Discounters squeezed from both sides

Discount department stores could close as many as 100 stores in the next three years unless there is a resurgence in sales. Woolworths has already announced the closure of 30 Big W stores over the next three years and The Reject Shop is set to streamline its network of around 360 stores.

Wesfarmers also faces decision time on its two discount department store chains, Kmart and Target.

Squeezed by competitors and tight consumer spending, the category is overshopped and has lacked differentiation and innovation.

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While there have effectively been four major discount department store chains, an overlap has become more evident with Myer, Harris Scarfe and the expanding Costco and TK Maxx chains.

Beaten on range and quality

The product ranges of the discount department store chains have also been crimped by chains like JB Hi-Fi, Baby Bunting, Supercheap Auto and Rebel. The specialist chains offer broader product ranges, recognised brands and pricing that offsets the price proposition that was the bread and butter of the discount department stores.

The challenge for the category is becoming greater with inroads from the online retail platforms, including Amazon, Kogan.com and Alibaba, as well as the entry to the Australian market of German discount chain Kaufland.

The discount department store category has been struggling for a number of years with only Kmart achieving growth in sales and earnings. Big W and Target have been losing money and market share, while The Reject Shop has struggled with declining revenues and bottom-line results.

As for Woolworths, there has been speculation that the Big W cull could reach more than 60 stores. And as it has moved to consolidate, there is continuing market expectation that the retailer will divest the Big W business altogether.

The current pruning of the store network has been seen as an effort to prepare Big W for sale as Woolworths did when it restructured the Dick Smith chain and jettisoned underperforming stores.

Closing stores is not a cheap or straightforward exercise for stores with long lease terms, especially with landlords increasingly facing difficulty in recruiting replacement tenants. Woolworths expects the exit from 30 stores, which equates to around 16 per cent of the store network, to cost around $250 million.

The Reject Shop will have closed seven stores by the end of June, reducing its national network from 364 outlets to 357, but more closures seem inevitable with the chain indicating it will post a loss for the 2019 financial year.

Struggling to rebuild

The Reject Shop has engaged Location IQ, a consultancy firm, to review its property portfolio and KPMG to examine financial aspects of the business. The two reviews are expected to identify further store closures and stores where leases would need to be renegotiated if stores are to be retained in the portfolio.

Wesfarmers has implemented a turnaround plan for the struggling Target chain which has achieved a slight improvement in trading performance but the rebuild will take time.

Kmart can attribute its success and leadership in the category in recent years to its everyday low price differentiation from competitors. However,  its sales growth has slowed, actually falling 0.6 per cent on like-for-like sales for the first half of FY19.

The Kmart result begged the question as to whether the integration of the Target chain into Kmart’s operations has had a negative impact, at least short term, on the category leader.

Wesfarmers has told investors it is keen to leverage the capability of its recent acquisition prize, the Catch Group, to scale its online sales platforms but also notes it wants to “optimise” the store network in Kmart and Target.

Optimising the store network could include brand conversions, resizing stores and reducing floorspace, and store closures.

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