While the Federal Court of Australia is expected to tie up loose ends on one of the biggest departmental store deals this week, retail analysts said yesterday that the Australian market was the perfect destination for Woolworths to grow its footprint.
Woolworths will soon know if the Australian court approves of its R22.3 billion deal to buy department store chain David Jones. This week David Jones shareholders voted in favour of the move, which Woolworths chief executive Ian Moir described as “a step closer to creating a leading southern hemisphere retail business with the necessary scale and common seasonality to deliver substantial benefits to our company and our customers”.
Woolworths already owns Australian clothing store chains Country Road, Trenery, Witchery and Mimco.
Zooming into the Australian market, retail analysts said that Woolworths would not achieve the same kind of trading footprint if it chose to grow its business within the borders of Africa. Simon Anderssen, an equity analyst at Kagiso Asset Management, said the deal would make Woolworths a large southern hemisphere retailer with combined clothing sales of about $3.7bn (R40bn). The major global clothing retailers have sales in excess of $10bn.
Anderssen said in apparel retail, the benefits of scale came from being able to earn higher margins on private label products sourced for stores.
“David Jones is… a retailer of other companies’ brands and therefore earns comparatively low margins. Sourcing and supplying Woolworths products to David Jones is a significant expected benefit of the deal. Woolworths targets 20 percent of its private label sales from 4 percent currently.
“Investors should be pragmatic about the profits this can add to the group given David Jones’s position as a retailer of high-end brands,” he said.
On what this deal would mean for the man behind it, independent retail analysts Syd Vianello said if the deal worked, it would give Moir the potential to be an international executive to be reckoned with.
“However, everything depends on his ability to make it work. This does give him a better profile but in the longer term he would be recognised as a desirable chief executive and a potential for any major retailer around the world.”
Both analysts added that high competition in the Australian retail market awaited Woolworths. Anderssen said David Jones’s main competitor in the department store category was Myer, “but both have been losing market share to other specialist and online retailers”, he said.
Like South Africa, many of the world’s large clothing companies have aggressive expansion plans in Australia. H&M, Inditex, which owns Zara, The Arcadia Group, which owns Top Shop and Miss Selfridge, Abercrombie & Fitch and Uniqlo were some of the brands opening in Australia in search for growth as their northern hemisphere sales had slowed, Anderssen explained.
Vianello said Zara operated extensively in South America, but the percentage of its global sales in the southern hemisphere was still small.
“Zara is more of a northern hemisphere retailer as is H&M. Woolworths could be competing against them, however its advantage would be its focus on the southern hemisphere as opposed to Zara and others, which have a northern hemisphere perspective,” Vianello said.
Locally, Woolworths would not have been able to achieve the same trade footprint it would achieve should this deal be approved, Vianello said.
Anderssen agreed, saying Woolworths would have struggled to acquire any retailer in South Africa as there were not very many meaningful local alternatives.
Woolworths shares rose 1.96 percent to close at R83.61 yesterday, giving it a market capitalisation of R63.5 billion. David Jones closed unchanged at A$3.98 (R40) in Sydney.