Coles Myer learns harsh Kiwi lesson

By KAREN SCHERER

Somewhere in Coles Myer's head office archives in Melbourne is probably a copy of a New Zealand Herald article dated November 15, 1988.

The report was headed "Coles Myer Aims To Be Major NZ Retail Force," but it is a fair bet it won't be sitting in a frame.

Australia's biggest retailer probably wishes it had never bothered to jump across this side of the Ditch.

In its 1989 annual report, the company boasted about its expansion in New Zealand. It was enthusiastic about the potential for its Kmart and Katies chains, as well as Progressive Enterprises, which at that stage ran the Foodtown, 3 Guys and Georgie Pie chains.

More than decade on, Coles Myer shareholders have made no secret of their displeasure that the company still has a presence here. It no longer owns Progressive Enterprises, and is widely believed to be looking for a buyer for both Kmart and Katies.

The only consolation for the retail giant is that it is not the only Australian company to find this market a bit tougher than it expected.

While there are some who are clearly enjoying success on this side of the Tasman, there are also a clutch of high-profile brands that are disappointed with their forays into Godzone.

Book chain Dymocks, for example, originally predicted that it would open 20 stores in New Zealand. Six years on, it has just six stores, and has been distracted by a lengthy legal battle with its main franchisee, John Todd.

As Mr Todd tells it, Dymocks simply did not do its research. It failed to take into account that it was setting up a greenfields operation, and struggled when it was unable to achieve critical mass.

If Dymocks regrets coming to New Zealand, it is not about to admit it. The company's Sydney-based general manager, Keith Perkin, does, however, concede it found the competition a bit tougher than it expected. Whitcoulls responded "very well" to the threat, he says, but he maintains the chain has learned from the experience.

"It was the right decision for us. It was our first market outside Australia. We have since expanded into Asia and it helped us learn a lot."

Achieving economies of scale has also proven a problem for Kmart.

Ian Clark, programme director for the Australian Centre of Retail Studies at Monash University, has some sympathy with Kmart's line that it simply found The Warehouse too tough a competitor, but Mr Clark also believes Coles may have chosen the wrong brand to bring to New Zealand.

"If you go back that far, Kmart within Australia was very much the poor relation in the Coles Myer stable. It was the brand doing most badly. Maybe Kmart wasn't in the position to provide the fight that one of the other brands might have done," he suggests.

In hindsight, it also made a mistake signing up 21-year leases, and demanding large sites on a single level. Such sites were not easy to find in New Zealand, and they did not come cheap.

It also struggled with distribution issues, and whether the stores should be run from Australia or New Zealand.

But the biggest mistake many Aussie retailers have made, according to their Kiwi cousins, is underestimating the competition. Few will forgive Harvey Norman director Katie Page, for example, for telling Australians that New Zealand's retail scene was "worse than the worst country town you have ever been to."

Harvey Norman has made it clear it sincerely regrets the remark, and Mr Clark notes the chain appears to be doing well in New Zealand. This is largely because it delayed its entry, and thoroughly researched the market, he believes.

"There are good reasons some Australian retailers have done poorly. Those reasons are not necessarily because of Australian arrogance, but just misreading the market and not doing their homework."

Property consultant Stuart McIntosh could not agree more. Mr McIntosh is well used to dealing with Australian firms who simply fail to do their research properly. But he also blames the rents demanded by Australian mall owner Westfield for making it tough for both Kiwi and Aussie retailers to make a buck.

Before Westfield moved into New Zealand, it was thought retailers would go broke if rent made up more than 12 per cent of their occupancy costs. Many are now paying 14 to 15 per cent in rent, he notes.

The chief executive of the Retail Merchants Association, John Albertson, believes many also underestimated the smallness of the New Zealand market.

"If you're sitting in Sydney or Melbourne, it's probably quite hard to get your mind around the size of the population in New Zealand," he says.

"While obviously they wouldn't expect the same level of business as central Sydney, the difference in the volume of people makes quite a difference to the average sale per staff member and the average sale per square metre. While the costs themselves are not as high, the sales you generate in relation to those costs are probably quite a bit less and it is getting that equation right that is probably the real challenge."

Westfield was brought to New Zealand in 1997, when it was given the management contract to run the St Lukes Group's shopping centres. It has since taken over St Lukes, giving it ownership of 11 of the country's prime shopping malls.

As some retailers see it, Westfield is largely to blame for the Australian invasion which has driven many independent retailers either out of the malls or out of business over the past three years.

Its New Zealand director, Grant Hirst, bridles at the suggestion. As he sees it, good retailers - no matter where they come from - have no problem paying Westfield rents.

"The good Australian retailers have set up offices here," he says. "That's very much what we did in the shopping centre business. We didn't come over here as a branch - we actually set up as an independent group to try to understand New Zealand.

"It took us about two years to understand it before we made any moves of any consequence. It's essential really. It's very difficult if you're sitting over in another country and you're ordering 12 to 18 months ahead - I don't know how you can ever do it."

Another common mistake is failing to take into account differences between the countries, Mr Hirst believes.

Clothing sizes, for example, vary widely depending on the make-up of the local population.

And nor are we the fashion disasters many Australians originally believed.

"Any Australian who has tried to walk over here and put down his product range without change has been really surprised at how poorly he has done," Mr Hirst says.

"What many have also done is totally underestimate how good the existing retailers are. There are some really strong New Zealand retailers who move fast, and they protect their patch very well."

Westfield's research has also shown that New Zealand consumers are still very much focused on price, while Australians tend to concentrate more on value.

It makes it tough for Australians who are used to higher margins in their own country.

Like many others, however, Mr Hirst believes that the Australians are learning from their mistakes. While it is inevitable more Australian chains will expand across the Tasman, he believes they will be more cautious than in the past.

"We are strongly of the view that the number-one priority is to grow existing retail chains here and we are always talking to them about that.

"As far as the numbers coming in from Australia, certainly some of the traditional retailers are no longer pushing for growth, even in Australia, so there has definitely been a drop-off."

Not that the influx of Australian-owned businesses has been without its benefits.

Mr McIntosh, for one, believes the competition has been healthy. Apart from anything, it has meant New Zealand retailers have become so confident about taking on the Australians that the flow now appears to be going the other way.

"We've certainly become far more sophisticated," he suggests.

"They've come across here intending to beat up the Kiwi and it hasn't necessarily worked. But certainly they've caused us to sharpen our game.

"There's no doubt about that and in many ways it has been beneficial for that reason."