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Darrell Lea goes to the dogs

Darrell Lea’s stores will be no more after administrators announced the sale of the company yesterday.

One of Australia’s only chocolate manufacturers and direct-to-the-public retailers, Darrell Lea has been sold to the Queensland based Quinn family, owners of VIP Petfoods, according to a report in today’s Australian Financial Review. The Quinns have agreed to buy the manufacturing and distribution parts of the business, but have declined to purchase the retail business.

The current tough conditions that led to Darrell Lea’s fall into administration, continue to dog (sorry!) the retail sector, and it would be a brave person to attempt to turnaround the company’s performance. Sales had fallen 20% over the past five years, before the business fell over.

Darrell Lea’s remaining 27 company-owned stores will stop trading this coming Sunday, and the majority of the business’s staff, around 400 employees, will be made redundant. The stores were struggling to compete against much cheaper products sold through the major retailers, Woolworths Limited (ASX: WOW), Coles – owned by Wesfarmers Limited (ASX: WES), IGA stores and others including Aldi and Costco. Price deflation has seen prices for many food items actually fall, including chocolates, lollies and sweets, which made it extremely difficult for Darrell Lea to compete, even if the company’s stores offered a premium product.

Consumers’ current focus on price and reluctance to open their wallets were other issues. With prices of essential utilities such as water, gas and electricity sky-rocketing, households have been cutting back on spending and funnelling the extra cash into paying down debts. Darrell Lea products will likely now be sold through the major retailers, as well as newsagents and pharmacies.

With many of Darrell Lea stores run within shopping centres, this could also be a sign of things to come for other smaller retailers, and could have a major impact on the earnings of the retail landlords such as Westfield Holdings (ASX: WDC), Westfield Retail Trust (ASX: WRT) and CFS Retail Property Trust (ASX: CFX).

The Foolish bottom line

The demise of one of Australia’s once-loved Darrell Lea is a sad story. Unfortunately, retailing is a tough, cyclical business, and only the strongest survive. Hopefully, we’ll still get to enjoy Darrell Lea’s Rocky Road, coming to a supermarket near you soon.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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