Despite shareholders’ unequivocal approval of Myer’s deal with Premier Retail’s Apparel Brands last week, many retail experts remain sceptical of the logic of combining the two businesses. “From a practical standpoint, even from a marketing standpoint, I can’t see a logic behind the rationale for a department store with, essentially, 50 stores or 60 stores across Australia to buy another 600 or 700 smaller stores,” Gary Mortimer, a Professor of Retail Marketing and Consumer
mer Behaviour at the QUT Business School, told Inside Retail.
“I think bringing on 600 or 700 smaller stores only dilutes management focus,” he added.
While the luxury and discount markets are relatively unaffected by the cost-of-living crisis, Mortimer noted that the middle-market is really exposed.
“I tend to look at what’s happening with Mosaic Brands and several other sort of mid-tier, mid-fashion retailers that are really struggling in the marketplace,” he said.
“The question is, what will customers gain from this merger, and what will encourage more customers to walk into a Myer store, or a Dotti or a Jacqui E?” Mortimer added.
The challenge
Brian Walker, founder and executive chair of Retail Doctor Group, told Inside Retail that the deal puts Myer under significant margin pressure, given its significant lease liabilities and overhead costs.
“In a tough market where department stores are struggling for survival globally, and then you bolt on the old brands of these retail operations? I’m very cautious about [it],” Walker said.
“It rejuvenates the sales line of Myer; for a period of time,” he added.
In FY24, Myer generated $3.27 billion in revenue, down from $3.36 billion in FY23.
However, during the EGM, numerous shareholders raised the point that Premier’s Apparel Brands are “second tier” and anything but fresh, new brands that could drive new customers into Myer stores
“When you look at Miss Shop, for example, and businesses like that within Myer, a lot of those brands that will come in [with the Premier deal] will cannibalise those ranges. It doesn’t necessarily mean a wider range, more choice, more sales. It can also mean wider choice and more cannibalisation,” Walker said.
At the same time, he noted that Myer must now successfully manage hundreds of independent retail stores of mature brands “in a country that, like all other Western developed countries, is under siege from the Amazons”.
“I think they’re different skill sets, so Myer will need to think through that, in my view, very quickly,” he said.
Mentioning the last round of financial results from Myer and Premier, Walker highlighted the decreased profitability of both businesses: “So I don’t think for a moment they’re walking into a kind share market, either,” he said.
With what many would consider as direct competitors to Myer’s new fashion brands being wound down as part of the Mosaic brands derailing, could afford Myer the opportunity to gain more market share.
The rationale
While last week’s vote leaves little doubt that the majority of Myer and Premier’s shareholders were very much for this merger, some shareholders present at the EGM raised questions along the same lines as the industry experts above.
One shareholder asked Myer executive chair Olivia Wirth, “Is it rational? Becoming bigger and bigger is not necessarily a good thing. You can’t be too big to fail.”
In response, Wirth said, “I’m not necessarily proposing and the board isn’t proposing that big is better, but we are proposing that this is better, and that is both in the interests of Myer-owned apparel brands, that there will be a stronger business, that will have greater scale, will have diversified earnings.”
“It will help us manage the challenging cycles that we all face, so we absolutely affirm that view,” Wirth added, before highlighting that the independent Kroll Australia report “twice, confirmed their view that they also believed that it’s in the best interest of the Myer shareholders.”
Since the deal was first proposed, Myer and Premier have argued that combining Myer and the Apparel Brands business would lead to “at least $30 million pre‑tax earnings benefits per annum on a run‑rate basis over the short to medium term,” largely due to economies of scale.
Of course, synergies on paper don’t always translate into real savings or retail success. One industry expert pointed to South African-owned Woolworths Holdings’ acquisition of David Jones in 2014 for $2 billion, only to sell it for about $100 million to Anchorage Capital Partners in 2022.
The winding down of middle-market Australian fashion brands could be seen as a cautionary tale for the Premier Apparel brands now in a transitional services agreement (TSA) for the next 12 to 24 months.
On the other hand, the successful turnaround of women’s apparel brand Dissh and the Sussan Group’s consolidation of its Sussan and Suzanne Grae store networks, provide a potential blueprint for repositioning a mid-tier fashion retail business for the future.
“The question I would always have for a board is, what is the benefit to the consumer? Because even if there are analysts out there going, ‘There’s some synergies in the background, maybe we can improve margin by, you know, 50 or 100 basis points’,” at the end of the day, it’s the consumer who decides, Mortimer said.