In the retail game, it’s often said that department stores are the first to be hit by the downturn. But don’t tell that to Bernie Brooks, the chief executive of department store chain Myer.
The company has defied the downturn to deliver a stellar profit result for the six months to 31 December 2008. Net profit in the period rose 5.3% to $89 million, despite a 3.7% fall in sales to $1.76 billion.
While sales are expected to fall about 5% over the full 2008-09 year, the company expects to hold its profits at levels similar to 2007-08 – an impressive achievement in this retail environment.
So how are they doing it?
Here are few insights into the Myer downturn-beating strategy:
Flexible cost base
At the heart of Myer’s excellent profit result is its extreme dedication to managing costs line by line – the company says it has been undertaking just over 100 business improvement projects during its turnaround phase, and most of these are now complete.
But this is not just about cutting costs. Rather, Brooks says Myer has been able to “variabalise” its cost base, particularly in the area of labour costs. When demand shifts, Myer is able to respond quickly, but when times are tough – as they are now – the business can be scaled back.
Supply chain management
The secret of the success of Woolworths is its supply chain management – better supply chain means working capital is freed up and cashflow and profitability improve. Brooks – the former MD at Woolies – has bought this discipline to Myer.
Transit lead times from China have been slashed from 42 to 24 days. Suppliers have been instructed to deliver “floor ready” merchandise that requires less handling before it goes to the shop floor.
Myer has even been working with suppliers to get them to put security tags on before shipping items.
Inventory control
Being stuck with inventory can be deadly in a downturn, and Myer has worked had to keep a very tight control on its inventory through careful buying, improved supply chain initiatives and successful clearance sales. Inventory levels fell from $366 million to $354 million during the period.
Increased advertising
With the downturn looming, Myer launched Project Bullseye, which is perhaps best described as the ultimate recession advertising campaign. By taking advantage of the poor conditions in the media sector, Myer has been able to drive a hard bargain with media companies and essentially get more advertising space for less. To further defray the costs, Myer has been able to convince suppliers to help pay for the campaigns.
Customer loyalty
There are plenty of sceptics about customer loyalty programs, but Myer has been able to use its Myer One program to great effect during the downturn by targeting discounts and other offers at its loyalty program 2.6 million members. A staggering 60% of Myer’s sales come from Myer One members, giving Brooks a powerful insight into customer behaviour and allowing him to tailor his offers to suit.
The double loop
The “double loop” concept is another borrowed from Woolworths and refers to the process of re-investing savings into the business to drive future profits. Capital expenditure in the first half of the year was $57 million, up from $41 million, as Myer pumped money into IT, a new point-of-sale system, brand presentation, refurbishments and new facilities.
Planning for growth
Brooks hopes this capital expenditure will set Myer up for a big period of growth when the economy turns. The company is also investing in new stores, which will further help boost growth.
Myer major shareholder, private equity group TPG, was probably hoping it would have re-floated Myer by now, but the global financial crisis scuttled that plan. However, the delay may work to Myer’s benefit – it looks set to be in an even more powerful position when the economy turns.
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James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
