“Quite smartly, they’re consolidating their efforts to fight on fewer fronts. Launching a venture in Australia, which initially would be unprofitable, would have a further impact on their balance sheet,” Mr Brookes said.
“When [Kaufland] first started this venture about three or four years ago, they were performing very well, making more profits, but their world has since changed.”
‘It’s like having a mortgage on your house, buying a holiday home, and then you find that the house mortgage has gone up and you can’t afford the holiday home.’
Former Myer chief executive Bernie Brookes
“It’s like having a mortgage on your house, buying a holiday home, and then you find that the house mortgage has gone up and you can’t afford the holiday home.”
Changes have also been occurring in Australia’s retail sector. Mr Brookes noted the industry is going through a restructure and is a “deteriorating market”. He also pointed to consumer confidence issues brought on by the bushfire crisis and ongoing concerns about climate change.
“While it’s an expensive thing to lay off 200 people and close sites they were looking to open, it’s probably a smarter thing to do than have a big hole of money that they’re going to pour more money in over the next few years,” he said.
Just one week prior to its announcement, Kaufland had topped up its coffers with a $100 million injection from its German parent company. It had also spent millions on store locations, massive distribution centres and 200 jobs with above-market-rate salaries and significant perks.
The company has not indicated its plans for its locations around the country, saying only that it would be “discussed with the relevant parties in coming days”.
However, sources have told The Age and The Sydney Morning Herald the company will complete the construction of its $255 million distribution centre in Melbourne’s north, which sits on a 110,000 square metre plot and was being purpose-built for the retailer.
Kaufland is also likely to finish its build in Dandenong South, which it received approval for early last year. It will likely sell both sites after completion. A spokesman for the company said it was too early to confirm what would happen to each site, which was being negotiated on a case-by-case basis.
Commercial estate agency JLL’s NSW head of retail, Jeremy Prestoe, said he was not aware of any deals struck by Kaufland in NSW for land to build its hypermarkets.
The mature nature of Australia’s commercial property market and scarcity of big 20,000 square metre sites favoured by the retailer made its business model difficult to execute, he said.
Mr Prestoe said Kaufland had been considering a different leasing model for its NSW expansion, taking over space occupied by Big W in shopping centres, before it pulled out.
“It seemed Kaufland was coming to the party on perhaps being attached to shopping centres but nothing had been transacted,” he said.
But while consumers might be disappointed they’re missing out on a new rival for Australia’s major supermarkets, Coles and Woolworths are set to benefit from the news, according to analysts.
JP Morgan’s Shaun Cousins labelled the company’s departure as a “significant positive” for the industry and predicted Coles and independent supplier Metcash would benefit most from the news.
“The entry of Kaufland would likely have exacerbated the market share losses for Coles especially as well as Metcash-supplied independents. This is no longer the case, providing upside to Coles and Metcash, in our view,” he said.
Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.
Simon Johanson is a business journalist at The Age and The Sydney Morning Herald.