The impending arrival of Japan’s largest fashion retailer Uniqlo on Australian shores is the latest signal to local retailers that there’s no escaping the giant tidal wave of global disruption threatening their bottom lines.
With 1200 stores in 14 markets worldwide and a mission to become the number one apparel brand in the world, the Japanese monolith follows Zara, Topshop and H&M as the latest big global fashion brand to storm the local market.
Like these brands, Uniqlo’s success is based on tapping into consumers’ seemingly insatiable appetites for fast fashion, along with a signature focus on unique, ‘innovative’ garments and customer service — all delivered with the utmost efficiency and cost control.
While consumers will lap up the buzz, Uniqlo’s formidable business model will instil yet more fear in a sector that’s still reeling from the challenge of online retail and increasing costs of doing business.
Myer and David Jones, for whom fashion is their bread and butter, are seeing their lowest operating profit margins in four years, with Myer’s profit slumping 8.7 per cent in the year to July 27.
Though Myer claims its gross operating profit margin increased 0.4 per cent to 41.7 per cent in the 2013 financial year, this figure omits costs of doing business, including wages and occupancy costs. Once these are factored in, Myer’s operating profit margin for the year comes in at just 14.34 per cent, having hovered between 14.83 per cent and 15 per cent in the previous three years.
David Jones has fared far worse, with its full-year operating profit margin shrinking to 11.25 per cent in 2013 from 15.46 per cent in 2010.
While David Jones chief executive Paul Zahra says wages and rent were the biggest contributors to increased operating costs, the thorn in the retailer’s side has really been slumping sales revenue — down 11.65 per cent over four years.
High street retailers are also in the doldrums, with local womenswear brand Bettina Liano up for sale this week after having gone into administration for the second time in two years. Other high-profile labels to recently go under include Lisa Ho and Kirrily Johnston. As a new rival, Uniqlo will steal vital market share from local retailers who are already gritting their teeth.
But there are profitable lessons to be learned from the new wave of big, fast fashion retailers — and there are some local retailers who are doing it right.
Brands that are forging vertically integrated business models – taking control of more than one stage of the production process, such as designing fashion garments as well as manufacturing, distributing and/or selling them – are much better placed to stay on top of their margins.
Country Road Group lifted its operating profit margin to 20 per cent in the year to June, up from 18 per cent in 2010. While the margin dipped to 15 per cent in 2012, the group has seen a 68.8 per cent boost in sales revenue since adding the successful Mimco and Witchery labels to its stable in September last year, with comparable sales (counting only its Country Road and Trenery labels) also up 11 per cent.
Specialty Fashion Group — which owns fashion brands Autograph, City Chic, Crossroads, Katies, Millers and Stylefix — also had a bumper 2013, swinging to a $13 million profit in the year to June and posting its highest operating profit margin in six years at 17.4 per cent. While lower cotton prices and an impressive 50 per cent jump in online sales growth boosted its margins, the group said its continuing shift towards vertical integration through direct sourcing was a key factor.
Cutting out the middle-man through direct sourcing means businesses can achieve a more streamlined supply chain and reduce costs. Vertical integration also means leaner stock control, as retailers can respond more efficiently to customer demand rather than having to rely on second-hand information filtering through the supply chain.
Most crucially for fashion retailers, a more streamlined supply process allows faster turnover of on-trend stock. In the fickle world of fashion trends, this lends a crucial sales advantage by enticing customers into stores more often. This tactic was pioneered by successful Spanish brand Zara which, like Uniqlo, is forging ahead at a rapid clip with its international expansion plans.
Myer chief executive Bernie Brooks believes retailers who rely on cheap foreign imports and sell on the high-street model are probably most likely to go under.
“I think there’s an inevitability that you will see retailers, particularly those that have up to, say, 10 to 20 stores and particularly in fashion … [who] go overseas, find something, drop it back into Shanghai or Shenzhen, get it copied, make a few minor modifications and then get it sold in Australia. That’s gone,” Brookes told Business Spectator.
With an overcrowded discount fashion market, department stores are hoping a focus on higher-end, ‘exclusive’ brand offerings will boost sales.
David Jones recently signed exclusive deals with popular UK high street brand Phase Eight and Australian designer Nicola Finetti. In the past couple of years, Myer has acquired nine well-known brands including sass & bide, Trent Nathan, Bauhaus and GRAB. Brookes says he will continue to purchase more brands “as they fit into our portfolio”.
But the danger inherent in pitching upmarket is the expectation of high-end service — a significant cost that the ‘pile ‘em high, sell ‘em cheap’ models of Zara and H&M avoid. Increasing service investment, both in terms of staff and sophisticated customer loyalty and omni-channel strategies, is cutting into Myer’s margins.
Luring customers in-store with high-end brands also has its costs. Myer says the benefits of “significantly higher margins” from its exclusive brands — which now make up 20 per cent of its product mix — were, ironically, offset by increased growth in lower-margin concession store brands in the 2013 financial year. (Concessions are staffed and run by the brand, which then gives a percentage of sales to the department store.)
This highlights the limit to how much department stores can maximise profits through exclusive or in-house offerings. Customers expect to see a wide range of well-known brands when they walk into a department store, but including more concessions means smaller returns. On the other hand, the upside is that the concession stores take on more of the risk.
Through continued experimentation with their product mixes, and once investments in their still-developing omni-channel strategies really begin to pay off, perhaps department stores can achieve the balance they need to ease the squeeze.
As for local fashion brands, take notes — and take them fast.
Follow @HL_Francis on Twitter.