David Jones And Target Australia | Comparative Study

2953 words (12 pages) Essay

30th May 2017 Marketing Reference this

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The paper examines the competitive strategies of two Australian companies namely David Jones and Target both operating in departmental stores industry. The paper looks at their backgrounds, their recent strategies and resulting financial performance of both. The paper also looks at the departmental stores industry in Australia. An analysis of the strategic management accounting tools of both organizations are examined and recommendations given as to their use. Lastly, the paper formulates five questions that will be used in further research undertakings in the industry.

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Introduction

David Jones and Target Australia operate in the departmental store industry in Australia’s service sector. While David Jones is a public company listed in the stock market, Target Australia is a subsidiary of Wesfarmers Corporation. The two companies recoded reduced revenues and profitability for the 2010/2011 financial year as did the entire industry. The slowdown in industry revenues followed the deteriorating consumer sentiments recorded around the country for the period under review. According to **** , slowdown in national economies is manifested through a slowdown in demand across the retail sector as consumers become cautious of spending. The following is a comparative analysis of the two companies’ competitive strategies.

Background

David Jones

David Jones (DJs) is an up market departmental store with 37 stores scattered across Australian states and territories. Founded in 1838, the company sells beauty and cosmetic products, women’s wear and related accessories, footwear and a variety of home products. In addition, the company provides gist and bridal registry services as well as Foodhalls for special occasions. Besides, DJs operates a health and medical business called Rose Clinic that provides health care screening services. DJs also operates a financial services business that is jointly run with American express. The company is headquartered in Sydney.

The Company’s total annual sales for the year ended 30th July 2011 stood at $1961.7million, a 4.4% drop from the previous year. The resulting after tax profit for the same period was $168.1 million, down 1.5% from the previous year . This is despite a reduction in the company’s cost of doing business by a 0.8% over the same period in the last financial year. The weak performance was attributable to a deteriorating consumer sentiment and a strong local currency that fueled a spite of deflation and led to outbound tourism. However, financial statements for the company reflected a strong balance sheet, low debt and solid cash flow.

Internal environment

The company undertook a strategic review of its operations in the year 2003. The review led to the closure of its unprofitable stores namely David Jones Online and Food chain. It also revitalized most of its stores. Its profitability improved thanks to economic boom and exclusive supply contracts from lading local and international product brands. However, the global slowdown affected its performance and continues to weigh on its recovery to date. In June 2010, allegations of sexual impropriety led to the resignation of its CEO.

DJs is led by a board of directors with seven independent non-executive directors, one chief executive officer and finance director who double up as executive directors. The board is charged with safeguarding the assets and interests of the company. Each store is run by an autonomous management and is responsible for its own accounts but must account for transferred prices of goods from the other stores.

Competitive strategy

DJs concentrates on the up-market segment of the market. It has a clear strategy of concentrating on its core businesses mainly the departmental stores and credit card operations. DJ also competes on the basis of cost efficiencies to offset the high cost of customer service initiatives. The company also returns excess cash flows to its shareholders to avoid holding excessive working capital and incurring it associated opportunity cost. The company also pays high dividend a signal to the investors that it has confidence of future earnings. As part of its strategic management, the company uses competitor analysis and value chain analysis to determine its relative positioning he market and the needed action.

Target

Target Australia is owned and operated by Wesfarmers. With a combined store count of 300 stores, Target is headquartered in North Geelong, Victoria. The company sells cosmetics, clothing, toys, electrical equipment and consumer electronics as well as general consumer merchandise. The right to use the Target logo was given by the Dayton Hudson Inc (now called Target Corporation) operating in the United States. Apart from the use of Target Logo, the two companies have no other association.

Target was founded in 1926 by Alex McKenzie and George Lindsay when they opened a drapery under a partnership arrangement . The company serves the midmarket with particular emphasis on quality and value. In 1968 the business had grown to 14 stores and Myer Emporium Ltd acquired it and renamed it Lindsay’s Target Pty Ltd. Later in 1973, the company was renamed Target Australia pty. Myer Emporium merged with GJ Coles & Coy Ltd to become Coles Myer Ltd. Coles Myer Ltd merged with Fosseys Stores and became Target Country giving the business a rural edge. In the year 2007, November 2007, Wesfarmers acquired Target as part of their acquisition of wider Coles Group.

Target’s operating revenue for the fiscal year ended 2011 stood at $3.8 billion. This was a decline of 1.2% from the previous year. The earnings before interest and tax stood at $280 million for the same period. This represented a 36% reduction from the previous year. The results point to the deteriorating consumer sentiment over the period as well as the strengthening local currency that as pointed earlier, fueled deflation and flight of consumer to cheaper foreign shopping destinations.

Internal environment

The company has operates as a subsidiary of Wesfarmers company. Target has a Managing Director who also serves as a director of the Wesfarmers parent company. Under the manager, the company is structured along its functional categories with a manager under each department.

Competitive strategy

Target targets mid market customers and continues to invest in new stores and refurbishments. It uses alternative communication methods to reach its customers such as the internet and social networks. The company is currently undertaking refinement of product presentation in stores as well as the delivery of products to the market. It continues to focus on core customer destination categories and speedy deliveries of the differentiated products. The stores have a convenient arrangement to ease customer shopping.

Recent plunge in profitability resulted from the company’s action to clear old stock at a lower margin. This was done in order to offer fresh and relevant products to the customers in the face of intense competition. The lost margin couldn’t be offset by the reduction in holding costs and therefore the company realized a loss. However, it is envisaged that the clearance of stock will lead to a better offering to the customers in the longer term. The company uses value chain analysis as a means of determining its standing against the competition.

Industry analysis

Both companies operate in the departmental store industry in Australia. According to IBISWorld, the total revenues for the industry stood at $19 billion. This represented an annual growth of -2.5% resulting from factors that were identified earlier. The industry employs a total of 109,396 as at the end of the last financial year. Following the global slowdown, the industry was badly hit as consumer spending was decimated. IBISWorld projects that the annual slowdown will continue into 2012-2013 financial year to settle at around $19.9 billion. In total there are 301 businesses with DJs and Target controlling 1%and 2% of the market respectively. Using porter’s five forces model, the following are the characteristics of the industry;

Degree of rivalry

Competition among firms is intense. Different companies compete for the same customers with little or no switching costs. In addition, the shrinking industry revenues makes firms go for each other’s market share resulting in intense marketing rivalry. A few companies at the top command most of the market share leaving the rest to compete for few low net worth customers. Competition is based on differentiation. In addition to the above, there are very high fixed costs of operating the stores. Thus, companies have to rely on the effect of economies of scale to drive profitability. Besides, the stores also maintain fashionable inventories which must be sold fast to fetch a good price.

Buyer power

Buyers have high bargaining leverage and can thus avoid purchase if they can get better deals elsewhere. Though there are no large customers buying in large volumes, the small buyers have intense knowledge and information on the products on offer and are thus very sensitive to pricing and brands. As noted, buyers can easily switch from the stress without incurring major switching costs- most products are standardized. Companies therefore rely on service differentiation to cultivate royalty from their customers.

Threat of substitutes

The stores offer mostly the same products from the same suppliers. This means that a customer can get the same product from the competing firms with ease. Buyers are inclined to specific brands and each of these stores has no exclusive access to these products. This means that buyers can get the same products from different stores. The result is intense rivalry from the firms as they compete for market share.

Threat of new entrants

There is minimal threat to new entrants as the industry is shrinking in total revenue and high fixed operational expenses reduce attractiveness of the market. Besides, the expected retaliation from the well heeled competitors keeps new entrants at bay.

Supplier power

Supplier power doesn’t pose a major threat to the industry as they are many and there are minimal switching costs. There is no threat of forward integration.

Findings and analysis

Part B Comparative analysis of the two companies

David Jones serves the high end market as opposed to the mid-market segment served by Target. DJ is one of the most recognizable brands in the country thanks to its strong positioning aimed at imprinting its image onto the minds of the customer. As a result, DJs is able to sell its products at a higher price than its counterparts in industry. It has heavily invested in customer service to attract and retain customers that sustain it even in times of falling demand. Besides, the company has an elaborate brand range that is one of the largest in the industry meat to offer its customers variety in a convenient one stop shop. Its huge presence in up-market locations points to its appetite for the top end market.

One strategic choice that DJs made in its 2003 strategic review entailed the scaling down of its online store. This was a failure of management foresight as a decade later, companies with an online distribution outlet continue to enjoy unsurpassed benefits. Among these benefits include ease of access to large customer pools, lower inventory levels as products are stocked only on demand, a widened regional reach and higher margins on sales due to lower operational costs.

Target operates at the middle level market position. It has several stores in the countryside pointing to its appetite for the medium to low income segment market. Using a low cost model, the store aims at passing the benefits to the customers in form of low prices . By offering fresh products to the market along with a refined presentation formats in the market. Emphasis is on speed of delivery to ensure only fresh products reach the customers. The company’s online store stands out as the most innovative and efficient means of delivering value to customers due to its ease of processing and speed of dispatch. It also has an elaborate product after sale service criteria making it one of the best in the industry. The company also takes a strategic review of its operations as well as a value chain analysis to find out the sections that lag behind the value delivery chain.

One of the most strategic moves that Target has made as a result of its strategic reviews in the recent times is the heightened use of the new media in searching out to its customer s. in particular, the company uses its online store to reach the markets beyond regions where the company has a physical presence. The company is able to pass the low cost benefit to its customers due to its low cost online presentation. In addition, the company is able to pass messages about new products to its customers fast enough before most of its competitor. On the downside, Target has a very high cost structure. As a result, it has a very high degree of operating leverage. This is as illustrated by the table below;

David Jones

Target

Year

2011

2010

2011

2010

Total Revenue

$2.101b

$2.014b

$3825

$3782

Operating income

$247m

$249m

$381m

$280m

2011

2010

Change in revenue

-4%

-1%

Change in operating income

-0.8%

-36%

From the above table, it is evident that a -4% change in revenues resulted in only 1% reduction in operating profit for DJs. However, a -0.8% change in revenues for Target resulted in a 36%reduction in operating income. This high sensitivity of profits to changes in revenues means that the company has a very high degree of operating leverage that pose a serious danger to its continued profitability especially at a time of falling sales and high operating expenses. The management should lower the fixed costs as much as practicable.

Discussion questions

What is the optimal degree of operating leverage for both companies

Degree of operating leverage that is optimal for any firm is the level of fixed costs that will reduce a company’s sensitivity to reduction in sales. The operating environment is expected to be harsh over the coming financial year as the national economy struggles to shrug the effect of the global slowdown. In this light, it is important to find an optima degree of operating leverage that will shield the company from external shocks but still lay an all important foundation to take advantage of the next phase of growth.

What are the two company’s star’s cash cows dogs and question marks?

In any competitive environment, it is important for a company to establish the competitive positions of its products. The dogs are products with low market share and low growth. They tie up organizational resources that could be dedicated elsewhere. Question marks are the products that use a lot of resources but have very low market shares. Stars have a high growth rate but they also consume resources while cash cows generate more cash than they consume. Dogs should be harvested, question marks analyzed, starts nurtured to become cash cows while cash cows should be milked.

What are the two companies’ long range business plans ?

Impressive short term performance should never be used as a guide to sustained long term profitability. Given the turbulence of the industry in which these firms operate, it is important for them to formulate long term plans clearly stating their strategies on conquering competition, rising costs, falling margins and a strengthening local currency that is fueling deflation. A strategic review focused on long term sustainability will be crucial to their survival and competitiveness even as operating environment stiffens.

What are the companies’ strengths, weaknesses, opportunities and strengths?

An elaborate SWOT matrix would help each of the two to gain an understanding of both their internal and external environment. In particular, the company’s strengths should be used to overcome its weaknesses and take advantage of opportunities. Only through conducting a thorough understanding of the competitive strengths and weaknesses of firms does a company enhance its ability to decimate external threats and take advantage of opportunities.

What is the competitor analysis?

The industry has a total of 301 players each angling for a market share. It is important to note that each has a plan and depending on their ability to plan and implement their strategy, there will be winners and losers. What is the two companies’ response to the forces of competition?

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Conclusion

The analysis concludes that Davis Jones is better heeled to weather the storm of deteriorating consumer sentiment due to its lower degree of operating leverage, and its ability to understand its consumers and cultivate unmatched brand loyalty. On the other hand, Target stores is vulnerable to falling sales and rising costs and its unable to resonate with its consumers. However, its online store stands out as well aligned to its sales strategy of reaching the consumer fast.

The paper examines the competitive strategies of two Australian companies namely David Jones and Target both operating in departmental stores industry. The paper looks at their backgrounds, their recent strategies and resulting financial performance of both. The paper also looks at the departmental stores industry in Australia. An analysis of the strategic management accounting tools of both organizations are examined and recommendations given as to their use. Lastly, the paper formulates five questions that will be used in further research undertakings in the industry.

Introduction

David Jones and Target Australia operate in the departmental store industry in Australia’s service sector. While David Jones is a public company listed in the stock market, Target Australia is a subsidiary of Wesfarmers Corporation. The two companies recoded reduced revenues and profitability for the 2010/2011 financial year as did the entire industry. The slowdown in industry revenues followed the deteriorating consumer sentiments recorded around the country for the period under review. According to **** , slowdown in national economies is manifested through a slowdown in demand across the retail sector as consumers become cautious of spending. The following is a comparative analysis of the two companies’ competitive strategies.

Background

David Jones

David Jones (DJs) is an up market departmental store with 37 stores scattered across Australian states and territories. Founded in 1838, the company sells beauty and cosmetic products, women’s wear and related accessories, footwear and a variety of home products. In addition, the company provides gist and bridal registry services as well as Foodhalls for special occasions. Besides, DJs operates a health and medical business called Rose Clinic that provides health care screening services. DJs also operates a financial services business that is jointly run with American express. The company is headquartered in Sydney.

The Company’s total annual sales for the year ended 30th July 2011 stood at $1961.7million, a 4.4% drop from the previous year. The resulting after tax profit for the same period was $168.1 million, down 1.5% from the previous year . This is despite a reduction in the company’s cost of doing business by a 0.8% over the same period in the last financial year. The weak performance was attributable to a deteriorating consumer sentiment and a strong local currency that fueled a spite of deflation and led to outbound tourism. However, financial statements for the company reflected a strong balance sheet, low debt and solid cash flow.

Internal environment

The company undertook a strategic review of its operations in the year 2003. The review led to the closure of its unprofitable stores namely David Jones Online and Food chain. It also revitalized most of its stores. Its profitability improved thanks to economic boom and exclusive supply contracts from lading local and international product brands. However, the global slowdown affected its performance and continues to weigh on its recovery to date. In June 2010, allegations of sexual impropriety led to the resignation of its CEO.

DJs is led by a board of directors with seven independent non-executive directors, one chief executive officer and finance director who double up as executive directors. The board is charged with safeguarding the assets and interests of the company. Each store is run by an autonomous management and is responsible for its own accounts but must account for transferred prices of goods from the other stores.

Competitive strategy

DJs concentrates on the up-market segment of the market. It has a clear strategy of concentrating on its core businesses mainly the departmental stores and credit card operations. DJ also competes on the basis of cost efficiencies to offset the high cost of customer service initiatives. The company also returns excess cash flows to its shareholders to avoid holding excessive working capital and incurring it associated opportunity cost. The company also pays high dividend a signal to the investors that it has confidence of future earnings. As part of its strategic management, the company uses competitor analysis and value chain analysis to determine its relative positioning he market and the needed action.

Target

Target Australia is owned and operated by Wesfarmers. With a combined store count of 300 stores, Target is headquartered in North Geelong, Victoria. The company sells cosmetics, clothing, toys, electrical equipment and consumer electronics as well as general consumer merchandise. The right to use the Target logo was given by the Dayton Hudson Inc (now called Target Corporation) operating in the United States. Apart from the use of Target Logo, the two companies have no other association.

Target was founded in 1926 by Alex McKenzie and George Lindsay when they opened a drapery under a partnership arrangement . The company serves the midmarket with particular emphasis on quality and value. In 1968 the business had grown to 14 stores and Myer Emporium Ltd acquired it and renamed it Lindsay’s Target Pty Ltd. Later in 1973, the company was renamed Target Australia pty. Myer Emporium merged with GJ Coles & Coy Ltd to become Coles Myer Ltd. Coles Myer Ltd merged with Fosseys Stores and became Target Country giving the business a rural edge. In the year 2007, November 2007, Wesfarmers acquired Target as part of their acquisition of wider Coles Group.

Target’s operating revenue for the fiscal year ended 2011 stood at $3.8 billion. This was a decline of 1.2% from the previous year. The earnings before interest and tax stood at $280 million for the same period. This represented a 36% reduction from the previous year. The results point to the deteriorating consumer sentiment over the period as well as the strengthening local currency that as pointed earlier, fueled deflation and flight of consumer to cheaper foreign shopping destinations.

Internal environment

The company has operates as a subsidiary of Wesfarmers company. Target has a Managing Director who also serves as a director of the Wesfarmers parent company. Under the manager, the company is structured along its functional categories with a manager under each department.

Competitive strategy

Target targets mid market customers and continues to invest in new stores and refurbishments. It uses alternative communication methods to reach its customers such as the internet and social networks. The company is currently undertaking refinement of product presentation in stores as well as the delivery of products to the market. It continues to focus on core customer destination categories and speedy deliveries of the differentiated products. The stores have a convenient arrangement to ease customer shopping.

Recent plunge in profitability resulted from the company’s action to clear old stock at a lower margin. This was done in order to offer fresh and relevant products to the customers in the face of intense competition. The lost margin couldn’t be offset by the reduction in holding costs and therefore the company realized a loss. However, it is envisaged that the clearance of stock will lead to a better offering to the customers in the longer term. The company uses value chain analysis as a means of determining its standing against the competition.

Industry analysis

Both companies operate in the departmental store industry in Australia. According to IBISWorld, the total revenues for the industry stood at $19 billion. This represented an annual growth of -2.5% resulting from factors that were identified earlier. The industry employs a total of 109,396 as at the end of the last financial year. Following the global slowdown, the industry was badly hit as consumer spending was decimated. IBISWorld projects that the annual slowdown will continue into 2012-2013 financial year to settle at around $19.9 billion. In total there are 301 businesses with DJs and Target controlling 1%and 2% of the market respectively. Using porter’s five forces model, the following are the characteristics of the industry;

Degree of rivalry

Competition among firms is intense. Different companies compete for the same customers with little or no switching costs. In addition, the shrinking industry revenues makes firms go for each other’s market share resulting in intense marketing rivalry. A few companies at the top command most of the market share leaving the rest to compete for few low net worth customers. Competition is based on differentiation. In addition to the above, there are very high fixed costs of operating the stores. Thus, companies have to rely on the effect of economies of scale to drive profitability. Besides, the stores also maintain fashionable inventories which must be sold fast to fetch a good price.

Buyer power

Buyers have high bargaining leverage and can thus avoid purchase if they can get better deals elsewhere. Though there are no large customers buying in large volumes, the small buyers have intense knowledge and information on the products on offer and are thus very sensitive to pricing and brands. As noted, buyers can easily switch from the stress without incurring major switching costs- most products are standardized. Companies therefore rely on service differentiation to cultivate royalty from their customers.

Threat of substitutes

The stores offer mostly the same products from the same suppliers. This means that a customer can get the same product from the competing firms with ease. Buyers are inclined to specific brands and each of these stores has no exclusive access to these products. This means that buyers can get the same products from different stores. The result is intense rivalry from the firms as they compete for market share.

Threat of new entrants

There is minimal threat to new entrants as the industry is shrinking in total revenue and high fixed operational expenses reduce attractiveness of the market. Besides, the expected retaliation from the well heeled competitors keeps new entrants at bay.

Supplier power

Supplier power doesn’t pose a major threat to the industry as they are many and there are minimal switching costs. There is no threat of forward integration.

Findings and analysis

Part B Comparative analysis of the two companies

David Jones serves the high end market as opposed to the mid-market segment served by Target. DJ is one of the most recognizable brands in the country thanks to its strong positioning aimed at imprinting its image onto the minds of the customer. As a result, DJs is able to sell its products at a higher price than its counterparts in industry. It has heavily invested in customer service to attract and retain customers that sustain it even in times of falling demand. Besides, the company has an elaborate brand range that is one of the largest in the industry meat to offer its customers variety in a convenient one stop shop. Its huge presence in up-market locations points to its appetite for the top end market.

One strategic choice that DJs made in its 2003 strategic review entailed the scaling down of its online store. This was a failure of management foresight as a decade later, companies with an online distribution outlet continue to enjoy unsurpassed benefits. Among these benefits include ease of access to large customer pools, lower inventory levels as products are stocked only on demand, a widened regional reach and higher margins on sales due to lower operational costs.

Target operates at the middle level market position. It has several stores in the countryside pointing to its appetite for the medium to low income segment market. Using a low cost model, the store aims at passing the benefits to the customers in form of low prices . By offering fresh products to the market along with a refined presentation formats in the market. Emphasis is on speed of delivery to ensure only fresh products reach the customers. The company’s online store stands out as the most innovative and efficient means of delivering value to customers due to its ease of processing and speed of dispatch. It also has an elaborate product after sale service criteria making it one of the best in the industry. The company also takes a strategic review of its operations as well as a value chain analysis to find out the sections that lag behind the value delivery chain.

One of the most strategic moves that Target has made as a result of its strategic reviews in the recent times is the heightened use of the new media in searching out to its customer s. in particular, the company uses its online store to reach the markets beyond regions where the company has a physical presence. The company is able to pass the low cost benefit to its customers due to its low cost online presentation. In addition, the company is able to pass messages about new products to its customers fast enough before most of its competitor. On the downside, Target has a very high cost structure. As a result, it has a very high degree of operating leverage. This is as illustrated by the table below;

David Jones

Target

Year

2011

2010

2011

2010

Total Revenue

$2.101b

$2.014b

$3825

$3782

Operating income

$247m

$249m

$381m

$280m

2011

2010

Change in revenue

-4%

-1%

Change in operating income

-0.8%

-36%

From the above table, it is evident that a -4% change in revenues resulted in only 1% reduction in operating profit for DJs. However, a -0.8% change in revenues for Target resulted in a 36%reduction in operating income. This high sensitivity of profits to changes in revenues means that the company has a very high degree of operating leverage that pose a serious danger to its continued profitability especially at a time of falling sales and high operating expenses. The management should lower the fixed costs as much as practicable.

Discussion questions

What is the optimal degree of operating leverage for both companies

Degree of operating leverage that is optimal for any firm is the level of fixed costs that will reduce a company’s sensitivity to reduction in sales. The operating environment is expected to be harsh over the coming financial year as the national economy struggles to shrug the effect of the global slowdown. In this light, it is important to find an optima degree of operating leverage that will shield the company from external shocks but still lay an all important foundation to take advantage of the next phase of growth.

What are the two company’s star’s cash cows dogs and question marks?

In any competitive environment, it is important for a company to establish the competitive positions of its products. The dogs are products with low market share and low growth. They tie up organizational resources that could be dedicated elsewhere. Question marks are the products that use a lot of resources but have very low market shares. Stars have a high growth rate but they also consume resources while cash cows generate more cash than they consume. Dogs should be harvested, question marks analyzed, starts nurtured to become cash cows while cash cows should be milked.

What are the two companies’ long range business plans ?

Impressive short term performance should never be used as a guide to sustained long term profitability. Given the turbulence of the industry in which these firms operate, it is important for them to formulate long term plans clearly stating their strategies on conquering competition, rising costs, falling margins and a strengthening local currency that is fueling deflation. A strategic review focused on long term sustainability will be crucial to their survival and competitiveness even as operating environment stiffens.

What are the companies’ strengths, weaknesses, opportunities and strengths?

An elaborate SWOT matrix would help each of the two to gain an understanding of both their internal and external environment. In particular, the company’s strengths should be used to overcome its weaknesses and take advantage of opportunities. Only through conducting a thorough understanding of the competitive strengths and weaknesses of firms does a company enhance its ability to decimate external threats and take advantage of opportunities.

What is the competitor analysis?

The industry has a total of 301 players each angling for a market share. It is important to note that each has a plan and depending on their ability to plan and implement their strategy, there will be winners and losers. What is the two companies’ response to the forces of competition?

Conclusion

The analysis concludes that Davis Jones is better heeled to weather the storm of deteriorating consumer sentiment due to its lower degree of operating leverage, and its ability to understand its consumers and cultivate unmatched brand loyalty. On the other hand, Target stores is vulnerable to falling sales and rising costs and its unable to resonate with its consumers. However, its online store stands out as well aligned to its sales strategy of reaching the consumer fast.

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