Fletcher Building's Distribution division is spending A$10 million to expand the footprint of its Australian bathroom and plumbing supplies business Tradelink by 60 branches, based on lessons learnt from the turnaround of its New Zealand-based Mico brand and growth in Placemakers.

Distribution chief executive Dean Fradgley said Tradelink, which generates a quarter of the division's revenue, is the number one priority to deliver sustainable earnings growth.
Under changes last August, Fletcher's distribution businesses in New Zealand and Australia were merged into one division, which now accounts for a quarter of the group's annual turnover at $3.2 billion. Divisional earnings before interest and tax rose 17 percent to $148 million in 2015, which Fradgley said was achieved by improving service to customers, based on their feedback.

An accelerated performance in Placemakers, which is New Zealand's largest building supplies merchant, and a turnaround in New Zealand's largest specialty plumbing and bathroom merchant Mico, has made them key earners for the division and lessons learnt from that growth was now being deployed in Australia, Fradgley said.

Changes included a flatter management structure, shared property and management costs, smaller branches, better employee engagement, and spending about 1.5 percent of total hours worked on training. Increased staff training at Mico resulted in the time taken to deal with each customer dropping an average ten minutes to 4 minutes, after feedback that 'tradies' wanted good service without spending too long in store.

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Another idea from New Zealand was sharing property costs through a 'shop within a shop' concept. Overheads were reduced by placing eight Mico stores within Placemaker outlets, a model that's now being expanded. A further trial of a Mico shop within a Humes store (part of Fletchers' building products division) in Timaru has also proved successful, Fradgley said.

The two Australian businesses in the Distribution division are Tradelink, which has an 18 percent market share and is number two behind Reece, and Australia's second largest roll former and roofing supplier Stramit.

Tradelink restructuring costs were a $3 million drag on the division's results in the first half, and a further $1million is forecast for the full year. However, earnings before interest and taxation were up 31 percent in the 2015 year to A$15 million and Tradelink is forecasting A$22m for the 2016 financial year, and a range of A$24 to $28 million for the following year.

The Australian businesses have scale that needs to be leveraged, Fradgley said.
Tradelink's strategy to grab market share off its larger rivals includes lowering property costs as a percentage of sales, concentrating on plumbers in the small-to-medium-sized enterprise category, and lifting e-commerce.

A 'winning in plumbing' trial in the Australian Capital Territory of a smaller branch with better presentation of top-selling products along with one-on-one service has led to the decision to open 20 similarly-sized stores a year over the next three years, he said. They'll mainly be in Queensland and New South Wales to increase the branch network as feedback shows SME plumbers prefer not to travel more than 15 minutes from a job to get parts, Fradgley said.

The $150,000 cost of the new stores compared to the previous $700,000 pricetag made it viable to proceed and payback is expected in under two years.

"It's based on the turnaround of performance in Mico. It's very competitive in New Zealand so we found ways to do things more simply while growing market share and offering great customer service," he said.

Fradgley, the son of a builder, formerly worked for one of the Northern Hemisphere's biggest plumbing suppliers. "Having lived through a recession in the UK we found more efficient ways of running branches including doing cheaper store fit-outs and smaller branches that lower leasing costs".

Forsyth Barr research head Andy Bowley said Fletcher Distribution was enjoying the cyclical benefits of a construction upturn in Auckland, better management decision-making, and following international best practice.

Mico has boosted market share by 2 percent in two years and more than doubled ebit to $3.5 million in 2015 and forecast $9 million in the 2016 financial year. That turnaround shows management already has some runs on the board when it comes to Tradelink, Bowley said.

"Reece has a head-start but if you look at Coles six to seven years ago in the Australian grocery market and where Woolworths was sitting and look at where it is today, relative competitive advantage is not structurally embedded for ever."

The strategy for Stramit is to shut underperforming branches, save $4.9 milllon this financial year in product and process simplification, lift employee engagement, and better leverage Fletcher's scale and buying power to improve pricing.

Fletcher Building shares last traded at $8.20 and have gained about 12 percent this year, outpacing the S&P/NZX 50 Index's 6.7 percent increase. The stock is rated a 'buy' based on the consensus of 11 analysts polled by Reuters.