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!

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