Spotleses looks to mop up Taylor shares


Spotless Services NZ Ltd., the laundry, hospitality and cleaning contractor, offered to mop up the remaining shares in Taylors Group Ltd., allowing it to fully merge their operations.

Spotless Services, a subsidiary of ASX-listed Spotless Group Ltd., offered NZ$2.15 per share, made up of NZ$2.08 cash plus a fully-imputed dividend of 7 cents for the remaining 34 percent of Taylors. The offer amounts to a 7.5 percent premium on the current share price of NZ$2. The shares have surged 53 percent in the past six months. "An acquisition of the minorities in Taylors that we do not already own will enable us to manage Taylors in a more integrated and simplified manner," said chief executive Josef Farnik, in a statement. "We continue to be committed to the New Zealand market and intend to continue to grow the Taylors business."

The offer is subject to Spotless boosting its shareholding to 90 percent, which would force a compulsory takeover, and Overseas International Office approval. The bid also requires the share price to remain stable while the offer is open in which the NZX50 gross index must not decline more than 10 percent. Taylors' directors will obtain an independent adviser's report before making a recommendation to shareholders.

Spotless shares traded at A$2.46 on the ASX yesterday and have climbed 28 percent in the past three months.


Retailers - praying for good Christmas


Michael Hill’s relatively subdued mood at today’s annual meeting was a realistic reflection of the state of the retail sector. Sales are depressed and most companies are hoping for, rather than forecasting, a good Christmas period.

Hill told shareholders - rather tongue in cheek - that he is optimistic about the next few months because he expected individuals to stop buying yachts and purchase jewellery instead.

Figures in the following table show that the listed retail sector is depressed, particularly as far as the New Zealand operations of NZX listed companies are concerned.

Sales Graph

On Monday Briscoe reported that group sales for the quarter ended 26 October were down 11.2% compared with the same period in the previous year, with Homeware sales off 10.2% and Rebel Sports 13.3%. Managing Director Rod Duke said August and September were poor but October was a bit better.

On the same day Hallenstein reported an 8% fall in NZ sales for the 2 August to 31 October period and noted that “trading conditions in New Zealand have been more difficult than Australia”. Finally, The Warehouse told the NZX this morning that group sales for the quarter ended 26 October were down 2.1% with Red Sheds’ sales off 1.6% and Warehouse Stationery 5.6% lower. The company reaffirmed that it expected consumer spending and trading conditions to remain subdued for some time.

These year-on-year sales figures compare with the country’s 5% annual inflation rate. Retail sales are usually subdued during a general election campaign but this election has been exacerbated by wall-to-wall media coverage of the international credit crisis.

Most retailers are highly dependent on the Christmas period and this year will be particularly important because of the depressed trading throughout most of 2008. The retail sector, particularly small mom and pop outlets, will face serious financial difficulties next year unless consumers open their wallets between now and 25 December.

Why Foodstuffs is winning the battle with Woolworths


New Zealand businesses often have a tough time competing against larger Australian rivals.

Our corporate history is littered with failed New Zealand attempts to break into the Australian market, while large Australian companies have done well here, often buying and running dominant companies in New Zealand and increasing their profits.

The Warehouse, Telecom and Air New Zealand are the most recent examples of our corporate failures across the Tasman. Only Michael Hill comes to mind as a success.

Australian-owned media companies Fairfax (the owner of Stuff, TradeMe and the former INL chain of newspapers), APN (New Zealand Herald) and the banks (ASB, ANZ, BNZ, Westpac and National) have all done extraordinarily well since buying into New Zealand, particularly over the last five years as they profited from dominant positions in a relatively fast-growing economy.

So most assumed that when Woolworths bought the Progressive supermarket operation in 2005 it would monster the apparently outdated cooperative structure of New Zealand’s Foodstuffs operation.

There was plenty of swagger in Woolworths’ early approach in New Zealand. It flexed its muscles as a massive purchaser to drive down prices and margins for suppliers in new “Trans-Tasman” bulk purchasing arrangements. This made a lot of local suppliers very grumpy and lost it an enormous amount of goodwill with the supplier community. New Zealand is still a small place and many have not forgotten these tough negotiating tactics.

Then in August and September of 2006 Woolworths locked out workers at its Palmerston North distribution centre for almost a month to show them who was boss after they went on strike for fairer and higher pay. After a couple of weeks, gaps began to appear on shelves. Customers joined the queue of grumpy parties, alongside workers and suppliers. Eventually Woolworths settled, but the damage to its reputation was significant with customers used to well-stocked shelves.

This early robust approach may well have worked in Australia, but it just got a lot of people’s backs up here. There is definitely a difference in business cultures between New Zealand and Australia. New Zealand managers tend to be more consensual and less confrontational than those in Australia. They don’t like criticising rivals and tend to be much more careful before deciding to “burn” a supplier or rival or union.

Australian business leaders tend to be more brash, more willing to criticise rivals and debate issues publicly. Their approach is much more about a good stoush and a beer afterwards. Here we’re a little more reticent. There’s something about our national character which is more conservative and unwilling to confront rivals. We try to avoid open confrontation if we can. That means we can sometimes get monstered in negotiations.

This, of course, is a crass generalisation, but many New Zealanders would recognise it. I worked in Australia as a business journalist for five years and found it a much easier place to report business issues because leaders there are more direct and uncompromising, although ultimately had a more outward-looking and more optimistic view of the future. I admire it, but I know it’s different.

Toll Holdings is still patting itself on the back for the amazingly high price it managed to extract from a vote-hungry Labour-led government after years of arm twisting. People I talk to in Australia still can’t believe our government rolled over for this price. They just chuckle and count the money.

So the failure of Woolworths to win the battle with Foodstuffs is unusual. We like to beat the Australians in any battle and this win is particularly sweet.

Woolworths expected to “turn around” the business it bought for NZ$2.5 billion within three years by bringing in the Woolworths Australia model of using massive purchasing power and highly centralised distribution systems to pass on lower costs to customers while increasing margins.

Yet the three years is nearly up and the business, which includes the Foodtown, Countdown and Woolworths chains, is seeing its sales growth and profit margins dropping.

Figures from JP Morgan analyst Shaun Cousins show that Woolworths’ market share has dropped to 43% from 45% in New Zealand, while Foodstuffs’ share has risen to 57% in the last couple of years.

Woolworths’ results for the financial year released on Tuesday lay bare the scale of the failure in New Zealand.

Woolworths’ profit margin (earnings before interest and tax to sales) in New Zealand actually fell 4 basis points to 4.19% and its overall profit growth was up only 6.4%. This compared with 18.8% profit growth and a 5.52% profit margin in the Australian supermarkets.

So Woolworths is a full 133 basis points less profitable in New Zealand than in Australia. That may not sound a lot but for a tight-margin, high-volume business like groceries this is a big deal. Comparable sales growth (after taking into account the different number of weeks in the financial years) fell to 3.5% in the fourth quarter of the 2008 financial year from 9.9% in the first quarter.

This is shockingly weak when overall supermarket and grocery sales reported by Statistics New Zealand rose 5.3% in the June quarter from the same quarter a year ago. Woolworths itself said food price inflation ran at 4.6% for the year so a 3.5% rise actually implies a fall in volumes.

Foodstuffs, which owns the Pak’nSave, New World and Four Square chains, is winning the battle.

So what went wrong for Woolworths and right for Foodstuffs?

Woolworths’ robust approach to heavying suppliers and workers was not popular, but the problems run deeper. Woolworths believed it could make significant gains by imposing a centralised distribution system on Progressive and introduced big “Homebrand” ranges that are made under contract for Woolworths. It is also rolling out its own Select, Naytura, Organics and Freefrom brands for various specialist foods.

This sounds like a good idea, but other suppliers get nervous when the supermarket chain starts stocking and promoting its own brands in precious shelf space at the expense of real brands. Suppliers also seem to prefer Foodstuffs’ decentralised approach in New Zealand where the supermarket is itself the warehouse (stack ‘em high and sell ‘em cheap).

It’s easier to take the supplies direct from the factory to the supermarket than to some intermediate depot. Suppliers also like dealing direct with supermarket managers rather than with warehouse managers. It means they’re one step closer to the customer.

The latest clash between New Zealand suppliers and Woolworths was revealed last month by The Independent. Woolworths wanted to penalise suppliers who were selling goods on discount through Foodstuffs at the same time as through Woolworths. It’s no surprise suppliers don’t love Woolworths.

There’s also something more fundamental going on. Foodstuffs is essentially a collection of owner-operated supermarkets who share purchasing and marketing costs, but are often fiercely independent and “local” in their approach.

That means the individual supermarket owners are intensely motivated to run good supermarkets because they keep the profits and tend to guess right what the population around their supermarkets wants to buy.

The corporatised Woolworths model has lots of employees but not many owners.

The final (and probably key) factor is Foodstuffs’ dominance in the discount grocery area. Pak’nSave has become The Warehouse and TradeMe of the grocery world all wrapped into one. It is cheap and cheerful with great ranges.

That’s what New Zealanders want right now. We are feeling the pain from higher food and fuel prices and want to find a bargain whenever we can. Pak’n'Save is simply bigger and better at it than Woolworth’s Countdown brand, as can be seen in this report from The Press.

Woolworths is trying to turn this around by converting some of its Foodtown stores to Countdown stores (Greenlane in Auckland is one that comes to mind) and rejigging its ranges to take them down market.

I think of my own family’s buying habits in recent months. We have a great collection of Pak’nSaves around us in Auckland and quite a few Foodtowns. When we need something unusual such as gluten- and dairy-free stuff we go to Foodtown, but it’s less often than it used to be. The strike/lockout in 2006 and the shortages it caused were the trigger point for us to start looking elsewhere. A visit to a supermarket is useless if you can’t get everything in one visit.

We’re now doing our big shops now at Pak’n'Save. We reckon we can save up to $100 a week.

Kiwis love a bargain and right now we seem to love the Kiwi grocery chain a bit more than the Aussie one.

Investors spooked by Brambles' Wal-Mart worries


Investors have begun bailing out of Brambles Ltd after it announced a major US customer, Wal-Mart, was reviewing its pallet arrangements with the logistics firm.  Brambles shares had slumped 14.56 per cent to $A8.57 ($NZ10.28) amid uncertainty over the financial impact of the announcement.

Brambles said Wal-Mart was changing its handling of pallets, including its arrangements with Brambles' pallet and container business CHEP, and other pallet pooling companies.  But the Australian logistics company did not give details of whether the decision would have any financial impact.

CHEP is owned by Brambles and currently manages the picking up and sorting of pallets, used to move goods, at many Wal-Mart facilities in the US.  Shaw Stockbroking analyst Brent Mitchell said it was difficult to quantify the revenue and profit at risk through CHEP's Wal-Mart contracts.  "That information is not available, so it's a bit hard to put figures on it," Mr Mitchell said.  He speculated that Wal-Mart contributed no more than 5 per cent to CHEP's US profit.  "It doesn't appear that all the businesses are at risk. You'd have to expect the Wal-Mart business to be at the low end in terms of the margin range."

Nevertheless, investors were responding to the uncertainty of how the announcement might affect Brambles outlook.  "The uncertainty that it has created has caused that reaction," Mr Mitchell said.

Brambles said Wal-Mart had indicated it may contract directly with third party pallet management service providers to retrieve and sort pallets at its own facilities in the US, or provide the services itself.  The company said it was working with Wal-Mart to identify ways in which CHEP could continue to supply low-cost services to Wal-Mart and its supply chain.  "Brambles and CHEP strongly value the relationship with Wal-Mart and will continue to work with Wal-Mart to develop the optimal supply chain solution for this important customer," it said in a statement.

Brambles was bullish in its outlook at its first half results in February, with plans to expand CHEP into India.  The company booked a first half net profit from continuing operations of $US296.7 million, which was up 10 per cent, or 3 per cent in constant currency terms.

CHEP sales increased 12 per cent to $US1.75 billion in the half year, led higher by CHEP Americas, where sales rose 11 per cent on strong demand for grocery products.

Fletcher Building forecasts $450-460m profit


Construction and building materials firm Fletcher Building forecast today that its full year profit before unusual items would be between $450 million and $460 million.  Its 2006/7 full year net profit was $484 million, up 28 percent from the previous year, and included a $70m one-off tax gain.

Speaking to the annual shareholders meeting, chairman Rod Deane said net earnings for the first four months of the June 2008 financial year were ahead of the same period a year ago.  The company was comfortable with a consensus of analysts forecasts for a net profit after tax and before unusual items for the year to June 2008 of between $450 million and $460 million, Dr Deane said.

Chief executive Jonathan Ling said market conditions were generally softer.

Dr Deane said in New Zealand, Fletcher anticipated a decline in new housing consents but also noted a backlog of housing work and unsatisfied demand for alterations and additions.  "Activity levels in commercial construction, and in infrastructure remain strong, and it is encouraging that our New Zealand construction backlog is at record levels of over $1 billion."

In Australia, residential markets vary state by state, while non-residential markets were generally flat. Infrastructure markets were expected to remain relatively steady with public infrastructure investment being a key driver.  The European and Asian markets served by Fletcher's recently acquired Formica for $1 billion were in good health, but the well-publicised weakness in the US continues, Dr Deane said.  "Notwithstanding that the rationalisation is taking longer than expected, we are comfortable that the benefits will be realised. Overall we remain pleased with the (Formica) acquisition," he said.

Mr Ling said the high New Zealand dollar had had an adverse effect on earnings – specifically in some of its building products and steel businesses, where it made exporting more difficult.  "The fact that the group performed so well despite the operating environment again bears out our focus on earnings reliability.  "Operating in different regions and across market sectors, our peaks have more than compensated for our troughs."

Mr Ling said Formica's Asian business had performed strongly, since Fletcher took over in July. The European business also performed strongly while the North American business had deteriorated. It was midway through a manufacturing restructure in a tightening market.

Fletcher had closed a Californian factory and doubled production at the Ohio factory but the project was taking longer than expected.  "However, overall we're happy with our progress with Formica."

Mr Ling said the Government's plans to introduce an emissions trading scheme to limit greenhouse gas emissions would, if implemented as announced, affect Fletcher operations in several ways.  Its largest carbon dioxide emitters, Golden Bay Cement and Pacific Steel, would be among the companies required to buy carbon units.

All operations would face increased electricity charges.  "We are concerned that the scheme, if not implemented well, could have a significant adverse impact on the competitiveness of New Zealand manufacturing.  However, there are ways to avoid this and we hope that the Government will pursue them."

Fletcher shares were up 7 cents to $11.25. They have risen from $10.95 at the start of the year but are down from a peak of $13.42 on May 24.