“An uncannily similar slope”: Will Myer meet the same fate as Toys ‘R’ Us?

I thought I’d be writing this blog in late January of next year when retailers delivered their Christmas, Boxing Day and New Year’s sales numbers to the markets. But two bits of information from last week have brought this story forward.

You never want to see the names Toys ‘R’ Us and Myer in the same sentence, but the last few days have highlighted the trend similarities between these two retailers’ struggles with the online world.

One lost the struggle. The other appears to be on an uncannily similar slope. While in Australia their sizes are very different, their performance ratios are very similar.

The decline of Toys ‘R’ Us

Toys ‘R’ Us had a significant share of the toy sector with revenues of about $250 million. About $40 million of this was from online sales.

The stores’ sales were decreasing at about 5% a quarter and online sales were growing in double digits per quarter.

Despite this, online sales didn’t deliver the same level of profit as equivalent pure online retailers.

Because the online engine sat inside a traditional retailer, the cost of doing business was over double that of a pure online retailer.

You can’t price match 20% off online if it means, at best, just break even with your overhead.

The key issue Toys ‘R’ Us faced in its last six months was sales were dropping at 5%, gross profit held at about 40% and the cost of doing business on falling sales grew to 40%.

Eventually their overhead and gross profit lines joined and crossed over.

At that point every time you discount to create footfall into the store you do it at a loss. There was no way back. As toys went out the door so did the retailer’s cash.

A closer look at Myer

Last week we learnt Myer’s overall sales revenue continues to decline and is heading to about 5% a quarter. Its gross profit is about 37% and its cost of doing business looks to be at about 33%. The lines are getting closer.

Like Toys ‘R’ Us, Myer’s online sale are growing strongly, but appear to have slowed significantly last quarter.

Once again, these sales are at an overall loss given Myer’s store overhead forms part of the internal online business’ costs.

In March 2018, a Myer spokesperson said: “Strength of the online business [a good thing] is driving a negative mix impact [a bad thing].”  

Just like Toys ‘R’ Us, the attempt to be an online retailer within a traditional retailer was done too late, and without the DNA of a pure online play.

I’m going to opine the freight rates both Toys ‘R’ Us and Myer have negotiated for their online deliveries to homes are much higher than those Kogan, Catch of the Day or The Iconic enjoy. That’s because retailers have an expertise in shipping pallets to stores in 100 postcodes, not items to 13 million homes or office addresses.

Amazon in the mix

To not very much fanfare, Amazon Australia launched Amazon Fashion on Tuesday, November 13, 2018.

It doesn’t have the exclusive brands Myer or David Jones enjoys. However, it does have a range of Australian and international fashion that resonates with sub-30-year-old Australian fashion shoppers.

Moreover, given it was launched by Amazon, it will have reached inside 7.5 million adult smartphones by the time you read this. It’s the latest, and largest, fashion choice — and will divert more fashion dollars from mainstream fashion retailers to online fashion retailers.

I truly hope Myer can navigate their way through the next eight weeks.

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