market share

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.

In the ongoing battle for supermarket supremacy there's a lot at stake. Last year New Zealanders spent more than $12 billion at supermarkets with the vast majority of that passing through the tills of the two majors Foodstuffs and Progressive Enterprises.

In both ownership model and approach the two rivals are radically different. Foodstuffs which owns the Pak 'n Save and New World brands is actually a collection of three regional co-operatives controlled by local owner-operators.

By contrast, Progressive Enterprises which runs the Woolworths, Countdown and Foodtown supermarkets is a far more centralised operation owned by listed Aussie retailing giant Woolworths.

The competition between the two has been likened to trench warfare a long grinding battle with progress measured in hard fought increments of a percentage or two of market share. When Woolworths bought Progressive in 2005 it was thought its massive buying power and experience from the Australian market would pose a major threat to Foodstuffs.

But, so far at least, the three co-ops have proved remarkably resilient.

Market-share comparisons between the two chains are complicated by the fact that while the publicly listed Woolworths publishes detailed numbers, the three Foodstuffs co-operatives do not.

Foodstuffs chief executive Tony Carter claims New World and Pak 'n Save had 58.4 percent of total supermarket sales in the year to February, up from around 58.27 percent the year before and around 55 percent when Woolworths bought Progressive in late 2005.

But Progressive chief executive Peter Smith begs to differ. He concedes that Progressive had a small market share loss but says this is largely due to it closing some stores and that the company's market share numbers have been pretty flat over the last two years. "We're sitting on a bit over 43 percent and it's been like that for quite some time," he says.

Most analysts seem to be of the view that Progressive has lost market share over the past three years. Sydney-based JP Morgan analyst Shaun Cousins recently told The Australian newspaper that Progressive had slipped from 45 percent to 43 percent market share.

Tim Morris, of specialist retail research company Coriolis, has compared Progressive's published sales figures with total supermarket sales data from Statistics NZ between 2003 and 2008. While Progressive's sales have grown by 23 percent over the period, the supermarket sector as a whole including independents as well as Foodstuffs grew by 37 percent.

"Foodstuffs has been growing significantly faster than Progressive," Morris says.

He has done work for both companies and describes himself as neutral. "They (Woolworths) talked some good talk when they came in and bought the business. But they've yet to deliver on the market share gains."

There are also significant geographical market share differences. Foodstuffs is particularly strong in Wellington and the lower North Island where Carter claims it has around 70 percent of the market and weakest in Auckland and the upper North Island where he says it has around 52 percent of the market.

"We are weakest in metropolitan Auckland and stronger in the regions. I suspect it's because the focus from our competitor (Progressive) has tended to be on where they live and where they know."

Carter reckons Foodstuffs' decentralised business model, with owner-operators making their own buying decisions, is a big advantage. "We give a lot of discretion to enable guys to tailor their range to the needs of their catchment."

The autonomy and enthusiasm individual store owners have for their staff and customers also make a difference, Carter says.

He also thinks Woolworths' buying power advantage has been over-emphasised. "Half of what we sell is fresh produce and there is no scale advantage in fresh produce. Of the balance, around half is supplied by New Zealand-only suppliers and the other half by multinationals. So they've really only got a perceived buying power advantage on perhaps a quarter of purchases."

In Woolworths' recent result for its New Zealand operations it achieved an earnings before interest and tax (ebit) to sales ratio of 4.19 percent down slightly on the 4.23 percent the year before and well below the 5.52 percent in the Australian supermarkets. "Ebit to sales basically measures how much profit we make from every dollar," Smith says.

The reason for the gap between New Zealand and Australia is because New Zealand has a lot of older stores, a lot of smaller stores and a lot of stores in need of refurbishment, he says. "We've got a lot of old stores that have just had an emphasis on basic groceries but not much else. We're turning that round."

New ordering, merchandising, point of sale and back office systems will be going live by the end of next month, Smith says.

"There isn't anything that's standing still in our business right now. We've had a project going on since we moved here and it's basically re-engineering the business. (Woolworth CEO) Michael Luscombe described it as New Zealand currently having open-heart surgery while it's still walking around. That's effectively what we are doing right now."

Smith promises big investment over the next five years with around 18 to 20 store refurbishments a year.

He points to the Countdown supermarket in the Auckland suburb of Greenlane, recently converted from a Foodtown, as an example of where Progressive is heading.

Painted bright green on the outside with Countdown emblazoned in red lettering, the store has a prominent fruit and vegetable section, stocks a small range of general merchandise such as vacuum cleaners and electronic equipment and features a walk-in beer chiller.

"It's a new generation Countdown you'll see a lot more of those," Smith says. "There were probably some similarities between Countdown and Pak 'n Save in the past but there aren't any now."

But it's the big box Pak 'n Save concept, with its wide aisles and product stacked almost to the ceiling, which has been the main ingredient driving Foodstuffs' growth, Morris says.

"There's a big saving in the Pak 'n Save model. "They do huge turnover per store."

Pak 'n Save has consistently come out as cheapest in Consumer Magazine's regular supermarket price surveys.

But things may be starting to change if Consumer's latest survey is anything to go by. It found that while a basket of 40 basic grocery items was still cheaper at Pak 'n Save in Christchurch and Wellington, it was less than $1 less expensive than Countdown. And in Auckland, Woolworths, Foodtown and Countdown were all cheaper than Pak 'n Save.

Woolworths certainly promised cheaper prices for New Zealand consumers when it first entered the market and drove a hard bargain demanding better terms from suppliers.

But according to one supermarket industry insider, after being beaten up by Woolworths and having to drop their prices by around 10 percent, most suppliers offered the same deals to Foodstuffs and then after the dust had settled quietly raised their prices again.

"It was a hard negotiation for some people when Woolworths came in," says Lindsay Davidson, commercial director of the Food and Grocery Council which represents suppliers. "Most suppliers I'm aware of had a subsequent trading terms discussion with Foodstuffs after Woolworths came in. In a broad sense it's business as usual now."

He's unsure whether there's any lingering ill-feeling towards Woolworths from suppliers. "We do an annual review of supplier preferences and it's all over the map. It varies year on year and category by category."

Smith is adamant that the arrival of Woolworths has led to lower prices. "The market today is a hell of a lot more competitive than when we arrived," he says. But Carter disputes this. "The relative competitiveness of their brands against ours has not improved."

Progressive has come together through various mergers and acquisitions over the past two decades and it along with some of its predecessor companies has had a number of owners, including Hong Kong's Dairy Farm Group and Australia's Coles Myer and Foodland Associates.

Because having the best sites is crucial in the supermarket game, this legacy of changing ownership has had a big impact on the situation today, Morris says. "Most people go to the closest supermarket or the one on their way home from work.

"Foodstuffs has been investing in property for 20 or 30 years. But Progressive in its previous incarnations sold off their property and didn't invest in the future. When Woolworths bought the business there wasn't a portfolio of future sites waiting to be developed. Supermarket retailing is like trench warfare. You've got to just keep throwing waves of troops into the trenches."

He accepts it's taken Woolworths almost three years to sort things because the Progressive systems were bad. "The jury is out to date. Certainly their (Woolworths) track record in Australia suggests you wouldn't count them out."

Grocery giant Foodstuffs' presence in liquor retailing could get a shot in the arm as it looks to swallow Liquorland.

The co-op, which controls around 56 per cent of the grocery retailing sector, is understood to be one of several parties interested in purchasing the 72 stores of DB Breweries' franchise retail chain. Besides supermarket wine and beer retailing, Foodstuffs also operates the large format liquor store Duffy & Finn's, and the smaller format Henry's.

Success in the Liquorland bid could add fuel to the already intense rivalry with Woolworths.

The Australian-owned supermarket firm is still pursuing Liquor Licensing Authority approval for store-within-store models selling spirits as well as beer and wine - despite being denied a bid to set up in a Christchurch Countdown in what was regarded as a test-case decision.

And success for Foodstuffs could spell trouble for independently owned stores, which cannot compete with the supermarkets' buying power. Large liquor chains have a slight edge in market share, controlling around 53 per cent, to the independents' 47 per cent.

Foodstuffs was not commenting on speculation of the bid, as was DB, citing confidentiality agreements. A DB spokeswoman said the company decided to review the option of selling the Liquorland franchise after several unsolicited expressions of interest. "We're not committed to a sale - we're investigating the possibility. "We just received a bit of interest and like any business, we evaluate opportunities as they arise. "Liquorland is a successful asset for DB Breweries, so while we are looking at the option to sell, we will only consider this if a suitable buyer is identified."

Cranleigh Merchant Bankers was appointed last month to evaluate bids and manage the sale process. Evaluation of a possible sale will take place over the next few months. The spokeswoman said any sale would ensure the future interests of franchisees and staff, and the continuation of the franchise as a whole. A sale would also need to ensure that DB retained "an excellent relationship" with the franchise, retaining placements for DB products within Liquorland outlets, the spokeswoman said.

New Zealand billionaire Graeme Hart is hatching a deal for his Carter Holt Harvey cardboard box business to join forces with its counterpart at Amcor, in a play aimed at challenging the dominance of Richard Pratt's Visy.

Mr Hart has been been in talks with Amcor for two months to form a joint venture between the separate corrugated and paper businesses of his forest products company and the Australian packaging giant. A combined operation would have revenue of about $A1 billion a year. Amcor has run a knife through the hierarchy of its cardboard box business over the past few weeks, making redundant at least three senior executives including its boss, Darryl Roberts. The Victoria-Tasmania general manager, Andrew Harris, and another senior executive, Walter Gross, departed almost immediately last month.

A former Amcor executive said the latest redundancies were aimed at lowering costs to a level that would eventually determine the shareholdings of both Amcor and Carter Holt in the joint venture. "Hart looks like he is going to take management control of it," the executive said.

The deal, expected within months, will raise concerns about a duopoly in Australia's $A2.2 billion cardboard box market, which is still reeling from the record $A36 million fine imposed on Mr Pratt and Visy for a price-fixing cartel with Amcor. The former Amcor executive claims the Australian Competition and Consumer Commission has given tentative approval to an Amcor-Carter Holt joint venture.

Mr Hart has gone on a spending spree since taking full control of Carter Holt early last year for $NZ3.3 billion, buying Swiss packaging giant SIG, Blue Ridge Paper Products of the US and beverage packaging assets from International Paper. But New Zealand's richest man will still have an estimated $A2.5 billion-plus to spend after selling a 20 per cent stake in Goodman Fielder in October and from a yet-to-be completed auction of Carter Holt's timber products business.

"They may be looking at it," another Amcor executive said late last week of Mr Hart's intentions for Amcor. "There's a rumour about Carter Holt Harvey every week - Graeme Hart has run the ruler over Amcor." Amcor executives will brief investors in Sydney on Tuesday next week about the overall business.

A New Zealander, Greg Beatty, the former boss of Fonterra Australasia, took over as Amcor Australasia's managing director in October from Louis Lachal, a 27-year veteran of the company who will retire next year. Also departing Amcor Australasia are Melanie Huson, the human resources chief who leaves next week, and another executive, Shay McQuade. Before Mr Hart took over Carter Holt, the company is understood to have offered the Amcor board about $A1.3 billion for its fibre packaging business about three years ago. Sources say Mr Hart has since made several approaches to Amcor for the business, to no avail.

Carter Holt is the third-largest cardboard box company in Australia behind Richard Pratt's Visy Packaging - which has about 47 per cent of the market - and Amcor (less than 40 per cent). Between them, the three control the cardboard box markets on both sides of the Tasman. Amcor's cardboard box businesses in Australia and New Zealand have struggled from a lack of investment.

Freightways' first-quarter profitability was flat as the express delivery company continued to be shackled by the sluggish economy. Managing director Dean Bracewell told shareholders at the annual meeting in Auckland yesterday that operating earnings for the three months to September 30 were up by 4 per cent. But higher interest rate costs meant net profit was flat at $7.7 million, he said.

Mr Bracewell declined to comment on mounting takeover speculation. Freightways, which shares the New Zealand express package market with NZ Post in a near-duopoly, has long been touted as a likely takeover target. Suggestions that Toll Holdings might launch a bid have been around for a couple of years. This month, the Australian Financial Review reported that as well as Toll, Qantas, FedEx and Deutsche Post's DHL were interested.

"I have no doubt that it's on at least a couple of companies' radar screens," First NZ Capital analyst Andrew Mortimer said. "I certainly wouldn't discount it but it's a question of timing. It's got an open register and it's vulnerable."

Mr Bracewell said he saw no short-term let-up in the challenging New Zealand conditions. "We said at the full-year we expected a flat environment and that's what we've got," he said. "It will come back; it always does. And when it does we'll be ready with good-quality capacity and we'll reap the benefits of it then, but I couldn't put a time frame on that."

At close the Freightways share price was down 15 cents at $3.80.

Growth in the business mail and information management businesses continued to outpace the core express business, Mr Bracewell said. Capital investment of $15 million would be spent during the 2008 year including the initial development of a recently acquired information management site in Wellington.

Freightways' largest shareholder is Fisher Funds, which has a 9.8 per cent stake. Fisher Funds chief investment officer Warren Couillault said Freightways was doing well relative to the conditions it was operating in. "It does feel to me that the underlying barometer of the economy, in moving freight around the country, has been weak for about a year and a half," he said. "The fact that they're holding their bottom line is good, given that they've got huge cost increases in labour, occupancy and energy. "The little nibbling acquisitions they are making in data and storage are good as well. That will give them a springboard in Australia and it's exactly what we want them to be doing."

Directors Sue Sheldon and Sir William Birch were re-elected to the board at the meeting. Directors' fees were increased from $225,000 to $336,000. This includes $52,000 to be available if a sixth director, likely to be an Australian, is added to the board.