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From food to fashion:
the new rules of retail

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SPW Contributors

Sanlam Private Wealth

When the world went into lockdown and the line between work and home was erased in a matter of days, the retail sector felt the brunt of it. The shift towards online shopping received an unforeseen boost, while malls stood deserted. Many of these trends may be here to stay, and amid a sluggish global economy, the sector is faced with a future very different to the past. During a recent webinar we held for our clients, Sanlam Private Wealth CEO Carl Roothman, Director of Investments Alwyn van der Merwe, investment analyst Renier de Bruyn and special guest Hubert Brody, Chairman of Woolworths, unpacked the most salient issues facing the industry.

Watch a recording of the webinar here:

Alwyn: Hubert, what are the trends to watch in the retail sector globally?

Hubert: There are a few ‘pre-COVID-19’ forces we should keep in mind. The first is the competition that line stores are facing from smaller, speciality stores – which can be dexterous in a way large, corporate retailers can’t. They can change their styles, product, way of presenting and store location rapidly – particularly on the fashion side. These smaller competitors are also able to provide personal service that’s not easy to imitate.

Another trend is that customers nowadays really want to interact experientially with organisations and brands, online as well as in stores. Selfridges in London is an example of a large department store getting this right, from their streetwear right through to the food section. In a Woolworths context, if you look at our food stores, our customers generally feel they’re interacting with our product. There’s lots of quality information in our stores, and it’s a good experience for people to be there.

The move to online shopping is of course a significant force. It’s about competitiveness on your website and in the mobile space, the richness of content you provide customers, the efficiency and user experience of your online environment, and delivery of product.

COVID-19 has fast-forwarded this general evolution in the retail sector through a series of ‘critical jumps’, for example, the work-from-home trend, resulting in changing consumer behaviour. But it’s not only an online impact – other important learnings for retailers that have emerged from the pandemic and resultant lockdowns include the need for dexterity and speed in adapting to unforeseen and significant changes.

Renier: Globally, we’ve seen a large number of large retailers filing for bankruptcy over the past decade. What has differentiated the retailers able to successfully transition to the modern retail era from these companies?

Hubert: I think the ones who have fallen by the wayside are retailers that have not stayed relevant. You need to be relevant within the demographics of the country or region in which you operate, in terms of the values of your customers, and in terms of how customers want to purchase and obtain their products.

But success stories also abound – and not only in the digital space. The Selfridges group, for example, has remained relevant. They've stayed young with their customers, despite the fact that they’re a department store and you’d think their customers would want to go to a speciality store. They've created great experiences and a digital presence, but the store is still where the action is.

Then one could mention Next, which has a turnover of around £4 billion, half of which is online. So they’ve been able to get the balance right, and are a very profitable group. They still have between 500 and 600 stores, and even during COVID-19, they stand to make profit of around £200 million. They have an excellent interplay of channel choices, but being large and having a strong hand to negotiate with landlords also plays a role.

Nordstrom is another group which has been able to shape itself into a number of formats – Nordstrom Rack, the traditional stores and then also a purely digital experience. Another retailer which has been able to introduce digital very successfully is Walmart, which now has a very big online offering.

Renier: Hubert, do you think the previous management of Woolworths underestimated the challenge of transforming David Jones, given the structural headwinds against department stores?

Hubert: All of us can now quite clearly say we shouldn’t have bought David Jones, or more specifically, at the price we did. But at the time, six or seven years ago, there was a lot of merit to the idea of including a southern hemisphere leader in fashion and apparel, given the economies of scale and competitive might it would bring.

A few things happened, however, one of which was the fact that the Australian economy and the retail sector weakened. There was also an influx of a number of international retailers into Australia at the time. The Australian market became very promotionally driven, meaning there was discounting all the time. We also have to acknowledge that mistakes were made in the way certain projects were run.

However, David Jones is part of our group – we believe there is value in the business. The projects have settled down and we’ve completed our flagship property. So we’ll trade it hard now, and then see what develops from that going forward.

Renier: Many South African fashion retailers have moved much of their sourcing to China in recent years. With the need for more flexibility in the supply chain, some now want to increase local sourcing again. How can retailers help to reignite the local clothing manufacturing industry?

Hubert: It’s a relatively slow process, since the infrastructure of the local garment industry has aged over the years and needs renewal. On the food side, Woolworths has been sourcing locally for a long time. We support suppliers – we make sure they follow the right ethical routes, and have the volume and the infrastructure to succeed. What will help us on the fashion side is a shorter supply chain, so one can adapt your product lines quicker through the season, as you see certain lines working and others not. You can’t do this when you are ordering from, for example, China. Together with government, we will have to develop the local industry.

Alwyn: Much effort is currently going into ‘steadying the ship’ at Woolworths. Once things have settled down, where do you see growth for the company?

Hubert: I think the Woolworths food business is absolutely correctly positioned for the post-COVID-19 period during which people will still be looking for meal solutions for eating in, in the comfort of their own homes, and also while they continue to work from home. There's no doubt that our food section has got a lot of run in it over the long term – it is well positioned for a transforming world.

With regard to our fashion business – we just need to regain some of the market share that we shouldn’t have lost, but have done. On the fashion side, it boils down to strategy, and operational implementation.

Carl: Alwyn, how is the global second wave of the pandemic likely to impact our markets, both locally and abroad? Should investors climb out now, and buy back later?

Alwyn: In my view, if the increasing number of cases in Europe doesn’t lead to economic restrictions, then theoretically it shouldn’t have a massive impact on economies and therefore also not on the earnings of companies. But of course markets won’t like it because it does have an impact on investor sentiment. Then we need to remember that we may in fact also get a positive surprise if a successful vaccine is developed – there are currently around five that are in the third stage of development.

What investors need to ask is: what has happened to asset prices over this period? I think assets in the equity market have on average been priced for a V-shaped recovery in both economic activity and company earnings. We don’t believe, however, that the actual recovery will be this sharp, and we’re therefore likely to experience some disappointments in the average recovery in earnings.

Note that we usually refer to averages. However, the valuations of high-growth sectors in global equity markets are discounting very strong growth in earnings. If these expectations are too optimistic, share prices in those sectors may well disappoint. On the other hand, the more cyclical companies, which have seen their earnings under pressure, have been penalised.

We’re certainly not advocating a large-scale sale. However, we do believe that globally, some shares are just too expensive. In our global equity portfolio, we’ve therefore rotated out of more expensive stocks like Facebook and Microsoft into cheaper companies that we think can, over time, still generate a reliable income and cash flow stream.

In our Regulation 28 multi-asset portfolios, we’ve trimmed somewhat on the global equity side. We haven’t done so on local shares, however – even though the South African stock market may be thought of as being ‘cheap and nasty’, in our view, it’s currently more cheap than nasty. So we’ll hold onto local shares for the time being.

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