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Value.able: online retailing

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Value.able: online retailing

The retail landscape is changing, and changing fast. Hyped-up tech floats will be here soon enough, but there are better ways to play this theme. Read Roger’s article at www.eurekareport.com.au.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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36 Comments

  1. Sean
    :

    Hi all

    1. I’m a man and the thought of going to the shops gives me the heebie jeebies.

    2. I’m an accountant so my short arms and long pockets prevent me from paying riduculous prices even if it means I get to feel what it is I’m about to buy and look at a pretty shop assistant.

    I LOVE online shopping. I admit that there are some things that I would never buy online, but equally there are some things that I doubt I will ever buy from a bricks and mortar shop again.

    Even before the AU dollar starting taking steroids I would regularly buy all bicycle related gear and components from an online UK shop, any fragrances from an online US shop and recently fishing tackle and gear from an online US shop. I’m talking quality items here not imitation fleabay rubbish!

    As long as you do your research on the products your buying and watch for the prices for shipping (lots of O/S online shops now offer free shipping once you purchase a reasonable amount) there shouldn’t be any problems. I’ve yet to have any negative experiences (maybe just lucky).

    I’ve found the quality, service, speed of delivery all very satisfactory.

    On a side note; some Westfield shopping centres in the Brisbane metropolitan area want to start charging shoppers to park for the privilage of shopping. Absolutely astounding; given the threat of online retail and lack of nationwide retail activity I would’ve thought anything that discourages people from turning up to your establishment where they might potentially spend money is short sighted indeed!

  2. Andrew
    :

    More thoughts for me on this issue. I think most i have covered before. Please note OR means online retailing and BM means bricks and mortar retailing.

    I liked the posts questioning whether certain areas will be more at risk from OR due to their core demographic (gender, age etc). I think this will play a big part and will mean that company management will need to come up with some creative strategies to cope with the differences.

    BM will find it hard to compete on price alone against OR. There for BM have two options, go online or a strategy that makes people want to visit a BM store regardless of price.

    As i have said this could be limiting the availability of the product to certain websites or BM only, create a BM shopping experience that people will be happy to pay the extra money for and/or try to cut costs to the extent that your BM prices are comparable with that online and push that message (this last one will be unlikely due to the different costs of running the two types of businesses).

    Manufacturer/retailers will be less at risk than a department store relying on suppliers as they retain power over their product and where to supply and have their products on sale. this means that they can push people to go through their BM shop fronts or push traffic for their product to their own OR setup.

    I think you can’t throw the entire retailing industry into one category. Different retailers are going to be more at risk from OR than others and some will take longer than others to be hit by OR.

    I expect in the near future all CD,DVD, Games to be sold online. This will mean JB will need to rethink their floorplan and products. I think an indication that this has already happened can be found in Pitt Street Westfields on Level 6 with an electronics superstore.

    There is no point buying CD’s now as even cares have MP3 players standard now and i don’t think their is enough of a margin in these products to really playout a battle for to try and compete, it may be just cheaper and better business to let them go.

    I think in fashion, the high end luxury brands will be better able to compete against OR and as you go lower down the product change you will see them becoming more and more weaker against the OR threat. Also, the effect of OR will change depending on the location of the BM stores. In my mind it is such a complex area with somemany different factors to consider. I can see why people avoid it.

    Myer will be more at risk than DJ’s as they have lower quality brands for sale than DJ’s. Both will be at risk in the cosmetics, perfumes etc market as people will just use their stores to try a certain product to find the right scent or shade and then buy them online.

    If OR becomes the bohemeth people think it will be who am i most down on? Westfield, Centro and other shopping centre operators as companys will start shifting their focus from BM to OR and require less physical floorspace, less demand for this space means less demand for shopping centre spaces which means that Westfield will not have the same bargaining position to extract premium rental rates. Westifeld has some quality assets so won’t be affected as much as centro though.

    I was thinking about a company i am familiar with DJS and i thought of the following scenario. DJ’s open up an OR store, close down a lot of their outer suburban stores and keep only BM stores in premium shopping centres which will be renovated to provide more of a DJ’s luxury brand experience. These stores will remain a physical reminder of the brand in shoppers minds and become landmarks where people will happily travel to for the experience, this is aided by the fact that the less premium stores (Macarthur Square in DJ’s case) will be closed down meaning that shoppers can’t go down the road and go shopping in one. They will either go to the premium ones or go online.

    In conclusion to this rambling post, i think OR will have an effect, BM can compete by limiting supply if possible or offering better afterservice (return policys etc) or a real life brand experience to differentiate themselves and who will be affected and the extent they are will be down to a number of different reasons.

  3. Prerak
    :

    Hi guys great thoughts floating around on the topic,
    Would like to mention some pros and cons I think in both the methods.
    The backbone of this debate I think is consumerism, how consumer would like to get best product by easiest, most economical and most importantly safest way. Ultimately what I would like to get end of the day is not only good product but the experience.

    Online retails.
    Pros:
    1. Ease would be a big tick here, literally one can purchase from needle to aeroplane while sitting on couch. ( Must be having a beer or two if he is going to buy aeroplane by ebay)
    2. Price. Good competitive prices for some products, due to few reasons, low cost operations, strong A$, bulk selling for the sites like Catch of the day etc.
    3. Provides excellent source of comparison for same or similar products on online stores.
    4. Cool Factor. I know some of peers and younger generation gets great satisfaction out of online shopping like it was for online chatting when I was teenager.

    Cons:
    1. Biggest threat I would think of doing online transaction is the credit card security. One might think of if Gov. documents can be leaked and published how safe is ones computer system in terms of the CC hacking.
    2. Not getting when you want. Generally for the online shopping it will take at least few days for the product to arrive at your door.
    3. Guarantee warrantee issues. Online stores offers this but it would be much cumbersome to pack your TV and send it to somewhere for repair or replacement.
    4. Online shopping is good for the known product. If one is trying some item first time how would he know that how that perfume will smell or how that color will look on the dinning set.
    5. Like cool factor it has also got the fear factor. Especially for elder generation who might not be proficient enough or just having the phobia as they have not done this before.

    Brick & Mortar stores

    Pros:
    1. Provides feel good factor. One can see, touch, feel the product before buying it.
    2. Sense of security. You always know where to go if you have any issues with the product.
    3. Excellent idea for the shopaholics. For the families who loves shopping would prefer going around downtown, or the nearest mall, do bit of shopping, have some food, see some fashion.
    4. It’s always been done that way.
    Cons:
    1. Price must be the biggest reason for people turning away from retail stores.
    2. High cost operations, as they need to pay rent, salary, maintenance, insurance etc.
    3. travel, parking, distance, and other logistic issues, mainly for the lazy person like myself.
    As the retail landscape is changing what I think is, in long run there is enough space for both the industries in the market, both has to adapt for the survival. Like I have noticed few retail store, would beat not only competitor prices but they would be coming close or match the online prices. People tends to go online for price comparison or product info or many other reason but I think they would prefer physical store when it comes to payment.

    As far as soft data like games, music, movies, books, newspaper etc are concerned online stores are the biggest winner.

    In either case there is a brilliant future for a company like VOC, to cater the market and get the toll.

    • Roger Montgomery
      :

      Nice break down Prerak and thansk for contributing your ideas. I agree with your conclusion. The remaining challenge for Voc is their performance in their own competitive landscape.

  4. Alex
    :

    I totally agree with the comments about JBH. They would get smashed if online really took off. Actually I still can’t see why it is an A1. Just were is the “moat” and “ability to set prices with inflation”, and “uniqueness of their business”, that people like WarrenB demand? I still don’t understand how you can generate a ROE of 35% plus for a business in such a competitive space as retailing. Particularly in a downturn! These guys have to continue to discount to keep generating their returns. I simply don’t trust the “story”. The fact that they have clearly missed the online boat (there website is laughable) makes me suspicious of management. With all the store openings, right in the middle of a retail recession, can someone please tell me why this company just isn’t a “retail” version of ABC learning. I know nothing about shorting. But If I could this would be my top pick…

    • Roger Montgomery
      :

      Hi ALex,

      Lowest cost supplier and EDLP strategy can build a very serious moat! A good recession can help, allowing them to win market share as the competitors with lower margins fall over.

      • Alex
        :

        Sure. Understood. I know they are a good retailer, But what happens to growth ounce saturation is reached? There is only so much “market” to share…Australia is a very small market, and suddenly the Aussie AV retailers are competing on a global stage. Are JBH suppliers “lower cost” than amazon’s, apple’s, or ebay’s?

        As I’ve said before every new store I’ve been in, outside a major mal is quiet as.. so if they have to stay in the mals, their costs are going to keep going up (like everyone else) HVN on the other hand is positioned in the lower cost warehouse spaces, and people have other reasons to go to a HVN store..eh furniture, flooring, office stuff etc etc.. I also like HVN’s franchise model. The local guy with his own financial interest stake in the store will always fight harder for a sale. Nobody gives a “x5%t” when you walk into a JBH store as a customer. This is a bad sign. They are a pure “price” only store. There is no specialty retailing about them, and hifi and AV is a specialty business. Once they wipe off Clive Peters, there main real competitor is DSE, and those guys are backed by you know who…

        Nup. I just don’t get it. It is way too late to get into this stock….

    • Ash Little
      :

      Hi Alex,

      It might be a good idea to have a look at ABC learnings half year report on 31 December 2006 and compare that to JBH half year report 31 December 2010.

      I would draw your attention to the balance sheet section and in particular the current and non current borrowings of both companies.

      Also you should compare the cashflow statements particularly the cashflow from operations section

  5. Kim Jordan
    :

    I think JB has got enormous opportunity to improve on their on-line sales, simply because there web site is just so awful at the moment – hardly better than Harveys!
    Compare those to the hungry Kogan for example.

    And there are few sites (worldwide) that have perfected the e-commerce experience like Amazon. JB’s web site e-commerce is circa 1960 compared to Amazon.

      • Alex
        :

        Roger, with all due respect a “wonder” hardly justifies a price premium. Right now Amazon can land a DVD or blu ray in Aus. within a week for 1/3. Not 30% off, but One third the price !!, of the cost of the equivalent on the shelf of a JBH store. And itunes can do it instantly.

        Amazon have had a 6-7 year head start and are HUGE. How can JBH compete on a global scale with that? No Roger the online retail model sailed years ago, and JBH well and truely missed the boat…

  6. Michael
    :

    Hi Roger,

    In this article you mention that M2 Telecom is currently cheap, yet in one of your posts from May you have the intrinsic value at $2.70 (current price ~$3.40). Any chance of clearing this up?

    Michael

    • Roger Montgomery
      :

      Hi Michael,

      Valuations change and we are now moving from 2011 to 2012. I hope that helps Michael and thank you for raising the question. I am sure lots of visitors to the blog would have the same question.

      • JustinP
        :

        I’m also interested in MTU – how do these figures look?

        Code: MTU
        Price: 3.44

        INPUT:
        ……….. EqPS .. Shares … DPS … EPS … RR
        2012 … 0.84 .. 121.00 … 19.8 .. 30.7 .. 12
        2011 … 0.73 .. 121.00 … 15.4 .. 25.4 .. 12
        2010 … 0.63 .. 121.00 … 10.0 .. 14.2 .. 12
        2009 … 0.45 .. 0.00

        OUTPUT:
        ………….. IV .. . ROE . NPAT .. POR .. MOS
        2012 … 4.24 … 39 .. 37.15 .. 64% .. 19%
        2011 … 3.55 … 37 .. 30.73 .. 61% .. 3%
        2010 … 3.44 …. 43 .. 16.20 .. 70% .. 0%

      • Michael
        :

        Thanks Roger. I am guessing then that your 2012 intrinsic value is signifciantly higher, but that I will have to wait for your A1 service to validate my calculated intrinsic value.

  7. Chris B
    :

    Hi Roger and fellow bloggers,

    As always, that was an interesting article.

    I have become increasingly bearish toward the retial space over the past few years to the point where the closest thing to a retail stock I own is Think Smart.

    While there *MIGHT* be some value emerging (over the next year) in the retail space it is going to take a very BIG MOS for any of the retailers to get my money.

    As an extension on Roger’s article, I thought it would be interesting to see what kinds of retailers bloggers believe are most susceptible to this online shopping phenomenon?

    In my opinion, stores that sell items such as CDs, DVDs, iPODS, even computers and TVs (think HVN, JBH) will be hurt more than stores that sell clothes, perfumes (think DJS, MYR, ORL).

    My reasoning behind this hypothesis is simply that when you buy a pair of jeans or shoes you generally want to make sure they fit well before purchasing them. Similarly, you wouldn’t buy a perfume without knowing how it smells.

    On the contrary, if you know what CD or DVD you are after, you don’t need to go to JBH to hear it or touch it first. You could simply find it online and buy it online. Even more disturbing for JBH is the fact that you can now just download your music INSTANTANEOUSDLY from other sites at a lower cost. Then, even more disturbingly still, it has become just too easy to download almost any media you want for free, illegally! How can stores that sell these kinds of products – that provide the slimmest of margins, thus are volume dependant – compete with online shopping, AND piracy?

    JBH lovers, please don’t get me wrong! I do not think JBH’s business will end tomorrow. I just think in the longer run, it is going to become harder for JBH to continue making the kinds of returns it has in the past and this is NOT JUST because they have saturated the Aussie market.

    Many people will argue that people will always buy plasmas and computers (etc) from a bricks and mortar store in preference to an online store. While this is true of most people, I believe that there could be a trend towards purchasing larger items online as well. Perhaps Gen Y will lead the way?

    So, what kinds of retailers do bloggers believe might be most at risk from online shopping?

    Chris B

    • Roger Montgomery
      :

      Thanks for the thoughts Chris. I wondered about your comment regarding fashion v electronics; I believe the stats suggest clothing purchased online is now bigger thanks to very generous return policies being pioneered by many US retailers for Australians. I am looking forward to hearing what everyone thinks too. So go ahead and throw a few suggestions in.

      • Pat
        :

        Human beans do not come in standard sizes therefore the apparel; shoes clothes etc they purchase may not fit. Returning something to a physical shop is a hassle but having to post it back would be worse. Accessories (hand bags, jewelry, personal care etc) are a different matter. If you walk into a shop for a pair of shoes and find some that fit correctly and at a good price it would take some discipline to walk out and take your chance on the internet.
        Now what I think works best are things that have fixed standards, DVD’s, beds, bedclothes, Tv’s, kitchen appliances, almost anything that you dont wear or eat.
        That’s my openion

    • Andrew
      :

      I agree that the electronics sector is probably most at risk from online retailing. It is so easy, you know what you are getting, don’t need to try it on and usually have a very good idea what you want to get in advance. I also think in the future cd’s, DVD, books and games won’t need to be purchased and the next gen will eb all saved onto a harddrive. Carpenters be warned as this will mean less bookcases and will need to be made.

      I have been thinking about this too in regards to fashion. I think to find out whether a fashion company is to be threatened by online retailing you need to look at the brands it stocks. DJ’s for example have a lot of high end brands. Some of these companys don’t have an online store. You can buy them online through american stores but unless the Aussie dollar remains high than i am not sure whether it will always be attractive. It is something which if i was a paid analysis and could spare the time might make for an interesting look into the threat it poses. If you can only buy a certain brand in a bricks and mortar stores than online is not a threat at all.

      if a fashion product is widely available online and this includes perfume, make up, clothes and shoes. It is so easy for savvy buyers to go into a bricks and mortar store, try it on to see if you like it and then write down a description and buy it online. My fiance and I have done this for huge savings and as Roger mentions the return policys are pretty generous.

      It is an interesting area to watch who is affected and what strategy bricks and mortar stores come up with to combat it if they are affected , i don’t think it is such a black and white question. I think there will be some grey areas.

      My view is that some stores with a high brand value will either open up their own store (oroton) or find a way to control on where and how much they can charge if not preventing their products being sold online through third parties and there for exclusiveley being sold in their branded bricks and mortar boutiques and dept store partners.

      It will also affect those that are reliant on their suppliers (dept stores) more than the manufacturers/retailers like Oroton as they have less control over when, where and how the products are being sold.

      • Andrew
        :

        I have been thinking about that myself recently. If indeed demand for bricks and mortar stores does decrease than Westfield is probably more at risk than the retailers as they will have to make do with less demand meaning they will find it hard to get premium rents from tennants at their centres.

      • Roger Montgomery
        :

        Very interesting indeed…have a read of JK Rowling’s decision to sell her ebooks of the Potter series directly from her own website. Wonder if her visit to the Value.able website prompted that!

    • Jason A
      :

      Hey Chris,

      I recently went on an online spending spree, doing my part to help out the US economy and I brought a couple of fashion items so I thought I would share. In terms of perfumes (colognes) I think most people know which scents they like, this makes ordering online easier. I agree I would never buy a new one online but I could happily buy 2 or 3 different bottles online because I know I like them.

      I also brought 3 pairs of shoes, socks and a pair of jeans from the US. The store that was selling the jeans had all the key measurements on the site, once I compared them with my existing pair of jeans (different brand) and talked to some friends who already owned the brand I was buying, I was happy to buy mine online. The same thing applies with the shoes and socks, I know what size I am roughly in most of the brands I wear so I’m happy to get them online.

      I also know a lot of friends who get excited when online stores such as ASOS have sales.

      (Gen-Y here For What It’s Worth)

      • Rob Walker
        :

        How hard will it be for a new cologne to get market share in a world with no market, you can’t scratch and sniff a computer scene. Recently a owner of a local car audio shop was telling me how frustrated he was when people window shop, ask his advice then buy online. Another shop, visited lately (snow equipment) now charges people $50 bucks to have their feet measured for ski shoes, as they use up to an hour of his time then walk out and buy online. When will people wake up and realize that these stores will just close down and you won’t be able to window shop. Imagine discussing with an indian call centre ,what snow shoe would suit a trip to new Zealand in September. I am gen x and hope when my children grow up they will not need the retail sector for employment. I guess it’s up to gen x and baby boomers to keep the shops open.

        Cheers

        Rob Walker

      • Chris B
        :

        Thanks for your thoughts Pat, Jason (Mr. Gen-Y), Andrew and Roger.

        Andrew touched on this next point/question briefly…How much of an impact can online shopping have on high quality businesses that have high quality brands that are highly sought after BUT are only bought from that particulat store (eg, ORL)?

        When the actual brand has become a major part of the competitive advantage of the business and the brand is not available just anywhere and everywhere, could these kinds of businesses be immune from online shopping?

        Personally, I think the growth in online shopping will impact a business like ORL less than a business like MYR.

        Chris B (Gen-X)

      • Chris B
        :

        Hi all (again),

        People interested in this discussion might also find this article of interest…

        http://www.smh.com.au/small-business/trends/online-boom-will-continue-to-hurt-retailers-20110524-1f1vz.html

        I also thought I’d put another thought out there, and that is to consider the types of clients that different retail businesses attract, particularly in relation to gender.

        For example, generally speaking (and please I hope no one gets offended here – remember, this is VERY general and yes I am stereotyping and I don’t even know if I hold any strong beliefs about this!) more females than males are attracted to retail stores that sell clothes and perfumes etc (DJS, MYR, ORL etc). And generally speaking, females like to shop more frequently than males.

        On the other hand, generally speaking more males than females are attracted to retail stores that sell gadgets and pieces of electronic equipment etc (JBH, HVN etc). And generally speaking, males don’t like to shop as frequently as females.

        Could it be the case that the type of client different retail stores attract (focusing here on gender) might help some retailers combat online shopping more than others?

        If so, the retail stores that attract the gender that do indeed enjoy physical shopping (over online shopping) might be more resiliant to online competitors.

        The same question can be applied to other factors pertaining to clients. For example, the average age of clients that are attracted to different retail stores.

        Also, another related topic..SPEED.

        How long might it be before retailers start to *really* feel the effects of online shopping and what kinds of stores do you think will be hit the fastest?

        I understand it is futile to try and guess what the actions of crowds will be in the future, but I thought it might make for an interesting discussion.

        Cheers,

        Chris B

      • Roger Montgomery
        :

        Thanks Chris,

        Successful start ups like Shoes of Prey suggest women are very happy to design their own shoes online and order without going to the shop. Who knows how it will all settle down. The BLEND button on my microeconomics blender has celarly been pressed in this sector.

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