THE DISTILLERY: Zahra's bargain blues

Jotters see big challenges ahead for David Jones, with one saying the GFC has left shoppers addicted to discounts.

David Jones boss Paul Zahra has to strike a delicate balance between chasing sufficient margin to fatten profits and chase enough sales to keep the stores ticking over. The retailer’s disappointing sales numbers have brought home to investors the risk of this strategy and Zahra has to sell shareholders a way forward. His job depends on it.

The Australian’s Richard Gluyas really sums up the results from David Jones from yesterday with his first two lines.

“When a retailer such as David Jones reports record swimwear sales in winter, nothing good is going to come of it. Any revenue and profit upside from flogging a $50 swimsuit is going to evaporate when a $600 coat sits on the rack, gathering dust ahead of the next clearance sale.”

Business Spectator’s Stephen Bartholomeusz says it should hardly be surprising that David Jones is struggling to get consumers to open their wallets.

“There has been a sharp fall-off in consumer confidence since the federal budget, the weather has been unseasonably warm and there continues to be intense competition. Even the latest Reserve Bank rate cut has failed to ease the pressure on retailers.”

But, as Fairfax’s Elizabeth Knight explains, this doesn’t change the fact that Zahra needs to better communicate to shareholders how David Jones is working towards achieving profit growth.

“But it's a tough juggling act. All retailers are guilty of feeding consumers' addiction to discounting to chase sales. It started with the global financial crisis and was exacerbated by online competition. To place customers in rehab and wean them off bargain buying is a tall order and one that requires a measure of collusive strategy among all the retailers. Myer has come to the party to some extent, but has not asked its customers to go cold turkey. While the industry in general has said it wants to ease up on discounting, it only takes one big player with an excess-inventory problem to push the others into price matching.”

It’s a point picked up on by Knight’s colleague Michael Pascoe.

“Just as well Paul Zahra is a retailer instead of a banker – otherwise the Australian Competition and Consumer Commission might be wondering if he was attempting a little price signalling while announcing disappointing sales figures.”

But what of the department store’s main rival Myer? The Australian’s John Durie reports on the practical side of competition between the pair.

“Rival Bernie Brookes at Myer has been talking up the retailer's promotional sales, but Zahra says David Jones will only match Myer where it needs to and otherwise will aim to support growing profit margins. He is backing his retail skills at a tough time in the market and if he pulls it off he will walk out a hero. If not, the downward spiral will set in quickly.”

The Australian Financial Review’s Chanticleer columnist Michael Smith also reports on the difference between Myer and David Jones, where the latter is happy to let the former chase sales as it focuses on margin.

“Sacrificing sales in an environment where consumer sentiment is short is a risky strategy. Even Zahra acknowledged David Jones was walking a fine line as he managed the company through complex times. The jury is still out on Zahra, who inherited the job suddenly at a tough time in 2010 after his predecessor Mark McInnes had to step down.”

Notice how Smith, like Durie, underlines just how important the outcome of this strategy will be for Zahra’s career.

In other news, The Herald Sun’s Terry McCrann is alarmed at the near-term prospects of the Australian economy as the resources boom comes to an end quicker than many anticipated.

The Australian Financial Review’s Jennifer Hewett writes that Australia’s productivity is still heading in the wrong direction despite all the rhetoric about getting a handle on costs.

And finally, Fairfax’s Tim Colebatch offers up his take on the departure of Ford from Australia’s carmaking market. The short of it is our wages and dollar are too high to produce cars that no one buys domestically.

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