Shopping for survival: the Myer-DJs merger

Rod Sims’ musings about the competition policy implications of the proposed merger of David Jones and Myer today have broadly identified the hurdles the transaction would have to jump to be cleared by the Australian Competition and Consumer Commission.

Myer chairman Paul McClintock breathed some fresh life into the proposal by writing (again) to his David Jones counterpart, Peter Mason, urging him to take a more serious look at the potential merits of a merger. He made it clear that all options, including the relative values assigned to each company, were open for discussion.

With the David Jones board in turmoil – half of the non-executives, including Mason, are departing, a question mark hangs over the status of its chief executive Paul Zahra – its shareholders are restless. Pressure will be imposed on the David Jones board to engage and at least give a serious proposal from a serious party the level of examination and discussion that it warrants.

Speaking at a conference organised by the Committee for the Economic Development of Australia in Sydney, Sims made the obvious point that it was unclear whether the transaction would proceed. He said it illustrated the complexity of merger analysis and then outlined what he regarded as the likely areas of focus for any ACCC review.

As the two groups were the only “traditional or conventional” department stores offering a range of mid to high-end consumer goods in the Australian market, they were prime facie each other’s closest competitor, he said.

There were specialist retailers for the same products they offered, but the commission would examine whether they exercised a meaningful competitive constraint on the department stores given the convenience aspect of the co-location of the separate product categories. It would also consider the likelihood of new entry by established overseas department stores in Australia.

The ACCC would also focus on the increasingly significant role of the online channel and whether consumers considered this a substitute or a complement to the physical offering of department stores. He noted that Myer and David Jones were also expanding their online offerings.

The commission would look at the competition between the groups to attract concession operators within their stores and also at the “competition” for key anchor tenancies in CBD and regional shopping centres.

If that’s the checklist, the merger is in good shape if Myer can convince David Jones that an agreed merger of equals makes sense.

The notion that there is a discrete department store market and that one should ignore the reality that the two department stores in question compete with large and powerful discount department store operators as well as chains of speciality stores would be to misunderstand what has happened within the Australian retailing environment over the past several decades.

After a year’s analysis, one of the influences behind Myer’s decision to approach David Jones was the recognition that they were both losing ground. Confronting a new wave of challenges and competitors threatened their long-term relevance.

The specialist retailers already provide some constraints in the reduced range of key product categories the department stores carry. However, they aren’t the only constraining force.

The ACCC doesn’t need to spend much time considering the likelihood of new entry by overseas department stores. Some are already here via a virtual presence, and others are coming.

Most of the big UK and US department store operators with strong online offerings (as well as pure online retailers like Amazon and ASOS) already cite Australia as a major market. In the department stores’ core fashion categories, they face bricks-and-mortar competition from Topshop, Zara, H&M, Uniqlo and Gap (with others in the pipeline), as well as an array of luxury brand retailers.

The concessions within the department stores are generally global brands owned by businesses that have demonstrated their negotiating and pricing strength over the department stores. It is unlikely that a merged Myer/David Jones would gain much leverage over property groups like Westfield, Stockland or AMP, particularly as they can get better yields from substituting specialty retailers for the department stores.

The reality of retail – in both the physical and virtual environments -- is that it is highly fragmented, intensely competitive and increasingly global. The customer base is very value-conscious and has better tools to shop around and get access to the global market than ever before.

The fate of Myer and David Jones isn’t pre-determined, even though they have been losing ground for years against discount and specialty retailers, new competitors and offshore online retailers.

Some of the more successful online retailers offshore have been groups like John Lewis in the UK, or Macys and Nordstrom in the US. These retailers have a strong physical presence as well as a very strong presence online. Both Myer and David Jones aspire to emulate them but, at this point, badly lag behind their online offers.

Merged, they could lower their back-of-store costs significantly – Myer believes by more than $85 million a year. They could develop a much stronger online platform and offer.

While the merger may not eventuate – it requires David Jones to engage and then be convinced it would create real value for its own shareholders by creating a much stronger business – Sims is right to some degree in saying that it illustrates the complexity of merger analysis.

The analysis is complex because the commission is no longer dealing largely with static markets and largely domestic competitors.

In retail, there is a complex mix of long-established competitors and business models, newer competitors with very different models and now the assault by global competitors via a varied mixture of bricks and clicks.

Competition policy has tended to focus on domestic markets and competitors. Now it will need to take account of both the real and potential competition that is or could occur within an increasingly global environment.

The analysis might be complex, but the conclusion is straightforward.

Would a merger of Myer and David Jones lead to a substantial lessening of competition in a market? Only if the market definition was based on what retailing used to look like 30 years ago – and one ignored both the reality and the potential of global competition.