The retail revolution

Global competition, Amazon may be set to pile on pressure

New Zealand’s listed retailers had a better than expected results season but mounting challenges from online global retailers and the rise of Amazon is expected to put more pressure on the sector.

The share prices of Hallenstein Glasson, Kathmandu and The Warehouse have spiked in the wake of fullyear result announcements in the past few weeks. Briscoe Group, which released its half-year figures in early September, has seen its shares drift downwards.

Grant Davies, an investment adviser at Hamilton Hindin Greene, said retailers had mostly surprised the market on the upside.

The strong New Zealand economy and rising house prices had kept retail spending strong, Davies said.

Amazon has not said when it will launch its Australian business, although some say it could be within weeks, after the building of a warehouse in Melbourne. The warehouse could make it much quicker for Kiwis to get products delivered.

Davies said Amazon’s move into Australia meant retailers were going to have to focus on providing a good experience for shoppers.

“Having a strong brand is going to be essential.”

The good growth for retailers would likely continue for the next year or so while the economy continued to be strong.

“With interest rates where they are, it’s going to keep the economy fairly well buoyant.”

Retailers had been through a tough few years and this last year had been about recovering from that, Davies said. “They have managed to tick that box.”

In the longer term it would come down to the strongest surviving, he said. “Only the ones with a properly differentiated product or service are going to survive.”

Outdoor clothing retailer Kathmandu had done particularly well by getting its inventory under control, a situation that had caused the company problems a few years ago, he said.

“I think the key aspect was inventory control. They have seen inventory drop slightly.”

Davies said the company had also taken a step back from overseas expansion by pulling out of the UK market. It was now using distribution outlets, which was a lower-risk approach.

However, Kathmandu was still very reliant on its three big sales a year and how well those did varied, depending on the weather and if other retailers had sales at the same time. Kathmandu’s online growth helped spread its business outside those sales, he said.

Mohandeep Singh, an analyst with Craigs Investment Partners, said Kathmandu had seen 15 per cent growth in online sales, although this was less than 10 per cent of total sales.

“Kathmandu had a relatively good result.”

Same-store sales were up 3 per cent, and while that was a pretty good outcome, Singh said the country had seen population growth.

“Their margins were down for the year because they had to do a bit more promotion.”

A squeeze on margins has also begun to be felt by Briscoe Group, which had previously been a standout performer in the retail sector.

Singh said Briscoe’s gross margin fell in its first-half result, a situation which did not happen very often to the company.

In the last few years the Rebel Sport part of the business had struggled, with Briscoes homewares taking the lead, but Rebel Sport had taken off of late with a pick-up in the leisure sector on the back of big sporting events such as the Lions rugby tour and the Masters Games.

Singh said The Warehouse had also benefited from this.

The Warehouse Group’s result was hit by losses in its finance business, which it had sold, but was better than the guidance the company had previously given.

Singh pointed to stagnant earnings growth in the red sheds part of the business, despite capital expenditure of $200 million to $300m over the last five years.

The company was now undertaking its third major strategy refresh in just over 10 years, he said. The Warehouse has said it will focus on everyday low prices rather than sales.

Singh said the company had ambitious plans to grow its earnings, but that could be a tough ask.

“At the same time we have had a resurgence of K-Mart which has a pretty strong cult following,” he said. “It all comes back to if you can hit the mark in terms of product.”

K-Mart was cheap but had the right product range, while Hallenstein had also done well with its range, he said.

That was in sharp contrast to Topman, part of the Topshop enterprise, which had struggled to understand the Kiwi market, he said. Top Retail, which operated Topshop and Topman in New Zealand, appointed receivers last month.

It was difficult to forecast the performance of retailers because they had two big uncontrollable factors — exchange rate and weather, Singh said. “And then there is continuing competition coming into the market.”