Tough times at Fisher & Paykel

By DITA DE BONI and KARYN SCHERER

There is a chessboard. On one side sits Gary Paykel and the management team at Fisher & Paykel. On the other are brokers, institutional investors and market analysts. And waiting in the middle are some 2700 F&P staff.

The pawns appear to be 200 or so middle managers, who the company has decided are no longer necessary to the game.

While the bean counters have applauded that decision, they are baying for more: they want F&P's prime business unit, the healthcare division, spun off into a separate company. They want more fat trimmed off the appliances division, whiteware margins improved, and some want the company to revisit a retail strategy which sees it give financial help to certain stores.

At a time when investors expect to exert considerable influence over a company's decisions, Mr Paykel is prepared to defy them.

"Who runs the business? Not the institutional shareholders," he says. "Because they can change tomorrow. These dudes are on a short-term fuse."

In his pale blue bunker at the company's East Tamaki headquarters, Mr Paykel is emphatic in stressing that the company can get a fair return for shareholders in its whiteware division. The healthcare business is "the best business in New Zealand," and appliance sales to the United States are going "absolutely, unbelievably well," he says.

The only time his defences come unglued are when he is asked to comment on the redundancies. "It's like going to a funeral of someone you know and love very much," he says in a sorrowful tone. "It's a dreadful thing to do - I've had to do it a couple of time here and it doesn't get any easier."

Mr Paykel and his corporate affairs offsider Richard Blundell brandish a fistful of analysts' reports that mostly recommend investors accumulate F&P stock. That, they maintain, is proof the market is "not rubbishing" the company despite a worse-than-expected performance in its whiteware division.

Nevertheless, almost all analysts have downgraded earnings, with ABN-Amro's Gary Baker summing up market sentiment by saying that while the outlet for the healthcare division remains strong, "there is uncertainty regarding how the whiteware changes will pan out."

As to the company's intention to more than halve capital expenditure, increase production capacity by 50 per cent, save $9 million a year on staff and achieve sales growth of $250 million in the division over the next three years, the jury is still out.

While sales of its appliances are growing at a healthy rate in the United States and Australia, F&P's 60 per cent or so share of the market in New Zealand is static at best.

The problem is not just sales, but costs. Like most New Zealand manufacturers, the Kiwi icon is struggling to compete with giant overseas players which are much more efficient.

The fact that it can lay off 200 staff, competitors maintain, is proof that F&P has not been a lean enough machine.

In a briefing for analysts, the company admitted it needed to "get our costs competitive and our quality in line with best practice."

While it largely blamed the increased cost of imported materials for the plunge in profit from its whiteware division, it also acknowledged it had forgone $4.5 million by dropping its prices to match imported products. Since last month, it has begun lifting prices again, by about 5 per cent.

But some competitors wonder why it bothered dropping them in the first place.

"They've got such a good image in the market that people should be prepared to pay more," says one competitor, who refuses to be named. "I was astonished, quite frankly."

According to Mr Paykel, analysts are simply not looking far enough out.

According to him, the six-month whiteware result - which saw earnings drop 36 per cent to $9.7 million - was a "hiccup." The only mistake the company will admit to is unhedged currency exposure, which hiked up costs of imported materials.

Analyst Clyde D'Souza, of Salomon Smith Barney, says F&P's hedging strategy was flawed because it hedged its revenues, but not its costs.

Mr Paykel says F&P's main fight now is against "cheap" imports, which he claims have eroded the power of its normally higher priced products in Australasia.

F&P has asked the Government to look at bringing an action against Korean brands such as Samsung, which it claims are being dumped in this country.

Both The Warehouse and Pacific Retail Group, which stock Korean brands, have denied the allegations.

But they are also keen to shift the attention to what they believe is a more fundamental problem the company should be addressing: its long-standing strategy of dealing only with retailers who will stock its products exclusively, rewarding them with financial help.

It is a matter of record, for example, that F&P has a floating debenture over the assets of the finance division of South Island retail chain Smiths City.

Exactly how much money F&P has lent the chain to finance hire purchase deals is not known.

But at the end of April, Smiths City had about $70 million of hire purchase deals on its books.

F&P is also widely believed to be financially supporting the Hill & Stewart chain. Mr Paykel confirms that "almost all our dealers have had some sort of assistance from us at one time or another," but he denies virtually owning Hill & Stewart.

"Right now, through the finance company, Hill & Stewart are receiving some assistance," he acknowledges. "I wouldn't say it is propping them up at all, because we would not be able to do that."

Critics are unconvinced. They say that despite the company's insistence that Korean imports are chewing up profits, F&P does not have to worry about freight costs and is protected by a 5.5 per cent tariff on foreign-made appliances.

F&P is too scared to give up its exclusive dealer arrangement, they claim, because without it many of the stores would collapse and it would face huge writeoffs.

One critic who is upset that F&P is blaming its domestic woes on cheap imports is Pacific Retail Group head Stefan Preston. Pacific Retail runs the Noel Leeming, Bond & Bond and Computer City chains and is the country's largest appliance retailer.

Until Noel Leeming bought Bond & Bond in 1996, Bond & Bond carried the F&P brand exclusively.

When the chains merged, F&P would not allow the arrangement to continue unless Noel Leeming also agreed to shun overseas brands. It refused.

Mr Preston admits that customers often ask for F&P, and makes no secret of the fact he would love to add it to his range. But he is also angry that F&P has blamed Korean imports, which make up only 5 per cent of the market, when Australia's Email remains F&P's main competitor in New Zealand and Australia.

In March, Mr Preston boasted that he had a plan to smash the exclusive distribution agreement. He is believed to have gone behind F&P's back to Harvey Norman and Farmers for supplies, with the offer to in turn supply them with overseas brands.

The plan never came off, because the other retailers feared it was too skewed in Pacific Retail's favour.

The only comment Mr Preston will now make is that "that particular plan required the cooperation of other major retailers, who chose not to participate."

He notes, however, that it is ironic that Farmers and Harvey Norman, both Australian-owned, stock New Zealand's favourite brand, while Kiwi-owned Bond & Bond and Noel Leeming rely on Aussie imports like Simpson and Westinghouse.

The irony has not been lost on The Warehouse Group, which imports the Korean brand Advanced.

Chief operating officer Greg Muir agrees F&P's retail strategy has proved sensible in the past. But he questions how long it can continue.

"We're living in a far more global market these days, where people have access to good-quality products made in different jurisdictions with different costs."

Mr Preston says Pacific Retail has not given up. But he stresses that it will take pressure from F&P investors to break the arrangement. "They have a right to be upset because the business is inefficient and they still haven't faced that."