CAPE TOWN, South Africa — Woolworths Holdings Ltd. of South Africa is using a $2 billion takeover of Australia's David Jones Ltd. to challenge fashion retailers Inditex SA, Hennes & Mauritz AB and Fast Retailing Co. in the southern hemisphere.

With combined annual sales of about $5.7 billion, the merged group will have more buying power than Abercrombie & Fitch Co. and Debenhams Plc and will be one of the southern hemisphere’s biggest department-store operators after Chile’s SACI Falabella and Brazil’s Lojas Americanas SA, according to data compiled by Bloomberg.

The acquisition will help the Cape Town-based company compete against chains including Inditex's Zara, Fast Retailing's Uniqlo and Arcadia Group Plc's Topshop. Northern- hemisphere fashion stores have been extending their networks into South Africa, Australia and other new markets, as consumer spending has benefited from buoyant mining investment in recent years.

Fast-fashion chains “are aggressively opening stores to capture market share,” Caroline Finch, an analyst at Ibisworld Inc. in Melbourne, said by phone. “That’s creating direct competition between David Jones and the likes of Inditex and H&M.”

Woolworths Chief Executive Officer Ian Moir wants to take advantage of the differences in seasonal fashions to compete with bigger global fashion brands.

Switching Seasons

With the southern summer occurring between December and February, Australian and South African stores are stocking summer dresses and board-shorts just as their northern counterparts are buying up coats and scarves.

“It gives us a huge advantage,” Moir told a media call in Sydney yesterday after announcing the deal. “We’ve got real scale in the southern hemisphere, we’ve got the same seasonality, so we’ve got a real competitive advantage over northern-hemisphere entrants.”

Woolworths isn’t related to Australian supermarket Woolworths Ltd. or historic U.S. five-and-dime store F.W. Woolworth Co., whose reputation inspired the companies which opened in Sydney and Cape Town in 1924 and 1931, respectively.

The South African retailer sells its own fashion brands from basic labels to the pricey ones including Country Road, Mimco and Witchery. It also sells organic and free-range food. David Jones offers products from companies such as Marc Jacobs Inc., Calvin Klein Inc. and Tommy Hilfiger Corp.

New Markets

Inditex, Europe’s biggest clothing retailer, entered Brazil in 1999 and now has 52 stores in the country. The Zara-owner also has 10 stores in Argentina, eight in Australia, eight in Chile and four in South Africa, according to its fourth-quarter earnings report.

H&M, Europe’s second-biggest fashion retailer, entered the hemisphere last year with a store in Chile and also opened a store via franchise in Indonesia. This year H&M opened its first store in Australia and it plans its first stores in South African and Peru in 2015.

"More and more international retailers are coming to Australia because it is a very interesting market, so it's getting more and more competitive every year," Hennes & Mauritz Chief Executive Officer Karl-Johan Persson said in an April 3 interview from Melbourne.

Fast Retailing will also open its first Australian store for its Uniqlo brand in Melbourne next week, it said in a statement in March.

Fashion Invasion

The offshore companies are also taking advantage of the underperformance of local counterparts, David Jones Chairman Gordon Cairns said in a phone interview from Sydney yesterday.

“Department stores in Australia have not done a great job competitively in the last 10 years,” he said. “The very fact that the northern hemisphere is coming here is because they actually believe that they can do a better job.”

The fast-fashion model pioneered by Inditex, where fashions can hit the racks within weeks of appearing on catwalks, has also made it easier for retailers to extend their reach, according to George Svinos, lead partner for retail at KPMG in Melbourne.

“You used to get retailers essentially shopping in the northern hemisphere, buying their inventory and then making it up in Australia,” he said. Zara now “send everything from Spain direct to Australia. They can operate anywhere in the world without all the palaver that used to be required to operate in multiple jurisdictions.”

Growing Scale

Moir said the merger will allow Woolworths to combine the advantages of scale with those of geography. The merged group’s combined sales of $5.7 billion last year compare with more than $4 billion from Inditex’s stores outside Europe and the Americas and about $1.75 billion from H&M’s outlets in the same region.

When a Zara outlet opened opposite a Woolworths store in South Africa recently, “our colors were similar, our silhouettes were similar, our patterns were similar. Our prices were much better,” Moir said yesterday. “Our sales went up when they opened across from us, not down.”

The common southern hemisphere position will allow Woolworths to have fashion lines more relevant to its markets than offshore retailers, the executive said.

Australian customers of Asos Plc, the U.K.’s largest online-only apparel store, told the company that “western brands tend to give them off-price products and last season’s products and there’s nothing specific to them,” Asos Chief Financial Officer Nick Beighton told a July 2012 investor call.

Custom Clothes

The London-based company has an office in Sydney and commissions clothes specifically for that market. H&M will also have a small collection that’s specific to its new Australian store, with the remainder of clothes being a mix of trends being sold elsewhere in the company’s stores, Persson said April 3.

Moir is also planning to be more competitive on price and lift David Jones’s share of own-label lines to more than 20 percent in five years or less, from about 3 percent at present.

That’s a change to the Australian company’s current strategy, which has emphasized its collection of international fashion brands and positioned itself at the high end of the department store market since at least 2000.

“The days of the customer overpaying for a label or overpaying for quality are long gone,” Moir said. “They’re too wise, they’re too aware.”

That strategy “fills me with a little bit of concern,” said Tim Montague-Jones, an analyst at Morningstar Inc. “It sounds as if they’d be going down-market,” where Myer Holdings Ltd. already competes with Wesfarmers Ltd.’s Target chain for mid-range customers.

It’s “up to the owners of the business how they want to see it run,” David Jones Chairman Cairns said. “If you’re the number one Australian premier upmarket retailer, you wouldn’t want to vacate that position.”

By David Fickling, Katarina Gustafsson with assistance from Janice Kew and Yuki Yamaguchi; Editors: Stephanie Wong, Thomas Mulier