China and David Jones... what do they have in common? Both are trying to navigate their way through periods of change, both have faced intense media scrutiny in the past few months, and both have developed strategies they hope will guide them through to the next phase of growth. Will it be easy for them? Far from it!
In David Jones' case, last week the department store announced it had suffered a 20 per cent hit to its first half earnings. Catching media headlines though was the retailer's full year earnings guidance with profits predicted to slump around 40 per cent. Much of that pain has been attributed to the company's new turnaround - or Omni Channel - strategy which will see it roll out new stores, increase floor staff, and develop its online presence in the market place. The company is throwing $70 to $80 million at the re-development.
Analysts have argued that it's the right thing to do but that David Jones should have done it at least 2 years ago. Given how much market share other retailers have taken up in the meantime - both domestically and overseas - it'll will be a true test of DJ's metal to see if it can catch-up the required ground.
Complicating matters somewhat is the weight that David Jones has had to throw behind this new venture. It's a lot of money but the board is confident it will work. The big assumption though is that retail conditions will improve and consumers will return to the stores. If they don't, or if it takes much, much longer than anticipated, David Jones will be facing some very difficult decisions.
Then there's China. Last week the HSBC Flash China Manufacturing PMI showed manufacturing activity at 48.1 for March (below the 50 level which separates expansion from contraction). In other words, China's manufacturing sector continues to go backwards. It's added to concerns about the economy and the potential implications for Australia.
Add to that though the comments from Premier Wen Jiabao about the economy slowing to 7.5 per cent, and BHP Billiton's comments that the price of iron ore was set to flatten, and you'd be excused for thinking the case for a hard landing in Chinese economic growth was beginning to build.
The policy response is a complicated one. Economists have warned that rumblings of a property market bubble could prevent the people's bank from cutting interest rates too far. What the authorities do have up their sleeves, however, is control over the reserve requirement ratios at the banks. By reducing the amount banks are required to keep as reserves, analysts argue the money will then be lent out to small-to-medium sized enterprises rather than the big property developers. I guess their reasoning is that they are smaller amounts of money and can be specifically tailored to individual projects. It's certainly an alternative - and potentially safer - policy response.
Whether you're looking at David Jones or China, it's clear both require swift and 'imaginative' policy responses. There has to be strong commitment too from all sides. I would consider that both are also in the 'danger zone'. That is, one significant wrong move from either David Jones or China could see growth de-railed altogether. It's a genuinely testing time.
David Taylor
