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Companies seek growth by diversifying in Australia

By Peter O'Brien

Friday 30th June 2000

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The Warehouse Group's purchase of two Australian discount variety retail chains is another example of companies looking for geographical diversification as they seek growth beyond the relatively limited New Zealand market.

Other New Zealand retailers operating in Australia include Hallenstein Glasson Holdings, through the Glassons chain, and Michael Hill International.

Hallenstein Glasson's report for the six months ended February said Glassons would have five stores in Melbourne and four in Sydney after the opening of new stores in the Sydney suburbs of Castle Towers and Burwood in May and September respectively.

The company said the number of stores would start to provide some critical mass in both markets.

More store opportunities would become available in the Melbourne and Sydney markets as Glassons' presence in Australia grew.

Jeweller Michael Hill has been in Australia for years and had 67 stores operating there at December 31.

The interim report for the six months ended December said new sites were under investigation in New South Wales and Victoria to open later in the year.

Michael Hill said there were a number of opportunities for more of its superstores to be opened in New Zealand and Australia. They would be investigated carefully, along with close monitoring of the current superstores' performance this year.

There were also opportunities to open more than 40 conventional stores in Australia over the next four or five years.

The report said such growth and the strength of the group's retail management and training systems would continue to ensure the company remained at the forefront of jewellery retailing and manufacturing in Australasia in the coming years.

Michael Hill's Australian same-store sales improved 6.3% in the six months and total sales were up 14.2% over the corresponding period of the previous year at $A53.52 million.

Earnings before interest and tax increased 14.6% to $A6.45 million.

The company's sales in Australia were double those of New Zealand in the period - expressed in New Zealand dollars - and 66.5% of the total $100.53 million.

The Warehouse Group's expansion was signalled at the 1999 annual meeting when it was said the company was continuing to investigate expanding offshore.

Australia was a prime candidate for expansion but the group would pursue all options that had the potential to deliver returns of more than the cost of capital.

There was still room for The Warehouse to expand in New Zealand because it had 7-8% total market share in the categories in which it competed and the category share could grow to 12-15% based on overseas comparisons.

The company's assessment of the retail scene showed it was under-represented in areas such as Wellington, Christchurch and parts of Auckland.

A large part of a planned 40% increase in floor space over the next three years would be directed into those cities.

The challenge was to put options in place that would allow the company to carry on growth momentum after 2002, apart from the floor expansion referred to at the meeting.

Last week's acquisition of the Australian Clint's Crazy Bargains and Silly Solly's chains confirmed the overseas expansion option.

The Warehouse's announcement said Clint's had 82 stores operating in Victoria, ACT, New South Wales and Queensland while Silly Solly's had 33 stores located solely in Queensland.

The Warehouse's statement outlined its general philosophy of expansion, although there was a fair amount of public relations language.

The acquisition provided an opportunity for continued growth over the next 10 years and application of the company's retail expertise and capabilities in a larger market.

It gave The Warehouse a significant entry point into the Australian general merchandise market which had exciting growth opportunities.

Expansion of New Zealand companies into Australia gives our sharemarket investors the chance to participate in larger industrial and commercial markets in addition to their holdings in Australian-based equities.

Such developments can benefit the New Zealand sharemarket because they are different from local companies transferring headquarters and main operations overseas.

Recent examples of the latter included Brierley Investments going to Singapore and incorporating in Bermuda, Lion Nathan transferring to Australia and the earlier case of Nufarm, formerly Fernz, also shifting to Australia.

Those shifts affected an already dull New Zealand investment scene. The Warehouse Group's announcement had an immediate effect on the local exchange, with the share price improving a net 38c last week, after earlier going up 43c.

Investors obviously approved of the company's move into Australia.

They had approved Michael Hill's Australian expansion and treated the share price well over the years, although it has been sluggish recently in line with the overall state of the New Zealand sharemarket.

Such expansions are also the other side of the foreign investment debate which usually concentrates on overseas-based companies.

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