“Today I’m drawing a line in the sand, separating the past and, through investment, taking the company into a new horizon.” David Jones CEO Paul Zahra announced yesterday.
This week the CEO also announced a massive 19.6% dive in first half profit, warning of an up to 40% slide in the full year result. Zahra’s plan is to address these sobering numbers with hefty investment across the business.
But will this be enough to get the company’s fire burning again, or has the retailing behemoth reached the end of its business best-by date?
Every business, without exception, goes through the same broad life cycle.
1. The start up phase, where it all begins – The budding business has large capital outlays, tight cash flows and high growth.
2. Growth and stabilisation – The now established business has steady revenues, healthy profits and enough cash flow to finance capital investment. Competitors notice this and start getting in on the action.
3. Maturity and decline – As facilities age, revenues decline while expenses remain relatively constant. This couples with increased competition and slowing industry growth to impact profits.
4. Death or re-birth – Without prudent management and capital investment, revenues continue to decline to the point of negative cash flow. Without urgent re-modelling to provide new life, the business fails.
David Jones is now at the back end of the maturity phase as its profits are hammered by online competition and the retail industry remains stagnant. The company is now facing a gradual decline to its demise if its position isn’t rectified.
Former David Jones chief Peter Wilkinson concurs, saying the retailer has “fallen prey to faster moving, more energetic and flexible specialty stores”.
“And as we’ve moved into the 2000s, they’ve not responded well to the online or multi-channel proposition.” Wilkinson observes. “It’s been a long and enduring change taking place.”
So what the company is now trying to do is cheat death. Luckily they’re on the right path to do it.
One of the only ways to avoid, or defer, the final stage of the business cycle is through capital investment. Unfortunately for a lot of companies, at this point there’s usually no cash left to invest and a bunch of unwilling bankers shaking their heads.
However for a public business as well established as David Jones, rustling up the required $160 million at this late stage is no hurdle in their attempt to climb out of the grave.
In fact, with the right scale of well placed capital investment, businesses can even wind back the clock to the growth stage. This is the re-birth of a business. With plans to increase their online offering from 9,000 to 90,000 items, David Jones might just pull it off.
“We had two paths” Zahra says, “to have death by 1000 lashes or take the pain this year, invest significantly and transform the company into an omni-channel retailer in 2013.”
The problem is that they’re now playing catch-up.
The key to making the transition from a company in decline to one of sustained success and even growth is to recognise the signs early. Warning flags include a significant slide in revenue, market share and profitability. Another is management turnover.
David Jones has experienced all of these over the past two years as the GFC set in, online retail boomed, earnings subsequently slid and the last CEO headed for the fire escape. All these warnings should have been heeded earlier.
Only time will tell whether the injection of capital into the ailing retailer will be enough to wake the giant, or whether it’ll be too little too late. Either way a lesson should be learnt as this uphill battle unfolds – if your business plans to cheat death, keep an eye out and do it early.
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