Myer online clicks into gear
Myer is closer to a significant online presence than generally appreciated, and two particular advantages give the group's strategy real growth potential.
Bernie Brookes was quite candid in his KGB Interview in saying that Myer could have made the earnings guidance it lowered earlier this week had it been prepared to take a short-term view and wound back the extra investment it has been making in its staff and slowed the spending on its omni-channel strategy.
While those would have produced short-term gains they would have damaged the business in the longer term.
The investment in staff is an investment in customer satisfaction in its traditional physical store network, which probably won’t visibly pay off unless and until the recessed environment in which retailers are operating improves and allows some top line growth. The investment in the omni-channel strategy is creating the foundation for a different retailing model in future.
With online sales of less than 1 per cent of the $3.1 billion of Myer’s annual sales, or approaching $30 million, it generally isn’t appreciated how far down the track the group is in establishing a significant online presence.
In recent years Myer has spent around $300 million on IT and point of sales systems and the other supply chain pre-requisites for an online offer. It is already rapidly scaling up its online presence, and is within another $20 million to $30 million and about nine months away from having a fully-fledged and fully functioning e-commerce platform.
It has already more than doubled the number of SKUs available on its website, from about 6000 to about 13,000, but once the next phase of its website development is completed later this year would have the capacity to vastly increase the breadth of its offer. Macy’s in the US has about 50,000 SKUs (stock keeping units) on its site and Nordstrom almost 140,000, while J.C. Penney has a staggering 250,000.
There is a lot of opportunity, and a lot of leverage, in Myer’s online strategy.
Another $20 million a year of sales on its website and the channel, built for far larger volumes, will break even. From that point on the far lower rental and staffing costs of a distribution centre relative to a department store means that, while gross profit margins are significantly lower, earnings before interest and tax margins from that channel could be nearly twice those of the physical stores.
Myer’s ambitions appear modest, although Brookes conceded he might be under-promising, but the potential is material. Publicly he is targeting around 8 per cent of total sales coming from Myer’s online business within four or five years.
Offshore, however, the best-in-class department store online businesses have online sales that are more than twice that rate relative to their in-store sales and have demonstrated that once their presence has been established online sales can grow at phenomenal rates. Some of those department store groups are growing their online sales at more than 35 per cent a year off bases already in the billions of dollars.
In this market, online sales generally are only just over 5 per cent of total retail sales but are growing at more than 20 per cent a year. The overseas experience suggests established department store brands pursuing "bricks and clicks" strategies can siphon off a disproportionate share of that growth.
Myer has two particular advantages in building an online business.
One is the Myer One loyalty program, with more than 4 million members who generate about 70 per cent of the group’s sales. The data available from that program and the relationships Myer has with those customers should enable it to make highly targeted offers to them.
The other is its portfolio of owned or exclusive brands, currently generating about 18 per cent of its sales. While Brookes says there is no premium in them, there are those who believe they are slightly higher margin products for Myer.
In any event they can’t be offered elsewhere, Myer can’t be under-cut on prices and, as Brookes said, they can be used as leverage in discussions with suppliers about the availability and pricing of competitive product. The exclusive brands will help protect Myer’s margins, both in-store and online and act as a drawcard for its website.
Myer has talked about 20 per cent as a target level for its exclusive brands but Brookes referred to department store operators like Macy’s in the US and Debenhams in the UK, where their proprietary brands represent nearly half their sales, as a guide to what might be possible.
The difficult retail climate might make it easier and cheaper for Myer to acquire more established brands to bulk up its own portfolio, which has grown rapidly in recent years – five years ago they generated about 7 per cent of its sales.
At 10 per cent of sales Myer’s online strategy would generate about $300 million a year of sales, roughly similar to one of its flagship stores. The far bigger EBIT margins within the online channel – margins that might be further swollen if Myer significantly expands its range of exclusive brands – mean, however, that a successful online strategy could have a very material impact on the group’s bottom line.
It should also enable Myer to continue to rationalise its store network, culling lesser-performing stores and creating leverage in negotiations with landlords.
Myer’s growth strategy, once focused on expanding its network of traditional stores, is now one of getting a better yield in a low-growth retail environment from a portfolio of stores roughly the same size as it operates today while tapping into the phenomenal growth rates the overseas experience – and the early experience here – suggests will be available online.