Nick Churchhouse

The Commerce Commission's argument forbidding a takeover of The Warehouse by supermarket companies Woolworths and Foodstuffs is wrong, wrong and wrong again, the High Court has been told.

Closing submissions in the two-week appeal against the commission's decision to block the acquisition began in Wellington yesterday with brief public summaries by lawyers for the appellants and the commission.  The rest of the closing arguments, which are expected to finish today, were closed to the public because of confidential commercial information being shared.

In June the commission blocked any takeover bid for the Warehouse Group, which comprises 85 Red Sheds and 43 "blue shed" stationery outlets, by either Woolworths or Foodstuffs.  The two groups dominate supermarket retailing, and each has a 10 per cent stake in The Warehouse.  The case focused on the three Warehouse Extra hypermarket stores, which offer full supermarket service.

Yesterday commission lawyer Stephen Kos, QC, told the court the basis of that decision was that any takeover would lessen competition. The commission had good reason to doubt that any purchaser would run the Extra stores in a competitive and commercially "vigorous" fashion.  The appellants' argument that Warehouse Extra would be unlikely to succeed should not be assumed by the court, Mr Kos said.  "They will compete and the acquisition will decrease that competition."

Woolworths' lead lawyer, David Goddard, QC, said the commission's case was full of holes because its decision had been based on "theoretical assumptions" and "speculative possibilities".  Mr Goddard said it should not be up to the appellants to disprove any doubt the commission had about the potential takeovers because only the commission had the full picture. Even then it had not used it.  "(The commission) did not paint a complete picture (of the competitive forces in the market). Rather, it zoomed in on a tiny portion of that picture. That is not the process required by the (Commerce) Act."

Foodstuffs' lawyer Bruce Gray, QC, told the court that the commercial potential of the Warehouse Extra concept was irrelevant, and in any case had not been proved one way or the other.  "The experts (witnesses) argued themselves to a standstill about what has happened in the past and what might happen in the future."

As it stood, the takeover would affect only the existing three stores, which had no competitive impact.  Mr Gray said the commission had constructed its analysis to its own specifications, which were angled to promoting a third supermarket competitor in a market it was worried about being too small.  "The job of the commission and the court does not change because markets are big or small."

A Foodstuffs acquisition of The Warehouse would strengthen the Extra business, because it could bring economies of scale not present now, he said.

Government departments are elitist and ignorant when it comes to helping small firms, one of New Zealand's leading small business experts says.  Massey University professor Claire Massey has criticised the Ministry of Economic Development (MED) and New Zealand Trade and Enterprise (NZTE) for ignoring most of New Zealand's small businesses.

Massey targeted the Government organisations' definitions and the policies they used to interact with small and medium enterprise (SME).  "They are using a construct -- the business life cycle -- which comes from large firms. If that is the only framework you use to look at small businesses, it misses the point," she said.

SMEs made up 99 per cent of New Zealand's business community, yet NZTE only dealt with the top 4% -- firms with at least 20% growth over five years.  "We love to see David beat Goliath, to see Icebreaker, Weta and Trade Me take New Zealand to the world. But most New Zealand firms are not like this," she said.  "We have to stop griping about lifestyle businesses and mom and pop firms as if they were a bad thing. They are not all embryonic multinationals, but they are just as valuable to the economy," Massey said.

The focus also missed the real force behind eight out of 10 businesses -- that of the owner.  A 2005 survey by Massey University showed less than 15% of small firms had got any help from MED or NZTE, and many knew little about what was available.  "They don't seem to mind being treated like second-class citizens, while we run around looking for the next Sam Morgan," Massey said.  While NZTE had $180 million a year mostly devoted to businesses with up to 100 staff, they blamed budget constraints for the fact they only interacted with the top echelon of those, Massey said.

But if that attitude was adopted within other Government responsibilities, such as education, it would be intolerable, she said.  "That's like dealing only with A students. It is easy to make a success out of A students."  New Zealand was not alone; most countries had an ill- thought out approach to small business development, she said.  "Countries just say `What should we be doing, let's focus on high growth.' There's not much sophisticated thinking going on there."  Taiwan -- "one of the development miracles of the world" -- had a bottom-up approach to development, putting the majority of their resources into small business, acknowledging that was where the growth potential was.  "That completely woke me up, they are doing the exact opposite of what we are doing," Massey said.

A MED report last month on structure and dynamics in SMEs showed that firms with 20 or less employees accounted for nearly 60% of new jobs in New Zealand from 2001 to 2006.  The findings showed firms with up to five workers comprised 87% of New Zealand enterprises, contributed 30% more new jobs than firms with 500 or more staff and made twice as much real profit per employee than any other sized grouping.

Encouraging the owners of "low-growth" businesses would have a massive effect on the economy, because even a small change in productivity over the large grouping would have a big upside, Massey said.

A $228 million sale and leaseback deal has boosted Australasian hardware chain Bunnings' property development profits by up to $40 million.

The sale of 11 retail warehouse properties in Australia and New Zealand to investors Charter Hall and New Zealand's Dominion Funds was announced as part of the company's capital management programme.

The New Zealand portfolio comprised five properties in Wellington, Hamilton, Palmerston North, Whangarei and Rotorua, and was bought by Dominion for $82 million.

Dominion Funds chief executive Paul Duffy said the price was a good deal. "We're very satisfied with that. It's good for our investors - that's the fundamental thing we have bought here."

The properties were all on main arterial routes and came with 12-year leases and rights of renewal.  With a property investment portfolio of about $900 million, the deal was not huge for Dominion, Mr Duffy said, but was significant in the partnership with Bunnings.  "It's an important one. We're looking to do further business in partnership with them, in other stores throughout New Zealand as they expand," he said.

Charter Hall property fund bought the Australian properties.

Bunnings said the sale would lift profits from property development reported in the second half of the 2006-07 year to more than A$42 million (NZ$46.8 million), A$36 million (NZ$40 million) higher than in the previous six months.

With 11 new stores in New Zealand in the past four years, Bunnings was targeting four new large-format stores each year, its New Zealand property manager, Dan Kneebone, said.

"The New Zealand market has accepted our offer pretty enthusiastically, so we're just responding to demand," he said.  New stores in Mt Roskill, Christchurch and Nelson were planned in the next 12 months.  "We have quite a bit of property in the landbank."

Bunnings bought a site next to Wellington Airport two months ago, but no date had been set for construction of a new store.

Mr Kneebone said the Bunnings concept was all about large-format stores that could offer a competitive range and low prices.  Since buying Benchmark in 2001, the company had invested more than $100 million to develop 13 large-format Bunnings Warehouses, and was progressively redeveloping 25 smaller stores into warehouse-sized outlets.

While many moaned about what it lacks, some business owners think after eight consecutive budgets Michael Cullen is finally starting to learn.

Lower Hutt fire alarm manufacturer Pertronic managing director David Percy said a 3c cut in the business tax rate showed New Zealand was starting to "play catch up" with the rest of the world.

"The number one thing in terms of growing a business is retained earnings. It's a move in the right direction," he said.

New Zealand's per capita income was just more than half of the US, and the only way to increase it was to build successful businesses, he said. "Most countries recognise this and it has taken New Zealand a while to focus on having successful businesses."

More tax cuts would further increase New Zealand's global competiveness, Mr Percy said, a point Business New Zealand chief executive Phil O'Reilly agreed with. "We can't compete with Australia if you are just doing the same stuff, it's important that we move that downwards rapidly over the next two years," Mr O'Reilly said.

An extra $630 million in research and development funding was going to be positive for a lot of businesses too, Mr Percy said. However the positive gloss was immediately tarnished by the flip side of the Budget - compulsory KiwiSaver contributions and an obvious lack of commitment to tightening Government purse strings, Mr O'Reilly said.

"The positive things they are doing are likely to be less than they might have been otherwise, because you're still seeing government spending squeezing out private sector spending. It's a pretty negative point."

The compulsory contribution to KiwiSaver was an "unwelcome surprise" for employers, Mr O'Reilly said. Even with tax credits to dull the pain, the forced contribution was going to increase payroll costs already hit by extra holidays and higher minimum wages, he said.

Even worse, it seemed the Government was forcing employers to start doling out money for nothing. "Employers will be most unhappy that something that is nothing to do with them employee savings they have been roped into," Mr O'Reilly said.

But even with 50 staff in his Wingate factory, Mr Percy said he was relaxed about the KiwiSaver changes. "Ultimately it is part of the salary package, so it just forms part of the backdrop in terms of wage negotiations," he said.

The positive windfall from a tax cut would still miss about 60 per cent of small businesses, Massey University's Centre for Small and Medium Enterprise Research Claire Massey said.

And the rest of Dr Cullen's package held little for the sector to get excited about, she said. "It's not a day for celebrating for New Zealand small business."

Comparing Dr Cullen's announcements to 50 paragraphs of small business highlights in last week's Australian budget, Dr Massey said New Zealand small business owners would be indifferent. "I don't think they will be pissed off because they didn't have high expectations."

But the lack of a positive message to the owner-operators and small enterprises from Government was very "underwhelming", Dr Massey said. "I'm not talking about the neighbourhbood dairy but the small firm who do have growth prospects, whose owners are ambitious, what do they get out of this?"

New Zealand investment opportunities have been ripening for 20 years, but Kiwis are too shy about equities and need to get excited about saving, an American investment expert says.

William Buechler first visited New Zealand the day before the 1987 sharemarket crash. New Zealand recovered more slowly than any other country. The resulting lack of exposure of investment opportunities had made the country flush with potential, he said on his return last week. "I felt then and I feel now that this is a great place to be investing."

Mr Buechler, owner of asset management company Barclay Partners, started putting money into New Zealand seriously about a year ago, after seeing potential in a post-September 11 global marketplace.

Since a visit in August last year Mr Buechler has built a hedge fund in Barclay Partners geared toward New Zealand investments, with a small percentage in Australian stocks. Back to investigate investment opportunities and meet Finance Minister Michael Cullen, Mr Buechler said he detected a more positive outlook. "You're really on the verge of some fabulous things happening here."

Conversely, he was "dismayed" at the lack of enthusiasm about government workplace savings scheme KiwiSaver. "I was shocked when I got here that there was not more excitement about KiwiSaver. There's been too much made of the fact it won't be compulsory and therefore it won't work. I disagree."

The key was educating people about the "power" of the savings movement and explaining the benefits of long-term investing.

Mr Buechler, who was involved in setting up 401k, the US equivalent of Kiwisaver, said it had become almost the measure of a company. "An employer wouldn't be able to attract employees if they didn't have (a workplace savings scheme). It's become almost pervasive."

The money accumulated through 401K had wider benefits, helping the United States economy ride out downturns and accentuating the upturns.

After the 1987 crash, Kiwis turned their backs on equity markets, and there was no national savings buffer to inject confidence into the markets like there was in the US.

"Your market basically went nowhere for 15 years. You didn't build an equity culture so you don't really have people thinking stocks and sharemarket."

The lack of focus on shares had caused businesses to pay better dividends to attract investors and led to many being undervalued compared with their international peers.

"That's what led to those opportunities that I see now," he said.

It was that culture change that he discussed with Dr Cullen last week, in a meeting prompted by Dr Cullen using quotes from an article Mr Buechler wrote for Forbes magazine. "We talked about how bright the future was for New Zealand."

Mr Buechler said awareness of the opportunities in New Zealand was not widespread, but the world was waking up to what New Zealand markets had to offer.

The strength of the stock exchange was critical in giving overseas investors confidence, and he liked what he saw.

"They are building the market. You are not going to get the outside capital without having a viable sharemarket."

The potential for NZX to grow was huge and its forays into the Australian market were "nothing short of brilliant".

Overseas investors were sometimes concerned about the size of New Zealand's total market capitalisation, about $50 billion, but it was a misplaced worry.

"It's a self-fulfilling prophecy. If there's more money floating around, the share prices go up, and bingo, the market cap goes up."

That said, if investors waited too long they would miss out. "The interest level in the US from institutions and the individuals we are talking to is growing exponentially."

New Zealanders needed to stop looking at property - "real estate is a little overdone" - and start looking at the innovation and potential in local companies to spread their investments, Mr Buechler said.

New Zealand was unique among younger investment markets in that it was less volatile than most. "I know what I own today I will own tomorrow," he said. "It's hard-earned money for me and for my clients. I cannot fathom putting it into some of the countries that do not have the political stability and legal system you have here."

Commercial landlords continue to cream it, with annual returns on office property beating sharemarket returns and leaving residential property for dust.

The latest investment performance index from the Property Council of New Zealand has shown owners of central city office buildings were making a 21.8 per cent return for the year till December, up from 18.3 per cent on the previous year.

Auckland was in the top spot, with a 23 per cent return, seven percentage points higher than in the 2005 year.

In Wellington, investment returns slowed slightly from 21.6 per cent in the 2005 year to 19 per cent for the year to December.

With returns from the NZX top 50 stocks at 11.7 per cent and residential property values up 9.3 per cent in the latest figures from Quotable Value, the office building investment sector was well ahead.

Property Council national director Connal Townsend said the gains were boosted by strong capital growth during the period, with Auckland cbd offices returning 13 per cent, double that of the the 2005 year.

Retail property and shopping centres improved as well, with returns of 18.9 per cent and 21.5 per cent respectively, up from about 15.5 per cent in 2005 in both cases.

On the flip side, industrial property investments were down sharply nationwide, with 2005 returns of nearly 25 per cent falling to 13.2 per cent for 2006.

Property Council research chair Alan McMahon said he was surprised by the severity of the drop but it was a natural part of the cycle, merely a slowdown to compensate for a spurt in industrial capital returns in recent years.

The ongoing positive returns from city office buildings would slow at some point too, he said.

"They have performed so horribly from the 90s that they have a lot of catching up to do." The non-central city office market slowed too, with Auckland returns down to 12 per cent from 18.7 per cent in 2005.

The composite figures for the total commercial property sector were down marginally to 17.8 per cent, from 18.7 per cent in the year to December 2005, but were still respectable returns, Mr McMahon said.

"I don't think you'll find any investors complaining," he said.

A DECLINE in retail sales for November has added to the economic slowdown and confirmed expectations that the Reserve Bank will hold interest rates.

A 0.2 per cent drop in seasonally adjusted retail sales reported by Statistics New Zealand was marginally bigger than predictions of a 0.1 per cent decrease.

An expected decline in car sales pulled numbers down, but the ex- auto measure was still a decrease of 0.1 per cent, contrary to expectations of a rise.

The figures were up 4.5 per cent on November 2005, and followed increases of 0.3 per cent in October and 1.1 per cent in September.

The retail figures were led by the electronics and appliance sector, up 5.2 per cent on October sales, with mobile phone imports the biggest contributor.

Most economists said anecdotal evidence pointed to a bumper December to offset a flat November, but Briscoe Group managing director Rod Duke disagreed.

The unseasonal start to summer had done what most predicted it would, with summer wear and normal December sales hurt by the chilly climate, Mr Duke said.

"We were a little up (on 2005) but we didn't get the sort of numbers we were looking for. A lot of items that traditionally sell just didn't fire."

Farmers' head of marketing, Dean Cook, said the weather had affected sales of seasonal goods, but November and December had been reasonable for traditional Christmas gifts.

Regionally the figures were consistent, the exception being a 0.5 per cent increase in Auckland retail sales.

The marginal decline had little impact on predictions for Thursday's Official Cash Rate review by the Reserve Bank, with most economists confident the rate would remain at 7.25 per cent.

ASB treasury economist Daniel Wills said the small decline would bring a sliver of relief to the Reserve Bank, but was almost under the radar with the bank looking further out to movements from the strong housing market.

ANZ economic analysts said the news was "inconclusive" and would have little effect on the OCR review.

BNZ head of economic research Stephen Toplis was still looking toward a rate rise encouraged by strong retail figures from October to December last year.

Citigroup economic analyst Annette Beacher held to her 0.25 per cent rate rise prediction, saying the retail figures were only a "pause" in a robust growth rate.