Zahra leaves DJs at the crossroads

The challenges of the online world loom large for the new chief executive, writes Eli Greenblat.

It was another red carpet party in Melbourne and newly appointed David Jones boss Paul Zahra had found himself perched on a stage, wonderfully sandwiched between smouldering Amazonian model and store ambassador Megan Gale and the sometimes twitching, slightly manic musical savant David Helfgott.

In the crowd was the kind of collection of odd celebrities, TV personalities and company directors that only a fashion event could bring under one roof: singer Kate Cebrano, game-show host Eddie McGuire and Nine boss Jeff Browne, horse racing power family Gai and Robbie Waterhouse, TV morning show presenters Karl Stefanovic and Lisa Wilkinson, Australian Olympic Committee president John Coates and one or two fund managers bumping around gawking at the supermodels and also wondering how much this was costing shareholders.

But the talk in the crowd was not about the launch of David Jones' multimillion-dollar refurbishment of its flagship city store, which Zahra was there to open that August night in 2010, but rather the sex scandal surrounding the sacking two months earlier of chief executive Mark McInnes.

The makeover was his baby but Zahra was slotted in to christen the new store and he showed all the nervousness and discomfort of any debutant. He welcomed guests, spoke about the glamorous new look for the Melbourne store and even mentioned McInnes (cue some mumbling and sniggering in the crowd), but overall gave a skittish performance for his first public event as the new boss.

"In those early days you could see he was nervous," one retail analyst said. "He was nervous sometimes before investors but it wasn't really a job he was probably groomed or prepared for in the first place, or maybe even wanted, but when McInnes was thrown out he stepped in and did his best under considerable pressure and during immense challenges for discretionary retail and department stores in particular."

Three-and-half years later it was a vastly different story. Zahra this time was in the wealthy Melbourne suburb of Malvern to open David Jones' new small-format store. It was a store design that was very much his baby this time, and a crucial plank of his personally crafted turnaround strategy for DJs.

He positively radiated confidence. He spoke confidently, with purpose, cracked jokes, welcomed guests and mingled with shoppers, executives, fashionistas and sidled up to Megan Gale - still smouldering - to show her one of the store's special features - a full-length mirror that takes photos to send via social media platforms to get immediate responses from friends on the look of a new dress or top.

But even then Zahra must have known his time at the top was coming to an end. He had most likely already had a difficult talk with DJs chairman Peter Mason, telling him perhaps "it's me, not you" and that he wanted out.

Even at the release of DJs' full-year results a month ago, analysts were impressed at Zahra's performance, presenting strongly and almost convincing the market the numbers were good when in fact they were not.

This week, what Zahra, the chairman and the board had known for a while became public knowledge when DJs surprised the market by announcing Zahra's intention to resign. He was burnt out. Tired. Exhausted by the workload, the heavy schedule and the demands on him from overseeing a national portfolio of stores and more than 3000 brands. Dealing daily with catty fashion designers whose egos needed to be stroked probably was not a joy either.

David Jones is now scouring the globe for a successor. It comes at a time when discretionary retailers are struggling with the challenges of a structural upheaval caused by the relentless onslaught of the internet and a cyclical downturn and slump in spending by consumers.

A shortlist of potential local candidates has been circulating headhunters. Former Oroton boss Sally Macdonald is considered a strong contender, but despite her success in reviving the fortunes of the handbag and fashion accessories group she has no real experience at a department store. DJs' manager of merchandise Donna Player is being put forward by some as a candidate. The highly regarded former Myer merchandising boss Penny Winn, who was squeezed out of the store when it was decided she would not be a potential successor to replace Bernie Brookes when he retires next year, is also gaining traction as a contender.

DJs' directors know the next leader they appoint must stay longer than Zahra's 3 years, not to mention be scandal-free, lest investor attention turn on them and their oversight of the succession strategy and grip on management. It will be a precarious balancing act for chairman Mason, and he might opt for an international candidate who can bring ideas from the department store industry in the United States or Britain.

Already some investors are talking about David Jones poaching a senior executive from upmarket stores such as Neiman Marcus in the US or the slightly less upmarket Nordstrom, while drafting someone in from Selfridges (which Zahra acknowledges as a store he wants David Jones to aspire to) or John Lewis in Britain.

But then what of internal David Jones candidates and the impact on them of bringing in an outsider?

"It's very challenging in the sense to identify talent within the existing group," former Myer chairman Howard McDonald says. "There are two views, obviously. Get two or three people who could be in the line of succession, but then it can become quite difficult because one wins and then there can be a management fallout. The other is to groom and continue to develop people, but always be on the lookout for external candidates, keep freshening up your senior management team but also providing the board with more options by way of succession."

David Jones will need to take its time to find the right chief executive, but investors will start to fret if that search drags on too long, especially as the department store tries to navigate its way through some of the toughest retail conditions in decades.

"They need to appoint someone in a reasonably quick time frame," fund manager Anton Tagliaferro of Investors Mutual says. "[But] they have got to let Christmas get out of the way, which is their peak selling season. Come January or February, they have got to hopefully get someone on board; they really can't wait six to nine months to come up with a new CEO."

Deutsche Bank retail analyst Michael Simotas says an overseas pick could be the best strategy for David Jones. "There has been press speculation that David Jones are looking outside of Australia for someone, and for someone with international experience in a similar department store format, and I think that would probably be the best solution," he says.

Although the trading environment and demographics alter from country to country, an executive from an overseas department store, especially from the US or Britain, would have deep experience in dealing with the threat from online sales and developing a strategy for a bricks-and-mortar store to actually make a go of the online world.

"Someone with the experience probably could add some value to David Jones because in the markets like the US and UK ... [they] are a little bit or quite a bit ahead of where Australia is in dealing with online and rolling out digital platforms," Simotas says.

Analysts do not expect the new chief executive to totally throw out Zahra's strategy that set David Jones on the path to prepare for the new economic and technological challenges it now faces. "An outside CEO would bring a fresh pair of eyes to David Jones," Simotas says, "but I don't think it needs to be a dramatic change because of the quality of the initiatives Zahra has put

in place."

Allan Gray chief executive Simon Marais has pretty basic demands: "Somebody who is a good retailer, somebody who knows the industry, has retail in their blood."

Marais' views will be listened to by the board given his funds management business has a foot on 7.2 per cent of David Jones and is one of its biggest shareholders. Marais remains an optimist when it comes to department stores and David Jones, but given he has more than $100 million of his clients' money tied up in the company that should not be a huge surprise.

"There are any number of stores like David Jones overseas, like Neiman Marcus in the US and John Lewis in the UK, where these online trends are much further developed than here. Some have done very well, and so it is possible you can do it, you can be successful.

"Clearly a new CEO will have to review Zahra's strategies, that's why they are the CEO. Does it mean they should change most of it? No, I think most of it is pretty obvious and the online strategy, for example, you need to use your [store] footprint to get a competitive edge online, and I'd be astonished if someone new at David Jones wanted to change that."

But former Myer chairman McDonald, a veteran of many boards and turnaround projects including Myer, cautions against any quick fix for DJs.

"With department stores there needs to be continued reinvention, if you like, of its offer, all the new social media online product offerings, direct sourcing ... the mix has to change and continue to change," he says. "The demands of department stores are considerable, given you are moving from electricals to dresses where the margins are different, the suppliers are different, demographics, the seasons changing constantly, they are very difficult businesses in that sense.

"They are not dinosaurs. You are looking at online stores and they are not right yet and they are not making correct returns yet, and so I think the combination provided by department stores ... is a real opportunity to leverage all the options that are emerging now in retail."

For Zahra himself, he has a bucket list of holiday destinations to cross off, and probably is keen to reclaim his weekends from the constant demands of the corporate world. That is, until the siren song of the executive life drags him back - but at least it will be in a role and at a time of his choosing.