In todays AFR: Nick Scali wants to conquer Britain. Does it stand a chance?
It's quite a lengthy piece and for those outside the paywall ...
Nick Scali wants to conquer Britain. Does it stand a chance?
The ASX-listed furniture retailer has made a big bet on the United Kingdom, where plenty of big Australian companies have come unstuck.
The Fabb Furniture outlet in Croydon, South London, is a pretty unassuming place: it has modest frontage in a retail park dominated by Britain’s biggest branch of Ikea. The Swedish behemoth lords it over the landscape, and seems to have a tractor beam hoovering up visitors as they emerge from their cars.
Inside Fabb’s narrow, warehouse-like building there’s a selection of perfectly decent sofas and beds. Although the slogan plastered over the walls is “Fill your home for less”, the prices aren’t a screaming bargain. Fortunately, customers are also offered five years’ interest-free credit.
Fabb has 21 stores, scattered across England in edge-of-town retail parks like this one. It’s fair to say that this chain, a former co-operative founded in 1979, isn’t one of the titans of the UK furniture market. So it might seem an unlikely launching pad for Nick Scali’s big assault on Britain.
The Australian company’s chief executive, Anthony Scali, admits as much. “It is a very poorly presented store network, with very average-looking furniture,” he told The Australian Financial Review after Nick Scali’s recent annual result.
But he has grand plans. It’s his first attempt to bust out of Australia and New Zealand, and he isn’t planning just to stick a few “Nick Scali” signs over the top of the Fabb ones. He’s ready to take some risks.
The 70-odd staff will stay put but the stores will be given a makeover and eventually restocked with Nick Scali products, ranging from modern swivel armchairs to mid-century modular sofas.
Fabb’s board has been cleared out – a cull that appears, from regulatory filings, to have spared nobody bar Fabb’s finance director Tracey Jackson and veteran managing director Matt Hesketh.
But Hesketh is now referred to as “commercial director”. Nick Scali just named former Best & Less boss Rodney Orrick as its British chief executive – ready to fly over from Australia, run the relaunch, then go for growth.
For Anthony Scali, the growth opportunity lies simply in the sheer scale of the UK market: 67 million people is just a lot more than Australia’s 26 million.
“You have got a big population,” he says. “Of the 60 million-odd people, there are going to be at least 20 million of those that are reasonably affluent, that will be our customers.
“All the UK retailers do double sales per store than we did in Australia, and we also think there’s less competition.
“The business we bought is located in the retail parks next to the likes of the DFS and Furniture Village, where their stores are doing £7 million ($13.7 million) a year to £9 million, which is a lot.”
But wait. If Scali’s lodestar is DFS, which has 118 stores across the UK and Ireland, there’s a klaxon warning. And it comes from the rival company itself.
At its most recent trading update in mid-June, DFS cut its full-year profit forecast in half. The company cited shipping delays on the Red Sea, which had driven up freight costs and delayed sales. It also said consumer demand was at “record lows”.
The economic stats back this up. Britain has at last emerged from a spell of soaring energy costs, double-digit inflation and rising interest rates. But in the big-ticket parts of the retail market, cost-of-living-conscious consumers are still feeling cautious.
The UK Office of National Statistics’ most recent data, from July, shows sales in the “furniture and lighting” sector slumping 12.4 per cent since the start of the year. The index for this category is at a three-year low.
Fabb itself has been struggling. As a private company, it doesn’t report as frequently as the likes of DFS. Its most recent accounts are for the 12 months to the end of June last year when margins topped 50 per cent. But Fabb was sober about the outlook.
“The retail sector continues to trade through difficult circumstances, with consumers demonstrating lower levels of disposable income,” its report said.
The company also noted hefty upward pressure on wages and on costs in its supply chain, but was hopeful these could be contained and would pass.
It’s not exactly a rosy picture, but the local industry expects it will eventually brighten as the economy – and particularly the housing market – revives and consumers regain confidence. And Scali reckons his company is well-placed.
“The key objective is to get to profitability within 18 months,” he says. “We’ve got this business that we’re starting with – a real low-cost space. So we think we should be able to get to profitability quickly, even with the tough landscape.”
His assessment is that the British furniture retail sector isn’t that competitive, which has left the gate swinging open for someone like Nick Scali.
“I’ve been in the UK often. I’m very close to the retailers. I see what they’re selling. In my view, it’s a very similar market [to Australia],” he says.
“They all look more or less alike over there. We will be a new entrant, and we think we can offer something different.”
Within the industry, this rings a bit of a bell. In 2016, Wesfarmers spent $705 million buying the struggling hardware chain Homebase and tried to transform it into Bunnings.
Like Nick Scali, they cleared out the board and management, brought in managers from Australia and revamped the brand at pace. The big assumption was that the Bunnings model would transfer readily to the British market and that the locals would welcome the Australian upstart.
But it all went wrong. Bunnings lost the existing Homebase customers and identity, and struggled to pitch the new concept. Even though Brits and Australians speak the same language and watch the same TV shows, their consumer habits and marketing cultures are less similar than anyone imagined.
“Just because you’ve got a great concept and you think the world’s heard of it, that doesn’t necessarily mean that resonates to people walking through the doors in a different country,” says one veteran of the UK retail scene.
“There are very, very few examples of successful retailers globally. Ikea is one, but it just doesn’t translate well unless you’ve got a completely distinct proposition. If all you’re doing is selling what everybody else is selling but with a concept that worked in a different country, well, why is that going to work?”
Within two years, Wesfarmers was forced to admit defeat and headed for the exit. The question for Nick Scali is, how can they rewrite that script?
Some industry observers say that furniture doesn’t involve committing as much stock into the stores, so Nick Scali will be able to experiment and adapt in Britain more easily than Bunnings could.
Still, Barrenjoey analyst Peter Marks warns that Nick Scali will need to educate British consumers and get the store refurbishments right.
“Shoppers want to trust the brand. You want to know the brand,” he says. “Homes are smaller and the wrap-around lounges that are popular here will not work in smaller homes in the UK.”
The online revolution
Scali hasn’t yet put any meat on the bones of his strategy, at least in public. It’s not yet clear how he plans to differentiate his stores from DFS or Furniture Village – or, more importantly, from online sellers like Amazon and Argos.
British consumers have long been at the vanguard of buying online, and by some counts almost one-third of retail sales are now made this way, compared with about one-fifth in Australia.
Furniture is not like shoes or fast fashion, where people routinely order items and send back the ones they don’t like or that don’t fit. But one retail consultant suggests the online revolution won’t leave this sector unscathed.
“Millennial consumers are now starting to buy houses, do stuff up, and digital for them is the only way,” the consultant says. “They’re saying, ‘why would I get my car, which I probably don’t have, and drive out of town to look at it? It’s a waste of time. Just order it and get it.’ So we’re right in the middle of this fundamental transition.”
Fabb has an easy-to-use website, allowing customers to order online. But the brand’s real strength, if the TrustPilot ratings are anything to go by – 79 per cent five-star – is customer service in the stores themselves.
The lower ratings tend to be from customers whose orders have been caught up in the freight and shipping delays – something Nick Scali will have to watch closely. The disruption on the Red Sea has eased but it isn’t going away.
Against the Bunnings experience, other Australian retailers have found their niche in Britain: jewellery chain Lovisa and stationery and gift seller Smiggle. Harvey Norman has established a beachhead in Ireland and will open its first English store in October.
All these brands, though, have chosen to enter the British market organically rather than by acquisition. But one executive from one of these companies told the Financial Review that Nick Scali might have made the right choice in its own sector, where well-positioned shop frontages aren’t always easy to come by. “If I were in their shoes, that’s how I’d have done it,” the executive said.
Barrenjoey’s Marks also gives Nick Scali a thumbs-up, calling the Fabb purchase “a logical, sensible way to enter the UK market”. The company could even buy a few more stores, he reckons, because Britain’s long leases mean vacant sites aren’t thick on the ground.
“He’s not betting the farm. He’s got an excellent track record creating value for shareholders, particularly with the Plush acquisition,” Marks says.
“If the UK works, it means the growth runway is a lot longer. If it doesn’t work, the balance sheet is in such a strong position that it’s not going to be a big deal.”
Anthony Scali has rolled the dice. But he’s not getting carried away.
“We are different, we have product differentiation. I think there’s an opening there. I see a segment that we can capture,” he says.
“I could be wrong. But time will tell.”
