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Individual retailers undergo a mixed bag of changes

By Peter V O'Brien

Friday 12th September 2003

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Retailing is one of the few sharemarket sectors where participants face little or no competition from each other.

Some of Briscoes' and The Warehouse's lines overlap but the companies are generally free of competition and pressure on margins from other listed groups.

Even the clothing interests of Hallenstein Glasson and The Warehouse seem directed at different markets.

Non-listed retailers provide the competition in each product segment.

Investors should assess each listed retailer in isolation, rather than lifting or dropping share prices for the lot at the same time.

The companies have no common element, apart from concentration on attempting to separate consumers from as many dollars as possible.

Few people make choices between buying food at a Restaurant Brands' Pizza Hut outlet, an appliance at a Pacific Retail Noel Leeming store and a necklace at Michael Hill International's retail jewellery shops.

The "choice" arises indirectly from prioritising one's discretionary spending power, rather than consciously assessing the merits of each retailer's products and prices.

It is a fair bet, for example, that people buying goods at Wellington's upmarket Kirkcaldie & Stains base their decisions on matters other than price and product range comparisons with The Warehouse's Wellington store a couple of kilometres away.

The attraction of one listed retailer over another is an investment that therefore comes down to basic financial performance and the intensity of competition within specialist product ranges.

It also relates to where the companies do business. Expansion overseas has become a feature of listed retailers' development in recent years.

Michael Hill International was the first to move when it opened stores in Australia, soon learning that the retail climate across the water required a lot of hard-driving work on the ground, irrespective of the amount of pre-entry market research.

The company is going through a similar experience in Canada. Hallenstein Glasson found Australia tough going, as did The Warehouse.

The latter company's preliminary report for the year ended July 31 says the group expected to reduce operating losses in its Australian "Yellow Sheds" this year through improvements in merchandising and reducing the cost of doing business.

Up to 16 stores were planned to open this year, with closures expected for a similar number.

The Warehouse's experience in Australia was the main reason for the company's share price erosion in recent months.

Australia may come right, but investors will need strong evidence that good ongoing profitability is available before it re-rates the stock.

New Zealand-based retailers' urge to expand to overseas is shared by other companies that find the local market too small for solid growth, but retailing has at least one difference.

It is the strong competition here for market share in a country that has been "overshopped" for years.

Arguments that the current situation arose from the growth of discounters in recent times and their decisions to discount further lack strength.

New Zealand had discount chains 50 and 60 years in the form of Woolworths, McKenzies and Selfridges stores, which operated throughout the land.

It is coincidental that The Warehouse's "red sheds" display the same colour as the earlier discounters.

Pacific Retail has also taken the overseas expansions road, announcing last week that it had brought the business of the UK's third largest specialist appliance retailer, Powerhouse, for $17.2 million.

Powerhouse was placed in receivership in August, probably explaining how Pacific Retail could pay "only" $17.2 million for a group with 139 stores after closures during the receivership, with sales of $398.6 million in the year ended March and with about 32% of the UK appliance market.

Pacific Retail knows the New Zealand appliance market.

We will soon see whether it knows enough about the UK to do well immediately or learn possible costly lessons about a different market.

It is difficult to compare financial returns for listed retailers, due to different balance dates.

Hallenstein Glasson and Kirkcaldie & Stains are still to report on the latest year, Briscoe Group has a December 31 year (last week's figures were an interim report), Pacific Retail balances on March 31 and Restaurant Brands on August 31.

Each company's sales are subject to seasonal factors, including Christmas and summer-winter splits.

Investment decisions should take account of those matters and relate them to individual financial ratios, rather than some global "retail sector" average.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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