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Myer and David Jones face more competition

Department stores Myer (ASX: MYR) and David Jones (ASX: DJS) are set to experience  increased competition in coming years, as specialty fashion groups from Asia and Europe plan to test the waters with flagships stores in Melbourne and Sydney.

Australia’s two big retailers, especially David Jones, are pinning much of their future growth on specialty fashion by signing exclusive deals with designers to increase their appeal to consumers.

The relatively recent arrival in Australia of international brands such as Spain’s Zara, Britain’s TopShop and US group Gap has made life difficult for Myer and David Jones. The increased competition has resulted in excessive discounting by Australian retailers in order to grow revenue, however this has come at the cost of decreasing margins and profit.

To make matters worse, Japanese fashion powerhouse Uniqlo has announced plans for its first Australian store. It will open in Melbourne’s Lonsdale Street in early 2014 and occupy four floors, selling men’s, women’s and children’s fashion. Owned by Japanese group Fast Retailing, the company has over 1,200 stores in 14 markets and has an affordable offering of casualwear.

In addition to Uniqlo, Swedish group H&M will open its first Australian store in Melbourne’s GPO in March 2014. Both have signalled a desire to open a number of stores in Melbourne and Sydney initially.

Foolish takeaway

It’s clear that the retail fashion scene has changed significantly in the past five years, as online retail has become mainstream and international brands have opened countless stores across Australia. Myer and David Jones have been slow to respond thus far, delivering poor online experiences and struggling to attract the required customer numbers to grow profits.

David Jones, in particular, appears to be turning it around. The company has pledged to reduce discounting to a minimum and focus on high end, high margin fashion over lower profit segments such as electronics. If it can execute its strategy, it will likely outperform competitor Myer.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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