By Sue Mitchell

Woolworths is planning to spend a ‘scary amount of money’ transforming the faded grande dame of Australian retailing into the best department store in the southern hemisphere.

The $15 billion department store sector is facing its strongest period of capital investment in a decade as Myer and David Jones battle for supremacy in a war of attrition where victory will go to the side with the deepest pockets and most powerful weapons.

As the department store market leader, and after investing more than $300 million into IT systems and e-commerce platforms after its 2009 float, Myer once had an edge over its smaller rival.

But the tables have turned in the 12 months since South African retailer Woolworths Holdings outlaid $2.1 billion to buy David Jones and another $215 million to gain full control of clothing and accessories retailer Country Road.

Woolworths chief executive and David Jones chairman Ian Moir is planning to spend a “scary amount of money” on new systems, programs and visual merchandising to transform the faded grande dame of Australian retailing into the best department store in the southern hemisphere.

Myer is not Moir’s only target – the Scottish-born former CEO of Country Road also has specialty retailers in his sights.

“I don’t mind whose sales I take – we’ll have a go at anybody,” Moir quipped during an interview with Fairfax Media last week.

Moir says David Jones and Myer have wasted too much time in the past focusing on each other rather than on customers.

“If you start worrying and looking over your shoulder at what someone else is doing and you’re concerned they might be doing something you should do, then you’ve got your attention in the wrong place,” Moir says.

“If you focus on the customer you deliver what they’re looking for and you take market share.

“Whether by us absolutely focusing and understanding our customer and doing a good retail job results in us taking sales from Myer or from specialty apparel, I don’t think it matters.”

However, he warns that those who lose market share to David Jones will struggle to compete in a market where size has become increasingly important.

“Playing catch-up is very hard. Once you’ve taken market share from someone or taken a customer from them it’s very hard for them to get it back,” he says.

VEILED THREAT

Moir has also predicted further industry rationalisation, saying retailers need scale to make the required investments in e-commerce and digital technology to bring them up to speed with international  competitors: “There will be fewer and fewer retailers.”

These comments appear to be aimed directly at Myer, which has been considered a takeover target since its $3 billion merger of equals proposal for David Jones last year galvanised Woolworths into making its takeover bid.

Myer shares have halved since the merger proposal and investors believe the retailer needs to raise as much as $300 million in new capital to fund another round of investment in technology and stores to regain relevance with shoppers.

Myer’s new chief executive Richard Umbers, who is due to unveil his turnaround plan later this year, is undaunted by Moir’s chilling predictions.

“What we’re very much focused on is our own customers and our own initiatives to engage with the customer,” Umbers told Fairfax Media after unveiling a key component of his strategic plan – in-store hubs where traditional department store services such as personal stylists and gift registries intertwine with digital services such as click and collect.

“In a market of this size there are plenty of opportunities for us to be successful. We’ll let David Jones look after their own business,” Umbers says.

“There is a new retail model emerging in Australia – one that is very customer-centric, very focused on the customer but also strongly digitally enabled as well.”

In the new retail model, traditional weapons such as exclusive brands  and sexy marketing campaigns are being  superseded by more powerful tools such as data analytics and customer relationship management programs that enable retailers to better understand what customers want and how to offer it to them in more compelling ways.

Since the Woolworths takeover, for example, David Jones chief executive Iain Nairn has removed more than 180 brands (80 in womenswear alone), replacing niche labels with larger mid-market brands such as Seed, FCUK, Marcs, Country Road and Witchery. Nairn’s meticulous market research showed these were brands David Jones’ customers were buying outside David Jones’ doors.

UNDERSTANDING CUSTOMERS

Over the next few years, David Jones will invest as much as $400 million on new accounting and merchandise planning systems, new customer relationship management systems and loyalty programs, visual merchandising, store refurbishments and new stores.

“Everything we do in terms of the money we spend on systems will be aimed at having more information and better understanding of our customers,” says Moir.

“When we do it will give us an enormous advantage. Customers these days expect you to know them and they expect you to deliver exactly what they’re looking for,” he says.

Part of the investment will be funded by the sale of two of David Jones’ four CBD stores in Sydney and Melbourne – deals that could raise almost $400 million. Myer has no similar pots of gold, having sold its stores before listing in 2009.

Retail consultant Brian Walker, CEO of The Retail Doctor Group, says department stores are spending heavily to make up for years of under-investment, but the capital expenditure and operational expenditure may not necessarily deliver satisfactory returns.

“The classic payback period is going out the door. It’s a long-term investment and for some it’s a leap into the unknown,”  Walker said. “None of us can predict what the future will bring.”

While new systems will undoubtedly improve efficiency, replenishment and stock availability, Walker questions what department stores can do to boost top-line sales, which have been going backwards for years.

He points to the lack of same-store sales growth at Myer and David Jones over the last four years, despite hundreds of millions of dollars of spending on e-commerce, customer loyalty and refurbishments.

“Seventy per cent of consumers know what they want to buy before they arrive in store – that doesn’t play to the heart of the department store,” says Walker. “Department stores are all about wandering around and impulse purchases.”

Walker believes that David Jones, thanks to its parent company’s deep pockets, is better positioned than Myer to succeed in an increasingly challenging environment 

“It’s not that [Myer] can’t do it, but it’s going to be an expensive and challenging journey,” Walker says.

He agrees with Moir that more mergers and acquisitions are likely.

“The bigger will rationalise at one end and at the other end will be niche players – for those in the middle ground it gets very tricky.”

First published on Australian Financial Review online, 25 July 2015.