Myer, DJs master web basics; now for the advanced stuff

David Jones and Myer face big challenges as they deal with lacklustre consumer demand, a shift in household spending away from merchandise to what the retailers call experiences - lattes instead of crockery, say, or a plane ticket instead of a new suitcase - and the expansion of internet retailing.

David Jones and Myer face big challenges as they deal with lacklustre consumer demand, a shift in household spending away from merchandise to what the retailers call experiences - lattes instead of crockery, say, or a plane ticket instead of a new suitcase - and the expansion of internet retailing.

They are however making a pretty good fist of a task that many observers thought would be beyond them. The price gap between them and overseas online retailers is closing, and it seems it is doing so without creating a profit sinkhole.

Consumer sentiment is cyclical, and it has lifted after the federal election. Most of the challenges Myer and David Jones face are structural, however, and JPMorgan neatly summarised them this week in its review of David Jones' flat $101.6 million profit for the year to the end of July.

Firstly, consumers are continuing to see value in experience shopping, on cafes and restaurants and travel, for example. The Australian dollar has risen in value by almost 5 per cent in a month, but is still 15 per cent lower than in mid-2011, so overseas travel is more expensive. However, at present levels of about US93.4¢, it is not the impediment to overseas travel it once was: after Paul Keating's famous "banana republic" warning in 1986, it did not push decisively above US80¢ for 21 years.

Secondly, Australia is being invaded by international chains such as Topshop and Zara, and luxury brand-specific stores, including Chanel, Coach, Armani, Hugo Boss and Prada.

The interlopers are clustering in central business districts and upmarket shopping centres, the crucial customer catchments for the department stores. JPMorgan estimates, for example, that DJs extracts about 25 per cent of its sales and a larger percentage of its profit from its CBD stores in Sydney and Melbourne.

Thirdly, there is leakage to savings. The impact was heaviest when savings were expanding. Households were spending slightly more than they earned when the savings trend began a decade ago, and were spending only 90¢ in the dollar by 2010. But JPMorgan does not believe the savings rate will fall, and says it could go higher.

Finally, there is the threat posed by online retailers, particularly international ones. Both department store groups were late to respond with online shopping platforms of their own, and the error was magnified as the Australian dollar rose.

Myer chief executive Bernie Brookes and DJs CEO Paul Zahra have both scrambled hard, and they now say they have the crucial elements of an integrated online offer in place. Myer says it offers more than 70,000 separate products on the internet, and DJs said this week it offered about 90,000. Both also say their online businesses are on the cusp of making money.

Turnover as a percentage of sales for both groups is, however, still only a fraction of what is being achieved in developed markets overseas.

The overseas retailing benchmark is for online sales to represent about 10 per cent of total sales. DJs' online sales exceeded $18 million in the year to July, and that was only about 1 per cent of the total. If Myer hits its online sales target of $50 million this year, it will be collecting only about 1.5 per cent of its total sales on the new platform.

Clearly the two chains have to do more. Zahra's take this week was that DJs has its online sales channel developed to a point where it is at last in a position to compete, and Myer is similarly placed. The big fixed costs on setting up the platform have been incurred, and the task now is to drive online revenue higher.

Price competitiveness with international online retail sites in categories such as cosmetics will be crucial to the success or failure of the exercise, and the slightly surprising news as I said is that on price, the Australians are getting back into the game.

What they call "price harmonisation" began more than a year ago with talks between the retail groups and suppliers that focused on important brands, products and volume lines.

The problem was obvious. The chains were offering goods that could be bought online from international competitors for significantly less. The question was how this gap could be closed. Myer and DJs argued that it would be the suppliers that would have to take the big haircut. So far it seems they were right.

DJs, for example, has now price-harmonised about 60 per cent of 250 brands it initially identified as being overpriced compared with international online competition. All up, the prices of 1700 products have been lowered, and DJs says its gross profit margin on the products has been maintained, and their sales have grown. Lower retail prices on the products are being covered by cuts in the wholesale price, and by higher sale volumes, as consumers respond to the price cuts and buy more.

Myer is reporting the same trend, and Brookes gave an example in his presentation of the group's results two weeks ago - cherry-picked because it was a pearler, no doubt, but illustrative nevertheless.

One of Myer's biggest cosmetic lines is Clinique DDML+, an upmarket moisturiser that goes out the door of a Myer store once every 90 seconds on average.

In July, Myer slashed the price of a 125 ml bottle of the elixir from $74 to $49, and cut the price of a 75 ml bottle from $40 to $29: in the following six weeks, unit sales jumped 108 per cent, and dollar sales rose 36 per cent.

mmaiden@fairfaxmedia.com.au