Independent Financial Review

The Foodtown and Woolworths supermarket brands may vanish from New Zealand under a cost saving strategy by Progressive Enterprises.

Supermarket retailer Progressive Enterprises is on the verge of collapsing its three supermarket brands into one chain - the Countdown brand, reports The Independent business newspaper, citing research from Australia.

The move would see the end of the Foodtown and Woolworths brands in New Zealand, leaving just Countdown to be rolled out in a revamped store concept to compete against rival Foodstuffs' Pak'n Save, New World and Four Square chains. The concept, called 2010c, is also being rolled out in Australia by parent Woolworths.

The Independent cites documents from Macquarie Research Equities which say Progressive "appears poised to collapse its tri-banded retail offer into just one brand after just two store trials of the Australian 2010c format''.

Progressive announced this week it will spend $200 million refurbishing and upgrading back-office systems in existing stores and building three to five new supermarkets each year, but it made no mention of store branding. The company has already spent $320 million in New Zealand on refurbishment since Woolworths bought the business three years ago. It has also rebranded two prominent Auckland Foodtown stores in a new Countdown format.

Woolworths (Progressive's Australian parent company) released second-quarter sales results last week revealing poor New Zealand performance, fuelling speculation it needs to do something to turn the business around.

New Zealand sales in the second quarter were expected to increase by 6 percent compared to the same period last year but they lifted only 3.9 percent to A$1.1 billion ($1.27 billion).

Adding fuel to speculation about a collapse of the brands is Progressive's managing director Peter Smith's response to the Macquarie report this week, said The Independent. Smith didn't deny the report, saying only there was no news to announce.

Statements by Woolworths' chief executive Michael Luscombe have also been interpreted as indicating a brand change. He was asked by Credit Suisse analyst Grant Saligari during a webcast where Progressive was in repositioning the New Zealand supermarkets business. "We've got no doubt that the new store format is the way to go,'' said Luscombe.

"The two stores that we put on the ground as our tests have been performing very well. They were existing stores that were big stores with big numbers and they've been doing very, very strong double-digit growth since that opening. "So we've got the right format, we just need to now get the critical mass of them out there.''

Rival Foodstuffs boss Tony Carter said he had heard the rumours about Progressive restructuring its branding but declined to comment further.

Woolworths paid $2.5 billion in 2005 for Progressive and signalled it would turn around the business within three years by using the Australian model of bulk buying on both sides of the Tasman, centralising distribution systems, lowering margins for suppliers while increasing its own margins, and introducing its own brands with the result of lowering prices for customers. But the plan met with a backlash from suppliers and Progressive's workers, and more customers have moved over to Pak'n Save.

Progressive's profit growth has slumped to under 4 percent in the last two quarters at a time when total grocery and supermarket sales have increased by more than 5 percent in the period, according to the Department of Statistics. Progressive owns 148 Countdown, Foodtown and Woolworths supermarkets. Woolworths will post its half-year results on February 27.

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.

Supermarket giant Progressive Enterprises is turning the screws on its suppliers with a "no clash policy" imported from Australia. The policy financially penalises grocery suppliers for having their product promoted in rival supermarkets at or around the same time as Progressive's own advertised promotions. Should a clash happen, suppliers will be charged for the differential on the price offered in the opposition supermarket.

Progressive also wants details of suppliers' forward promotion plans with competitors. The practice so worries the Food and Grocery Council, it went to Auckland barrister John McBride for an opinion.

The council told its members to seek their own legal advice, but says it would counsel against accepting the policy. It has recommended they decline the request to share forward promotion plans.

Progressive's managing director Peter Smith said in a written statement yesterday that the company was not breaching any law when indicating to suppliers it would not accept promotions for inclusion in its mailers where there was a clash with a competitor's promotion arranged by the supplier. But nowhere did Smith address the policy's punitive element dropping the price of a product in a Progressive store to match that of a competitor, then back invoicing the supplier for the price difference. Nor did he address the cost to the supplier of having a product dropped from a promotions mailer at the last minute.

Smith said it did not make commercial common sense to enter into a promotion arrangement with a supplier at the same time or immediately following the same or a greater promotion by a competitor arranged by the supplier. "Having the same or a greater promotion in competitor's stores immediately before or at the same time defeats the purpose." Smith recognised the policy might require suppliers to revise marketing plans and said he was happy to work through concerns with suppliers.

In documents obtained by The Independent the grocery council's commercial director, Lindsay Davidson, told his 158 members that Progressive risked breaching restrictive trade practices under the Commerce Act.

The policy could also be seen as a prohibitive price fix when Progressive had "Select" or "Home Brand" competing in the same category, or horizontal pricing, in which it could be seen as trying to influence the retail prices of a competitor.

Progressive told suppliers the week prior and the week of a promotion in rival supermarkets such as New World would be deemed a "no clash" period. This means there must be no advertised clash on the same product or assortment of products as between a Progressive mailer and a competitor's mailer for the week of and week prior to the promo. In the event a supplier had a promotion at New World with prices lower than in Progressive stores, Progressive would lower the retail price immediately on the same product in its store. It would then back invoice the supplier for the difference, based on items scanned at the checkout.

Progressive runs Foodtown, Woolworths and Countdown New Zealand-wide and Fresh Choice and Super Value supermarkets in the South Island. Foodstuffs runs rival New World and Pak'nSave.

Foodstuffs managing director Tony Carter said he had heard about the new Progressive policy on promotions but his company did not practice it, nor had it ever been practised in New Zealand before. He warned suppliers if they breached confidentiality by tip-ping Progressive about its promotions "we would view it very seriously".

Suppliers spoken to by the Independent are furious about the practice and don't want to co-operate with it, but fear if they don't play ball their products will be left off the supermarket shelves.

The Commerce Commission said it had not received a complaint about Progressive Enterprises' 'no clash policy' and did not have sufficient information to determine whether or not the behaviour breaches the Commerce Act.

RUNNING A RULE

Auckland barrister John McBride has run his legal ruler over Progressive's "no clash" policy.

Remember, the policy means that if New World, owned by competitor Foodstuffs, runs a promotion on a product a week before one planned by Progressive's Woolworths stores, Progressive would not only pull the product from its promotional mailer, but would lower the product price to match the competitor, then deduct from its next remittance the difference for what it costs Progressive to match a lower promo price.

The key issues raised were:

Supplier volumes could be reduced because a supplier's product is removed from the Progressive mailer, damaging the benefit of going to the lower price point. If Progressive had ordered the product before it was left out of the mailer it could mean the product didn't sell, forcing Progressive to delay re-ordering.

A contract cannot unilaterally be varied unless by agreement, so it is unlikely Progressive could legally enforce a back invoice that reduced the pre-agreed supply price of promo goods. It would also breach this contract by removing it from the mailer.

Section 30 of the Commerce Act prohibits a price-fixing arrangement between competitors. "There is no cartel hatched in a smoke-filled room or secret phone calls between CEOs of competing businesses," says McBride. But the likely effect is a regime to make sure New World doesn't have a promo price when Progressive does.

There is a risk of a prohibitive price fix if there is no Progressive house brand in the product market. But it would be difficult for the Commerce Commission to demonstrate individual suppliers' vertical agreements with Progressive also amounted to horizontal understanding between those suppliers.

On a possible breach of Section 36 of the Commerce Act covering the misuse of market power, McBride said it was hard to bring home a case against a powerful supermarket over alleged "bullying" of suppliers. The supermarket could convincingly say it was enforcing the policy in the interests of delivering benefits of price, quality and choice to consumers, therefore it was not anti-competitive. But McBride said it would be very difficult for Progressive to characterise a "no slash" policy as being in the interests of consumers.

Competition concerns are likely to prevent Fletcher Building from buying all of the wood products assets put up for sale by Carter Holt Harvey (CHH), analysts say.  However, Fletcher Building could end up with most of the New Zealand businesses, paying around $800 million and staying within its debt comfort zone.  Auspine, Hyne or Weyerhaeuser are the likely buyers of the Australian assets.

CHH's wood products businesses, put on the block by Graeme Hart's Rank Group, have a price tag of $2 billion to $2.5 billion.  The Commerce Commission and its trans-Tasman counterpart, the Australian Competition and Consumer Commission, would balk at Fletcher Building swallowing all of the operations on sale - Wood Products NZ, Wood Products Australia and the Carters retail chain, First NZ Capital analyst Andrew Mortimer said.

Fletcher Building owns the Placemakers chain, which buys more than half of CHH's domestic lumber. It therefore has a strategic opportunity to lock in security of supply, Mortimer said.  But the potential for vertical integration would worry the Commerce Commission.

A bigger hurdle was the particle board market which would be 100% owned by Fletcher Building if it subsumed CHH.  The companies dominate the medium density fibreboard market between them and Mortimer said a combination of these assets was unlikely to be allowed.  Combining CHH and Placemakers presented fewer problems as consolidation would comprise only 36% of the building supplies market.

Fletcher Building might also not want to see CHH fall into a competitor's hands. The combined sales in the trade market, however, "might aggregate to around 45% within acceptable levels so as to not substantially lessen competition".  "Of more concern might be the consolidation of market share in certain product lines, including timber, insulation and wallboard."  The company faces a big hurdle if it wants to own both CHH's manufacturing and distribution businesses.

Nevertheless, Fletcher Building should be interested in the New Zealand wood products and distribution businesses, given the improved distribution capability and the ability to secure supply, Mortimer said.  More margin might be available in the supply chain under Fletcher Building ownership.  However, there was little value for Fletcher Building in CHH's Australian assets. "Fletcher would have no particular distribution advantage and would acquire only a modestly attractive market share."

US firm Weyerhaeuser, which has just sold its New Zealand forestry interests, was a more natural candidate for the Australian business. CHH, Weyerhaeuser and another company, Hyne, command around 60% of the softwood lumber market across the Tasman and the acquisition of CHH would present both with an excellent consolidation opportunity.

The Australian market is fragmented and the CHH sale presents a chance for one of these three players to consolidate. Interested parties are understood to be conducting due diligence and indicative bids for CHH are expected this week. Final bids are due by late November.

Bankrupt Christchurch businessman Mark Taylor has been forced to wind up another company.  Franchise Operations Ltd - formerly Stirling Sports Franchises - was put into liquidation in the High Court at Auckland last week, in the ongoing fallout from last year's Building Depot collapse, which had amassed debts of more than $8.6 million.  Franchise Operations, formerly known as Stirling Sports Franchises, was put into receivership in December. The liquidation has left all unsecured creditors out of pocket.

Receivers had earlier sold the Stirling side of the business, including the brands and logos, in July for $850,000 to Lane Walker Rudkin Industries, whose directors are Ken and Patricia Anderson. The company's shareholder is Stirling Corporation Ltd, of which the Andersons are also shareholders and directors.  The Stirling franchise had been managed through NZX-listed company RetailX, whose shell became British telecommunications company Plus SMS in March this year.  Franchise Operations and its 88% shareholder, Lennox Corporation, were placed in receivership last December when ANZ called in a $2.9 million debenture after Lennox defaulted on a loan. Lennox is also now in liquidation.

Taylor is the sole director and shareholder of Franchise Operations, Lennox and RetailX. Taylor's wife, Janine, is a shareholder in Lennox Corp and RetailX, according to Companies Office records.  Mark Taylor was bankrupted in May. RetailX owned 10% of the Building Depot and Taylor and his wife owned the rest. Building Depot paid RetailX a management fee.

Receivers Ferrier Hodgson said Franchise Operations' and Lennox's only asset was the intellectual property, including the trademarks, emblems and logos, associated with the Stirling Sports brand.

The receivership hasn't affected the ongoing operations of the Stirling Sports chain.  The proceeds of the sale of the business were paid to debenture-holder ANZ and there was no money for other creditors, according to the receivers' final report.  A settlement was reached between security interest holders Colin Taylor, Merilyn Taylor and Timothy Goulding.

Taylor's father, Colin, founded the Stirling Sports chain and ran it for more than 40 years before selling it to his son in 2003. By then, it was a 43-store chain. Mark Taylor soon afterwards bought the Building Depot from Fletcher Building.

The DIY chain's collapse came in the wake of increased competition with the introduction of Australia's Bunnings Warehouse stores, the expansion of Mitre 10 megastores and existing competitors such as DIY chain PlaceMakers and ITM. The Building Depot offered goods at the lower end of the general retail market, where competition had become more fierce.

Leading New Zealand wool and possum-fibre garment producers are working together on market opportunities in Canada, the United States and Europe.

Led by Paul Spicer of outdoor clothing manufacturer Norsewear, the "cluster" involves woollen underwear producer Finespun and technical mountain bikewear specialist N-Zone.  Spicer says the three will "share an umbrella - to build a new product range from the three companies' best products."

They're targeting the extreme outdoor market, "touching on fashion." The range is broad in styling and technical performance, from woollen intimate apparel and socks, to mid-layer garments and heavy outer-layer garments using wool and technical fibre inners.

The three companies couldn't be more different in terms of history and structure but the products are a near-perfect fit.  Norsewear is more than 40 years old, famous for its socks and rugged hikers' jumpers and jackets. Finespun, previously Lane Walker Rudkin Manufacturing, claims to make some of the world's finest woollen fabric. N-Zone, on the other hand, is "high technology and high energy" with product and graphics based around the mountain-biking subculture.

"The group approach gives us the opportunity to share some of the volumes we wouldn't be able to do individually, or our factories would be too specific to produce individually," says Spicer. "We can't go into those markets with just apparel. We need all the other bits to go with it. We need the technical strength."

Spicer says the cluster came about as a result of meetings of the Industry New Zealand-sponsored textile, clothing and footwear strategic partnership. As convener of the market access subgroup, Spicer was impressed to meet other companies with skills and products complementary to Norsewear's. He also found that collectively, their address book listed many of the top retailers globally.

Woollen products made in New Zealand have come a long way from chunky jumpers. Norsewear, for ex-ample, is making "very technical use of merino and possum," says Spicer.

A garment may have a 20.5-micron merino wool outer and a superfine 18-micron merino/possum inner in contrasting colours and may be black on the outside and natural possum on the inside, giving it "an amazing thermal quality but also adding a lot of style by the way of contrast colours."  Though not as technical as some of the wools Norsewear produces with high-tech inners, like Coolmax, it is "a very technical product," Spicer says. "It has got a bit of an edge to it. [It's] not just a tourist product."

The three companies' collaboration gives a large combined contingent of product and graphic designers. "I think we've got a heap of talent there," says Spicer. "We're cross-referencing on product development with one another's ranges as to what we think collectively is going to work."  Spicer says he's confident of some "quick wins" for the group, already with strong leads to follow up, particularly chain stores in Britain, Canada and the US. He doesn't rule out working under a single brand some time in the future.