Jeweller succeeds where many fail

By David McEwen

Friday 1st November 2002

Michael Hill International's mission is to explore "new frontiers," its annual report reveals. Certainly its share price has been charting new territory, hitting a record price of $5.50 recently.

Investor enthusiasm reflects another outstanding year for the jewellery chain. Net profit increased 22.5% to $12.3 million for the year to July, from a 13.2% increase in revenue at $214.1 million.

Its one-step-at-a-time expansion programme in Australia has been an outstanding success and investors are waking up to the idea that the fresh retailing formula could work in many other countries. The company surprised many by announcing that Canada would be its next frontier.

In the annual report, chief executive Mike Parsell explains this move: "Our objective was to identify a new market with low barriers to entry, relatively low risk, with strong potential to grow a substantial business ...

"The population of Canada is 31.1 million people. The size of the jewellery industry was $1.58 billion in 2000, which is similar in size to the Australian jewellery industry. Australia, however, has a population of only 19.6 million people, meaning the comparative spend on jewellery per head is much lower in Canada ...

"Our market research confirmed the design and styling of our merchandise, our store layouts and advertising strategy would be well accepted."

One might be tempted to ask whether the boys from Whangarei can really teach the Canadians anything about selling jewellery. But then, many asked the same thing when Michael Hill launched in Australia, and it proved it could succeed in a tough retail environment with careful planning, a lot of market research and trained and motivated local store managers.

In Australia the company started with a single store in the least competitive city, Brisbane, and learned the lessons that would apply in the rest of Australia. The annual report shows it now has 47 stores in Australia, overshadowing its 35 in New Zealand, and providing revenue of $133 million compared with $80.6 million.

Nevertheless, the New Zealand business performed exceptionally well last year. Total revenue improved 18% while same store sales increased 13%. Earnings before interest and tax improved 33%.

Even with an allowance for self-congratulation, the report is justified in pointing out "this was a terrific result for a mature business." The growth was driven partly by the company's decision to join the Fly Buys programme in October 2001 and an increased focus on improving the stores' "interaction" with customers.

The Australian operation ended the year with revenues up 10.4% and same store sales up 6.4%. This was below expectations and resulted from a slump in sales after the September 11 attack and a loss of margin from the strengthening Aussie dollar against the US currency.

However, by the second half the Australian operation had recovered its sales momentum and a new inventory system was installed to avoid the worst effects of currency change. By year-end, the Australian earnings before interest and tax had risen 24.4% a creditable result under the circumstances.

While New Zealand is almost saturated with Michael Hill stores, there is still a lot of room for expansion in Australia. Western Australia, for example, has not yet reached critical mass that will deliver economies of scale and this will only be achieved in 2004, with further store openings.

The report is a beautiful thing, highlighted in silver and gold and dripping with jewellery pictures in close-up. It's a far cry from its plain reports of a few years ago and reveals its growing confidence as an expanding chain with global aspirations.

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