Big domestic retailers are about to face a huge wave of competition from smaller discount retailers and international brands. Bricks-and-mortar giants David Jones Limited (ASX: DJS), Myer Holdings Ltd (ASX: MYR), and Premier Investments Limited (ASX: PMV) will likely see margins come under more pressure in the next 12 to 18 months, as a range of international retailers open their first stores in major Australian locations, and discount chains Target, K-mart and Big-W target the price points often associated with the likes of Myer and smaller specialty stores.
Consumers, particularly women, who have passed through a Target store or seen Target TV ads recently, will have noted the renewed enthusiasm the company is putting into designer label clothing. This category and a $60-$120 price point has long been the domain of Myer and Premier Investments' stores such as Dotti, Portmans and Just Group. David Jones usually caters for higher price points, however investors would note a similar theme from the intensity of recent efforts to improve revenue per square meter by signing numerous exclusive distribution deals with designers and increasing floor space dedicated to clothing.
In my eye this signals that in the future there will be more competition for consumer fashion spending, and that many of the major retailers are pinning their hopes of an earnings recovery on their unique approach/brands.
Another consideration for investors is the added competition from overseas brands, not only online, but also from newly established or to-be-established bricks-and-mortar stores in major capital cities. Zara has been in Australia for a number of years, having identified Australia's high GDP per capita and growing population as catalysts for solid earnings potential. By all reports the stores have performed well, and in the process taken sales away from Australian companies (see the deterioration in Myer and David Jones revenue in recent years).
This overseas threat is growing and simply cannot be ignored. Zara will be, or already has been, joined by Marks and Spencer, H&M, Uniqlo, Mango and Sephora. Not all of these will succeed, but analysts at Citi Group estimate that these companies will draw in in over $1 billion in revenue once established. Citi believes that H&M represents the most significant disruptive force, as it sells similar products to Premier and Myer at a 30-40% discount.
Add to this rising unemployment, low consumer and business confidence, and only a moderate up-tick in housing construction, and the major retailers in Australia have some concerns in the coming years.
Foolish takeaway
Fashion retailers have few competitive advantages compared to businesses in other industries. With the increased penetration of the internet in Asia, entering the market is as easy as employing Chinese manufacturers, building a well-designed website, and developing a decent online marketing strategy. As a result of this competition, Australian retailers pinning their hopes on fashion will have to execute exceptionally well to deliver similar returns to years gone by. My preferred retail exposure includes companies with a strong customer base, such as JB Hi-Fi Limited (ASX: JBH), or brands that are less susceptible to changes in fashion tastes such as Super Retail Group Ltd (ASX: SUL).
