what they’re doing is educating consumers on how easy it is, how good it is, to shop online using your mobile, using your laptop, more and more your mobile and that’s kind of like a rising tide lifting all boats.  That should help all online retailers because it’s educating consumers on how easy it is to shop online.

If you look at it then from our point of view as interested in business, particularly interested in investing and it goes to the other end of the spectrum, if you like.  If Amazon are the bees knees in retailing at the moment well the nightmare story of course is Myer and I was going to say to a lesser extent but really there isn’t much in it between them and David Jones.  As someone who is across this all the time how do you see these two companies, are they doomed?

Well that’s a tough one to answer.

The answer would be no they’re not doomed.

Well you’re trying to box me into a yes or no.

I am.

We’re all doomed in the end, aren’t we?  Myer may be sooner than others.  Myer and David Jones, it’s tough.

Are they viable businesses going forward?

From what the analysts are saying and what the fund managers think David Jones, I think, is viable because it’s got a much smaller store footprint, about 30-odd stores, but Myer I don’t think it’s seen as viable in it’s current format with about 65 to 66 stores, it’s too many, they need to shut down probably half of them is what analysts say.

Do you reckon those South Africans regret buying David Jones?

Yeah, that’s another tough question, you’re always asking the tough questions, James, you should be a journalist.

That’s why I bring you on.

I think it was a good deal maybe at the time, it’s going to take a while to get back the momentum at David Jones but when this economy really starts firing again, when we see growth again, when we see meaningful increase in wages again, when that wealth effect comes in again then you watch David Jones fly, they always do that.  Mark McGuiness, the former CEO of David Jones, always used to say – and he should know because he was there for a long time and he knew it back to front – David Jones was always kind of first into the recession, they would feel it the most, but always the first out of it.  We’re not in recession but we’re certainly in a low growth environment.  When we hit our strides again I think watch David Jones fly but with Myer they need to get out of those stores but it’s costly to do so.

Okay, so you don’t put them in the same category, you don’t put the two of them, that’s interesting.

No.

When we look at the supermarkets then, and I think this is actually our opportunity to mention our BT Financial Group Mega Trend Moment because, Eli, the area I’m really interested in is that supermarket area and I’ve always felt that Australia in some ways was so fast picking up on trends, in other ways there was parts of industry that were terribly protected.  Supermarkets were the big one.  I always thought the supermarkets were a bit old fashioned compared to European supermarkets and then on top of that the incredible layer that you get in Germany and the UK, the Aldis, the Lidls, the Kauflands, they weren’t really here.  I know Aldi are here but the strata isn’t here competing with each other.  You’ve been looking at Kaufland, who are they and tell us what that’s all about.

Yes, so this is one of those German discounters.  The Schwarz Group is a private company, they’re one of the biggest retailers in the world, they’re up there with Walmart, they’re huge.  The Schwarz Group based in Germany they own Lidl, they’re very much like Aldi, very similar format in terms of size.

But they’re a slightly more aesthetically pleasing version of Aldi, nicer stores.

Nicer, very much so, but still have that private label offering and a very small offering in terms of the amount of products like an Aldi.  The other retailer they own is Kaufland.  Kaufland is a very different offer to an Aldi or a Lidl, it’s much bigger so it’s two or three times the size of a normal supermarket but has that private label offering.

Is it more like Kmart rather than a supermarket.

Yes, it’s got aspects of all of it.  It’s kind of similar to a Walmart for those who have visited a Walmart in America.  When you walk into a Kaufland you’ll have the supermarket which is your fresh groceries, your dried groceries, your packaged groceries, everything you expect from a Coles or a Woolies.  You’ll have merchandise that you would see in Kmart or a Big W or a target.  You’ll have hardware like a Mitre 10.

I see, like an emporium, everything you need.

Yeah, it’s everything, it’s groceries, general merchandise, hardware, books, toys, everything you need under one roof, and they’re coming here.

Isn’t it curious that Schwarz, the holding company, chose to launch Kaufland rather than Lidl.  Why is that?

That is an interesting question.  Normally the idea is that where Aldi goes Lidl follows and where Lidl goes Aldi follows.

People were waiting for Lidl, weren’t they?

Yeah.

They were waiting for Lidl to sort of take on Aldi in all the cities, that’s not going to happen it would seem.

That’s right, they always follow each other.

Yeah.

In this case no.  I wonder if it’s because they can’t get the properties.  Aldi has been here for almost 20 years and Aldi have been scooping up any property they can which fits that format which is that kind of very much smaller format.  It could be harder to get those size stores.  Whereas at the other end of the spectrum to get those stores which are two or three times the size of Coles or Woolies is a bit easier, especially with the collapse of Masters.

They’re going to build greenfield sites way out in the burbs somewhere.

Yeah.  There is a thinking among many analysts that they’re going to try and scoop up a lot of those Masters stores because those Masters stores were probably the perfect size for a Kaufland but not good for an Aldi.  That’s maybe why.

Okay.

Kaufland are backing Australia, they’ve sent out their CEO who’s going to run it, her name is Julia Kern and she’s in her late 20s which is not unusual for Kaufland to entrust such a huge job to a young person.

Has she actually said we are coming, we’re going to open stores?

The boss of Schwarz Group has and they’ve bought a huge centre out in Adelaide, they’ve bought another site apparently in Dandenong on the outskirts of Melbourne and they’re looking for more.  They’re going to start rolling out from next year apparently.

A lot of our listeners would have shares in Woolworths and Wesfarmers which still owns Coles, and of course just about anybody who has super is going to have stakes in those companies.  You were telling me about David Jones and Myer and that was very interesting how you didn’t put them in the same basket, you really saw David Jones perhaps as having more of a future.  What about Woolworths and Coles?

They’re going to be fighting for every cent and every dollar and every percentage point of market share.

They were such good stocks for so long, do you think they can do that again, do you think they can reoccupy that position?

Analysts and fund mangers believe they should and it’s good sometimes to have that exposure to that end of the market.  We always have to eat, that’s not going away.  The way we shop certainly will change.  It’s interesting now that Coles will become an independent listed company at the end of the year.

Yeah, I should have asked you, so when will that happen?

Could happen end of the year or the beginning of next year.  Wesfarmers is just a bit concerned about the timing of that demerger.  Christmas, January, such an important time for retailers.

From next year Coles will be a separately listed company and Wesfarmers will have many things in it, crucially it will have Bunnings in it.

It will have Bunnings which will be the majority of the business, more than 50% of earnings. With the Coles demerger they don’t want to disrupt it during that crucial Christmas period so it could be in the new year it happens.  Wesfarmers will also own roughly 20% of Coles once it’s listed.  We’ll see what Coles will do and what they’ll do next.

Just coming out the door I saw Richard Goyder, the one time head of the whole box and dice at Wesfarmers, has popped up as – he’s already Chairman of something.

He’s Chairman of Woodside Petroleum, he’s Chairman, more importantly, of the AFL, of the country’s biggest sporting code. 

I’m aware of that, yeah.

I know there’s some kind of football competition on in Russia but I’m not sure whether that’s interesting.

Now he’s Chairman of Qantas.

Now Chairman of Qantas from the AGM taking over from Leigh Clifford.  He’s got probably one of the most impressive, well-connected maybe envious corporate boardroom gate tickets in the country.

Hasn’t his record been put under a shade with how Wesfarmers has really gone nowhere in recent years and it’s been fairly convincingly shown that the huge purchase, at the time, of Coles was a very expensive exercise.

Yes, it was expensive and it was just as the GFC was hitting so there was a lot of nerves around it.  I suppose there are so many ways to splice and dice that.  They bought Coles for about 20 billion at the time of the GFC.  With that they got Coles, Target, Kmart, Officeworks.  They’re now going to demerge Coles in a deal worth about 20 billion plus get 20% of it plus they still own Kmart, Target, Officeworks.

It sounds to me like you’re impressed by Goyder.

I think he’s an impressive character, I think he’s done well at Wesfarmers over the time.  Certainly, the move of Bunnings into the UK was disastrous and it was on his watch.

That was on his watch, yeah.

That was a bad move and I’m sure he would say that too and no one is happy with how that went.  Certainly, Coles I think worked out well, Officeworks has done incredibly well for them.  People underestimate how well Officeworks is going in this market.  Kmart has done very well.  Target obviously is struggling but Kmart has done very well.  Now he’ll have the AFL, he’ll have Woodside, he’ll have Qantas, he’s a very busy guy.

Tell me something, you’re right across this area and I love the work you do, it’s very tuned in not just analytically but very good on the news front and who’s who and what people are doing in retail.  Tell me who do you actually admire?  If someone said to you listen, I’ve got a little bag of money here and I want to invest in a few listed retailers who do you like?

In case the Royal Commission is listening I do not have a financial advice license.

Don’t you worry about that.

Please don’t listen to my advice.  I think you need to look at retailers that have proved over the years and decades to be consistently speaking the truth about the state of their business both in good times and bad times.

Is that an issue in retail, do people exaggerate?

I think there is exaggeration, I think there is what’s sometimes known as channel stuffing where you have lots and lots of sales upfront but then it collapses in the back end.  Dick Smith is a really good example of that.  There seems to be a rule, never buy from private equity, maybe that’s true or not true but if you’re an investor in Myer and you bought from private equity that was a disaster and very sad story.

Who do you like, who are you impressed by?  You don’t have to tell me that it’s an advice to buy the shares but who are you impressed by?

I think Reliance Worldwide is an interesting company that was floated off and the Munz family run that.

Tell me about it, it’s ball bearings, am I right?

It’s actually even more boring than that and to me that sounds like the kind of stock Warren Buffet would invest in, it’s so boring, it’s behind the wall plumbing which is basically all the joints and pipes that go on behind the wall and do all the important stuff.  They’re deep into that behind the wall plumbing both here and America.

Is it still a favourite stock, is it still a stock that the analysts are saying is a buy?

I think it’s doing very well and they’re doing very well since the float.  They’ve bought a big company I think in the States or the UK.  They’re big in America, they’re one of the biggest behind the wall plumbing suppliers in America.

I know a lot of people privately who are big fans of them.

The tradies seem to like it and I’d say go where the tradies go, that’s maybe a case for Bunnings.  You can’t buy shares directly in Bunnings but I have met a few times now the CEO of Bunnings, Michael Schneider, who has taken over from John Gillam and John Gillam is incredibly impressive.  John Gillam is one of the most impressive CEOs I’ve ever met and Schneider has got a huge job on his hands because now Schneider, the CEO of Bunnings, he’s going to be generating the lion share of profits for Wesfarmers.

When you buy Wesfarmers you’re going to be buying Bunnings from now on.

Almost, Bunnings is a bit on the side.  He’s very impressive and I think you go where the tradies go and they seem to love Bunnings.

Tell me about Ruslan Kogan and the Kogan Group, about his, as they say, messy attempts to sell some shares.

Yeah, it was messy.

I see them as having the potential of being the great Australian online retailing company.  Their stock price is ten times higher than it was a year ago.  Can they do it, can they become the Harvey Norman of the sort of online era?

I think it could happen and they’re certainly well-placed for it.  The name itself, Kogan, seems to now have caught on as a kind of label, as a brand, it’s caught on where you couldn’t say that about a lot of other online stores.  Kogan seems to have caught, maybe it’s just the luck of his name, it’s easy to pronounce and it looks good on a brand, on a TV.  It kind of makes sense and it seems to me that maybe the way that the retail sector evolves is you’ve got one dominant local player, the domestic player.

Invariably, right?

Right, and then you’ve got Amazon or eBay.

It’s there for someone to take, yeah, and I’m asking is he the one that might take it?

It looks like he is in the pole position.

He is, yeah.

In New Zealand you’ve got Trade Me, I think, which seems to still carry on and do very well but also you’ve got Amazon and eBay which are the international players.

Okay, so you mentioned Reliance Worldwide, you mentioned Kogan, anyone else?  A final call on that list of retailing stocks for people to have a look at or have an examine.

I don’t think you should count Gerry Harvey out, and we’ve spoken about this a few times and on other podcasts.  Whatever you think of Gerry Harvey and the way he goes on about things and the way he talks about the industry or retail or his own business what’s great about Harvey Norman, the business, is that Harvey Norman owns that property, they own their own home.

Yes, unusually these days they own the shops, they own the physical buildings.

It’s worth hundreds of millions if not billions of dollars so that’s almost like a floor that could help the share price that the shares would struggle to under.  Whatever trouble they get in there’s always the property there.  Myer doesn’t own its own property, they’ve sold it.  I think there’s security in property, it’s old fashioned and I just don’t think yet we’re ready where consumers will buy a bed or buy a couch online, I just don’t see it happening as yet.

Interesting, very good.  Eli, at this time of the week I normally do a few questions from listeners and we have a few which I’m going to just rip through because they’re waiting, I’m sure, for their answers and it’s a very enjoyable part of the show.  Here we go.  Question from Tom, I read The Acquirers Multiple, that sounds like a book, by Tobias Carlisle recently.  He uses enterprise value over operating earnings as an indicator of value.  Does he now, Tom.  Basically Tom tells us what this sort of screening process of value investing what you might call a formula that Tobias Carlisle uses.  Back testing over 18% annual returns over the long term, that sounds good.  I know a single factor is not necessarily good strategy.  Have you heard of Tobias and his approach to investing, what do you think?  Tom, I’ve got to tell you I’ve never heard of him, that doesn’t mean he’s no good, I’m sure he’s perfectly good at what he does.  Formula type investing like that I have to say there is no perfect formula, if only there was.

If only there was, [0:22:07.3].  What’s Warren Buffet’s record, over 50 years 20%.

Warren Buffet and Benjamin Graham, and the core value investing is probably the best one, it certainly seems to be the most robust but nothing is perfect.  I think that’s the best answer for you, Tom.  Question from John.  Hello Money Café.  Casual financial discussion is not something I have much of in my personal or professional life.  That’s a pity.  I enjoy being able to tune in every week and increase my fiscal literacy.  Good for you, John.  Thanks for making the show, my question is I have some ETF investments set to reinvest dividends rather than pay them out.  What happens to the change, when he says the change I think what he means is the leftovers.  For example if I receive $100 in dividends and the share price is 45 a share I automatically buy another two shares, what happens to the $10 change?  That’s a great question.  I was pretty sure it was like a DRP, that it gets rolled over and kept until the next time but I did go and ask our friend at Vanguard this morning, Robin Bowerman, what does happen.  It is the same as a DRP.

What happens, John, is whatever is left over if you can’t buy a share with what’s left over because it’s not enough money they just basically bank it and then the next time the DRP, the dividend reinvestment plan, comes around in a year’s time it’s in there and it’s used again.  That’s the answer to that one. 

James, just remind me again your stance on ETFs, are you a fan, not a fan or sceptical?

My stance on ETFs is it’s perfectly sensible. 

What is that?

It is that you should use them, it’s a great way into markets that are hard to get at.  If you want to buy tech stocks in the US, if you want to buy Europe, if you want to buy that sort of thematic it’s very useful.  I’m not crazy at all about just buying an ETF in the market, it’s okay for some people if you know absolutely nothing and you have no qualms about the mechanics of them or the ethics of them.  Question from Max.  Thanks very much for this great publication, my question for you and James is picking funds.  Is it a waste of time splitting your money across three or four managers?  This is useful now because Alan is often putting forward this idea that you buy a couple of different managed funds.  Max says by the time you’ll be holding maybe a hundred stocks you might as well buy the index for less.  I don’t agree, Max, because the ETFs or the index fund is not thinking, it’s a passive fund and if you have four seriously smart managers who are very good at what they do, especially if they specialised – let’s say one does mining and one does retail and one does tech, you would expect them to do better than an index.  Yes, you’d have four funds, yes, you’d have four sets of fees but it would be proportionate so I think it would be worth the effort there.

The final question from Greg.  James, I am with Alan on this, can you explain how advisors getting paid on positive performance sends the wrong signals?  Alright, the background to this, Eli, is that there’s always debate about should you pay fees, how much should you pay and that is to extreme you say I don’t care how much fees they pay as long as they’re making me money.  That’s all well and good but I do think if someone is paid for performance and performance is everything they’re going to push the boat out and I don’t mean in a good way, I mean they’re going to stretch the numbers and the funds that blow up are invariably the funds where people were pushing the boat out to try and get their own income higher on the basis of their returns.  That’s why I’m sceptical about having performance as the primary indicator for a fund manager.  There you, thank you very much everybody, we’ll be back next week with the show.  Eli, thank you very much for dropping in.

Thank you, James.

Great to hear what’s going on in the retail world and as you mentioned Reliance Worldwide very interesting, Kogan very interesting, interesting to hear what you said about David Jones.  I would have written them off, I must say.  Okay, we’ll leave it there for today, folks.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice and if you’re there it’s very helpful if you could leave a review or a rating, it helps people find the show.  Send in your questions and we’d love to answer them in next week’s episode, the address is hello@theconstantinvestor.com.  Until next week, I’m James Kirby, Wealth Editor of The Australian.

I’m Eli Greenblatt, Senior Business Reporter at The Australian newspaper.

Thanks a lot, folks, talk to you soon.