High-End to High-Stakes: A Deep Dive Into the David Jones Acquisition

The David Jones acquisition flooded Australian news outlets when it was announced in December 2022. While many have thrown their support behind the renowned retailer returning to Australian ownership, the sale price was significantly lower than expected. Let’s take a closer look at the acquisition and the factors that contributed to this massively discounted sale.

Who is acquiring David Jones?

Private equity firm Anchorage Capital Partners will acquire the 184-year-old premium retail department store from South African company, Woolworths Holdings Limited (WHL, not to be confused with Australia’s supermarket chain). The Sydney-based firm is set to spend an estimated $100 million dollars in a cash transaction to acquire the retailer, but so far neither party has confirmed the sale price.

WHL will retain the property housing the David Jones flagship store on Bourke St in Melbourne, which is expected to sell for approximately $250 million at a later date. Talk of the David Jones sale had been bubbling for a year by the time Teoh Capital Limited joined the race in November 2022. In the end, Anchorage won out over the competition and is on track to officially settle the acquisition with WHL in March 2023.

How are department stores performing in Australia?

David Jones currently has 43 stores across Australia and New Zealand, and employs approximately 7,500 people. Other major department stores competing alongside David Jones include Kmart, Big W, Harris Scarfe, Target, and Myer. On the whole, Department Stores in Australia are expected to record $21 billion in revenue for 2022-23, having posted an annualised 0.3% growth since 2018. Over the next five years, revenue is forecast to decline at an annualised 0.8%.

 Why did David Jones sell for so much less?

In 2014, WHL purchased David Jones for $2.1 billion. So how exactly did we end up here, eight years and a significantly lower sale price later?

While WHL and David Jones initially seemed like a good match, the result has been classed a “failed long-distance relationship.” Woolworths’ goal of building a world-class retailer ran into trouble on the branding front, as David Jones focuses on high-end brands and Woolworths is primarily an own-label retailer.

WHL purchased David Jones hoping it would complement the brands it already owned, such as Country Road, and its Woolworths fashion and food chain across southern Africa. The company experimented with opening stand-alone food halls in upmarket suburbs, and fancy convenience stores at BP petrol stations. While these strategies had previously worked in South Africa, they proved unsuccessful in Australia and New Zealand.

Woolworths also opened smaller format David Jones stores, tried reducing floor spaces at some branches, and consolidated its Sydney and Melbourne CBD stores. These strategies again proved unsuccessful, as evident by the company selling off a number of stores, including:

• The Sydney CBD store for $510 million
• The former men’s store in Sydney for $360 million
• The men’s store in Melbourne for $121 million.

Ultimately, over the eight years WHL held ownership of David Jones, it burned through at least $1 billion on refurbishments, IT, unsuccessful endeavours, and other operational costs, which seems to have left the company eager to cut its losses. These challenges, alongside frequent leadership changes at David Jones, pushed WHL’s vision for the retailer well out of alignment with the reality of the situation.

How has consumer spending changed? 

The COVID-19 pandemic and geo-political instability overseas have contributed to inflationary pressures, cost-of-living challenges, and declines in discretionary income for David Jones’ potential customers. The onset of the pandemic drastically changed consumers’ daily habits, forcing them to prioritise essential purchases over non-essential ones. Consumers became increasingly price conscious, choosing to pay off debt, or boost their savings, rather than shop at department stores.

Household consumption accounts for over half of Australia’s GDP, and lockdowns contributed to GDP declining by 7% in the quarter of June 2020. At the beginning of the pandemic, the retail sector was limited by negative consumer sentiment, which discouraged consumers from spending. Many industries had an excess of stock which resulted in department stores discounting their products to clear inventory and encourage consumers to spend.

Retailers indicated that shipping and delivery and supply chain disruptions were the biggest challenges in 2021, followed by lockdown restrictions and staffing. Throughout the pandemic, travel restrictions and lockdowns dramatically reduced David Jones’ foot traffic from tourists and locals, especially during the periods that bricks-and-mortar stores were forced to temporarily close. The retailer also faced labour shortages during the pandemic, with logistics, freight, and warehouse workers at higher risk of contracting COVID-19. These workers were vital as companies transitioned to online retailing. 

As the pandemic progressed over 2020-21, household consumption increased with consumers receiving government support in the form of JobKeeper, JobSeeker, early access to superannuation and tax concessions. Nevertheless, enough time has passed since consumers received those payments that many are now feeling the pressure of rising cash rates and inflation. Keeping these factors in mind, IBISWorld forecasts real household discretionary income to fall by 7.1% in 2022-23.

Of course, David Jones’ challenges didn’t just stem from the pandemic. The Russia-Ukraine conflict has also put pressure on procurement and supply chains and driven up coal and gas prices. Businesses like David Jones that operate large facilities must now ensure energy contracts are as efficient as possible to limit growth in utilities costs.

How has David Jones managed the threat of online shopping?

While many consumers faced financial challenges during lockdowns, others had money to spare that would otherwise have been spent on holidays, entertainment or in bricks-and-mortar retail stores. With cash to splash and plenty of time at home, these consumers increasingly made the move to online shopping.

Online retailing has brought down geographical boundaries impacting consumers, while rapid growth in internet and broadband penetration and mobile device ownership has made digital channels more appealing than ever. Both consumers and businesses have adopted ecommerce as a safe and viable alternative to traditional bricks-and-mortar retailing.

On top of these factors, the changing retail environment means that price-conscious consumers can compare products and find lower prices more easily online. In our current age of online shopping, consumers no longer need to rely on retailers like David Jones to source items from overseas, as they can typically purchase them online and have them delivered direct to their door. The Online Shopping industry in Australia is forecast to grow at an annualised 18.1% over five years, with revenue on track to reach $56.2 billion by the end of this financial year.

As competition from online shopping increased, David Jones moved to cut costs by making a number of changes, including:

• Reducing staff, floor space, store locations and brand offerings
• Cutting departments, such as white goods
• Establishing more generic David Jones brands

David Jones lagged behind other department stores like Myer, Kmart, and Target in its shift to online retailing. Successful retailers relied heavily on technology and new, integrated reporting capabilities to meet high demand and accelerating online sales. David Jones (and, in fairness, other department stores) have been plagued with online issues around customer experience and inventory management systems.

David Jones’ CEO Scott Fyfe was positive about the retailer’s future and it’s focus on improving the customer experience, both in-store and online. These improvements will be particularly important given that Inside Retail’s Australian Retail Outlook predicts that 10 per cent of floor space in department stores will be repurposed by 2024 as retailers move to omnichannel business structures.

Can David Jones remain relevant amongst its competition?

David Jones is battling to stay relevant as a luxury, high-end department store. Despite both Myer and David Jones recording billions in annual sales, their profit margins are both remarkably low. In 2021-22, for example, David Jones posted sales of $2.06 billion, and a profit of $14.5 million – a margin of just 0.7%.

Over the past eight years, David Jones has struggled to differentiate itself from Myer, its primary competitor. David Jones has focused on high end brands as part of its retail strategy, but has so far been unable to fully capitalize on the massive growth in premium retail spending. This is partly due to overseas high-end labels seeing an opportunity to establish a physical footprint in Australia with their own bricks-and-mortar stores.

David Jones is now stuck in limbo as neither a specialist or generalist store, as the role of the specialist is played by the individual brands themselves. Consumers will often choose to shop at specialist or brand labelled stores for the customer experience, rather than shopping at David Jones. 

David Jones is also facing intense competition across the majority of its departments, including clothing, footwear, electronics, beauty, and designer goods. For example, JB Hi-Fi and Harvey Norman are providing strong competition for electronics.

In 2014, department stores like Myer and David Jones held a significant market share, and were challenged when overseas beauty retailer Sephora came to Australian shores. Rumours emerged that both David Jones and Myer attempted to engage in partnerships with Sephora to have the brand open concession stores or outlets within the department stores.

Ultimately, Sephora opened a chain of stand-alone stores in high-profile locations in shopping centres and city CBDs. Myer and David Jones then had to compete with an established brand, that had already developed online retailing, and had a low-cost strategy. David Jones was successful in 2019 in establishing a partnership with Sephora, in an attempt to remain relevant and compete in the beauty industry. However, as of 2022, department stores are no longer listed as major players within the beauty industry.

In 2022, Millennials and Gen Z accounted for 72% of global luxury spending, and are the fastest drivers of growing demand for luxury goods. David Jones has been slow in engaging with these consumers and redefining its luxury retail experience. The company has fallen behind other high-end brands that have utilised influencers in their marketing strategy, and those that have focused on improving their online presence and retailing services. 

Department stores have become smaller and less successful versions of shopping centres and malls, which provide a multitude of products and services for consumers under one roof and serve as tourist shopping destinations. A great example of this is Chadstone Shopping Centre, which is Australia’s largest shopping centre, and is known as the ‘Fashion Capital.’ Chadstone Shopping Centre is able to market itself more successfully as a tourist destination than department stores like David Jones.