SYDNEY - The struggle to stabilise David Jones, Woolworths’ beleaguered investment in the Australian retail market bought for over R20bn four years ago, continues as the company announced the loss of 15 head office jobs and the departure of MD for clothing and general merchandise, David Collins.
This follows the exit of Australian MD John Dixon in May amid restructuring and cost-cutting initiatives.
Woolworths’s share price has halved from the highs reached in late 2015 and the company was forced to write off A$713m (R7.2bn) from the David Jones business earlier this year.
In the light of the Woolworths struggle, the lure of investing in Australia might pale for many would-be investors.
However, Ian Matthews, head of business development at Bravura, a South African investment banking and corporate finance advisory firm with a presence in Australia, maintains that viewing Australia as a difficult investment destination is inaccurate.
Bravura has advised several South African businesses with regard to their entry into the Australian market.
“The Woolworths situation tends to overshadow the many successful acquisitions that have been made by South African corporates in the country,” says Matthews. “As an investment destination, Australia offers hard-currency earnings and diversification in a robust economy that has been recession-free for 26 years, with consistent GDP growth. However, understanding market needs is critical to investing successfully, because there is not necessarily strong growth across all sectors. Investors must be aware of potential investment pitfalls.”
Although Woolworths has impaired the value of David Jones, it is still continuing to invest in Australia. Group capex is set to increase from R2.59bn in 2017 to R3.8bn in 2018, with further spend anticipated in 2019.
David Jones is extending into food and spending almost A$200m on refurbishing its flagship store in Sydney. It’s a risky move given that the upmarket food segment is well-served by private delicatessens.
The department store model itself may continue to struggle as online players Amazon and eBay make the trading environment difficult for traditional retailers.
Matthews says that Woolworths’ struggles underscore the imperative to ensure a thorough analysis of the market in order to understand its drivers, peculiarities and weak spots. “Retail is a highly competitive sector, even for local companies, and the level of saturation is high. A number of South African retailers such as Truworths, Clicks and Pick ‘n Pay who were front-runners in entering the Australian market, did not produce the results they were hoping for. Truworths, having bought Australian brand Sportsgirl in the mid ‘90s, read the market and quickly cut their losses five years in to focus on their business at home.”
There are other sectors beyond retail that present good investment opportunities. Matthews highlights the financial services and ICT sectors, where South African corporates have been able to reap rewards.
“Dimension Data and Datatec have completed numerous successful acquisitions. A technology-savvy and solutions-driven customer base makes Australia a hub for innovation.”
In considering Australian opportunities, Matthews cautions that South African businesses often tend to misjudge what is an extensive regulatory environment.
“Acquiring a business in a regulated industry results in compliance obligations and associated costs which must be fully understood. For investors planning to establish or expand business operations in Australia as part of a diversification strategy, there are opportunities in the right sectors. But to maximise long term value, companies should ensure that they receive informed, local advice with an understanding of the South African investor perspective to effectively navigate the complexities.”