International Introspective: A more buoyant Aussie retail market tracks U.S. trends

Two of the larger mass retailers in Australia share the names Target and Kmart with two of the U.S.'s big retailers, and that isn't the only similarity between the two nations' retail landscapes. Three players - Big W, Kmart and Target - dominate Australia's toy and children's apparel markets and are currently entrenched in a pitched price battle, putting the squeeze on smaller competitors and suppliers' profit margins. Sound familiar?
February 1, 2004

Two of the larger mass retailers in Australia share the names Target and Kmart with two of the U.S.’s big retailers, and that isn’t the only similarity between the two nations’ retail landscapes. Three players – Big W, Kmart and Target – dominate Australia’s toy and children’s apparel markets and are currently entrenched in a pitched price battle, putting the squeeze on smaller competitors and suppliers’ profit margins. Sound familiar?

But unlike the U.S., Australia’s retail market, buoyed by a strong economy and currency on the international scene, made healthy gains in 2003 and witnessed a brisk Christmas season. Toy sales fared well, posting a 5% to 7% gain that added up to a retail take of between US$754 million and US$900 million for the year. And that’s a year without the kind of red-hot toy that turns parents into grizzly gladiators who’ll stop at nothing to secure it for their wee one.

John Redenbach, merchandise director of Toys ‘R’ Us Australia, says the strong Australian dollar is currently creating some exciting new price points that should continue to fuel toy sales in 2004. He explains that the boosted Aussie buck gives importers more buying power, meaning retailers can now sell a US$40 item for US$29.99 and maintain margins. And in the toy business, it’s all too apparent that lower prices attract consumers.

In 2003, Australian toy consumers found the doll category most attractive. The Barbie/Bratz war ‘created a richer feeding ground,’ says Tony Oates, GM of Australian toy distributor Funtastic. Data from Australian toy industry tracker GfK Marketing Services shows the category grew by 20% to take in approximately US$86 million and capture 21% of traditional toy sales. Barbie maintains roughly a 30% lead in the category over Bratz, says Redenbach. Action figures and activity toys tied for the next largest share at 12% each, racking up a combined US$126 million. Preschool toys and games/puzzles round out the category top five at 11% market share and US$57 million each.

On an item level, the big sellers follow U.S. trends, so Barbie, Bratz, Hot Wheels and Yu-Gi-Oh! all sold well. Redenbach is expecting the release of Spider-Man 2 and the Shrek sequel to jolt action figure sales in 2004, and he believes that the introduction of lines from LeapFrog competitors Fisher-Price and V-Tech will make for an explosive educational field this year. Redenbach estimates retailers sold 50,000 LeapPad units in 2003 and says it’s just getting started.

As for who stands to benefit the most, the mass retailers control about 70% of the Australian toy market, with Kmart at 29% (164 stores), Target at 23% (140 stores) and Big W at 18% (106 stores). With 37 stores, Toys ‘R’ Us Australia has a 9% market share, and specialty retail – made up primarily of two chains, Toy World and Toy Kingdom, with 350 or so outlets between them – commands a 15% share. The remaining 6% falls to department store Myer Grace Bros.

Kmart, Target and Myer Grace Bros are all owned by the Coles Myer Group, giving this retail conglomerate a stranglehold on the market. But according to Oates, the two mass retailers are fierce competitors that have separate management, buyers and buying strategies.

Fred Gaffney, president of licensing agency Gaffney International, says when you walk into a mass retailer in Australia, you’d think you were in a Kmart or Target in the U.S. because they share very similar layouts and merchandising standards. In fact, Oates says the big three’s positioning is similar to U.S. discount chains. Target is aggressive in locking down brand and license exclusives (see ‘Is Australia a licensing nirvana?’ on page 37 for more), while Kmart and Big W pretty much do battle on price alone. Oates adds that Big W, owned by Woolworths, is very much modeled after the mother of all big Ws, Wal-Mart. Its logo even reads ‘We Sell For Less.’

And like mass retailers in the U.S., these three are fighting a price war, using the top 200 toys as ammo. Oates says they sell these toys at cost to lure consumers into their stores. Margins are shrinking, and he worries that retailers like TRU, which can’t rely on sales of shampoo and shoes to offset bargain toys, are going to suffer.

Redenbach cagily hints that he’s got plans in place to cope with pricing pressures, but finds the mid-year institution of lay-by far more troublesome. Australia’s seasons are opposite to North America’s, so the country has its summer outdoor toy and Christmas selling seasons at the same time. To compensate for this Q4 double-whammy, Oates says Australian retailers (led by Target) have been trying over the last decade to re-condition consumers to buy toys in July. The stores publish massive catalogues advertising toy bargains, and consumers truck in and select items for layaway (a.k.a. lay-by) until December.

Australian toy sales in July now rival December’s numbers. In fact, Redenbach says there was one week in July 2003 that was as big as the biggest retail week in December. The problem, as he sees it, is that smaller retailers get hit twice instead of once a year. The retail landscape is just as intense in July as it is in November and December. You don’t want customers asking for a refund or returning merch to store stock if they find it at a lower price later on, so you drop key items to your Christmas pricing levels, explains Redenbach. ‘There’s a lot of business to be done earlier in the season, but you’ve got to be prepared to do it at no margin.’ Added to this strain is the difficulty and expense of warehousing the goods for customers until they’re ready to pick them up in December. Concludes Redenbach, ‘It’s just become a game of diminishing returns.’

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