South African retailer Woolworths will meet in the next few weeks with Australia's David Jones' suppliers to discuss which brands will go and which will stay under its private label strategy.
Woolworths chief executive Ian Moir has tried to quash concerns that David Jones, known for its range of international, national and designer brands, will become more like a Marks & Spencer or even Target after Woolworths' A$2.2 billion (NZ$2.4b) takeover.
"Everybody seems to be getting quite scared about what we're going to do about private label,' he told AFR Sunday.
"You need to understand that we won't do anything that isn't driven by our customer," he said. "It's what made us a successful business in Country Road and a successful business in Woolworths."
However, Moir said that some existing brands that no longer resonated with customers would have to go to make way for new private label brands from Woolworths' South African stores and a wider range of brands from Woolworths' Country Road stable.
"There are a lot of brands that don't really resonate with the customer and don't perform for us," he said.
"A lot of those are brands that customers that most customers would never be able to name. Those are the brands we will replace."
"We will have meetings with suppliers in the next few weeks - we need to make sure that brands that are important to us understand that they as part of our growth - we see these brands expanding with us."
Moir said Woolworths remained committed to the house of brands strategy originally introduced by former David Jones chief executive Peter Wilkinson almost 14 years ago and perpetuated under Mark McInnes and Paul Zahra, who stepped down last week.
"We are just as committed to international and national designers and local concessions as we've always been," he said.
After originally suggesting in April, when the takeover deal was unveiled, that private label sales could reach as high as 30 per cent of sales, Moir said private label was now likely to reach about 20 per cent of sales.
Woolworths would take into account customers' shopping habits - using its sophisticated customer relationship management systems - before pushing the private label strategy too far, too fast.
Moir has also hired Cap Gemini as program managers to manage the integration process and Ernst &Young to assist with staff and cultural issues.
"We'll bring our most successful Woolworths brands from South Africa into David Jones, brands like RE: our denim brand and JT One and young leisure and lingerie brands. The customers will love them, they'll see them as different brands, as new brands, as exciting brands. They won't see them as downmarket. We have no intention of taking David Jones down market."
Private label products generate higher gross margins than wholesale and concession brands - around 60 per cent compared with between 15 and 30 per cent.
Woolworths needs to lift David Jones' group gross margin, which is currently around 39 per cent, to achieve its targets for earnings growth between A$130m and A$170m by 2019.
UBS analyst Darren Cohn believes Woolworths could exceed these targets, lifting earnings by between A$163m and A$242m by 2019.
However, Cohn has described the plan to lift private label sales from 3 per cent to 20 per cent of sales as the "key risk" for Woolworths.
"The Australian customer knows David Jones as the store where one buys branded goods," the South African analyst Cohn said in a recent report."Changing product mix is difficult to do - even if it is for around 35 per cent cheaper clothing, arguably of better quality," he said.
Cohn said Woolworths had not conducted the exhaustive customer surveys it did in South Africa before changing the product mix there.
"Therefore, by definition, the risk remains that the Australian consumer rejects the mix changes,"' Cohn said.
"It is very important to remember that private label is, on average, about 30 per cent cheaper than branded goods. Therefore, if volumes remain constant sales will be lower than originally forecast."
Moir declined to give gross margin targets but was confident Woolworths would be able to lift David Jones' EBIT margins, which are currently around 3.5 per cent adjusted for property, to around 10 per cent, in line with those at Country Road but less than the 17 per cent in its South African clothing business.
- Sydney Morning Herald