A possible Myer / David Jones (DJ) merger is continuing to make headlines, but I think all customers really want to know is whether or not this merger will mean lower prices for them as a result.
Although DJ initially declined Myer's merger proposal back in November last year, it would appear that Myer's more recent announcement that it was prepared to up its offer if DJ could show that it was worth more has kept the prospect of a merger alive. Yesterday we saw the appointment of a new David Jones Chairman, former Westpac director Gordon Cairns, who according to The Sydney Morning Herald said his next job was to "appoint management consultants and investment banking advisers to review the Myer merger proposal".
With this move looking like it's still on the cards, I decided to do some digging to examine what the likelihood would be of the potential single-super-retailer offering more competitive pricing. Here's what I've found.
Impact On Prices For Consumers:
There's no doubt that if these two companies were to join, it would result in substantial savings for the merged entity through efficiencies created with single administrative, distribution, digital and buying functions. Despite this, retail expert and CEO of Retail Doctor Group Brian Walker believes it's unlikely that consumers would see a drop in prices. This is based on his prediction that the primary focus would be on maximising profits for shareholders.
While Walker explains that the merger would also create tremendous buying power which the new super-retailer could use to lower prices paid to its suppliers, he believes that a less competitive landscape without any fierce rivalry would probably mean higher ticket prices for customers.
With that said, I feel it's worth considering the current levels of competitiveness in the retail sector for both Myer and DJ to see whether they could actually afford to keep prices at current levels.
The Competitiveness Of Myer And David Jones:
If you look at the current state of Myer's and DJ's positioning within the Australian retail market, it is clear to see that they're coming under strain. Although these retail giants dominate the department store landscape, the first worrying aspect is the minimal growth figures they've been reporting over the past few quarters which have ranged between 1% to 3%. Meanwhile, competitors like Harvey Norman - who reported a 4.3% growth in sales during the 1st quarter of 2013 - appear to be posting stronger levels of growth on average.
Myer and DJ are also facing increasing competition from international retailers too. According to Brian Walker, the Australian market simply can't house two department stores of that size and scale, which I tend to agree with. In his commentary last month about the initial failed merger bid by Myer, he also makes reference to the competition (online and offline) from abroad which these two companies now have to contend with. He points to the fact that 18 out of the top 20 US online retailers have physical stores, many of which are moving into Australia and setting up shops themselves.
As a result, not only are Myer and DJ having to compete with other physical stores for shoppers, but they're also having to clammer for online visitors as well - something which both these businesses are failing miserably at. Online retail is an area of the Australian market which is evolving and growing at a rapid rate. DJ and Myer, however, are reporting online sales figures of just 1% and 1.6% respectively of their total volume of company wide sales. Compare that to the large US department store Nordstrom where online sales via their website account for 25% of their total sales volume.
Another obvious comparison to make would be with retail giant ASOS, a global fashion online retailer who offer free shipping to 237 countries. Back in August 2013 they reported that the group's international sales were up 44% - of which 63% of that was attributable to their business in Australia alone. This contribution of Australian sales was said to be worth around $801 million, demonstrating what a massive driving force ASOS have become in the growth of Australia's retail market as a whole. It's also an indication of how competitive the online retail space is becoming and that the longer companies wait to gain a foothold in this arena, the tougher it'll become to do so.
In my humble opinion, what all of the above implies is that keeping prices at current levels or raising them is unlikely to be a sustainable position if the merger were to take place. Therefore, I believe that the new super-retailer would almost have no choice but to lower prices (even if only across certain categories of products to begin with) if they wanted to ensure long term survival - forget about prosperity - in the Australian retail sector.
The only aspect I'm hesitant to venture a guess on though, is how long it would actually take before those price drops reached customers.