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most assumed that when Woolworths bought the Progressive supermarket operation in 2005 it would monster the apparently outdated cooperative structure of New Zealand’s Foodstuffs operation.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