Woolworths takes A$2 billion plunge

Last updated 11:48 10/04/2014

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After fiddling around the edges of the Australian retailing scene for a few decades now, one of South Africa's largest groups has made a lunge for one of the centrepieces of the industry.

Woolworths Holdings is plumping down A$2.15 billion ($2.31 billion) in cash for David Jones, the department store operator.

It is offering a hefty A$4 a share, a steep 25 per cent premium on the David Jones share price before the offer was unveiled. With the backing of the David Jones board and by seeking to merge via a scheme of arrangement, the offer is all but certain to carry the day.

And Myer lost little time in running up the white flag on Wednesday, withdrawing its offer for David Jones while promising to be a ''robust competitor''. Perhaps unsurprisingly, Myer's share price rallied as fears it would be forced to pay over the odds to win control of David Jones faded.

But now the tables have turned and rather than Myer emerging as the dominant force in the department store sector via a David Jones merger, it will now be on the back foot, doing battle with a bigger rival with deeper pockets and - on the face of it - greater expertise.

David Jones' fortunes have waned notably over the past few decades as consumers became more price conscious and as the focus of retailing has shifted away from department stores. Its problems have been exacerbated by an indifferent board, many directors having limited knowledge of retailing and, from time to time, lacklustre senior management.

And with the rising challenge from upmarket retailers such as Zara along with the specialty youth market outfits such as H&M and Uniqlo, its time to smarten up or bail.

Woolworths Holdings is not afraid of a fight, and points to its ability to build sales when a Zara outlet opened near one of its own stores in South Africa. And, even though Zara has been in Brazil for 15 years, it has not been able to build the sort of scale that Woolworths Holdings has at the fashion end of the market.

As a result, the South African group's sharemarket value has risen to A$5.5b from A$1.5b over the past five years, as its increased scale has helped to fatten margins, in part thanks to its successful private label business.

Lacking the right infrastructure to profit, David Jones could not make a go of its own push earlier into private label retailing, opting more recently to become a ''house of brands'' department store operator.

But that will now be reversed, as its new owners put their own extensive knowledge base and infrastructure in private label retailing to great effect.

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David Jones private label business generates around 3 per cent of revenue, which Woolworths Holdings wants to lift to around 20 per cent, which would drive sales and margin expansion.

For example, at the South African company, private label sales are 25 times the size of David Jones. With a highly developed private label infrastructure spanning sourcing and distribution, it can achieve a quick product turnaround.

The South Africans reckons they can drive David Jones' top-line sales growth at better than 10 per cent a year and profits at more than 20 per cent annually over the next five years.

''David Jones don't have the infrastructure [for private label sales]. We are a private label business. That's what we do,'' Woolworths Holdings head Ian Moir said.

The other key push will be customer relationship management, as Woolworths Holdings aims to aggressively drive an increase in both online sales and also greater interaction with its customers.

Country Road generates annual revenues of A$70 million online, about 10 per cent of its total - and larger than David Jones' online sales.

From a background running Woolmark, Moir was put in to turn around the ailing Country Road when Woolworths SA bought it in 1998. He ended its US adventure, cut costs and streamlined the supply chain. Now, the fashion retailer contributes close to a quarter of the group's earnings, which will rise to about half the total with David Jones under its control.

After living in Australia for so long while at Country Road, Moir took Australian citizenship and is very familiar with the retailing industry here. His group has been looking to expand abroad for more than a year, looking at Brazil but eventually opting for Australia, and David Jones in particular, citing a commonality of values as the core attraction.

Corporate South Africa has been part of the Australian retailing scene since the mid-1990s.

''This is about enabling what [David Jones] has got,'' Moir said, arguing that he would be building the business, with overall employment numbers likely to rise, not fall.

- Sydney Morning Herald

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