The Warehouse

The Warehouse Group says its moves to reduce labour costs and improve productivity were not significant enough to warrant a separate disclosure to the sharemarket.

But the National Distribution Union estimates the labour savings will be the equivalent of about 600 full-time jobs at The Warehouse. The Warehouse is running a productivity and labour costs initiative called Project Invigorate.

Chief financial officer Luke Bunt said the scheme was partly to train staff to generate more sales. It was also about labour scheduling and having the right number of staff on the shop floor at slow and busy times. "The result of Invigorate will be higher sales, but rather than redundancies, it could conceivably mean that people would be paid for fewer hours.

"It's partly about cost reductions and it's partly about increased sales, but what it isn't is about is wholesale redundancies," Bunt said.

In response to Businessday comments that the eventual reduction in hours of work at one of the country's largest retailers was a matter of public interest, Bunt said: "If we felt the number of people that may lose their job as a result of any initiative within the organisation was going to be significant we would do so [make an announcement] and we haven't said so."

Bunt said chief executive Ian Morrice had said the company was aiming to reduce costs by $30 million out of its costs base over three years. "But what he has also said is that much of that will go against offsetting inflationary pressures in the other parts of the business."

Reduction in the costs of goods, freight, productivity improvement and control of inventory were all contributing to the $30 million.

Asked about the total of labour hours that might be saved, Bunt said:

"If we felt it was so significant that it warranted separate disclosure because it was of interest to the public then we would be [disclosing it]. Unfortunately this isn't helping your story because it isn't that significant."

National Distribution Union general secretary Laila Harre said the union had a broader concern that the reduction in working hours in the retail sector would be disguised by company restructuring that took place largely through attrition.

This made it difficult for those outside the process to suggest ways retail jobs could be protected. Attrition and non-replacement of staff were just as significant in the labour market as losing jobs through redundancies. "It is true that Project Invigorate itself is not leading to redundancies, but it is also true Project Invigorate will result in a significant reduction in labour hours worked in The Warehouse."

The union's estimate of 600 full-time positions was based on the nine stores in which Project Invigorate was first implemented in Christchurch.

That was using the difference in the current funded hours and the ideal "invigorated" hours and applied to the rest of The Warehouse operation.

Bunt said The Warehouse Group did not report labour costs separately in the annual report because it was a commercially sensitive figure. There was a line called "employment costs" but that was employment costs across the entire group. Asked if they had a plan and target to reduce labour costs Bunt said,

"We do but it's not something I can comment on."

There was a plan around productivity but there were conversations for individual stores and individual people which the National Distribution Union was involved in.

Speech by NDU Retail Secretary Maxine Gay to the Council of Trade Unions' 'Unions and Productivity' conference, 18 March 2009

For the third year in a row, retailing performance is likely to be low on the list of concerns among shareholders attending the annual meeting of The Warehouse in Auckland tomorrow.

The questions are likely to be the same as they were in late 2006. Is the company going to be taken over and when?

Stephen Tindall, who controls around 52 percent of The Warehouse, still holds the key to the future of the company he founded. As he is just a non-executive director of the company these days, it is unlikely he will be scheduled to speak to Friday's meeting. But it is probable that shareholders will put the pressure on (as they did last year and the year before) for him to get to his feet and say a few words. It's likely, however, that once again shareholders will get little meat on the carcass. Tindall will most probably reiterate that he will aim to do the best by the company and the shareholders.

Behind the scenes there will have unquestionably have been very recent further, separate, negotiations between Tindall and the supermarket giants Woolworths and Foodstuffs over a possible takeover. Both of the supermarket giants were blocked from making bids when the Commerce Commission successfully appealed against a High Court ruling that such bids could be made.

However, on October 9 The Warehouse blew that out of the water by deciding to stop the move it had made into supermarket retailing with its Warehouse Extra concept. While analysts have speculated that one or both of the supermarket companies will reapply for Commerce Commission approval, they are wrong. Neither party will, because neither party now believes it needs to.

The commission's argument had been that independent Extra could lead to increased competition in the supermarket sector. But Extra is now being wound down and the hurdle is gone. The Warehouse is well under way with plans for the three Extra stores to be converted simply into normal Red Shed general merchandising stores. The company has put the exit and restructuring costs at $10m to $12m before tax but says the move will lead to annualised pre-tax improvements in operating earnings of about $9m. With Extra out of the way both Woolworths and Foodstuffs are keen to strike a deal with Tindall. But price is the big snag.

Before the commission blocked any takeover Woolworths had indicated it was prepared to offer $7.15 a share for The Warehouse. The Australian company paid $6.50 a share for its 10 percent stake, compared with Foodstuff's entry price for its 10 percent holding of about $5 a share.

Doubtless both supermarket companies will now be arguing conditions have changed enormously since 2006 and therefore any acquisition of The Warehouse should be at a much lower price level. The Warehouse stock has been hovering under $4 recently.

From Tindall's perspective, however, there is little reason to rush. He does not have to sell and he will hold out for what he sees as the right price, still likely to be about $8. It appears unlikely any deal will be reached before Christmas and, indeed, Tindall will probably want to see how The Warehouse handles its most crucial trading period in what are truly awful times for retailers.

Shareholders are likely to get a brief update at the annual meeting on latest trading. However, this will probably not add much to the $322.4m first-quarter sales figures presented to the market on November 7.

Both on an overall and same-store basis, the figures were down 1.6 percent on the same time a year ago. Other major retailers such as Briscoe Group and Hallenstein Glasson have actually reported much bigger drops than this recently - Briscoe down 8 percent and Hallenstein Glasson nearly 7 percent lower. As a store that grew up in relatively tough times in the 1980s and 1990s, The Warehouse would rate its chances of holding, and perhaps even increasing, its market share during the downturn.

Relatively robust Christmas trading figures would provide Tindall further ammunition with which to drive up any takeover bids. The likelihood remains that a deal will be done, possibly more toward the middle of next year.

Woolworths and Foodstuffs would still be able to raise the cash despite the credit crunch. Woolworths may ultimately be the more desperate to bolster its position in New Zealand since anecdotally it is still losing supermarket share to Foodstuffs.

In 2006 pretty much all the shareholders present at The Warehouse's annual meeting believed that it would be the last one. Three meetings on nobody will want to be so bold as to definitely say this will be the last time - but it really might be.

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.

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.

The two-year battle for control of New Zealand's biggest retailer looks set to move to a new arena - the Supreme Court - after the Court of Appeal blocked Woolworths and Foodstuffs from making bids. The decision led to The Warehouse's share price plunging to a nine-year low of $3.01 before rebounding to close down 60 cents on $3.22.

Woolworths, of Australia, and Foodstuffs, owner of New Zealand's two largest supermarket chains, issued statements expressing disappointment and saying they were reviewing their options. They have 20 working days to decide whether to appeal to the Supreme Court. Stephen Tindall, The Warehouse founder whose interests control 52 per cent of the shares, was unavailable for comment.

The Commerce Commission, which blocked the two chains from bidding for The Warehouse last June and then had its ruling overturned by the High Court in November, hailed the decision as a victory for consumers. Despite The Warehouse having only three stores with grocery offerings, it could not be ruled out as a significant supermarket competitor, commission chairwoman Paula Rebstock said. "The commission considered the presence of an innovative third party, such as The Warehouse, had the potential to increase the level of competition in this important market."

Most analysts, fund managers and competition lawyers BusinessDay spoke to said they thought Woolworths and Foodstuffs would go to the Supreme Court. "I'd say there's an 80 per cent-plus chance of that happening," Tower portfolio manager Paul Robertshawe said. Buddle Findlay competition partner Tony Dellow said: "Given they have already spent a lot of money on this, the incremental cost of going to the Supreme Court is pretty low."

What chance the companies have in the Supreme Court will be hard to gauge till the Court of Appeal issues its judgment, probably early next week. "A lot is going to depend on how the Court of Appeal has framed its answer today," Chapman Tripp partner Andy Nicholls said. The two main questions would be about the likely performance of The Warehouse Extra stores (offering groceries) in the next few years and how speculative the commission could be in predicting whether the stores would challenge the existing supermarket duopoly. "The concern everybody will have is the extent to which the Court of Appeal has endorsed the commission taking quite a speculative approach when faced with a new entrant. I imagine the supermarkets will be looking hard at that, and that would be the question they would consider [testing] in the Supreme Court."

If they are unsuccessful, there are several other ownership scenarios for The Warehouse. Mr Tindall, who made a $5.75-a-share bid in partnership with Pacific Equity Partners in 2006, may have another go at privatisation. "Price-wise the timing would be better now than it was then," Forsyth Barr analyst Guy Hallwright said. "But raising debt would be a lot more difficult."

Deutsche Bank analyst Kristan Walker said Mr Tindall and PEP could well make an offer for the 20 percent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands – that's an extra 20 percent that sits alongside his 50-odd percent, and then it's not so much of stretch to get to the compulsory acquirement level."

Market commentator Arthur Lim said funding such a move would not be an issue, with Mr Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. Nothing was stopping Mr Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal, such a move would be premature.

Rival bidders may also emerge, with Australian conglomerate Wesfarmers seen as the most likely. However, after buying supermarket chain Coles last year, Wesfarmers was busy trying to turn that business around, ING senior analyst Craig Brown said. "I think you've got the two most logical bidders on the table right now."

The Warehouse may decide to scrap its grocery strategy, though it is unclear whether that would clear the way for a Woolworths or Foodstuffs bid. "One thing that hasn't changed in all this is that the key player is Stephen Tindall," Mr Brown said.