Brian Gaynor: Go in for a quick slog, go out for a duck

COMMENT

The overseas expansion strategies of New Zealand's listed companies are in the spotlight again after the poor performance of The Warehouse in Australia.

It is an important issue because many companies have destroyed substantial shareholder wealth when they have moved overseas.

Why has this happened? Why do so many New Zealand companies made such a hash of their foreign expansion?

The quick answer is that their strategies are far too risky and the chances of success are extremely low.

As the domestic first class cricket season is in full swing, it is appropriate to use a cricket analogy to describe what has been happening.

The best way for a batsman to build a big innings is to start slowly.

He plays defensively at first, gets his eye in, takes the odd single and assesses the quality of the pitch and opposing bowlers.

As he gets used to the pace of the wicket his confidence grows and he starts hitting the odd boundary.

As the innings builds, the twos turn into fours and the fours into sixes. Bowlers become demoralised and the batsman reaches 100 and goes on to a higher score.

The high-risk approach is where the batsman starts hitting for the boundary from the first ball.

This can be extremely exciting but the chances of success are slight, even for the better batsmen.

Many New Zealand companies are unwilling to take the slow, innings-building approach. They make little attempt to familiarise themselves with foreign conditions or to build a long innings from scratch.

Instead, they adopt the high-risk approach and start swinging for the boundary before they have had the opportunity to assess the state of the wicket.

Air New Zealand is a classic example. Its acquisition of Ansett was extremely high risk because the Australian airline was large and had a huge level of debt, Air New Zealand had no experience of the Australian domestic market and the company turned down an opportunity to share the purchase cost with Singapore Airlines.

The acquisition was doomed because if anything went wrong Air New Zealand didn't have the expertise or financial resources to fix it.

The best example of the slow, innings-building approach is Michael Hill International, while The Warehouse exemplifies the alternative high-risk strategy.

Michael Hill opened his first jewellery shop in Whangarei on May 13, 1979, and a further six stores over the next seven years.

The company listed on July 15, 1987 after issuing shares to the public at 65c each. Only two of the 65 new listings that year - Hallenstein Glasson and Michael Hill - are still on the stock exchange. Most of the others went broke.

In 1987, Michael Hill decided to expand to Australia. Brisbane was identified as the most suitable location because 70,000 New Zealanders were living there.

A month after listing, the company opened its first store in Brisbane and by the end of 1987 it had four outlets in and around Brisbane.

Michael Hill and his wife, Christine, sold their Whangarei home and moved to Queensland.

Michael Hill's growth strategy has been the same in New Zealand and Australia.

The company started from scratch on both sides of the Tasman and slowly increased the number of stores when it developed the right formula.

If Michael Hill had jumped into Australia with a big-acquisition, high-risk strategy he might not have survived, as its jewellery market is different to that of New Zealand.

Australians have a more flamboyant style whereas New Zealanders' taste is more conservative.

Michael Hill International is a big success story. On June 30, it had 46 stores in New Zealand, 84 in Australia and four in Canada.

The company has adopted the same low-risk, innings-building approach to the Canadian market. This has benefited shareholders as the company has had five one-for-10 bonus issues since 1987.

One cannot leave the Michael Hill story without mentioning its footwear experience.

In July 1992, the company bought three shoe stores in Christchurch and by the end of 1993 it had nine New Zealand shops operating under the Michael Hill Shoes brand.

But the concept didn't work. Management time was being diverted from the jewellery operations and the stores were sold in 1994.

Michael Hill's two-year involvement in shoes offers two important lessons. The company took a cautious approach to footwear, so its failure had a limited effect on shareholder returns.

Michael Hill had the courage to sell its poorly performing shoe operations, whereas many companies, including Brierley Investments (Thistle Hotels) and Telecom (AAPT), hang on in the hope that an ill-conceived foreign acquisition may turn positive.

The Warehouse opened its first outlet in Takapuna on November 20, 1982, and had 53 outlets when it listed on November 14, 1994.

When the discount retailer announced the acquisition of Clints Crazy Bargains and Silly Sollys in Australia in mid-2000, it had 69 Warehouse stores and 25 Warehouse Stationery outlets in New Zealand, and its share price was $4.30.

The immediate response to the acquisition was positive, and by the end of 2000 The Warehouse share price had been as high as $6.85.

But the acquisition was extremely high risk because the company was changing from an organic growth strategy in New Zealand to an acquisition growth approach overseas. It had no experience in Australia, and Clints and Sollys had 105 stores, in four states, which had to be reconfigured and rebranded.

The Warehouse went into bat on a difficult pitch, facing fast bowlers and had to start hitting fours and sixes from the first ball. This strategy was far more dramatic than Michael Hill's four small Brisbane stores, but it also had a far greater chance of failure.

The performance of the The Warehouse in Australia has been disappointing.

The company now has 130 stores there, and these had an operating loss of $13.4 million for the year to July.

Chairman Keith Smith told the recent annual meeting that the Australian trading environment continued to be difficult for the company.

There is plenty of evidence to suggest (Michael Hill International and The Warehouse are two good examples) that a low-risk approach to foreign expansion is far more prudent that the high-risk acquisition strategy adopted by many New Zealand companies.

Organic growth is more prosaic and gains far fewer headlines, but it lets shareholders sleep at night.

The most recent example of the high-risk approach is Pacific Retail's acquisition of Powerhouse in Britain.

The electrical retailer, which has 135 stores in the UK, has just come out of receivership and operates in an extremely competitive market.

Pacific Retail, which had 48 stores in New Zealand at the latest balance date, has no experience of the UK market.

The purchase price was low but - as The Warehouse discovered in Australia - a low purchase price can be indicative of deep-seated problems.

On November 28, Pacific Retail announced a net loss of $33,000 for the six months to September 30. UK operations contributed a loss of $3.7 million.

Deputy chairman Phil Newland said losses were expected to continue in the UK "in the medium term".

Most of the New Zealand listed companies that have gone overseas through a high-risk acquisition strategy have destroyed shareholder value, and the odds are heavily stacked against Pacific Retail making a success of its Powerhouse purchase.

* Disclosure of interest; Brian Gaynor is a shareholder in The Warehouse.

* Email Brian Gaynor