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H&M, Cotton On expose SA retailers on price, fashion - analyst

Nov 01 2016 14:04
Matthew le Cordeur

Cape Town – Stuttafords’ application for business rescue is a symptom of the local fashion retail industry, whose price points and fashionability have been exposed by international retailers entering the market.

Stuttaford’s decline after 158 years of trading was no surprise, 36ONE Asset Management retail analyst Evan Walker told Fin24 on Tuesday.

A significant consumer slowdown has been exacerbated by the rand fall-out, explained Walker. “That means higher prices for consumers, especially in branded goods,” he said. “The customer base has shrunk dramatically.”

However, he said the biggest issue facing retailers is that international companies like H&M, Zara and Cotton On have come on shore and have “exposed retailers on pricing and fashionability”.

“It’s horrendous,” he said. “If you go into H&M, you will see they are substantially better priced and more fashionable. They will grow exponentially.

"Going forward, the customer will either not spend or they will spend with international stores.”

READ: Stuttafords liquidation will be avoided - CEO

Downward spiral

Walker doesn’t have a good thing to say about any of the retailers - from embattled Edgars to Truworths, the Foschini Group and Woolworths - who he says “are expensive compared to international guys”.

“Our domestic retailers are going to be in a downward spiral, as none of them have invested back in price,” he said.

“The South African retailers are stuck in the mode of trying to protect their gross margins at all cost to keep their share price at elevated levels,” he said. “The long consumer downturn will come back to bite them and they will lose to their global rivals.

“They understand the issues, but they are slow to transform,” he said. “They didn’t have a cold winter and so there was poor delivery.  

“The pricing architecture is just too high,” he said. “We need a pricing architecture that reflects how tough the environment is.”

READ: Stuttafords seeks voluntary business rescue to secure future

No man's land

Within this tough market, Walker said that Stuttafords is “no man’s land”.

“Department stores globally have been struggling as the brands they stock have started their own stores,” he said.  

“The internet has been tackling them quite furiously,” he said. “Department stores are not the place to be. They are very costly to run.”

“It is very difficult to attract customers, especially in the South African environment where credit has been so alluring,” he said. “Stuttafords did not have a sufficient balance sheet to offer that. They had no real part to play and were not able to offer extended credit.”

Walker said it is difficult to tell whether Stuttafords will be able to come out of this or whether they can reform their business into a fast-fashion option like H&M.

“That’s going to be a wait-and-see approach,” he said. “Stuttafords is a no-go show and has been in the eye of the storm. They are old dinosaurs that have not moved with the times.”

Private labels

Stuttafords CEO Robert Amoils acknowledged that private label and vertically integrated retailers were in a better position.

“The biggest challenge we’ve had as a retailer is the length and duration of our supply chain,” he told Fin24 on Monday.

"We’re acquiring product nine to 12 months out, which means we’re unable to immediately and/or in a short space of time reposition our stock holdings and/or brand offering.

“If you’re vertically integrated and able to control brands… it certainly holds you in good stead,” he said.

“We’ve started to invest more heavily in house brands. However, it hasn’t been a strong strategy of our business over the course of five years, but certainly one we’re going to reinvigorate going forward.”

Amoils said costs have been escalating particularly as a result of rand devaluation and local inflation.

“That created a double edged sword, where you have costs escalating and full margin turnover dropping,” he said. “We have also been subjected to a lot of fierce competition from international and local retailers that (where we) also had to discount and/or promote more aggressively.

“I still believe that South Africa has great retailers – both local and international - in the market and it’s a cycle that one just has to go through. Unfortunately, we were just caught unaware of the dramatic nature of the downturn and the impact it has had on us.”  

PODCAST: Fin24's Matthew le Cordeur interviews with Robert Amoils

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