Myer & DJs: dinosaurs or dynamos?

Navigating the department stores to success in the new retail environment requires a sophisticated and delicate management. So how to assess the groups' value in this context?

There is a remarkable air of unreality currently surrounding Myer and David Jones. Both businesses are underperforming. Both blame weak retail trading conditions but insist their business models and strategies for the future are sound. The sharemarket is very sceptical. Both stocks are trading at, or close to, a five-year low with dividend yields of 11 per cent. Some retail insiders see little future for department stores; to them, both companies are dinosaurs. The share analysts are divided in their views – some have Myer as a ‘hold’, and some as a ‘buy’. Some see David Jones as a ‘hold’ or ‘buy’, others as a ‘sell’. So much for the experts.

So, how do we make sense of these two iconic retailers, both of which are well over 100 years old? Are they dinosaurs, or potential dynamos?

Let us start by remembering why they came into being, and what is still their fundamental raison d’tre today. When Welsh immigrant David Jones founded the company in 1838, his mission was to sell "the best and most exclusive goods" and to carry "a stock that embraces the everyday wants of mankind at large." That is a pretty good definition of what department stores around the world have always done – offer the convenience and the excitement of presenting, in one location, a wide range of products across many categories.

In Australia and elsewhere, this offering was challenged by the growth of shopping centres, which are themselves a type of mega department store. Myer and DJs survived this challenge by representing themselves strongly in the centres. They were often the cornerstone tenants.

The department store model is now being strongly challenged by specialist retail chains, many of them global, and by internet selling. Particularly strong in fashion, the chains such as Zara, Top Shop and H&M offer broad reach through shop numbers, rapid change in product lines and designs, slick marketing and sophisticated sales models involving multiple channels (store, online, mobile). The internet competitors offer low prices and rapid fulfilment. Both the chains and the internet sellers appear to have a cost advantage over department stores.

The impact of this competition, and of depressed retail sales, can be seen in the low operating margins of Myer and DJs. Both have to discount constantly to maintain sales. The Myer operating margin is 12 per cent on sales of $2.8 billion. DJ's margin is somewhat better – 14 per cent on sales of $2 billion.

Department stores everywhere are responding to these challenges in similar ways. They are rationalising and upgrading their stores, offering multiple channels (including online), seeking to stock exclusive lines, exiting some categories (such as electrical goods), focussing on customer service, building loyalty programs, and embracing social media. This results in a complex agenda that requires the management team to strike a sophisticated and delicate balance. Reduce the product range too much and you risk compromising the essence of the department store ‘one-stop shop’ formula. Build revenue around exclusive brands to achieve differentiation and you may play directly into the hands of the specialists.

To be successful in the future Myer and David Jones will need to get two things right. First they will need to understand and ‘live’ the central idea that unifies all the elements of the new, complex, business model. Without this idea constantly in mind they will become lost in complexity and they will fail. The idea has to do with creating and building a loyal customer audience: a community of people who want to deal with Myer or DJs for a range of reasons which, in combination, create loyalty to the brand.

The second requirement is execution capability built on deep retailing expertise that recognises there are no ‘silver bullets’; success will depend on getting a lot of things right most of the time. Myer and DJs must do all the ordinary things extraordinarily well, and then some. This will only happen through a relentless focus on stakeholder ‘moments of truth’.

In the above context, how do we assess Myer and David Jones? DJs has a long-held premium position across its 35 stores and its mission continues to be that of a ‘home of brands’. Many strategies are being deployed to reinforce and enhance this position, including store openings and refurbishments, a multi-channel sales strategy, new and exclusive brands, systems enhancements and customer service initiatives. Debt levels are relatively low and the company has a policy of owning its flagship sites. There is a sense that the business has woken up a little bit late to the need for all these changes, but the execution ability seems solid.

Myer has been through a series of ownership changes and seems to be very much a work in progress. Restructuring, and positioning the business for a public float, has arguably led to a loss of retail management capability. It has 67 stores but only a minority of these are premium stores. Debt levels are relatively high. The main elements of the Myer strategic agenda are similar to DJs and there is a clear focus on building customer loyalty, but its execution feels less convincing. For example, the logic for the recent $42 million purchase of a majority stake in fashion group Sass & Bide is difficult to understand.

So, are Myer and DJs dinosaurs or potential dynamos? If you conclude that they have the ability to execute a complex multi-faceted strategy that leads ultimately to a growing base of loyal customers then you might see them as the latter. The execution risk, however, is very high. In this context, the consistent premium positioning and low debt levels of David Jones are significant advantages.

Christopher Tipler is a Melbourne-based management advisor and author of Corpus RIOS – The how and what of business strategy. His web site corpusrios.com contains more material on this and related topics.

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