James Pascoe

James Pascoe is the great success story most New Zealanders don't know about. David Hargreaves reports.

THE term quiet achiever doesn't seem quite adequate for James Pascoe Ltd. In the past decade or so, this proudly Kiwi company has emerged as a significant force on the trans-Tasman retail scene through shrewd acquisition and expansion of businesses.

It is in the mop-up phase of another substantial takeover in Australia -- and it is not ruling out more acquisitions in future.

Including the latest acquisitions it runs more than 500 jewellery stores as well as a department store chain. Its brand names include Farmers, Pascoes and Stewart Dawsons in New Zealand and Prouds and Angus & Coote in Australia.

The company now lays claim to being the biggest jewellery retailer in Australasia. It has an estimated 20 per cent of the Australian jewellery market.

Revenues on the other side of the Tasman alone are likely to top $500 million this year. The company employs many thousands of people, including more than 4000 in New Zealand. Not bad for a business that started with one store opened by James Pascoe in Auckland's Ponsonby in 1906.

Yet as a privately owned business, Pascoe is not required to divulge much about itself, so its achievements are not broadly known.

It is worth comparing Pascoe briefly with high-profile rival Michael Hill International. It, too, has done very well across the Tasman, but has just 120 stores in Australia and about 190 in total.

Pascoe has been controlled since the 1980s by David Norman and wife Anne, a granddaughter of James Pascoe. The Normans value their privacy and rarely speak to the media but cooperated for this article by answering questions by e-mail and supplying other information.

These are busy times for the company as it looks to digest Angus & Coote, a long-established Australian jewellery chain. The A$70 million- plus A&C takeover was carefully orchestrated and demonstrates the Normans' eye for an opportunity.

A&C, like Pascoe a family- controlled business, started losing money last year, reporting a A$3.8 million loss. Pascoe pounced -- grabbing a 15 per cent shareholding, and just months later Coote family members agreed to a takeover bid.

A&C, which has 300 stores, will require a lot of work to return to profitability.

But the Normans will take confidence with what they and Pascoe achieved with Prouds.

Prouds has been built up from just 67 stores to 160 since being bought in 1996. It now turns over more than A$200 million and generates pre-tax profits of about A$20 million. But it was bought in similarly difficult circumstances, having been placed in administration. At the time A&C, ironically in view of current events, worked with Pascoe to carve up the Prouds assets. Pascoe took the Prouds brand stores and A&C took the Edments and Goldmark chains -- both nowin the Pascoe fold.

For Pascoe as a business there were two main attractions in buying A&C. First there was the challenge in turning an underperforming business around and second, Pascoe will get stronger purchasing power on an international basis. It becomes a significant buyer on a world scale.

Though market observers believe Pascoe's A&C acquisition will prove to be a good one, there has not always been such enthusiasm for Pascoe's takeovers.

Some commentators were perplexed by the $122.3 million purchase of the Farmers department store business in 2003 from Australian company Foodland.

Why was a jewellery business buying a battling department store chain? At the time Farmers' performance was fairly ordinary. But the doubters have been proved wrong. It is believed the 58 Farmers stores are now trading far more profitably.

Mr Norman says the acquisition was not originally planned.

"Believe it or not Farmers approached my wife and I regarding the possibility of operating Pascoe jewellery concessions within the department stores. When we took a closer look and saw the potential of the Farmers business it soon became clear we should return it to New Zealand ownership."

For Mr Norman, the purchase and development has provided "a deep sense of satisfaction that a New Zealand retailing icon is back where it should be, that is at the forefront of the NZ retailing industry".

"When we changed the byline of Farmers to 'Your Store' we did so with the real intent of making Farmers relevant to its market. Our market surveys showed overwhelming support for the Farmers brand, its heritage, and a desire to see it succeed."

Asked how Pascoe has been able to grow and thrive in such competitive markets, Mr Norman says the company "empowers its people and is tolerant of mistakes".

Pascoe as a company tries to bring integrity and value for money to its offerings, he says.

The jewellery trade has had a struggle in recent times, with high gold prices and higher interest rates biting into trade.

Mr Norman says the traditional jewellery market is at the bottom of what is normally a seven-year market cycle.

"Statistical data and our own experience is that we have bottomed out and business levels are returning to normal," he says. "However, we believe it will be at least another year before 'fine jewellery' turnover levels return to the trend line."

Mr Norman believes New Zealand is wide open for the development of a younger, more fashion-oriented jewellery market. One or more of the A&C brands might be introduced.

Goldmark, aimed at 16-29-year- olds, is seen as a likely starter.

"The Goldmark brand holds great potential on both sides of the Tasman. To us it makes sense to harness the economy of scale when it comes to sourcing, and marketing," Mr Norman says.

The growth of the Pascoe business has had the deal-seeking private equity companies sitting up and taking notice.

Market sources suggest that the Normans have been approached by several private equity firms seeking a slice of the Pascoe action -- but have been politely sent on their way.

On whether a float of Pascoe or part of it, such as Farmers, would ever be considered, Mr Norman says they would never say never. But it would be "most unlikely".

For the future, it is aimed to keep the Pascoe name at the forefront of the retailing industry.

And, yes, Mr Norman confirms, that would include looking at more acquisitions.

"Does the sun come up most days?"

Prouds The Jewellers, owned by New Zealand's James Pascoe, has extended its $A76m ($NZ87m) takeover bid for Australian watch and diamond specialist Angus & Coote. Prouds has extended its A640c cash per share bid for Angus & Coote from January 8 to February 2. Auckland's privately owned Pascoe's runs Stewart Dawsons and Pascoe Jewellers, and the Farmers department store chain.

COMMENT: When it comes to going forward, a good plan is better than a good quarter

P UMPKIN Patch executive chairman Greg Muir's refusal to give a profit update or guidance didn't raise a whimper at this week's annual meeting.

Shareholders were smart enough to realise that the company's growth strategy, rather than the important November- December trading period, will determine its sharemarket performance.

Pumpkin Patch's approach is far more aggressive than any other New Zealand retailer, and it will become one of the great New Zealand-owned companies if the strategy is successful.

In simple terms, there are two types of retailer, the big multi-purpose store operator and the specialty retailer. The Warehouse, which has turnover of nearly $18 million a year for each of its stores, is a big multi- purpose retailer whereas the three main listed specialty retailers with overseas ambitions, Hallenstein Glasson, Michael Hill and Pumpkin Patch, have annual sales of less than $2 million a store.

The multi-purpose operator grows by building bigger and bigger stores offering a wider range of products, whereas the growth orientated specialty retailers have to keep opening more stores in different places.

Pumpkin Patch has grown from 27 stores in July 1999 to 168 in July. This equates to 20 new stores each year or one every 18 days.

Michael Hill has taken a more subdued approach - its store numbers have risen from 102 to 177 over the same seven-year period, a new opening every 33 days.

In the past 12 months Pumpkin Patch opened 31 new stores, Michael Hill a net 21 and Hallenstein Glasson eight.

The Warehouse's Red Sheds in New Zealand remained static at 85. But their retail space increased by 4.2 per cent as existing stores were replaced and others extended.

Pumpkin Patch plans to raise the tempo and open at least 35 new stores by next July - equivalent to a new opening every 10 days.

Fitting out each new store will cost up to $1 million.

There will be a particularly strong emphasis on the United States and Great Britain although the company continues to expand in New Zealand and Australia.

This rate of growth is unprecedented for a New Zealand retailer or any other NZX company.

Listed specialty retailers have to expand overseas because New Zealand's small size and low population density restrict their growth prospects.

In the year to July, Pumpkin Patch achieved average sales per New Zealand store of $1.27 million compared with NZ$1.99 million per Australian store.

Ebit (earnings before interest and tax) per store in New Zealand was $252,000 compared with NZ$396,000 in Australia.

The group will be highly profitable if it can emulate or exceed its Australian returns in the Northern Hemisphere.

But Pumpkin Patch is far more than a specialty retailer. It designs its own clothes, contract manufactures in China, ships the end products back to New Zealand, sorts and then dispatches them to its worldwide stores. It also has wholesale and direct selling - internet and mail order - operations.

The organisational demands on the group are huge.

Greg Muir and managing director Maurice Prendergast have to ensure that the company maintains the highest standards in a number of areas including;

The design team has to remain at the cutting edge of the fashion world.

The company has to ensure that its contract manufacturing continues to produce high quality and consistent merchandise.

Transport and logistics will become increasingly important the more it expands overseas.

Store site selection will continue to be important as will the fit out of these new outlets.

The company must continue to adopt appropriate pricing and marketing policies for its different markets.

If - and it is a big if - Pumpkin Patch continues to maintain its current level of excellence and growth for a further 10 to 15 years then it will become one of the great New Zealand-owned companies.

Michael Hill has developed and sustained a successful business strategy over a long time.

Hill opened his first jewellery store in Whangarei in 1979 and moved to Brisbane in mid-1987.

Michael Hill International has had a more subdued growth rate. It opened its first store 27 years ago and plans to have 197 outlets by mid-next year after adding 20 this financial year.

Pumpkin Patch opened its first store in 1992 and plans to have at least 203 retail outlets by mid-next year.

Pumpkin Patch designs and contract manufactures all of its product whereas Michael Hill designs and contract manufactures only a small proportion of its final sales.

Another big difference between the two companies is that Michael Hill took complete ownership of his company's expansion into Australia, selling his Whangarei home and moving his family across the Tasman. His daughter Emma now takes full responsibility for the company's expansion into Canada.

By comparison, no senior executive seems to be taking clear responsibility for Pumpkin Patch's Northern Hemisphere expansion.

The group gives confusing signals as Greg Muir was awarded the Deloitte/Management magazine Executive of the Year award this week for driving the company's overseas expansion whereas most investors believe that Maurice Prendergast is responsible for this.

The company also misses the opportunity to give shareholders an in-depth analysis of the American or British markets, particularly at this week's annual meeting.

Maybe this was the reason no questions were asked and the meeting was over in 35 minutes.

Hallenstein Glasson is the other specialty retailer trying to make it across the Tasman. As the accompanying table shows, it generates more revenue and ebit per store than Michael Hill or Pumpkin Patch but it has been unable to achieve an adequate return in Australia.

Hallenstein Glasson is struggling to make headway in Australia because it doesn't have anything unique to offer compared with Michael Hill or Pumpkin Patch, which design and contract manufacture a proportion of or all of their retail merchandise.

Finally the takeover offer for Australian jewellery retailer Angus & Coote by the highly ambitious Auckland couple David and Anne Norman illustrates there is only the quick or the dead as far as specialty retailing is concerned.

Angus & Coote was founded 111 years ago and listed on the Australian Stock Exchange in 1952 yet its market capitalisation was only A$56 million before the Normans made their A$6.40 a share takeover offer last Friday.

The ASX listed company reported a A$3.8 million loss for the year to July because of weak demand, high gold prices and a 27 per cent increase in the number of retail jewellery outlets in Australian shopping centres between 2003 and last year.

After the takeover, which has been recommended by the target company's directors, the Normans will own more than 500 jewellery stores in Australasia under the Angus & Coote, Prouds, Pascoes and Stewart Dawson brands. They also own the 55-store Farmers chain in New Zealand.

The Angus & Coote acquisition should help rationalise the Australian market, but the Normans will be tougher competitors for Michael Hill International.

Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.

FARMERS department stores are under new management, with Rod McDermott taking over as managing director and chief executive as the company moves ahead with its change of image.

Chairman Denham Shale said Farmers had completed the full transformation at about a third of its stores and was hoping to complete work at most by the end of next year.

"We are definitely wanting to get ourselves at a level where we're on our own. We don't really want to be in a space occupied by others."

Farmers was aware of its "social responsibility' in smaller towns where it was often the only department store, he said. In those areas Farmers was working to revamp stores but retain a wider range of products.

In Matamata and Rotorua, Farmers has merged old stores or moved into larger spaces to make a combined department and homeware stores.

The 58-store chain was bought by New Zealand-owned private company James Pascoe three years ago from its Australian owners Foodland Associated.

James Pascoe is owned by husband-and-wife team David and Anne Norman. Mr Norman will become group managing director for James Pascoe and remain on the board.

A spokesman for Farmers said the new arrangement would allow Mr Norman to turn his attention to other parts of the group, mostly the Australian jewellery chain.

In September, Pascoes launched a lightning raid on Australian jeweller Angus & Coote, snapping up about 11 per cent of the business and sparking talk of a full takeover. It later took its shareholding to almost 15 per cent.

Mr Shale said James Pascoe was happy with its holding.

As well as Farmers, James Pascoe owns Pascoe Jewellers, Stewart Dawsons and Australian jewellery chain Prouds. Farmers has 58 department stores across New Zealand.

In a statement, James Pascoe's board said Mr McDermott's appointment would provide the continuity and stability required to achieve Farmers' repositioning.

In recent years, Farmers has been moving away from its history as a general merchandise store and moving upmarket, with an increased focus on jewellery, clothes and makeup.

Mr McDermott has 30 years retailing experience, including management positions in Australia with Myer and Big W, part of retailing giant Woolworths.

He has been with Farmers for 15 years, and has been chief operating officer for the past three years.

Fisher & Paykel Appliances Holdings Limited (FPA) announce that, in conjunction with James Pascoe Limited (JPL), it has entered into an agreement to acquire the shares in Farmers Holdings Limited, the ultimate holding company for the Farmers Group, New Zealand's only nationwide department store chain.

James Pascoe Limited is a private family owned company which owns and operates the Pascoes retail stores throughout New Zealand. The acquisition will be undertaken by Hector Paskel Limited, a subsidiary of JPL. The sale and purchase is subject to normal preconditions including the consent of some landlords and confirmation of financing of the transaction.

The Farmers Group will be split into two distinct businesses resulting in JPL owning and operating the Farmers Retail chain and FPA owning and operating the Finance and Farmers Credit Card businesses.

The total consideration being paid in cash for the Farmers Group will be $311 million, of which FPA's contribution for the Finance business will be $188.7 million funded by debt. This figure is supported by an independent valuation undertaken during the due diligence process. Settlement is scheduled for late October 2003.

FPA has entered into a long-term 20 year arrangement with JPL to supply financial services to the Retail business on an exclusive basis including exclusivity of the Farmers Credit Card. FPA expects the acquisition to be EPS (earnings per share) neutral on a normalised basis after funding costs and amortisation of goodwill during the first year after separation.

Alastair Macfarlane, the Managing Director of Fisher & Paykel Finance commented "This acquisition provides us with the opportunity to merge our existing Fisher & Paykel Finance business with Farmers Finance to form a leading retail consumer finance company in New Zealand." "Significant benefits from synergies, increased efficiencies, and new initiatives involving the Farmers Card will result from this acquisition over the medium to long term" Mr Macfarlane said.

Farmers Finance has consumer finance receivables of around $300 million and over 500,000 active customer accounts, 350,000 of whom hold a Farmers Card. These receivables generate an annualised earnings contribution before interest, tax, depreciation and amortisation (EBITDA) of between $24 million and $28 million, three times greater than the pre-tax earnings of FPA's ownFinance Company, Fisher & Paykel Finance.

The Farmers Finance business has been an integral part of the Farmers Group for over 50 years providing consumer credit to customers shopping at Farmers stores. More recently these services have been expanded to other third party merchants. The Farmers Finance business is financed from the issue of commercial paper and medium term notes pursuant to a $600 million asset backed capital market programme. This arrangement will continue under the new ownership.