Super Retail Group chief executive and group managing director Peter Birtles tells Business Spectator's Robert Gottliebsen and Stephen Bartholomeusz:
- Suppliers are charging more for products coming into Australia than the retail price available overseas
- Super Retail is looking to grow and develop the leisure categories into areas such as home handyman or personal fitness gear
Stephen Bartholomeusz: Peter, earlier this month you issued a trading update which appeared to show you defying retail gravity with sales and margins up. What is it about your model that makes you different from your peers?
Peter Birtles: Well, I think there are a couple of things like the macro level and more of an internal level within the business. If we look at the macro level, first of all there’s a cast of categories that we’re involved in across the whole grid, whether it’s our Super Cheap Auto business involved in selling products to customers who’ve got a passion for their cars or our BCF business to our customers who love to go fishing. Ray’s Outdoors finally getting outdoors and spending time camping. And now with our sports businesses again that’s about getting outside and enjoying sporting activities. And our view is that customers are still spending money on their leisure time and that they’re looking to enjoy themselves and that part of retail spending has probably been a bit stronger than other parts of the sector. I think within our business we’ve got a very strong, positive culture. We are pretty innovative. Around 20-25 per cent of our products are renewed on an annual basis, so we’re always trying to give the customers something new to look at. So, I think there are both macro and micro factors.
SB: Peter, when one looks at the categories that you’re in, they do appear at face value to be peculiarly vulnerable to competition from online. What’s your assessment of that? And what are you doing to protect yourself?
PB: I think there’s certainly a bit of context around that question. Let’s say if we look at the average spend in our businesses. In Super Cheap Auto the average transaction value is around $33. In Rebel Sports it’s around $64. And it’s around $70 in our BCF and Ray’s Outdoors business. So, our customers are not making major purchases with us. There is an element to the offer that’s I think susceptible to online competition, but that’s more at the higher end of the offer, so whether that’s the more expensive wheels in a BCF or more expensive footwear in Rebel or Amart, so that there’s an element there. If we look at how we respond to that, I think there is a combination of factors. First and foremost we’ve got to look at our relative pricing position and to see the opportunities to ensure that we’re not too far out of the ballpark when it comes to pricing. That requires us to look at our cost structures. It looks at the buying prices from our suppliers. And we’re working with a number of our big global international suppliers to look at the cost prices coming in to the Australian market, so that we’re able to offer retail prices that are competitive with global competition. I think there’s also a broader piece here which is customers see prices as one part of the mix, but also they’re looking for an overall level of offer that involves information and services. And what we can do as a business is that we can demonstrate that we have a much greater understanding of our local customers’ requirements than any global international online site and, you know, whether that’s with our Super Cheap Auto customers, we understand the local cars, we understand the kind of activities that our customers are involved with, the same with our fishing business, we understand the local conditions, and sports as well, so it’s being able to demonstrate an understanding of the customer and to be able to give them an offer which runs into those specific requirements.
Robert Gottliebsen: Peter, if the price is not too far different, then I think what you say is correct, but if there’s a very big difference in say athletic footwear, then the customer says ‘oh look I’m being ripped off by the Australian retailer’. And there are suggestions that in the athletic footwear market there is quite a big difference in a number of the products, between overseas retailers or overseas suppliers and Australian suppliers. What have you got to do? Are we being ripped off by the people who supply the material? Are our rents too high? What sorts of changes are you going to have to make to be at least competitive?
PB: I go back to my earlier comment that, putting context around this is important. So, if we look at the sports division, footwear sales are around 25 per cent of the overall sales. Twenty-five per cent of those sales would be at a retail price of more than $150, so you’re talking the vast majority of your footwear sales are at lower price points. The Rebel customer is generally a suburban customer, so a lot of the business is about selling footwear to families for their children. So, I think we’ve just got to be careful in terms of understanding the level of risk within the Rebel business. Having said that, the issue that you raise is relevant to that part of the business, so it is susceptible to that online competition. I think there is a combination of factors there. I think we’ve got to look at the cost price that the products come in to the Australian market place – and with a number of suppliers the cost prices coming in to the Australian market place has a higher point than the retail price that you see on some of these international sites.
RG: We’re being ripped off, in other words. It’s just a straight rip-off job?
PB: There are obviously cost structures and different factors involved, but we’re working with the suppliers to understand why that’s the case and we’re working with them to see if we can reduce the cost price. That’s maybe looking at things like supply chain, it’s looking at more direct flow of product through from manufacturer into the Australian market place and we’ve got the supply chain capability to help our suppliers to bring that product in without necessarily having to go through the channels that the product comes through at the moment which is perhaps a little bit complex. I think there are opportunities to reduce costs, and we are in a much more transparent market place where retail price is much more visible, and I think the suppliers need to be much more aware of that, so we’re talking to them about that.
SB: Peter, you’ve seen recently both David Jones and Myer saying not only are they putting a lot of pressure now on their suppliers and threatening to drop them if they can’t supply competitively, but they’re also putting a lot of pressure on their landlords to renegotiate leases to quit centres and rethinking their whole strategy of their retail occupancy. Are you doing similar things?
PB: This leads into the future retail model and certainly as part of our future business model we’re envisaging a full multi-channel offer, so that our customers can access our products either in store, through the Web, through their mobile device. Now, all of that’s part of the mix and we need to develop the supply chain solutions to service the customer however they want to do that. So whether they want to come to a store, or whether they want product delivered to a collection point, to their home, these are all parts of the capabilities that we need. We certainly see that the retail store is going to change and evolve over time and so to attract a customer, there would have to be more of an experiential element, there has to be more information available to the customer to encourage them to visit the store. Now, it does mean that potentially, if you look at a different type of retail strategy going forward where you would maybe look at some major hub stores that cover a larger offer, they provide more in the way of information and services and then maybe supported by more local convenience-type stores. So, absolutely, I think all retailers need to look at their real estate strategy and work out what’s the best given that retail as an industry is evolving.
RG: But as you change the structure of your retail offer and the way you sell, a part of that will be lower rents.
PB: I think that the mix of costs will change in that as you see a growth in online business, more direct forms of business, so there isn’t the same rent impost to support that. So, certainly, we’ll be looking to manage our rent cost going forward.
SB: Peter, when you bought Rebel Sport last year I think your share price fell 14 per cent instantly and there were a lot of skeptics about your ability to grow that business profitably. I know it’s reasonably early days, but the signs appear quite good.
PB: Yeah. I mean we were very positive about the acquisition and potential. The business had been managed in a particular way by its previous owners over the last four or five years and we felt there was an opportunity to take the business forward to see some top line growth. Rebel is the market leader, but probably hasn’t maximised its position in the market place and a bit more confidence getting on the front foot, more marketing, investing in the stores making a much more compelling and exciting place to go and visit and spend time. We feel there’s some real opportunity there in terms of the way that we present the offer. We think there’s some work that can be done with the team to really excite and motivate the team and that’s been a strength of our businesses, and to work much more closely with the trade partners to grow the market. So, we’re very positive about the top line opportunities in the business and although, as we discussed earlier, there may be some areas in which there are some cost challenges, there are also some big cost opportunities in the business. Our organisation has some very strong sourcing capabilities and we can apply that to the sports category and there are some ways of doing business with our supply chain and our operating model that we can also bring some efficiencies to the overall business. So, we’re very positive about the opportunity and so far, so good. After a few months we’ve had a good turnaround in trading performance and there’s a real, strong, positive feel throughout the business.
SB: When one looks at the categories that you’re in, there is this connecting thread that they’re all leisure related. Is there a deeper logic to that particular grouping?
PB: For us it is very much that connection about the things that people do in their leisure time. So, they are choices that our customers make to get involved in leisure activities and we’re about helping them enjoy their leisure activities as best we can and giving them the right products, the right information and the right services. So, that’s the real connection and I think it also applies to our team as well in that many of the team that work in our businesses also share those passions, so we have plenty of people in the auto business that are very passionate about their cars or in our BCF business a lot of the team spend their time fishing and it’s the same in the sports business, so there’s that element of a real passion for the activity which both our customers and our team can share.
RG: Peter, you reduced your stock levels through better use of your warehouses. Is this a major exercise where there’s still a lot more to go to manage your stock more efficiently?
PB: Yeah. If I look at the working capital across the grid, there are certainly some big opportunities I feel. I think when we look at world’s best practice, and we look at the net working capital investment for store, and when we benchmark ourselves we’re running at around 16 per cent net working capital as a percentage of sales. If we look across the globe, 10 per cent net working capital to sales is certainly a sensible objective and, you know, that means that across that working capital is around a $70 to $80 million net prize for us to work on, so we certainly feel there’s a big opportunity there in terms of improving our efficiency and that comes through a better supply chain, it comes through better ranging at a local level – so plenty of opportunities still to come.
RG: Is that a weakness in the entire Australian retail scene? Have we not spent enough money on our stock management and reductions in stock levels?
PB: Well, I think that an area that we feel that we’ve perhaps done better than many has been the supply chain management to the business to this point. But certainly there’s a lot more opportunity, so I think generally it is an area across Australian retail that we can all improve it.
RG: It looks to me as though the Australian retail industry both in its purchasing of goods from overseas, and its management of its stock, because it’s been so sheltered from the rest of the world because of our isolation, it’s allowed to develop practices that weren’t world standard and it’s now only really getting to address those things. Is that a fair comment do you think?
PB: I think that there are some areas in which Australian retail can move forward, but also I think there are examples of very good retail offers within Australia and Australian retail also faces some challenges that perhaps some of the international competition don’t face. If we look at the relative cost of labour, the relative cost of rent, they’re much higher in Australia when we compare it to certainly the [United] States and parts of Europe, and then we also look at the logistics challenges that we have certainly for businesses that are national businesses. We have a small population in a very, very big country, so relatively the cost of moving products is higher, so I think we’ve learned to take on some of those challenges and as an industry have managed those quite well.
RG: But you’re really looking to reshape your business both in your branches and in your interface with the Internet, so that your business will look quite different in say one, two or three years?
PB: I think it’s probably more four or five years than one or two. All elements of our business are performing well and have been consistently for some time, so we’re not in a position that we have to make radical changes to our business in the short term; we’re in a position where we can plan and make the changes over that four or five year period as consumers continue to change their behaviour and as capabilities are developed and technology is important. Technology allows us to do more things. Data flows through the business. Supply chain capabilities and so on. It’s more a gradual evolution of the business, I think, that we’ll see over the next few years.
RG: That’s a long time. Not many businesses can afford to change over four or five years. You know, it’s normally two or three.
PB: Well, as I said, you look at our track record. We’re very constant in the plans that we’ve got in place and so we continue to evolve and adapt our offer and that’s been a regular part of the way that we do business. If you look at the Super Cheap Auto business today, the offer is different from where it was three years ago, the same with BCF. That will continue to happen, but when we’re looking at some of the underlying supply chain and say online capabilities, these are things that just take a little bit longer to make sure that they’re done properly. But we’re very confident that we’ve got the time to do that.
SB: Peter, elsewhere in the retail sector there is a lot of stress. We’ve seen a number of retailers already collapse. Does that provide opportunities for you? And are you looking to expand the number of categories you’re in?
PB: We’re continuing to assess the offers that we have and I think that the great thing about each of our businesses is that there isn’t necessarily a finite boundary in terms of what we can do. Having said that, a clear part of branding – and we feel that retailers really need to focus on their retail brand and invest in their brand and be very clear in terms of the proposition and what it really stands for – I think you’ve got to be careful about stretching your offer outside of the boundaries of the brand. If you take our Super Cheap Auto business, essentially we see that as a business that can sell everything for the home handyman and the types of products that he keeps in his garage, so that allows us to be fairly broad in the way that we think about the business. The whole outdoor businesses that we have, we’ve expanded the offer more recently into areas like water sports and 4-wheel driving and that’s been very successful for the business. And we’ll look at the sports area as well, and I think that a view for us in that area is that Rebel and Amart haven’t necessarily captured the move to personal fitness, personal wellbeing, and they’re areas to expand the offer. So, in each of our businesses we’ll continue to grow and adapt and develop the offer.
RG: Peter, just finally, outside of any acquisitions what’s one thing that you did in the last year or so that made your group a lot more efficient?
PB: I would say that I’d come back to supply chain. It’s such a critical element of our business model and the continued work that we’ve done around taking on more sourcing directly ourselves and being able to move product from Asia into stores much more efficiently has been a major driver of margin improvements across the whole group.
SB: Ok. Peter, thank you very much indeed for your time. We appreciate it.
PB: Thank you.