Episode 3 - Australian retail, the Cotton On perspective

Intro: Welcome to The REAL Deal, a monthly podcast about what’s happening across the real estate and infrastructure sectors. Episode grab (Ash): IN 11.59 “Obviously retail isn’t for the faint hearted” OUT 13.11 “there’s still retail sales to be had”

Intro: A titan of Australian retail, Ash Hardwick, Co-Founder of Cotton On Group, joins Dexus CEO Darren Steinberg to discuss Australia’s retail landscape. From bricks versus clicks to the impact of the broader economic environment, Ash opens up about how Cotton On has grown to become an international success story and how the group maintains its customer and product focus through cycles.

Disclaimer: The information contained in this podcast is general information only and opinions of participants are their own and not the views of their organisations. Any advice is general advice only. Past performance should not be relied on as indicative of future performance.

Darren: Welcome, everyone, and hello to Ash Hardwick from Cotton On to The REAL Deal. It's great to be in Melbourne with you today, Ash, it's taken me a long time to be able to speak to you again after last year's grand final! Ash is a very passionate Geelong Cats supporter and as a Sydney Swans man, I'm only just recovering from what happened last year down here at the MCG. So welcome, Ash.

Ash: Thanks, Darren.

Darren: Now, Ash, you founded Cotton On back in the 90s and today run one of the largest retail groups in Australia. There are only a handful of domestic retailers that have successfully ventured overseas, and you guys are right up there. We’ve known each other since the 90s, but perhaps you can tell our listeners how you started in retail and how you grew Cotton On to be an international success story.

Ash: Well, that's a long story, but thanks for the introduction. Nigel Austin founded and started Cotton On in 1991, which was my final year of high school, and so watched him get off the ground and then joined early in 1992. We opened the first store that Nigel opened was in Geelong and as was the second one when I joined in in ‘92. So, two stores back then to 1500 today. We both tried our hand at university for a few years, but we added a couple of stores pretty early on in the early days. So the workload threw us both out of university prematurely and (we) made our way through country Victoria in ‘92, ‘93 and then ventured across to Western Australia, where we met in 1994, with a small little acquisition of seven stores.

Darren: The dodgy leasing guy from Perth, was it Bliss that chain wasn't it?

Ash: Yeah, it was, yeah. A long time ago. So we went from five stores to 12 overnight from one side of the country to the other. And that was the start of the national rollout back in 1994. Unfortunately, West Coast beat us in a grand final as soon as we'd arrived. So it wasn't a great start. But yeah, it's been a fun ride since then, made our way through Australia, a few hundred stores in Australia and then ventured overseas in the early 2000s.

Darren: It's an amazing story and I think about all the retailers that I met back in those days and I still vividly recall you and Nigel coming and we inspected the Bliss chain and I was like, “Who are these guys? Who are these young blokes?” You know, the biggest mistake I made was not investing with you at the time, Ash.

Ash: Would have been a good bet.

Darren: It's a long way from the 2000s to today. And as you sort of launched, you guys always had the touch for the right product. I think that was one thing that sort of dawned when I look back at the success of your business, the product in the stores, getting the locations right in the shopping centres, that’s one aspect, and we'll talk a bit more about that later on. But the actual product, you seem really in touch with your customer, the consumer, how did you guys get that sort of layer of contact to be able to pick those trends ahead of many of your competitors?

Ash: I guess of the partnership between Nige and I, he's inherently a customer, product guy. So we had that instilled in everybody from the get-go. He still lives customer and product today. I guess my involvement was more on the property and expansion side. But the culture of retail and customer was just ingrained in him from his father, who was a rag trader as well, and it's still very alive and well today, the customer-centric operation.

Darren: Yeah, I think that's one of the secrets of success when I sort of look at the some of the retailers today, it's just not ingrained. It's not, it doesn't come naturally, they've all been sort of trained up in universities rather than the gut feel. So the secret sauce of Cotton On, Ash, what is it? Is it the chemistry between you and Nige? Is it the product? What do you think is the secret sauce?

Ash: I don't know that there's one thing. Obviously, it's a pretty intricate recipe of a lot of things. But certainly, for if I reflect on 30 odd years of our business, people stand strong at the top. It's just been the aggregation of great people, like-minded people, not necessarily the same ones. It's been a journey where people have floated through our business in and out. But certainly, in the early days it was very family orientated, lots of brothers and sisters and cousins and then through the journey, lots of international expertise that we imported in, lots of long-tenured people. It's really been a people march. I'd say that would be the most significant input into what's been created. Obviously, we exploited some good luck along the way and dealt with some bad luck pretty efficiently. So yeah, lots of things have gone into it.

Darren: Someone said to me, the only thing you get with luck, Ash, is good car parking. So, I'm sure there's a lot of skill in there. But the point about people is really important because I think if you look at any business in any sector, it's getting the best people in, and they tend to be able to work your way through tricky markets or problems a lot easier. So yeah, people first, I think it's something that we certainly at Dexus take very seriously, get the right people on board. So Ash, obviously the world's changed a lot since the ‘90s, since we were sort of leasing shops back then. You know, back then it was very difficult for retailers to distribute product any other way than via the shopping centres. Yes, there was a mail order and other bits and pieces, but it was quite clunky. Today, obviously retailers have a choice about how they distribute: it’s online, it's in shopping centres. ‘Omnichannel’ I think is a word that comes up a lot. What's your view, as someone who’s been in and around shopping centres for 30 years, what's your view on shopping centre investments today?

Ash: Shopping centres have been really our lifeblood from the beginning. It's been around for a long time, it'll be around for a long time. There are other channels and there are lots of ways to get product to customers now, but certainly I’ve got a lot of faith in the shopping centre model. Yes, it's different to what it was in the ‘90s, but as long as it continues to evolve, it's by far the biggest channel that we have, it's likely to be the biggest channel that we'll have forever. We're very much bricks, you know, boots on the ground, retail.

Darren: Bricks and mortar, bricks versus clicks. Are you seeing any impact from Amazon at this stage? I know from a Dexus perspective, we're watching them expand quite quickly. We've built them three big distribution hubs. I mean, obviously different product to potentially where you're aiming, but are you seeing any sort of impact from them on the Australian landscape?

Ash: Ah look, it's interesting, they're growing quickly, they've done an amazing job internationally. Australia is a very unique country geographically to do business for them. So we're really confident in our omni approach and having multiple touch points for customers that we think gives us competitive advantage. Obviously, we design and manufacture our own product, so we're not competing with them directly. They're doing a great job everywhere else, there's no reason why they won't do a great job here. It's not something that's in our wheelhouse too much. We don't tend to dwell on other retailers or other businesses and just concentrate on what we do well.

Darren: Don’t get distracted. Ash: Don't get distracted by them. Darren: So it’s obviously a tricky time for retail now. We've had 12 interest rate rises, maybe there's a 13th. I think the Dexus view is we're there or thereabouts for interest rates. We're starting to see it, we have about $10 billion of shopping centres on our platform, we're starting to see the shopping centre sales being affected. It sort of started around May. What's your sort of view on the Australian consumer and where we're at, at the moment, when you think about shopping centre performance and retail performance?

Ash: Yeah, I think obviously 12 in a row is pretty significant and it takes time for people to adjust to their own behaviours and spending habits. It's certainly not uncomplicated for everybody to deal with. I think from a shopping centre perspective, it's the mix of the product that you have in a shopping centre. Not everybody is as affected by the interest rate rises as others. Our customer is a 22-year-old that who is less affected by the interest rate rises than perhaps another age demographic. People of your age… (laughs)

Darren: You’re not that much younger.

Ash: No, that's not fair. We’ve got a really resilient customer, they're absolutely aware of it. The media is not letting them be unaware of it. So it's certainly doom and gloom from a media coverage perspective. But for that 22-year-old customer, she's pretty resilient and she's pretty keen to shop and to be out in the shopping centres. So it's just a matter for the shopping centres to find the right mix of tenants. You can't fill it full of the same things that are affected by interest rate rises. It's got to be a balanced offering that caters to everybody.

Darren: Yeah, I think we've seen a lot of that over the years with the change of the mixing of the shopping centres. You know, if you went back into the early 2000s, not so much the big mega malls but some of those mid-tier malls were being filled full of sort of mid-level fashion and it was quite obvious that not all of those guys were going to survive. All it did was cut margins and as a result, you know, impacted the ability to drive rents. And we've seen those, let's say, ‘tier twos’ that were trying to be sort of imposters to the Cotton On's of the world, they've dropped away now as things have got more challenging. Just coming back to the retail cycle: I mean obviously cycles, trends, are part of the retail landscape and we've worked through many cycles now, I think if you talk about that early ‘90s period, there was quite a difficult recession going on when you guys started in the boot of Nige’s car. Obviously ‘97 was a bit tricky, 2000, 2001, 2008 with the GFC, and COVID now. We've been through a few things over the past 30 years. The retail has been quite steady through that period, but what do you think some of the trends are as we move forward from here for retail? What should people be looking for if they're retailers, or as shopping centre owners, what should they be looking at for the assets?

Ash: Yeah, obviously retail is not for the feint hearted. The cycle exists. There's always going to be good times and bad times and lots of challenges. I think the best thing to look for is key management teams, like we started with people at the beginning of the conversation. Good management teams can work their way through the peaks and troughs of retail. It's so important. With the exception of COVID, which was obviously quite unique, the other periods that you referred to, they happen from time to time. Whether it's macroeconomic conditions or just tough retail times, they repeat themselves over and over again, so there's nothing again, other than COVID, there's nothing that we haven't really seen before and it's just a matter of dusting off the playbook and working your way through it. It's tough at the moment for some macro reasons, but it's still reasonably buoyant, there's still retail sales to be had. Whether you're in the right industry at the right time, is the challenge.

Darren: And manufacturing, at the moment. Obviously, there's a lot going on geopolitically with China. Do you still manufacture with China at all?

Ash: We do. That geopolitical stuff's probably one of those things that never goes away as well. So we have a great relationship with our supplier base in in China. They've been excellent for our business. It's not without risk because governments tend to get involved and make things a bit tricky. So we've had to broaden our supplier base through other parts of the world.

Darren: You're in Vietnam?

Ash: Yeah, we’re in Vietnam and Bangladesh, and we'll continue to look for other places only as a as a backup if things go particularly awry, from a political standpoint.

Darren: Do you think you'll ever be able to manufacture in Australia again with the advent of technology, or are we just too small a market? Ash: There will be components of the manufacturing process. I'd love to think we can grow cotton or be involved in the production process. Start to finish from agriculture through to readymade garments, but I probably doubt it. It's a nice idea and hopefully technology and the way the labour market navigates its way, it would be a nice thing to do. Absolutely.

Darren: We had a futurist in not long ago talking about, with the advent of AI and robotic manufacturing, that you should be able to compete on a more global space because the labour cost is eliminated. But it's still very expensive to build things here in Australia and with the union influences, et cetera, and that adds particular costs that you're just not getting in some of these other countries. Just coming back to retail sales, just a quick question on the differences you're seeing currently state by state: which states are better than others and or are they similar? And also, how Australia compares sales-wise to what you're seeing internationally at the moment?

Ash: Yeah. Well, in Australia, from a state-by-state perspective, our data is a little bit skewed because we've got lots of stores in some states and very few in others. But I guess headline, we just finished our first quarter of the financial year last Sunday and the quarterly results look like Western Australia, South Australia and Queensland outperformed the country. Victoria and New South Wales, obviously the biggest data set, was probably next best and the tough ones were Tasmania and Northern Territory. But as a whole bricks is still growing for us. It's probably been more challenging in the online and wholesale space for the last three months, and probably that extends through past financial year as well. But the bricks business is performing better than last year across most states, just those smaller ones have been a little bit tougher.

Darren: So is there still growth in the online or is that sort of…

Ash: Yeah, absolutely, it's just got to find its way. It was in its, not it’s infancy, but it was relatively a new channel for us going into the COVID period. And then we closed 1,500 stores around the world and online did its thing. Fortunately, we were pretty advanced in our development of that capability.

Darren: Luckily.

Ash: Luckily, yeah. So it went from being about 10% of our business to 100% of our business. And obviously comping that scenario has been pretty difficult. So it's been a difficult couple of years post COVID in the online space, but it's fighting back and it'll always be an important part of our business. I don't anticipate closing 1,500 stores ever again.

Darren: Hopefully not Ash, I don't think any of us wants to live through that. I still get the shakes when I think about it. Yeah, it's really interesting in our logistics business, we for the first time ever, I heard one of our customers is saying they're contemplating shutting their Sydney distribution centre, relocating to Melbourne because the sheer cost of the rents have gone so high because there's under 1% vacancy in the core markets now in industrial. Relocating to Melbourne and distributing from the Ravenhall precinct. And in the old days they would have not done that because of the petrol costs, but of course with the advent of electric vehicles, now it's taking that element away. And with more robotics, the people issue wasn't such an issue. So it's really the first time I've heard that in about, well, ever. But is that something you guys think about when you think about distribution as well?

Ash: Yeah, we do. I guess one of the mantras at Cotton On is “current best answer”. I wouldn't profess to play the futurist role and say exactly how it's going to look. The best thing I could say is, however, is the most efficient way to do it at any given point in time we'll explore that. As it stands today, we've got a single distribution centre in Geelong to service the whole country. We've previously had them in Brisbane and if you asked me ten years ago, I would have said Perth, Brisbane, Sydney, Melbourne would be the most efficient way for us to do it. And I sit here today with one DC in the country, so current best answer will prevail in the foreseeable future. I think we'll run with the one, but as fuel prices and the labour market and road transport, as they all evolve into different parts of their own cycle, we’ll adapt into whatever's the quickest and most efficient way to get product to the customer.

Darren: Yeah, you've got the added benefit of having all those stores around the country, which are as good for returns if people want to return. It's a great distribution network that you guys have established. So, Ash, thanks so much for coming in. It's been awesome catching up with you today. I can finally talk to you again after that shocking grand final last year. Couple of final predictions or questions for you. Just quick responses, retail sales are up or down over the next 12 months?

Ash: They'll be up over the next 12 months.

Darren: And Sydney finishing above Geelong in the next 12 months. Or how is that going to play out?

Ash: No chance. No chance.

Darren: Well, we'll see. We'll see. Hey, Ash, thanks so much for coming in.

Ash: Thanks for having me, Darren.

Darren: It's been a great pleasure to catch up. Just for our listeners, please send any questions you have to therealdeal@dexus.com. And in our next episode we'll be sitting down with Lorie Argus, the CEO of Melbourne Airport, and talking about airports and infrastructure. Outro: This podcast is recorded on the lands of the Gadigal people of the Eora nation and the Wurundjeri people of the Kulin nation. You’ve been listening to The REAL Deal, a podcast for Dexus. Listen to The REAL Deal at dexus.com/therealdeal and follow free on Apple Podcasts, Google Podcasts, Spotify or wherever you listen to podcasts