The two major department store chains in Australia, Myer and David Jones, are reviewing a proposal to merge their businesses. If this merger were to occur, what would be the impact on the property sector? Due to changing shopping habits and perhaps a lack of innovation, department stores in Australia are gradually becoming less relevant to the retail sector and to retail landlords. A merger of the two major store chains could be the fundamental change that the industry needs.

Myer and David Jones are the two major department store chains in Australia and they typically anchor regional shopping centres, which are the largest shopping centre format in Australia. Myer approached David Jones in October last year with a merger proposal, which was initially rejected. Myer repeated its offer last month, which David Jones is now considering. Under the Myer proposal the two businesses would continue to operate as separate, independent department store brands. However, the merged entity would have a consolidated executive/management team and operate as a single business.

Department store performance over the last five years has fallen below long-term averages. According to the Australian Bureau of Statistics, average annual turnover growth for department stores was generally flat (-0.3%) over the last five years, compared with the long-term average growth (for the 10 years prior) of 3.8% per annum. Given the duopolistic market position of Myer and David Jones, they account for a large proportion of total department store spending in Australia. Department stores are essentially resellers of goods, operating on thin profit margins. Department stores have been impacted by the growing presence of online retailing, which offers a more cost effective method of selling. This has partly contributed to the weaker performance of department stores in recent years.

There are various reasons for the proposed merger. The most obvious is cost savings and efficiency. If the merger were to proceed, an estimated AUD 85 million per annum in cost synergies is expected within the first three years, according to Myer’s proposal. To further increase cost efficiencies, we may see store closures in certain locations where leases reach expiration. Myer has a network of 67 stores around Australia, while David Jones has 38 stores. Regional shopping centres would be the most affected; the presence of department stores has contributed to their stability over time. Traditionally, department stores have large floor areas and are set out over multiple floors. The consolidation of store numbers would help to improve sales productivity (rate per sqm per annum). Landlords would be able to re-lease the freed up space to new tenants to enhance their centres’ tenancy mix. The merged business would also hold stronger bargaining power over shopping centre landlords in terms of lease and rental negotiation.

As the retail environment in Australia evolves, a merger between the two department store brands will potentially help to reinvigorate the sub-sector and bring department stores back to their previous status.

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