Jones and $306 million from Wesfarmers’ Target – and there’s more where that came from, with Myer set to publicise a revaluation of its own brand value in its interim result next month. There’s scarcely a positive story left, as Kmart managing director Ian Bailey noted last week.  “We’re in a category or format which locally is seen as being doomed,” he said during a Property Council of Australia breakfast. “You don’t read too many articles about what a wonderful future department stores have.” Perhaps ironically, Bailey may be the one department store boss in Australia moving into half-year earnings with something positive to talk about. After emerging from turnaround several years ago, Kmart has gone from strength to strength, cementing its price leadership in the market and garnering a loyal following of bargain hungry shoppers. The same cannot be said for most other major department stores in Australia, which are still trying to re-identify themselves in the 21st century retail market. The resignation of Myer CEO Richard Umbers last week, following the prior departures of CFO Grant Devonport and deputy CEO Daniel Bracken, was billed by chairman Gary Hounsell as an effort to speed up the New Myer turnaround in the wake of its third profit warning since last July. But his subsequent admission that Myer’s next chief executive will need to look under every rock for an answer to the retailer’s woes demonstrates that Umbers’ vision for the company’s new identity, which has underpinned nearly everything the company has done for several years, is in doubt. Whoever takes the job as Myer’s next CEO will be handed a gargantuan task, which will undoubtedly be made more stressful by an ongoing campaign by major shareholder Premier Investments to overthrow the Board. Umbers’ predecessor, Bernie Brookes, having correctly predicted forthcoming write-downs in the sector several weeks ago, has now returned Down Under, although he’s not interested in the job. Brookes’ view on the future of Australian department stores, and indeed large speciality retailers, is that they have been on the right track with recent efforts to scale-down their physical footprints while investing in digital initiatives, but he also argues that any attempt to dismiss current weakness as cyclical (the “subdued trading environment”) is misguided. “There have been some under the misbelief in Australia that there’s a cycle based on economic and political and social issues,” he says. The discerning customer In Brookes’ view, the 0.3 per cent decline in department store turnover year-on-year to December 2017 is less about subdued wage growth and escalating household costs and more about some fundamental changes in consumer habits. “[Customers] are changing in that they’re becoming more frugal, more conscious of price and they’ve got more optionality when they shop around,” Brookes explains. “[Customers] are more informed, smarter, more frugal, more discerning and that will continue.” In his address at the Property Council breakfast last week, Bailey touched on a similar point, remarking on how digitally integrated the life of the shopper has become, reflecting on the need for Kmart to reposition itself to respond. “Customers almost have perfect information now,” Bailey said. “Retailers many years ago used to charge different prices in different places – pretty tricky now.” Internal survey data has shown that 30-70 per cent of Kmart’s customers are researching online before going into stores, also known as reverse showrooming. “This isn’t like researching a new television or trampoline – they’re researching $6 items in large volumes,” Bailey explained. “The customer experience doesn’t start when they turn up at the door, it starts with [the phone].” Market shifts on the horizon? Kmart plays at a different side of the market to Myer, and thus faces different commercial priorities, but as increasingly discerning customers flock to fast fashion players, it may make sense for the traditionally upper-middle market department store to make the shift downwards. That’s the view of Queensland University of Technology associate professor Gary Mortimer, who says that while there’s room for one upmarket department store – namely David Jones – the future for Myer may be moving directly into the arena that Target is attempting to occupy. “[Myer] could move down into the middle of the market, capturing that shopper that was originally the Target shopper,” Mortimer suggests. Under Wesfarmers’ department store boss Guy Russo, Target, itself a business in turnaround, is attempting to position itself as an affordable, yet fashionable, discount department store. But Mortimer believes Wesfarmers’ new managing director Robb Scott will pull the pin on the business in 2018 by merging it into Kmart, leaving a gap in the market that Myer, under a new CEO, may be able to exploit. There are signs that Scott is increasing collaboration between the businesses. Upon writing down more than $300 million from Target earlier this month, Scott also announced that efforts to increasingly interconnect Target and Kmart would change Wesfarmers’ disclosure policy in relation to its department store division. Target and Kmart will now report earnings as one entity, although sales will still be reported separately in the interests of shareholder disclosure. A merger of Kmart and Target would cement Wesfarmers at the discount side of the market, potentially signalling headwinds for Woolworths-owned Big W, which is in the early stages of a turnaround program aimed at making the business more competitive on price and product. In a recent media conference, Scott said unprofitable Target stores could be converted into Kmart stores, although he did rule out the possibility of a complete merger. For Myer, another option may be voluntary administration, which while extreme would, as Mortimer notes, free the business from many of its lease obligations. “Strategically, one of the challenges Myer faces is that its turnaround was moving too slowly. They have businesses running at a loss that they can’t close because they’re constrained by long-term leases. “If they were to go into administration, it would put them into a situation where they could force close on leases and that would close up to 20 stores pretty quickly,” he explains. Whatever the case, 2018 is shaping up to be a formative year for the future of the department store segment in Australia, as its doubtful that shareholder patience with last much longer.