Why The Reject Shop needs a rebrand
The Reject Shop is looking for a new CEO but perhaps it should also be looking for a new name. The variety and seasonal merchandise chain has been struggling for several years to boost sales and profitability and has seen its share price fall from close to $7 down to $2 in the past 12 months.
The chain has implemented cost-savings measures but, like most retailers, it is battling to contain staffing and store-occupancy costs.
The chain’s origins date back to 1981, when Ron Hall and John Shuster opened a store in South Yarra. Macquarie Bank invested in The Reject Shop in 1994 and a decade later, with 100 stores, the chain listed on the Australian Securities Exchange and began a steady expansion across Australia.
It acquired a number stores from its direct competitor, Discount Superstore Group, which had previously been owned by the Retail Adventures and before that Australian Discount Retail. The competitor failed financially three times, twice under the ownership of former Kathmandu founder Jan Cameron, and finally closed its doors in 2014.
The Reject Shop currently has 364 stores but will close seven by the end of June after failing to negotiate better lease terms, and it is expected that the store network will be pruned further.
Warning investors of a decline in sales and margins and a full-year loss, the chain’s chairman, Bill Stevens, said the board has engaged Location IQ, a consultancy firm, to review its property portfolio and KPMG to examine financial aspects of the business.
The Reject Shop had anticipated a profit of up to $4.1 million for the 2019 financial year when it released it first-half results last February. The profit forecast was a key factor supporting advice to shareholders to reject a takeover bid by Allensford, which is controlled by Raphael “Ruffy” Germinder.
Last week, Stevens conceded that the FY19 result is now expected to be a loss of between $1 million and $2 million. The revised trading result suggests The Reject Shop will be making writedowns and provisions in its full-year accounts that will wipe out a $10.6 million first-half profit.
Apart from the profit forecast, The Reject Shop relied on a growth blueprint that included development of new products and ranges to replace underperforming merchandise categories in two key areas, greeting cards and storage solutions.
The share price fell to $2.10 last week after the negative announcement, 60¢ below Allenford’s bid which had valued The Reject Shop at $78 million.
With a 19 per cent shareholding, Allensford now has a representative on The Reject Shop’s board and will no doubt take a keen interest in the Location IQ and KPMG reviews. The outcome of those reviews could determine whether Germinder launches a further takeover bid and, if so, at what price.
Directors and management were buoyed by a lift in December sales but in the months since, revenues have fallen by 2.9 per cent.
The key questions around The Reject Shop revolve around the reason or reasons for the flagging performance of the past three years or more. While the retailer saw Discount Superstores Group exit the market, competition has arguably increased from supermarkets, discount department stores and other chains.
Heavy discounting by retailers for seasonal events such as Christmas and Easter have impacted on the chain, and Stevens is also quick to blame continuing low consumer confidence, flat wages, cost-of-living pressures and the housing market downturn for declining sales.
However, there is more at issue than the tough retail market conditions, and one of them may be the branding. The Reject Shop stopped selling factory seconds back in 1985 yet retained a brand that suggests not top quality rather than a more positive value proposition.
The branding clearly did not hamper the chain in around 25 years of solid growth, but it may well have passed its use-by date, with consumers wooed by other retailers and online vendors.
Changing the name may well be a more important move than changing the CEO notwithstanding the reversal in The Reject Shop’s fortunes under Ross Sudano.