From the source: Martin Matthews, Brand Collective

Brand Collective is the business behind a range of apparel, accessories and footwear brands, including iconic labels, such as Volleys, Superdry and Clarks, and smaller labels, such as contemporary womenswear company Elka Collective.

Martin Matthews has been involved with Brand Collective since 2011, when it was owned by Pacific Brands. He became CEO in 2014, when private equity firm Anchorage Capital Partners acquired the business.

Selling through a combination of department stores, discount department store chains, branded retail sites and several company-owned websites, Matthews is on the frontlines of some of the biggest trends in retail right now, from the changing nature of wholesale relationships, to lease agreements, to the daigou boom. He spoke with Inside Retail Weekly about these topics and more.

Inside Retail Weekly: What were some of the highlights for Brand Collective in 2018?

Martin Matthews: It was a big year for Volley, with a lot of work building the foundations of the brand and in particular, building the foundations of our China business. We opened three stores in China, which was huge for us. It’s still very much early days, and we’re hoping 2019 will be even more exciting. We hope to open more stores in the middle of this year, and we’ve got a lot of new product releases coming in the next 12 months.

IRW: What kind of growth did Volley see last year?

MM: Overall growth of the brand was 30 per cent for the year, and online growth was 176 per cent. Online is our best channel; it’s the only channel where you can buy the full range of Volleys outside the Chinese retail stores.

IRW: I understand Volley blew up in China after a celebrity was seen wearing the shoes in a paparazzi photo. Can you tell us a bit more about that?

MM: We think she bought the shoes at a boutique in Los Angeles – we didn’t have a hand in that – and was perhaps wearing them at the Shanghai airport, and it exploded from there.

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The first thing we had to deal with – which every brand operating in China has had to deal with at some point – was that a huge amount of Volleys sold was counterfeit product. Every manufacturer that could make Volleys started making them. So we had to get on top of that, raid factories, close a heap of production and destroy tooling, and then we set up our own legitimate operation in China.

IRW: Is Volley the only brand that Brand Collective is selling in China right now?

MM: Yes. We are looking into some international opportunities over the next 18 months for the other brands we own, but Volley is the only one in China right now.

IRW: What’s the breakdown between cross-border and domestic sales? That is, has the China boom led to a resurgence of Volley in Australia?

MM: I can’t share exact sales figures because we are in the middle of a negotiation with our China partner, but it’s fair to say that Australian sales have grown significantly. Within the 30 per cent growth, there’s strong growth in Australian wholesale, though part of that is product that is sold into China. You’ve heard about daigous?

IRW: Yes. Is that a big part of your business?

MM: Yes. We don’t know exactly how much because it’s hard to know who these people are. We think it could be 20 per cent of our Australian wholesale business going to China. [A daigou is someone in Australia who buys products for customers in China, either because the product is unavailable there or because it is more cost-effective to buy overseas.]

IRW: Did any of the other brands at Brand Collective have a big year last year?

MM: Superdry is our biggest brand and it sponsors the Invictus Foundation, so we had Harry and Meghan over here wearing Superdry and the whole British team wearing Superdry. That was fantastic for the brand; it took brand awareness to the next level.

IRW: Did you see any impact from that on sales?

MM: It’s very hard to measure the direct sales impact, particularly because a lot of the things Meghan wears are for sale and so they sell out immediately. But she and Harry were wearing the official Invictus Games uniform, which obviously wasn’t available. [Superdry customised over 500 items of clothing for the Invictus Games staff, competitors and the Duke and Duchess of Sussex]. But we had a 12 per cent increase in foot traffic in our Sydney stores over the period of the Invictus Games. To put that in context, traffic has been down in the double digits pretty consistently, so it’s probably a 20 per cent boost compared to the market.

IRW: Looking at this year, what are some of your top priorities for 2019?

MM: We have a contemporary women’s brand called Elka Collective. It’s one of our smaller brands, but the fastest growing. We opened the first Elka Collective store in December last year in Chapel Street, Windsor, Melbourne. It’s been trading incredibly well; our online business has more than doubled since last year, and we also launched in David Jones in January. That brand is expanding rapidly, and I think what we’re looking to do this year is really scale that brand. Ideally, we’d like to open a store in NSW and Queensland this year.

IRW: I’m curious about the decision to open in Chapel Street. I’ve heard some analysts remark about the era of Chapel Street being over. What made you want to open there?

MM: We agree! But we opened on Chapel Street in Windsor. The northern end, the South Yarra end, is definitely a very tired retail precinct. And up to now the southern end, the Windsor end, has been more of a cafe and lifestyle precinct, but that’s where we think people are. All the traffic and activity and type of customers who we want for the brand are there, but at the moment there’s not a lot of retail there. We’re one of the first fashion brands to open there.

It’s a little bit of an experiment, but so far it’s working. And of course, all of our decisions are based on what sales we can achieve and what rent we have to pay. But as an emerging end of Chapel Street, the rents are far more reasonable than at the established end. The established end is expensive and declining, and this end is far more competitive and has far more growth potential.

IRW: It’s interesting that you were drawn to the cafe-laden end of Chapel Street. We’re seeing shopping centres expand their dining precincts in the hope of attracting more customers too…

MM: You fish where the fish are. That dining-out trend is enormous, it’s where the growth has been. And I think customers want a good mix of retail. If you look at the US, it’s a good example of malls that didn’t diversify at all. The only thing you can find at malls are shops; there’s no entertainment, no food. And if you go to the other extreme, and only have entertainment and food, that’s not what the customer wants either. They want a good blend.

IRW: It’s no secret that department stores are struggling right now, and some high-profile brands have closed or plan to close their department store concessions. Has this changed the dynamic for brands like Elka Collective that are going into department stores in terms of their negotiating power?

MM: I think what’s happened is that there are more options for brands now to get to customers. It once was the case that you had to go through bricks-and-mortar retail, so you went to a major chain retailer like a department store to get your brand listed, and that was pretty much your only chance to get your brand in front of customers. Whoever controlled the property, the customer-facing asset, in negotiations had the power.

What’s changed with online marketplaces, brand websites and specialty-branded retail is that there are now many other ways to get your brand in front of the customer. Brands have much more balance in that relationship, and some of them are exercising that balance. They want their brand to be presented as well as possible and they also need it to make commercial sense.

Department stores and other major retailers can’t necessarily demand the sort of trading terms they have in the past, but the reality is when you see those brands leaving department stores, it means they probably have had a fight over trading terms, but the department store has probably not yielded. That’s why they’re walking away or switching to another department store that will probable entice them with a better deal, though they will need to go exclusive.

It’s not necessarily the case that people are getting better deals with department stores at the moment; they’re still very big businesses, they just happen to not be growing anymore. It’s natural for brands to be focusing on the channels that are in growth and the channels where they can present the most complete range.

IRW: Besides the commercial terms, what else is of consideration when you’re contemplating going into a department store? Customer service has been a hot topic in the past…

MM: Customer service is enormously important, and I wouldn’t be the first person to say department stores haven’t done a great job of it. There’s a lot of talk in both department stores about investing more in customer service. I haven’t seen a lot of tangible evidence that that’s happening; we’d like to see more. We’re hopeful that the new management team at Myer have followed through and will continue to follow through on their commitment to improve

You hear a lot about the quantity of staff – everyone says they’re going to put more hours on – but for me, equally important is the quality of staff. The previous management team at Myer talked about cutting back office staff hours and putting those same back office staff onto the floor. They weren’t trained in customer service; they’d never done it before. It’s not a solution if staff aren’t engaging and knowledgeable.

I think it’s going to be a long journey for the department stores because it does take a long time to get the right people and train them. But I think they understand that to be relevant going forward, they’re going to need to make that investment, because it’s the one differentiating factor. If you’re going to draw people into a store environment, the service has to be noticeably better than logging online, where frankly, the range and fulfilment experience are incredibly powerful and quite convenient.

IRW: You’ve been outspoken about lease agreements in the past, and why you think landlords need to share the risk with retailers. What are your thoughts on this topic currently?

MM: The market is starting to shift slightly, but only through absolute necessity. Look, it is difficult for landlords because over the years, they’ve built a business model on very high valuations of their property. They valued their property upwards essentially every year, and I think the first move downward was last month, with Vicinity Centres valuing some of their regional centres downward.

I think you’re going to see a lot more of that because they fundamentally built a business model on a boom-time retail economy which is no longer the case at least in terms of pure physical retail. A lot of them built their rent escalation clauses on this, and they’re still expecting 2.5 per cent above CPI when actually foot traffic is falling in those centres. It’s an unrealistic expectation, certainly in the long term, but their property valuations are based off this view of never-ending growth in incremental income. That’s got to crack, and it’s starting to crack. But how quickly and how sharply, it’s hard to say.

I think the challenge is that this model has driven an enormous focus on sales productivity. To increase those valuations, landlords have had to go after the highest sales productivity retailers. That’s fine, that’s a natural commercial thing, but compared to other markets in the world where the leasing markets are more competitive, it makes it harder for retailers to invest in experiential retailing.

If your sole metric to be economically viable is sales productivity, you’ll end up with small shops absolutely packed with products, because you can’t have a single square metre in the shop where you’re not selling something, otherwise you can’t afford the rent. That contributes to customers not wanting to shop in a retail environment anymore, because if a shop is just packed with stock, what is its competitive advantage compared to online?

I think the market has to go through an adjustment period to take the pressures off rents and allow retailers to invest in the retail experience, not just the ‘stack it high, watch it fly’ retail mentality. That’s going to be hard, but I think it’s necessary.

IRW: You often hear shopping centre owners talk about turning centres into community hubs, which would seem to counter the idea that they’re only thinking about sales productivity. What do you make of this? Is it all talk?

MM: To give them some credit, the best landlords are making that shift. But there are almost two competing philosophies within the one landlord. At the end of the day, they still have to generate the rents, particularly in existing centres. Having said that, they are also investing in new developments to create more of a balance.

I think the most interesting evolution, which is probably more apparent in Asia, is the mixing of residential and retail developments, so you end up with medium- to high-density apartment blocks combined with shopping centres. Australia has continued population growth and high housing prices, so we’re going to need high-density residential development. For that to be combined with retail so you have a full lifestyle solution for those residents is good for the property market I think. And you are seeing landlords head in that direction.

IRW: What are some potential industry challenges or areas of concern that you’re keeping a close eye on at the moment?

MM: Declining traffic in shopping centres. It’s probably not that surprising that we saw double-digit declines particularly at our NSW stores. What was surprising was the quantum of it. I think it was a 22 per cent decline in NSW in the week of Boxing Day. Even though Black Friday was huge and brought forward some sales, I think the last week of November was 3-4 per cent higher off a much smaller base. So those two together, there was still a significant double-digit decline in traffic. I don’t think many people in retail today would have seen that before in their career. It’s a really significant shift for the retail landscape.

It’s not to say people aren’t shopping, because we know conversion rates are going up across the board. People are just doing much more deliberate shopping trips, doing more research and engaging with brands online, but in the long run it is a challenge. When you think that people used to do aimless browsing in shopping centres, particularly discretionary retailers would pick up a lot of sales that weren’t necessarily in the customer’s mind when they pulled up in the car park. It’s a little bit harder to achieve that without that behaviour.

IRW: What kind of conversations have you had with peers in the industry about the decline in foot traffic?

MM: A lot of people that have been in the industry a long time are generally pretty negative, and I don’t like to spend a lot of time talking about the woes of retail. I prefer to spend time with people who have ideas and are doing well, and there are a lot of retailers doing well, some are getting excellent results. But yes, the short answer is that the general mood is negative.

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