Deka's fate sealed by rising costs

By SIMON HENDERY

The Warehouse, Downtown Auckland - a stream of customers shuffle between rows of ceiling-high shelving and rummage through big red packing crates searching for the bargain they've been promised in the jingle.

Less than 200m up the road, at Deka Queen St, the neatly laid out racks of merchandise atop a scuffed lino floor seem a somewhat anorexic offering by comparison.

Deka has seen better days and there was an air of inevitability about this week's announcement by Perth-based parent Foodland Associated that it was finally cutting life support to the haemorrhaging 60-store chain, with the loss of 468 full-time and 947 part-time jobs.

In one form or another, Deka has been part of New Zealanders' shopping experience for years.

It was born in October 1988 when LD Nathan merged its retail operations, including what had been the Woolworths Variety and McKenzies department stores, under a single brand.

In 1990, the Maori Development Corporation, iwi interests, and a management team, including Deka head Wayne Walden, bought the group off LD Nathan.

They went on to buy Farmers, which was in statutory management after the collapse of owner Chase Corporation, and in 1993 sold the Farmers Deka group to Foodland.

Terence Delaney, Farmers chief executive from 1987 to 1995, said that with Farmers' earlier problems, it was ironic it had emerged as the group's surviving business.

Mr Delaney said Deka's demise was almost inevitable because it failed to establish "a point of difference" in the retail market.

The company has also been hampered by expensive long-term leases for many of its stores. A source within the company, who asked not to be named, said a significant portion of Foodland's $A20.7 million write-down for the Deka closure related to lease payments.

While Foodland has been able to turn Farmers around and has also succeeded with its Progressive Enterprises supermarket chains - Foodtown, Countdown and 3 Guys - making money out of Deka has proved difficult.

Farmers Deka boss Nick Lowe took over from Mr Walden late last year and has spent the past few months masterminding a new strategy for Foodland's non-food New Zealand business.

Mr Lowe arrived in New Zealand in 1998 after Pacific Retail Group, which owns the Noel Leeming, Bond & Bond and Computer City chains, wooed him from Britain's largest appliance retailer, Dixons.

He was headhunted by Scottish-based conglomerate Murray International Holdings, which at the time was Pacific Retail's largest shareholder.

Mr Lowe left Pacific Retail a year later after being unable to reach agreement with the board on his pay.

He gained notoriety when it was revealed he had earned a salary package at Pacific Retail worth $1.1 million and had negotiated a severance package of $975,000.

Mr Lowe is blunt about the decision to close Deka.

"While we've done quite a few things like changing the merchandise mix over the years, Deka is a format that has been affected by increased competition in the market place and we haven't been able to significantly refurbish the stores ... it's lost some attractiveness as a destination."

Leases at a number of Deka sites are close to expiring, and rather than renewing them, Mr Lowe has decided to focus on an "aggressive" expansion of the more-successful 62-store Farmers brand.

"We got to a situation where the investment required in the [Deka] chain would have been very, very substantial. We obviously have to look at where the capital is best spent and I certainly believe that investing substantially in Farmers is the right thing to do."

The plan is to increase Farmers' existing 160,000 sq m of retail space by at least 30 per cent by July 2003.

Seventeen of the scuttled Deka sites will be converted to Farmers stores, creating about 400 jobs. Four new stores are also planned, and three existing ones will be expanded.

Farmers' credit book has continue to shrink recently, but Mr Lowe says its new growth strategy is not a reaction to a drop in the financial services side of the business.

But the company has backed away from a home-loan service which it expanded nationally only late last year.

Mr Lowe said that despite positive customer feedback, the depressed housing market meant not enough clients to support the loan business, which may be relaunched.

Analysts have warned that the Farmers expansion will pit the company against similar growth strategies proposed by competitors Harvey Norman and the Warehouse - both of which are planning major floor space growth over the next few years.

"This aggressive expansion leads us to believe that New Zealand is in danger of becoming overshopped in terms of department stores," Macquarie Equities said in a research report late last year.

"Foodland's New Zealand operations are going to suffer from an irrational market, no matter what positive steps its management is taking to restore growth and profitability."

Since the Macquarie report, the Warehouse has committed itself to becoming even larger, saying it believes it can increase total retail space by 50 per cent to 450,000 sq m over five years.

One player suffering from the effects of a congested market is Australian-controlled Kmart, a Coles Myer subsidiary.

Yesterday Coles confirmed it was considering all options for the loss-making chain.

The Warehouse's chief executive, Greg Muir, said his company would be interested in striking a deal with Coles if it decided to quit the business, but was not holding its breath.

"We had some hope before Christmas that we could talk further to Kmart but it's all gone very quiet so at the moment we're assuming they've deciding to box on in New Zealand."

Mr Muir said the Warehouse had shown an interest some time ago in buying the Deka chain, but in at least the past two years had not talked to Foodland about doing a deal.