progressive lockout

New Zealand businesses often have a tough time competing against larger Australian rivals.

Our corporate history is littered with failed New Zealand attempts to break into the Australian market, while large Australian companies have done well here, often buying and running dominant companies in New Zealand and increasing their profits.

The Warehouse, Telecom and Air New Zealand are the most recent examples of our corporate failures across the Tasman. Only Michael Hill comes to mind as a success.

Australian-owned media companies Fairfax (the owner of Stuff, TradeMe and the former INL chain of newspapers), APN (New Zealand Herald) and the banks (ASB, ANZ, BNZ, Westpac and National) have all done extraordinarily well since buying into New Zealand, particularly over the last five years as they profited from dominant positions in a relatively fast-growing economy.

So most assumed that when Woolworths bought the Progressive supermarket operation in 2005 it would monster the apparently outdated cooperative structure of New Zealand’s Foodstuffs operation.

There was plenty of swagger in Woolworths’ early approach in New Zealand. It flexed its muscles as a massive purchaser to drive down prices and margins for suppliers in new “Trans-Tasman” bulk purchasing arrangements. This made a lot of local suppliers very grumpy and lost it an enormous amount of goodwill with the supplier community. New Zealand is still a small place and many have not forgotten these tough negotiating tactics.

Then in August and September of 2006 Woolworths locked out workers at its Palmerston North distribution centre for almost a month to show them who was boss after they went on strike for fairer and higher pay. After a couple of weeks, gaps began to appear on shelves. Customers joined the queue of grumpy parties, alongside workers and suppliers. Eventually Woolworths settled, but the damage to its reputation was significant with customers used to well-stocked shelves.

This early robust approach may well have worked in Australia, but it just got a lot of people’s backs up here. There is definitely a difference in business cultures between New Zealand and Australia. New Zealand managers tend to be more consensual and less confrontational than those in Australia. They don’t like criticising rivals and tend to be much more careful before deciding to “burn” a supplier or rival or union.

Australian business leaders tend to be more brash, more willing to criticise rivals and debate issues publicly. Their approach is much more about a good stoush and a beer afterwards. Here we’re a little more reticent. There’s something about our national character which is more conservative and unwilling to confront rivals. We try to avoid open confrontation if we can. That means we can sometimes get monstered in negotiations.

This, of course, is a crass generalisation, but many New Zealanders would recognise it. I worked in Australia as a business journalist for five years and found it a much easier place to report business issues because leaders there are more direct and uncompromising, although ultimately had a more outward-looking and more optimistic view of the future. I admire it, but I know it’s different.

Toll Holdings is still patting itself on the back for the amazingly high price it managed to extract from a vote-hungry Labour-led government after years of arm twisting. People I talk to in Australia still can’t believe our government rolled over for this price. They just chuckle and count the money.

So the failure of Woolworths to win the battle with Foodstuffs is unusual. We like to beat the Australians in any battle and this win is particularly sweet.

Woolworths expected to “turn around” the business it bought for NZ$2.5 billion within three years by bringing in the Woolworths Australia model of using massive purchasing power and highly centralised distribution systems to pass on lower costs to customers while increasing margins.

Yet the three years is nearly up and the business, which includes the Foodtown, Countdown and Woolworths chains, is seeing its sales growth and profit margins dropping.

Figures from JP Morgan analyst Shaun Cousins show that Woolworths’ market share has dropped to 43% from 45% in New Zealand, while Foodstuffs’ share has risen to 57% in the last couple of years.

Woolworths’ results for the financial year released on Tuesday lay bare the scale of the failure in New Zealand.

Woolworths’ profit margin (earnings before interest and tax to sales) in New Zealand actually fell 4 basis points to 4.19% and its overall profit growth was up only 6.4%. This compared with 18.8% profit growth and a 5.52% profit margin in the Australian supermarkets.

So Woolworths is a full 133 basis points less profitable in New Zealand than in Australia. That may not sound a lot but for a tight-margin, high-volume business like groceries this is a big deal. Comparable sales growth (after taking into account the different number of weeks in the financial years) fell to 3.5% in the fourth quarter of the 2008 financial year from 9.9% in the first quarter.

This is shockingly weak when overall supermarket and grocery sales reported by Statistics New Zealand rose 5.3% in the June quarter from the same quarter a year ago. Woolworths itself said food price inflation ran at 4.6% for the year so a 3.5% rise actually implies a fall in volumes.

Foodstuffs, which owns the Pak’nSave, New World and Four Square chains, is winning the battle.

So what went wrong for Woolworths and right for Foodstuffs?

Woolworths’ robust approach to heavying suppliers and workers was not popular, but the problems run deeper. Woolworths believed it could make significant gains by imposing a centralised distribution system on Progressive and introduced big “Homebrand” ranges that are made under contract for Woolworths. It is also rolling out its own Select, Naytura, Organics and Freefrom brands for various specialist foods.

This sounds like a good idea, but other suppliers get nervous when the supermarket chain starts stocking and promoting its own brands in precious shelf space at the expense of real brands. Suppliers also seem to prefer Foodstuffs’ decentralised approach in New Zealand where the supermarket is itself the warehouse (stack ‘em high and sell ‘em cheap).

It’s easier to take the supplies direct from the factory to the supermarket than to some intermediate depot. Suppliers also like dealing direct with supermarket managers rather than with warehouse managers. It means they’re one step closer to the customer.

The latest clash between New Zealand suppliers and Woolworths was revealed last month by The Independent. Woolworths wanted to penalise suppliers who were selling goods on discount through Foodstuffs at the same time as through Woolworths. It’s no surprise suppliers don’t love Woolworths.

There’s also something more fundamental going on. Foodstuffs is essentially a collection of owner-operated supermarkets who share purchasing and marketing costs, but are often fiercely independent and “local” in their approach.

That means the individual supermarket owners are intensely motivated to run good supermarkets because they keep the profits and tend to guess right what the population around their supermarkets wants to buy.

The corporatised Woolworths model has lots of employees but not many owners.

The final (and probably key) factor is Foodstuffs’ dominance in the discount grocery area. Pak’nSave has become The Warehouse and TradeMe of the grocery world all wrapped into one. It is cheap and cheerful with great ranges.

That’s what New Zealanders want right now. We are feeling the pain from higher food and fuel prices and want to find a bargain whenever we can. Pak’n'Save is simply bigger and better at it than Woolworth’s Countdown brand, as can be seen in this report from The Press.

Woolworths is trying to turn this around by converting some of its Foodtown stores to Countdown stores (Greenlane in Auckland is one that comes to mind) and rejigging its ranges to take them down market.

I think of my own family’s buying habits in recent months. We have a great collection of Pak’nSaves around us in Auckland and quite a few Foodtowns. When we need something unusual such as gluten- and dairy-free stuff we go to Foodtown, but it’s less often than it used to be. The strike/lockout in 2006 and the shortages it caused were the trigger point for us to start looking elsewhere. A visit to a supermarket is useless if you can’t get everything in one visit.

We’re now doing our big shops now at Pak’n'Save. We reckon we can save up to $100 a week.

Kiwis love a bargain and right now we seem to love the Kiwi grocery chain a bit more than the Aussie one.

The country's leading supermarket group, Foodstuffs, pushed its sales beyond the $7 billion mark and increased market share at the expense of competitor Woolworths in the past year, Foodstuffs' annual reports say.

The Foodstuffs group, which consists of three regional cooperatives, two with a financial year ending February and one March, boosted total sales in the 2006-07 year by 7.9 per cent to $7.18 billion.  Shareholders of the cooperatives are the owner-operators of Foodstuffs' stores, including New World, Pak 'N Save and Four Square.

Foodstuffs paid them total rebates and dividends of $285 million in the past financial year - an increase of 9.2 per cent on the previous year.

Commentaries in the annual reports confirm that Foodstuffs' supermarkets benefited from industrial action at Woolworth's supermarkets in September 2006.  Foodstuffs South Island chairman Russell Nieper said "significant residual market share advantage" had come from the dispute, resulting in market share figures "well in excess of expectation".

On a national level, Foodstuffs is estimated to have about 57 per cent of the supermarket spend, compared with Woolworths' 43 per cent.

Brian Drake, chairman of Foodstuffs (NZ), the entity that represents all three of the cooperatives, said Foodstuffs continued to strengthen its financial base. "And this, coupled with the close cooperation that exists between the companies, makes the future look positive.  "The organisation faces challenges at wholesale and retail level but, with further national initiatives planned for the new financial year, we can continue to look forward with optimism and confidence to another year of real progress."

There is only brief mention of the Foodstuffs' acquisition in June/July 2006 of a 10 per cent shareholding in The Warehouse.  Woolworths also took 10 per cent before both applied unsuccessfully to the Commerce Commission for approval to take over The Warehouse. Foodstuffs and Woolworths are appealing against that decision in a High Court case due to start on October 23.  Mr Drake said The Warehouse had "a similar culture to Foodstuffs as the company is New Zealand-owned and controlled". 

Foodstuffs (Wellington) Cooperative Society saw pre-tax earnings fall to $53.07 million from $163.18 million. However, last year's profit was hugely boosted by a $119.75 million gain on the sale of Kapiti Fine Foods to Fonterra.

Trans-Tasman grocery giant Woolworths recovered from the "hiccup" caused by industrial action in the first half of the year, with the New Zealand division posting earnings of $178.2 million for the year ended June 24.

At a group level, Woolworths reported a 27.5 per cent rise in net profit, to A$1.3 billion. Earnings before interest and tax rose 22.6 per centto A$2.11 billion.  A final dividend of 39c a share was declared, bringing the total dividend for the year to 74c a share, up 25.4 per cent on the previous year.

Woolworths entered New Zealand in late 2005 through the $2.6 billion acquisition of Progressive Enterprises, which owns Foodtown, Countdown and Woolworths.

It faced a tough induction to the New Zealand market, with prolonged industrial action in the first quarter of the financial year, when about 600 staff were locked out after disputes over pay parity and collective employment agreements.  Chief executive Michael Luscombe described the industrial dispute as a hiccup and said the New Zealand business had recovered from the disruption.  "Our operation levels, all the metrics in the business, have returned to normal post the industrial action that we had in quarter one," he said yesterday.

The New Zealand results were very pleasing, and the business was well positioned for growth.  Sales for the year hit $4.5 billion.  Meaningful comparisons with the previous full year were not possible, as the New Zealand results were included in Woolworths' accounts only from November 2005.

Mr Luscombe said the results from the second half of the 2007 fiscal year, which exclude the impact of the industrial action, provided a clearer picture of how Woolworths was performing in New Zealand.  Sales in that half were up 4.8 per cent, and earnings before interest and tax were up 12.6 per cent.

The outlook for the 2008 fiscal year was positive.  "I'm happy to say that our experience in the first few weeks of 2008 financial year has maintained the growth that we had in the latter part of the year."  He said Woolworths was a long way into its plan to reposition the business in New Zealand.  Changes so far include the introduction of a Home Brand suite of products, integrating systems in line with Australian operations and changing buying systems.  "We've improved the buying terms in New Zealand and we've invested that money into much lower prices and better value for the New Zealand consumer".

The first New Zealand store using the Woolworths system would be online before Christmas, with the introduction of other systems-integrated stores to follow.  "This and many other initiatives are putting the NZ business in a great position for future growth."

Woolworths is still pursuing a general merchandise presence in New Zealand.  It has appealed against a Commerce Commission decision denying its application to have the right to bid for The Warehouse.  Mr Luscombe said a date of October 23 had been set to hear the appeal.  He said that depending on what happened with The Warehouse, as well as the general merchandise asset of rival Coles - which Woolworths is also interested in - the group may look at returning some money to shareholders next year.

He forecast continued profit growth for the 2008 year.  "Net profit for fiscal 2008 is expected to grow in the range of 19 to 23 per cent."

Tough negotiating with its staff and suppliers has allowed Woolworths in New Zealand to cut prices to boost market share, although not yet its profit, the giant Australian retailer said in reporting its first half sales yesterday.

The company's New Zealand supermarkets business grew 155.3 per cent to A$1.99 billion ($2.23 billion), although that figure was distorted by the timing of its purchase of Progressive Enterprises in November 2005.

It bought Progressive - owner of Countdown, Woolworths New Zealand and Foodtown chains - for $2.6 billion.

Comparable New Zealand sales for the first quarter were up 1.9 per cent and for the second quarter were up 3.8 per cent, but these were hit by an industrial dispute in the first quarter that affected the second quarter.

It lost market share to rival Foodstuffs during the strike, but chief executive Michael Luscombe said by December that had been recovered in volume terms, if not in value.

He said Woolworths' renegotiation of prices with suppliers to the New Zealand stores had allowed it to improve margins which the company had "reinvested" by cutting prices.

Luscombe said when Woolworths bought Progressive there had been a "very large gap" between its prices and Foodstuffs', which runs the New World, Pak n' Save and Four Square chains.

The Woolworths stores had had to cut prices significantly just to get near Foodstuffs' prices.

Overall inflation in Woolworths New Zealand stores had been just 1 per cent compared with generalised food price inflation of 2 to 3 per cent.

Luscombe said Foodstuffs had responded quickly "like a good competitor" but because of its price advantage it did not have to cut so aggressively. Woolworths was not seeking further changes in price relativities.

"We are not looking for a price war."

He said the initiative in December to give Woolworths' customers a petrol discount at Shell and Gull stations had generally positive results, even though Foodstuffs had quickly matched its move in a deal with BP.

The price battle has spilled over into a fight for control of New Zealand's largest general merchandiser, The Warehouse. Both Woolworths and Foodstuffs have purchased a 10 per cent stake and applied to the Commerce Commission for full control.

The winner is seen to gain a crucial advantage in spreading their influence into general merchandise sales.

Woolworths reported that group sales rose 11.5 per cent in the six months to December 31.

Shares in Woolworths added 0.7 per cent to A$23.81, having climbed 2.5 per cent yesterday on hopes of strong sales.

Luscombe said the group outlook was positive for the second half.

"Provided current retail trading pattern and the present business, competitive and economic climate continue, we expect sales from the continuing operations for the full year to grow in the region of 8 per cent to 12 per cent," he said.

The guidance is a restatement of the sales outlook the company gave last year.

The company's supermarket division posted sales growth of 16.7 per cent to A$18.84 billion in the half year.

- NZPA

The top brass of Woolworths don't seem to seek out the media very often.  Chief executive Michael Luscombe and financial director Tom Pockett chose to give one-on-one interviews to a small group of New Zealand journalists last week, showing just how much the Australian supermarket giant wants to buy Kiwi discount retailer The Warehouse.

Before then Woolworths had pretty much maintained media silence since buying a 10 per cent stake in September.

Mr Luscombe and Mr Pockett bridled at any suggestion that they were now undertaking a "charm offensive". But they managed to say a lot of nice things, about The Warehouse, its founder and 52 per cent shareholder Stephen Tindall, New Zealand, New Zealanders and even Foodstuffs. "They (Foodstuffs) are a very very good competitor," Mr Luscombe said.  Perhaps wary that nationalistic concerns could loom - with an Australian company bidding against a Kiwi company for control of another Kiwi company - Mr Luscombe was keen to play down any differences between New Zealand and Australia.  "Because of the nature of the Anzac spirit this area of the world has shown how two countries can work together in a very harmonious way," he said.

Woolworths is now set to square up against Foodstuffs, which also owns 10 per cent of The Warehouse. Neither has committed itself publicly to making a bid. But neither would have applied for Commerce Commission approval if they were not serious about buying the company.

Woolworths has accused Foodstuffs of not being interested in general merchandising and seeking to "cannibalise" The Warehouse stores for the benefit of Foodstuffs' food retailing. Foodstuffs denied this, saying there was no way it would be looking to pay the sort of money required if it was not very interested in general merchandising.

The battle for The Warehouse is likely to intensify further.

Woolworths spent $2.6 billion getting into the New Zealand market a little over a year ago by buying Progressive Enterprises. It is a big investment. Through Progressive, Woolworths has 43 per cent of the supermarket share with its Foodtown, Countdown and Woolworths brands. Foodstuffs, through brands such as New World and Pak 'N Save, has 57 per cent.

Woolworths hasn't found things plain sailing since entering the New Zealand market. First there were grumblings of discontent from its suppliers. Then prolonged industrial action led to sparsely stocked shelves in the company's supermarkets.  "The industrial situation was one we did not anticipate. It has not happened anywhere else. We will put it in the past," Mr Luscombe said.  "Our aim is always to be a good employer."

He pointed to initiatives such as introduction of fuel and milk price discounts as ways in which Woolworths was trying to compete and give value to the customer.

"We've got a long-term commitment," he said. "We are out to earn the respect and loyalty of the New Zealand consumer.

"In Australia we were a clear number two (to Coles) for a long time. Over time we moved from number two to number one.  Just because we own a business does not give us a right to the spoils. We understand that just because we turned up doesn't mean the status quo will change overnight."

The three-year settlement achieved the workers' key aim of equal pay across Auckland, Palmerston North and Christchurch Foodtown, Countdown and Woolworths Distribution Centres.

A single national pay rate will deliver 19.7% to the lowest paid distribution centre in Christchurch by year three.

"Twenty-eight days without pay was hard, but in the end we won our agreement," said Mangere distribution delegate Daniel Patea. "Some of us had no money except for the kind donations from the public, but we knew if we stood staunch, we'd win - and we did."

"They tried to bully us into submission through starvation, but all they've done is made us stronger."

The unions initiated national bargaining to deliver parity of allowances across the sites.

NDU National Secretary Laila Harre said that the workers achieved parity across all three centres by the third year at a level equal to 95.4% of existing Palmerston North allowances.

The small difference will be protected for current workers in Palmerston North, she said.

"While this settlement results in three separate agreements we only got there because the employer failed completely in its mission to force workers to give up their national bargaining power."

"Three separate agreements were always an option, but our determination to bargain nationally was absolute and because of that we achieved our pay parity objective."

Engineering, Printing and Manufacturing Union National Secretary Andrew Little said that Progressive gave up the fight in the face of overwhelming public support for the workers.

Also achieved were 5 weeks annual leave for those with 10 years service and a $1000 interest free loan for the returning workers.

Daniel Patea said that the most important win from the dispute is the sense of community and activism that now exists on the worksite.

After months of organising and protesting Countdown, Foodtown and Woolworth supermarket retail workers won a real wage rise and kept their long service leave.

The scene has been set for tackling youth rates at the three brands through the working party. Union pay rises averaged 4.5% (50c to 55c an hour), and 5.5% for young workers.

Annual leave increases to five weeks after 10 years service.

The settlement came in the third week of the warehouse lockout, and only after employer attempts to pressure union members failed.

Among the tactics used by the employer was an offer of 3.5% to non-members. In some stores union members were told they too could be locked out.

Fortunately the work done this year to improve union communication in the supermarkets paid off – allowing information to get out to members quickly.

Although around 200 members resigned from the union after the employer misinformation, many quickly rejoined.

The supermarket campaign, Shelfrespect.org, used rallies outside supermarkets to increase member activism and build customer support.

Before negotiations started delegates in Auckland put the campaign on the 6 o'clock news with a noisy lunchtime rally at the Onehunga Foodtown.

One delegate said: "They're going to hate this. The only reason they don't expect it is because they're used to walking all over us."

A mid-year recruitment drive saw membership grow by hundreds, including among young workers who now have a $2 youth fee.

At Foodtown stores membership climbed from 22% to 27% in just a few weeks.

So with confidence and membership growing the union met the company for the first negotiations in July.

Management took a hardline: their best offer was 2.6% over 9 months, and they absolutely refused to increase annual leave to five weeks for long serving staff.

They wouldn't discuss other issues and even a company offer to remove youth rates for junior supervisors was withdrawn.

"It was clear from the start that the company wasn't going to budge and that we had to build activism in preparation for any future actions," said Retail Secretary Judy Attenburger.

The following week delegates and activists at meetings around the country rejected the company's "insulting" offer and endorsed a customer campaign and petition.

In Auckland, 500 members came to a stop work meeting.

When it came to discuss the next step in the campaign, one worker suggested short strikes of up to an hour during busy shopping times.

An indicative vote showed over 90% support for such action.

Over the following weeks the media captured union members in Auckland, Whangarei, Palmerston North, Gisborne, Lower Hutt, Wellington, Nelson, Christchurch and Dunedin plastering customers with stickers and handing out plastic shopping bags with "I support supermarket workers" printed on them.

One delegate, Jane, who has been a delegate at Foodtown Greenlane for 18 years said "I'm just sick of the crap the company's dealing us, and that's why I stand up for the people."

Just as the supermarket campaign took off, Progressive locked out their 600 distribution workers. Laila Harré explains that the lockout was also aimed at supermarket workers.

"The company saw the union getting more active everywhere and we are sure that the lock out was used to try and frighten supermarket workers," she said. "The cost of a living wage and equal pay for equal work for 17,000 supermarket workers was always going to be much greater than equal pay for equal work for the company's 600 warehouse workers."

But with supermarket workers in Auckland, Palmerston North and Christchurch joining the distribution workers on their picket lines and marches, the company's attempts to divide union members failed.

"The solidarity from our supermarket members during the lock out was great," says Karl Andersen, TES Sector secretary. "Supermarket workers were refusing to do the work of the locked out workers. Members called to tell us when supplies were arriving, allowing us to set up pickets outside stores.

The distribution centre workers appreciated seeing their supermarket co-workers at the picket lines, often bringing money and food.

In Mangere, the local Countdown delegate presented one of the first worksite donations.

In Wellington supermarket delegates and the Brass Razoo Band raised $1500 in just 30 minutes for the lockout fund."
A week after the supermarket negotiations resumed on the 7th & 8th of September a settlement was reached in mediation.

The settlement was a good result on key issues as well as providing a basis for the union and employer to continue work on developing a single pay scale across the three brands.

The strength that both the warehouse and the supermarket workers showed Progressive brought greater respect for them at the bargaining table.