What we can learn from Oroton's business model

One of the biggest announcements in the last few weeks was not a profit update, but the statement from Oroton (ASX: ORL), one of the shining lights of the retail sector in recent years, that its exclusive licence with Ralph Lauren would expire at the end of the financial year. I think it’s an interesting event to discuss, not only for its impact on ORL itself, but as a statement about the retail sector (and the distribution business model) itself.

ORL is a company which until a week ago or so had a market capitalisation of around $320m, selling its own brand (Oroton) as well as Ralph Lauren, the massive brand of which ORL held an exclusive licence to sell within Australia and New Zealand. ORL has done a fantastic job in recent years with both brands, and one point I have made in recent months is the big advantage retailers selling their own brands (as a direct criticism of the department stores) have. Obviously, ORL is able to control the pricing and distribution of Oroton and therefore will always be protected from the issues we have seen that have plagued the sector (margin compression because of online competition). In the case of Ralph Lauren, ORL was somewhat sheltered because of the sheer popularity of the brand. David Jones (DJS) and Myer (MYR) have faced major issues as astute and tech-savvy shoppers have ended up buying the same products online (likely overseas) at cheaper prices.

Anyway, being a distributor comes with its own risks as you can be a victim of your own success, and ORL has faced that reality as Ralph Lauren has decided to take the business itself rather than give away the huge profits it does to ORL. As part of the licence agreement, Ralph Lauren has to buy ORL’s inventory and store assets, a cost which is expected to be $30m, which is chump change for a business which generated net profit after tax for ORL of almost $9m. Additionally, Ralph Lauren generated 45% of ORL’s group sales and 35% of group profits, so this is a huge loss for the company (down around 20% since the announcement) and a cautionary tale for those retailers using the distribution model. And of course, just another reason to be negative on the department stores of course!

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.