KGB INTERVIEW: Bernie Brookes

Myer chief executive Bernie Brookes tells Robert Gottliebsen and Stephen Bartholomeusz:

—Myer realised about 18 months ago that it would 'disappear' if it continued to focus on cost-cutting measures.

—The retail sector's struggles are more comparable to movie theatres — who have focused on value-added customer experiences to combat online movie streaming and downloads — than the struggles of the newspaper sector.

—Myer would applaud the Australian dollar moving back towards the 75 cent range.

—Increased competition from offshore retailers is actually driving more foot traffic to long-established retailers such as Myer.

—Myer sees itself as well-positioned to defend against any acquisition attempts by those looking to buy department store groups.

Stephen Bartholomeusz: Bernie, you’ve had three consecutive quarters of comparable store sales growth and you’ve got a profit increase. Is that a signal of the retail recession we’ve had the last several years or so? Or is it down to the things that you’ve done?

Bernie Brookes: I think it’s a combination of both. I think, not blowing my trumpet but the trumpet of the entire team, the plan that we put into place has been executed really well and our five-point plan has gone well. But added to that there has been a little bit of less head wind I guess you’d call it from a consumer point of view. In a lot of good bits relative to employment levels and equity markets and a bit more stability on a world global basis. So, I think you get all that together and it’s a combination of both, but we were pleased to get not only a sales result but also a profit increase.

SB: You said at the media conference last week, and I assume at the analysts' conference, that service and the investment to service that you’ve made over the last couple of years was a major factor in the result. Can you explain how you think it contributed and how you measure how it contributed?

BB: Sure. So, I think firstly like most businesses we went through this period of time where cost cutting was the sole answer to what was a pretty tough retail environment and I think we realised some 18 months ago that we were going to disappear if we continued to just cut costs all the time. So, we took a decision to invest $26 million or a million extra hours into service, and that’s really given us a step up. How we measure that is a number of things. Firstly, we have exit interviews with customers. One of the main measures is the number of customer compliments to the number of customer complaints. So, 18 months ago for every compliment we were getting, we were getting two complaints and that’s about 12,000 contacts that we get each month, so it’s pretty sizable. What’s happening now is we’re getting over four customer compliments for each complaint, so it’s reversed it significantly. We also measure based on sales productivity, sales per labour hour and we also have a number of measures of mystery shopping, but overall it gives us I guess you’d call it a score and we’ve certainly moved from a very poor position to what I would say is good, but we’ve got a long way to go to be better and best.

SB: Does it encourage you to invest more?

BB: It certainly does. In fact, we’ve now started again in the last half to pepper more money into certain areas. We’re finding that if you invest in an area such as intimate apparel, if you invest in areas such as suit fitting or bra fitting, if you like, if we invested in other areas that are high service orientated, that’s where we’re getting the results. So, we’re going to continue to step up the level of service in stores.

Robert Gottliebsen: David Jones are not taking that strategy, are they? They tend to cut back their costs. Is that your opinion?

BB: Well, we just won the Roy Morgan Research for the Best Department Store on Service and I think that’s an indication that we are therefore providing better service and I think that’s the pleasing part for us. I’m not as certain as to what David Jones’ strategy is, but I know what our strategy is and that is to make sure we provide the very best service.

RG: Come on. You know exactly what David Jones’ strategy is. And you’ll be monitoring it very closely. So, do you think that what you’re doing in service is a competitive advantage?

BB: Oh, definitely. You know, for us it’s about the experience when they come into the store and when we’re trying to compete with the Internet and, you know, you can buy a product on the Internet in say a bra or you can buy a cosmetic on the Internet, the issue for us is going to be able to how we make that an experience that adds the value plus the service, competitive on price, but all the bells and whistles that go with it.

RG: Well, just taking that for a second, is the retail model going to change in the sense that I’ll go into a store and what I’ll see is a screen and I’ll buy in the store perhaps fitting this sort of file on the screen with available stock there?

BB: I think we’re starting to see a couple of models move to that direction and as an example we opened a store at Fountain Gate and when we opened Fountain Gate, we gave a lot of the staff iPads where they could order product online for the customer, so we’re integrating that approach of both online and in-store. So, if you go to Fountain Gate and you want size eight shoes and we’ve only got size seven, what they’ll do is actually order it online for you and get it delivered. And we’re starting to see that work very well. So, this integrated approach is about the screen, yes, but it’s also about touch and feel of the product, a bit of both.

RG: Does that mean that you’ll need less stock?

BB: Well, we’ve posted a result that’s got seven per cent less stock than last year and I think that’s indicative of the fact that some of that includes what we’re selling online and we don’t need to carry as much inventory. It also means that we need less sized stores because you don’t need to carry enormous big ranges in some of your second and third stores because you can get them online and deliver them the following day.

SB: The last several years, Bernie, have been really difficult for retailers generally, not just Myer and it’s forced retailers, but you in particular, to change things that you were doing, change your strategy from store openings and top line driven stuff to productivity. Do you think given that there is structural change occurring as well as this sort of cyclical stuff that that’s been a positive in the long run for you, that you’ll be better placed to compete with offshore retailers and online retailing?

BB: Definitely. We needed to do it from a survival point of view. I think what was happening, we had the arrival of international retailers such as Zara and The Gap and Top Shop. We’ve had an addition of websites peppering Australia with very good offers and world products and so we’ve had no choice but to step up our game. So, it’s actually been, in hindsight, a bit of a blessing because it’s made us drive on productivity, review our model, invest more in technology, invest more in service and we’ve had to change the whole… or make a paradigm shift in the way in which we think about a department store. It has to be each individual department. It’s no good having a Miss Shop competing with another department store or discount department store. It’s actually competing with some of the fast fashion shops around the world. So, we’ve had to change the mindset, change the strategy, change the mentality and change the whole measures that we had.

SB: If you look at where you were including this period at where you are today, what are the most significant things you’ve done?

BB: I think firstly we’ve moved towards loyalty because rather than just a mass market media approach, we’ve moved to more personalisation in the way in which we communicate with the customer and we now have five million Myer One customers. That’s been the first change. The second change which has been our strategy on getting exclusive lines, making sure that our Myer exclusive brands — they’re 20 per cent of our business — stand as reputable and significant brands in the business. And the third thing has been the investment in service, so we can provide a very, very strong investment in service. I would add to that that we’ve also reviewed the store model and going for smaller stores, higher productive stores and really making sure that when we refurbish we reduce some of the space and we optimise what we carry inside the store, so we’re reducing things such as we don’t carry DVDs and music anymore. We don’t carry products such as gaming anymore. So, that strategy has given us the high productivity, better service, a competitive differential and that it’s all about a very buoyant future.

RG: When you say you deal with your customers, what do you mean by that? Are you emailing them? Are you writing to them? How are you doing that?

BB: Sure. So, what we do is we have our Myer One database, which has five million customers. We interrogate that database and we make sure that when we communicate to them, we communicate the offers that are relevant to them. So, let me give you an example. I, for many years, got offers on suits and electronic products and men’s shirts which are what I buy, but about two years ago having a grandchild and having a second grandchild, what’s happened is that my DNA has changed and I’m starting to buy some products for the kids, so suddenly I’m getting all these offers on children’s wear and toys as well, so I think, unbeknownst to anybody, they’ve read the DNA of me as a customer and they’re changing.

RG: So, as soon as you buy a toy, or say two toys, they say, “This customer’s doing something different.”

BB: I’m moving into a different characteristic.

RG: And your computer systems are able to do that?

BB: Oh yeah, my word. We’ve got about six or seven guys – we call them the Brains from the Thunderbirds – and they’re pulling the data out and evaluating exactly what it is that I buy or all of our customers buy and pepper them and move them into different characteristics.

RG: So, you’re advertising less in newspapers and on television?

BB: Oh, we definitely are, yeah. We’re spending about two or three per cent less on overall media, but I mean we all know the problem is ears and eyeballs. You know, where are the ears, where are the eyeballs? So, we’re now spending a lot more on digital, spending a lot more on web advertising, a lot more on direct marketing and a lot less on newspapers, TV, radio and a little bit less on mainstream TV.

RG: Do you think that the retail department store, non-food store, the model that we’ve seen for the last three years, do you think that’s becoming like the newspapers and gradually fading away or changing dramatically?

BB: I think if you think of the newspapers, I agree it’s a model that is, you know, very, very susceptible to what’s gone on. I actually think we’re like the movie theatre. I think that from a movie theatre point of view, you’ve got a traditional movie theatre and everybody’s saying it’s the end of the world for movie theatres, everybody can download movies and what did they do? They came up with an experience called a Gold Class Cinema. So, I think I’d rather put us into the bracket of the Gold Class Cinema. If we can improve the experience, make it a unique proposition, something that people really enjoy; something they can’t buy on the Internet or they can’t download, then that’s what will be the future.

SB: Bernie, when itemising lots of the changes you made a little earlier, you left one out and it was direct sourcing. Can you explain the benefits you’d get out of that?

BB: Sure. So, if I go back to sort of four years ago, we were buying about $40 million through Li & Fung, an agent through the whole of Asia and in fact they manage the whole world, a very, very good organisation and they served a purpose for us. We decided to set up our own office. Today we’ve got just short of 100 people in both Shanghai and Hong Kong and they’re buying not only about 85 per cent of the products coming directly out of China, about 15 per cent out of other parts of the world. The three big advantages of that are firstly we can control the speed at which we get product to the customer, so we’ve got four hubs in China, four distribution centres. We’re looking at about 24 days from the factory in Shenzhen into our customers’ hands, so speed is the first one. The second one has been the better buy in price and what was happening is we’re buying something from an agent here that was clipping the ticket and potentially buying it from an agent in China that was clipping the ticket and they might have even been buying it from a consolidator of factories, so there were three or four profits along the way. So, immediately it means that things like our Myer exclusive brands have a starting margin now of about 70 per cent. We have to take the advertising off, the markdown off and eventually give it to the customer at a good price. So, the second one is price. And the third one is controlling our own destiny in regard to quality assurance. So, we have 14 QA people. They’re checking the product, visiting the factories and making sure that we’ve got A1 quality product for the customer.

SB: It’s been fortuitous that the Australian dollar has been as strong as it’s been over the last couple of years. If it were to go back to historical levels over that 70, 75 cent range, what impact would that have on the economics of direct sourcing?

BB: I think firstly it would mean that our buy in prices would obviously go up, however there’s one thing to consider about that, everybody’s buy in prices would go up. So, if the price was 75 cents against China, you know, the dress that we buy for $30 dollars would obviously be maybe $40 dollars, so potentially it’s $40 bucks, the retail price moves up. But it’s the same for every one of our competitors. So, that’s the downside, but it’s not quite as bad — in fact it’s buffered by the fact that it’s equal hardship all the way around. However the advantage for us if the dollar did move that way and firstly it stops people going overseas and coming back with bags full of stuff that they buy overseas because of the strong Australian dollar. The second, it’s certainly going to help from a tourism point of view and there are going to be quite a few more tourists back into Australia. So, we’d actually applaud if the dollar was down to 75 cents.

RG: Do you think that property investors, people who own properties and other retail properties for that matter — certainly in the non-food area — do you think they’re going to face a fairly tough time?

BB: It depends on the quality of the mall. I mean if they’ve got an A-grade mall, you know, a Chadstone, a Doncaster, a Sydney City, then they’re not going to suffer too much because they’ve got beautiful properties, wanted locations with an increased demand, particularly from overseas retailers to enter them. So, I don’t see any sort of blood bath for those that own the A and B malls. I do think it’s going to be a bit difficult for those that own the C and D-grade malls. As retail volumes go down, as more is bought on the Internet, as less independents are looking at opening stores. You know, a couple of stores that I know in my local area have said look we’re going to close up, the rent is too high. So, I do think in the C and D-class malls it’s going to be pretty difficult. So, depending on where you fit, you are going to have a tough time. You’ll find those retailers have got to sort of walk away or get a better deal and that’s the first time we’ve seen that.

RG: Even with the A and B-class mall you want to put the rent down as well, don’t you?

BB: Oh, we want to put that everywhere.

RG: Yeah. But are you succeeding in doing that?

BB: We’re getting some breakthrough. I think firstly there’s a lot written about this and a lot of it is overhyped. I mean we’re getting some rent reductions in certain locations, let’s say half a dozen to a dozen stores, and as the lease comes up we’re negotiating the rents and we’re negotiating them down, but it’s not significantly down. You know, there are one or two extreme examples, but generally we are getting a reduction in rent and I think most of the other retailers that are producing results are also saying they’re getting rent reductions as well. They’re getting better contributions from the landlord for fit out and they’re getting some easing in regard to what’s called outgoing. So, there is no doubt there is pressure on the landlords as supply and demand occurs. I mean there’s less demand for sites, so therefore there’s more supply and therefore the prices they charge can’t be as good as what it was in the past.

SB: You referred a couple of times to offshore retailers. Almost on a daily basis we’ve seen another offshore big brand retailer saying they’re going to enter the market. Is that necessarily a negative thing?

BB: What normally happens if you take let’s say Miu Miu or Uniqlo or H&M, no matter who it is that’s coming, they’ll follow the same DNA of the people that are here now. Zara is an example and Top Shop. They want to be in central CBD prime locations or very good quality A-grade malls. The advantage for that is that we’re there as well. And so what they do is they drive foot traffic. So, there’s no doubt that when we get a Zara next to us or when we get a Top Shop next to us, we actually see an increase in the categories or the departments that they actually trade in, so it’s actually a bit like a honey pot where, you know, the bees come to the honey pot and it works really well. I think you’ll find when you talk to the supermarkets, they’d rather have an Aldi located next to them in the shopping centre than they would at five or 10 kilometres away. It’s the same for us. So, they are coming. It’s an attractive market. It’s a stable market. Finding it pretty difficult to get quality real estate and that’s what’s slowing a lot of them down, but when they come they’ll locate next to us and it actually gives us a bit of a kick.

SB: The other area of getting people on is online. I think you said that sales are up 200 per cent relative to last year off of a small base admittedly and you’re still maintaining a goal of $300 million or 10 per cent of sales in five years. In terms of how you’ve executed online are you finished? Are you halfway through? What’s left to be done that you think is critical to a good offering?

BB: I think the online development is not a programme. It doesn’t have a start and finish date. It’s a never-ending process because as we improve our site by putting more video on it, as we improve it by a better digital, as improve it by more range or better photography, what happens is everybody else is doing the same. So, there’s going to be this continual chase to get a quality website that attracts customers. I mean from our perspective of eight million views in the last six months or eight million website page visits, fantastic and a great start, but we know the opportunity going forward is going to be for us to be able to really drive significant mass with a quick delivery and more importantly an integrated approach in our store. John Lewis, for example, have 40 per cent of the product that they sell online click and collect. When the customer comes in to click and collect – I mean it’s collected in-store – about a third of them are buying something else. So, that’s where our advantage can be. So, we’ve still got to work hard at getting the photography right. The two big drops for us in the next six months are firstly what’s called online-for-form which is nearly finished now which is our ability to pick that product from the best location closest to the customer to get it quickly and get it to them and the second one is the development in the site itself. So, we’re really seeing a much better quality site. We’ve got fashion runway shows on there. We’re able to integrate it in that business and we’ve now got to integrate more with Myer One which gives us a good competitive advantage as well.

SB: What kind of proportion of your offer have you got online now?

BB: It’s about 40,000 SKUs. That compares with, say, a small store, but if you take something like Myer Melbourne which has 180,000 SKUs. The answer to that is not necessarily more. In some cases you’ve got to be careful because I mean in our research customers say I don’t necessarily want the biggest range ever on show because it’s hard to search, hard to find. So, we’re trying to find what we call the optimum range, so we put more products in some areas, test more, see if we get more sales. It’s quite new ground to us. I mean we’ve been in it for a few years and we’ve always been in retail, it’s still finding out what the customer wants. At say the start of a season we might have 100,000 products on and when all the new dresses come in for the new season, but in a period such as March and April where it’s a little bit slower — transition season — then we’ll come back again and reduce the number. So, you’ll find the number is going to vary a lot and we’ll find out what the optimum number is I think by learning what it is over the next few years.

RG: In terms of consumers are you seeing different demand patterns? Is the strength in the middle or the top or the bottom as the first division and then in terms of states?

BB: Our Myer One data says to us that there are two big winning areas at the moment. The first is the very top customer, so those that are coming in and buying let’s say international dresses and purchasing premium electronics, so we’re seeing, if you like, the absolute… the top of the cake going very, very well. We’re seeing what we call our gold customer which is the high, we like to say the bottom of the A demographic are finding it a bit tough. But we are seeing what we call our top of C and bottom of D demographic starting to go well. We call those our silver Myer One customers.

RG: Who are the A and B and bottom of C, the…?

BB: So, demographics.

RG: Yeah, but what sort of… what’s the occupation or what do…?

BB: So, I’d say that those people that are, say, bankers or those people that are doctors are doing very, very well at the top and then if I try and put a bracket on what I call the silver customer, they’re people that are say local bank managers, maybe earning $120,000 to $180,000 a year. That’s the area that’s starting to see some good growth in our stores.

RG: Ok. And what about states?

BB: States. Our two standout states again have been Western Australia and Queensland and that does reflect I think the little bit still the mining economy, the investment that’s taking place. Western Australia is number one followed by Queensland. We have seen a bit of a revival in New South Wales which is quite pleasing. The areas that are finding it pretty tough are still Tasmania, certainly South Australia and Victoria’s a bit of a mixed bag. Regional Victoria is finding it pretty difficult. CBD Victoria and near CBD are reasonably good.

SB: Within the Myer exclusive brands strategy the Sass and Bide acquisition appears to have been quite successful. Does that encourage you to go out and buy some more and are you thinking of buying some more brands?

BB: We got a lot of criticism for buying Sass and Bide, but I did think it was unwarranted because it did stack up from a financial point of view. But rightly so, we didn’t know how to run a freestanding store, so I can understand the degree of scepticism. We’ve now gone from zero concessions to well over 20. We’ve now gone from 15 freestanding stores to 20 and in addition to that we’ve stretched the brand into sunglasses and intimate apparel and it’s got double digit growth in sales and double digit growth in profit again. So, it’s been a runaway success for us. So, that does whet our appetite to purchase more brands. In the last three months we’ve purchased Grab Denim, we’ve purchased Bauhaus and for us we are on the lookout now for brands that we’ve got gaps in the market that we can purchase and make the Myer exclusive brands. We haven’t miscued on any of those at all. We’ve purchased some great brands over the years and they’ve turned out to be winners. Trent Nathan which is just in its first year with 35 stores, it’ll do probably about 30, 40 per cent above our expectations in the first year. So, we haven’t miscued yet and we’re certainly out there looking for good quality brands that fit our criteria.

SB: Last thing for me, on the other type of acquisition, everyone’s been waiting for this retail downturn to bottom out. It looks like it might be. Does that worry you because there are people out there that would like to buy department store groups and appear to be positioned to buy department store groups?

BB: Yeah. I think we’ve repositioned ourselves pretty well, but I mean I almost think if you’re going to buy something… So, if somebody said “I want to buy Myer”, the key question is what can you do with the business? A) Can you reduce costs? Well, I don’t think you can reduce costs too much more and we just had that discussion and I understand the downside of it. B) That you invest a whole lot of capital. Well, we’ve invested $600 million worth of capital. Or C) we can just use it as a cash cow to get a return. So, we’re pretty confident that we’re going to generate more cash, a sustainable dividend. So, I don’t think it’s quite as attractive as what Myer was in 2006 when TPG bought the business because it had no capital spend on it, it had very much fat… a lot of fat in it that could be cut out and it had some property to sell. We were well short of our criteria. I don’t see us as a target for anybody at all and I think really the key question for us is what we can do in our business to make it strong just to make sure we’re not a target for anybody.

SB: Thank you very much indeed, Bernie.

BB: Much obliged. Thanks.