Poor management, rising rents and online sales rush blamed for REDGroup Retail collapse

Poor retail conditions, skyrocketing rents and claims that REDGroup Retail was poorly managed are some of the reasons booksellers, publishers and industry experts are giving for the company’s shock collapse.

The claims come after administrator Ferrier Hodgson took control of REDGroup Retail yesterday. 

The company has 169 Angus & Robertson stores, 61 of which are franchised and Borders has 26 stores, mostly in Victoria.

The group employs about 2500 staff but trading is expected to continue as normal according to the administrator.
Industry groups have offered various explanations for the collapse, some of which include restrictions due to parallel imports and exploding rents, and the retail industry is blaming the increase of online retailing due to the high Australian dollar.

Maree McCaskill, chief executive of the Australian Publisher’s Association, says the industry is in decline and consumers are partly responsible due to their constant bargain hunting.

“We have been saying this for a long time. Consumer buying habits are changing, people want to shop online and more and more Australians are taking advantage of the high dollar, where they can get books cheaper overseas,” she says.

“They have no loyalty to Australian businesses, they don’t care where they buy anything. I can’t particularly blame them for that but you do see in other markets such as Europe a much greater pride and concern about their country’s own business.”

It’s not just publishers and retailers caught up in the collapse. Marina Go, publisher at Independent Digital Media and owner of a Gloria Jean’s franchise in a Border’s outlet, says the decline isn’t surprising.

“Customer volume has been significantly down. I’ve had the store for nearly two years now and I’ve seen a very sharp decline in customer numbers in the Borders store,” she says.

“If there is no Borders then our business doesn’t exist in our current form. We have insurance but it doesn’t cover everything.”

Poor management

The performance of REDGroup retail has been worrying publishing industry figures for some time.

Last year the company recorded a $43 million loss and shortly afterwards managing director David Fenlon left the operation. Warning bells sounded when the company managed to gain a waiver for breaching some of its loan covenants.

Scribe Publications chief Henry Rosenbloom says REDGroup’s owner Private Equity Partners is partly to blame.

“The managers were bovver boys who alienated all their inherited knowledgable staff (who left), made appalling decisions about stock selection and presentation and tried to treat books like potatoes,” Rosenbloom says.
“They never listened so their business declined drastically and they ended up trying to sell giftware instead of books.

“It’s a very good example of why bookselling is not a corporate business – it’s a hands-on, detail-intensive business with low profit margins. Only people who love it and know what they’re doing can make a success of it – internet or no internet.”

Go says the company’s strategy of moving into electronic books was one element responsible for its collapse.

“I don’t think it’s just a shift to online, I think it’s a shift in the strategy that’s there as well. I don’t think it can just be about online to see that decline in customer numbers from two years ago,” she says.

“I do believe that they may have started to make their own bed.”

Online retail

Publishers have leapt on the collapse of REDGroup Retail, saying the high Australian dollar is pushing shoppers to look overseas for deals.

REDGroup is certainly blaming online retail, with chairman Steven Cain yesterday saying GST-free shopping online is making it harder for local retailers to survive.

“We are obligated to charge Australians who buy their books locally GST for books we source locally yet when those same Australians buy books offshore no GST or duties are charged,” he reportedly said.

McCaskill says buying online means fewer and fewer jobs in the retail industry.
“People don’t realise that there are costs here. Our geography is the same as the US but we have a much smaller population and there are costs associated with that,” she says.

McCaskill says she is not in the business of cutting wages but points out that wage costs are higher here than they are in the US and the general cost of doing business is putting pressure on publishers.

She says the growth of sales for sites such as Amazon and Book Depository are in large part due to the high Australian dollar.

“If the Australian dollar dropped, then people wouldn’t shop online,” she says.
“Right now the Australian dollar is quite high but if it dropped like a stone within the next six or 12 month, then consumers would come running back.

“But businesses can’t just be waiting around for all of these consumers to start coming back and ultimately you’re seeing the demise of the retail sector.”

The issue of online retailing edging out local stores arises as the government is holding an online retail forum in Sydney today, with attendees including internet giants Google, PayPal and some Australian retailers.

Tony Nash, chief executive of Australian online bookseller Booktopia, says the collapse of REDGroup is unfortunate but represents an opportunity for local ecommerce agents.

“Obviously there will be market share redistributed to other companies if they no longer exist,” he says.
“There is a lot of talk about overseas online bookstores like Amazon but hopefully Australians will ask if there are any local operators or independent bookstores.”

Nash points out the role independent bookstores will play in the future. With smaller ranges and more personable staff he argues that the bookselling industry will survive but on smaller scale than previously.

“Most independent bookstores are owned by people who are quite passionate about books. The service and knowledge is at a higher level than what you get at Borders,” he says.

He points to BookTopia’s revenue, which grew from $8 million to $15 million in the past year and says there is clearly a space for Australian retailers to survive.

“Overseas online retailing isn’t imposing a threat on us. In fact it’s helping us. We have a good time and we think the economic model is right to offer Australians some value,” he says.

Mark Rubbo, managing director of independent book chain Reading’s agrees.

“Privately it will be good for independents such as myself,” he says.
“But it’s a shame for the whole industry really. There are going to be closures because I don’t see any big companies picking them up. A lot of sales are going to be lost.”

Concerns for landlords

Another aspect is rising rents, with a variety of retailers, including bakery franchise Baker’s Delight, saying for some time that landlords are increasing rents despite shoppers holding on to their cash.

Council of Small Business chief executive Peter Strong, who runs an independent bookstore, says the extremely large footprint of Borders’ stores coupled with low sales was a recipe for disaster.

“They’re still putting rents up and they’re maintaining a bubble in the real estate market,” he says.
“They need to drop rents – and drop them by a lot – to help retailers and other businesses.”

Strong points out that that if Borders locations close landlords are going to have huge gaping holes – REDGroup retail was Westfield’s second largest tenant. He says that will push up rents for other stores located in major shopping centres.

“A lot of people have said ‘this will be good for you’ as an independent, but not necessarily,” he says.
“First of all the administrators will have a fire sale so everybody will be flocking there for books. It’s just an indication of how volatile it is.

“As someone who owns a competitive bookshop it doesn’t mean things will get better.
“Landlords are not decreasing rents even though retail turnover is down. It’s a big sign of what’s happening in bricks and mortar and just shows off how bad things are.”

Publishers worried

Other experts are saying the publishing industry, with its failure to reduce prices and lack of innovation with regard to online retailing, hastened the collapse of REDGroup.

But parallel imports have also been blamed, with Strong saying those restrictions are stopping businesses from selling books cheaper.

“There was this great debate about parallel imports last year, but the issue is that you could come into my shop and by law I could not sell a particular book to you, but you could go and then buy that book on the internet,” he says.

“It’s not the main reason the company collapsed but it’s just another nail in the coffin of the bookselling industry.”

Prices are also a huge factor, with Nash pointing out that booksellers can no longer get away with paying huge prices for books when consumers can go online and buy the same product for as much as 50% discount and receive the book within days.

“They have books for about $22-24 which you can buy for $6 online … it is extremely hard to justify having prices at that level and they will start reducing them,” he says.

McCaskill blames the cost of doing business but admits that not much can be done until the Australian dollar drops.

“It’s not just books, but retail and distribution costs are high as well,” she says.

“We are going through a massive retail crisis and we’re seeing it throughout the industry.”

And publishers are hurting. Last week Penguin announced that its sales staff will be reduced, which McCaskill says is the result of more shoppers going online.

“This is a consequence of what’s happening. People say ‘oh, they can just get a job somewhere else’, but jobs are not prolific in Australia,” she says.

“You can’t just move out of something like a bookseller into book retail trade online.”

Some disagree that parallel imports and costs of doing business are behind the collapse, with author Sophie Cunningham saying parallel imports are only part of the problem.

“I do think the market is shrinking, which means that the bookshops that do survive have to be really tight, really on top of things,” she says.

Nash says the market will have to change and he sees more manufacturers selling direct to customers.

“I think the future of retailing is changing,” he says.

“My prediction is that you’re going to see more manufacturers just selling books directly and they’ll just move online because that’s where all the people are going.”