Jul 29, 2010
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Global retailers covet lucrative Aussie market

Jul 29, 2010

Global retailers, facing sluggish sales at home, have their sights set on Australia as they reach out to new markets but they may have their work cut out with Australian consumers in a new frugal mood.

U.S. chain Gap Inc (GPS.N) will open its first Australian store in Melbourne at the end of August, and Spanish fast-fashion icon Zara parent company Inditex (ITX.MC) told shareholders this month it will expand in Australia and in South Africa in 2011.

They are attracted by rising incomes and population growth in an economy that was barely dented by the global financial crisis.

The Australian market, isolated geographically and with reverse seasons to the Northern Hemisphere, has proved tricky for foreign retailers and that has fostered high prices and fat margins for local chains.

Australians now buy books, clothes and other goods online from international retailers, especially with the Australian dollar strong near 90 U.S. cents AUD=.

"Australia's isolation and the control of certain brands by distributors means they have been able to keep prices and margins much higher than if they were in a more competitive environment like the U.S. or Europe," said Arnhem Investment Management analyst Martin Duncan.

"And that has created an opportunity for international retailers to come in and exploit what is a relatively benign market," he said.

According to Thomson Reuters data, Gap has a gross profit margin of about 40 percent, compared with 59 percent for Australian retailer Just Group (PMV.AX) and 58 percent for Country Road (CTY.AX).

The global players face a fragmented local market, with smaller listed players including Just Group, which owns Just Jeans, Portmans, Dotti and other fast-fashion chains, Country Road and Specialty Fashions (SFH.AX) and the brand-heavy department stores David Jones (DJS.AX) and Myer MYH.AX.

A push into Australia is part of move by retailers to cash in on growing consumer wealth across Asia. Inditex opened its first stores in India in 2010, while Gap is expanding into Southeast Asia including Thailand this year and plans to open its first four stores in China later this year.


Australia's solid economy during the crisis has helped lure global retailers battered by weak economies at home. But some caution that despite strong employment growth and rising incomes, Australian consumers may not be in the mood to spend.

Retail sales, which account for about 23 percent of Australia's GDP, rose a modest 0.2 percent in May from a month earlier as consumers fretted about higher interest rates.

"That is where the big swing factor is going to be -- how much of that available disposable income growth next year is for consumption versus savings," said BT Investment Management analyst Sondal Bensan.

"There is a lot of frugalness amongst consumers, and that shouldn't necessarily be the case now. I don't think next year is going to be a great year," Bensan said.

U.S. discount warehouse Costco, which opened its first store in Australia last year, said on Wednesday that store sales volume have been above its worldwide average although it has struggled to find large sites.

Gap's Melbourne opening will be followed in October by Sydney and both, at 1,200 and 850 square metres, are substantially larger than their local competitors. Just Group averages just 145 square metres per store, according to Citigroup.

"We do have plans to open more stores, but judging by the size of the stores it is not easy just to reach out to a shopping centre and request this size," YC Eu, marketing manager at Gap franchise partner Busby Holdings, told Reuters.

Both the Melbourne and Sydney stores are part of mall redevelopments, and Eu said it would be difficult for Gap to slot into existing shopping centres.

She said Gap plans to bring its major chain Banana Republic to Australia, once Gap is established. Local media reports say up to 15 Gap stores are planned in the first three years.

But the large store size highlights that it won't be easy with restrictive planning laws to find suitable sites, and the international retailers may need to allow for higher rents than they are used to.

Australian retailers already pay out steep rent to mall owners such as Westfield (WDC.AX). Citigroup's Craig Woolford says Just Group pays a rental-to-sales ratio of 18.5 percent, versus 10.2 percent for Zara and 7.8 percent for Gap.

"Australian specialty retailers pay away substantially higher costs to the shopping centre owners," Woolford said.

Swedish fashion giant Hennes & Mauritz (HMb.ST) told Reuters it has no concrete plans for Australia "for the moment".

"But of course Australia is a very interesting market," a spokeswoman said. Local press reports said a store lease was being negotiated in Sydney but H&M declined to comment.

(Additional reporting by Nick Vinocur in Stockholm and Sarah Morris in Madrid; Editing by Dhara Ranasinghe)

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