NZ Herald

Household power bills are set to rise across much of Auckland, in the latest of a string of price hikes by power companies.

In a move that will add between $5 and $6.50 to the average power bill, Mercury Energy will increase central Auckland power bills by 4 per cent on October 1. Customers in Manukau, Papakura and Franklin also face bigger bills, with rises of between 2.5 and 5.7 per cent on top of the average monthly bill of $165.

Mercury Energy said the rise was to cover "general increases in operating costs" including the cost of third-party suppliers. But consumer advocates said the latest round of price increases showed there was too little competition for our power bills.

Meridian Energy and Contact Energy have said they will raise prices by 6 per cent in coming months - an increase of around $10 a month for the average household.

And while energy analyst Molly Melhuish said the latest price hikes were no bigger than expected, there could be worse to come, as the effect of the winter's low lake levels continues trickling through into power bills.

Consumer New Zealand chief executive Sue Chetwin said households missed out on the benefits of competition in the power market. Most of the competition was for commercial and business users, she said. "The companies have this cosy arrangement where they don't really compete for new [household] customers," she said. Ms Chetwin said that since the power sector was deregulated, household power prices had risen while commercial and industrial power users had seen their bills flatline or even go down.

Ms Melhuish said New Zealand's power prices were high relative to the cost of making and distributing the power.

Ms Melhuish said the latest hikes would be too much for some people in Auckland. "It's a huge amount to people who cannot afford even the tiniest increase," she said.

Consumer New Zealand figures show household power bills rose between 7 and 10 per cent in the year to March.

The organisation runs a website where people can find which power company is the cheapest in their area: Powerswitch.

The prevailing Government policy of "internationalisation" presents the idea that New Zealand can develop a robust and growing economy, even if manufacturing companies send the "dirty bits" of their production process overseas. They promote the view that labour cost differences between New Zealand and low-cost countries make the relocation of the "dirty bits" (production) away from New Zealand inevitable, therefore we should focus on keeping the "shiny bits" (design, research and development, marketing and ownership) in New Zealand.

This message is clear in the Advancing Economic Transformation Cabinet paper released last year, which says: "The key challenges arising from international integration are for New Zealand to:

A. Position itself as an attractive location for investment and skills and for those parts of international supply chains that relate to high-value products and activities and that provide the greatest return (eg R&D and design). This includes an imperative to develop more and/or larger internationally successful New Zealand businesses, networks of businesses, and segments of the economy; and

B. Capture the best return through our businesses being part of international value chains offshore (return profits to New Zealand), through developing new business models of operating internationally (such as investing directly in offshore product and distribution chains), rather than transferring valuable activities offshore."

Few would have a problem with the document's objectives and the recommended actions appear deceptively rational. However, they are constructed around a fundamentally flawed concept that "valuable activities" can be separated without penalty. Internationalisation might work in theory, but the message from New Zealand's manufacturing sector is clear that at a practical level this will not work. For global businesses, the interaction between each of their "separate" components has a subtle and pervasive impact on their performance and effectiveness.

It is not only important to get all of the elements of the business system right, but also the interconnections between those elements. Much of the literature on internationalisation simply shows the different elements or activities of the business system. Diagrams show different components of the supply chain - customers, marketing research, development, production, etc - as different blocks. While it is obvious that a global business is not compelled to physically co-locate activities, a superficial analysis can form the view that individual blocks can be separated without penalty or risk. This view underestimates the importance of supporting interconnections between functions.

Good businesses will make decisions about the location of their activities based on suitability for the activity itself and the effectiveness of interconnections with other elements of the system. There will be tradeoffs. A firm may not seek lower labour costs because it is too important that they can produce new products rapidly, suggesting they should have all their functions in the same place. Alternatively, a company may locate R&D closer to its low-cost labour production site or locate product management closer to end markets.

This might compromise the quality of the R&D, but this affect can be outweighed by the importance of the low-cost production, the productive use of multiple time zones or some other component of the competitive landscape. The cost and reliability of the supply is also a critical factor of internationalisation. The disruption to supply chains may be a huge strategic risk, and the greater the international interdependence, the worse the effect of even short-term disruption.

In reality wage costs are a fairly minor component of the overall picture that controls the profitability of manufacturing. It is worth noting that a direct labour content of less than 5 per cent of sales is not unusual in high technology products, and exchange rate fluctuations could have five times the impact of the difference in labour rates. Many factors contribute to a country's international competitiveness so the priority for Government must be to maximise the advantages available in the policy framework. What does this mean for a country like New Zealand?

There is no one-size-fits-all solution regarding the location or value of business activities. What might suit garment manufacturing will not necessarily suit high technology electronics or other complex products. The strategy for each business will be different but there are some common themes for New Zealand, given the country's attributes of isolated geography and small population.

A number of our firms now compete globally at a micro level in small markets or in the post-processing of our "primary" outputs. Policies and assistance need to nurture the creation of entire businesses in these areas, rather than trying to prescribe which bits should be encouraged and which bits should be neglected. Even if some businesses do send production overseas, it would make sense for our policies to maintain a neutral or positive bias towards locally-based production.

Policy settings need to make it more attractive for innovative business to create wealth in New Zealand through personal incentives, company incentives and national infrastructure. Factors such as broadband, transportation networks and tax incentives for productive activity can encourage activity. This comprehensive approach to policy support will promote the retention of as many of the supply chain components as possible, rather than focusing on individual links of the supply chain. The Government must not seek to pick winners or favour particular supply chain activities, as businesses will determine the profitability of their activities themselves.

Effective policy must provide incentives, or at least no disadvantage, for winning behaviour. Investment in research, development, productive activity, skills and capability development and new ventures will all assist in increasing our international competitiveness. Incentives are best delivered through the tax code generally to encourage investment in productive activity rather than in static assets. The support of winning behaviours and monetary policy that secures a stable exchange rate will help mitigate disadvantages of the wage rates. Given such changes, perhaps more companies will keep more of their supply chain in New Zealand.

* John Walley is the chief executive of the Manufacturers and Exporters Association.

Grocery giant Foodstuffs' presence in liquor retailing could get a shot in the arm as it looks to swallow Liquorland.

The co-op, which controls around 56 per cent of the grocery retailing sector, is understood to be one of several parties interested in purchasing the 72 stores of DB Breweries' franchise retail chain. Besides supermarket wine and beer retailing, Foodstuffs also operates the large format liquor store Duffy & Finn's, and the smaller format Henry's.

Success in the Liquorland bid could add fuel to the already intense rivalry with Woolworths.

The Australian-owned supermarket firm is still pursuing Liquor Licensing Authority approval for store-within-store models selling spirits as well as beer and wine - despite being denied a bid to set up in a Christchurch Countdown in what was regarded as a test-case decision.

And success for Foodstuffs could spell trouble for independently owned stores, which cannot compete with the supermarkets' buying power. Large liquor chains have a slight edge in market share, controlling around 53 per cent, to the independents' 47 per cent.

Foodstuffs was not commenting on speculation of the bid, as was DB, citing confidentiality agreements. A DB spokeswoman said the company decided to review the option of selling the Liquorland franchise after several unsolicited expressions of interest. "We're not committed to a sale - we're investigating the possibility. "We just received a bit of interest and like any business, we evaluate opportunities as they arise. "Liquorland is a successful asset for DB Breweries, so while we are looking at the option to sell, we will only consider this if a suitable buyer is identified."

Cranleigh Merchant Bankers was appointed last month to evaluate bids and manage the sale process. Evaluation of a possible sale will take place over the next few months. The spokeswoman said any sale would ensure the future interests of franchisees and staff, and the continuation of the franchise as a whole. A sale would also need to ensure that DB retained "an excellent relationship" with the franchise, retaining placements for DB products within Liquorland outlets, the spokeswoman said.

Foodstuffs and Woolworths have up to 20 days to decide on whether to appeal the court decision blocking any takeover bids for The Warehouse.

Legal experts were surprised at yesterday's Court of Appeal decision, having previously believed the Commerce Commission faced an uphill task overturning the High Court judgement granting the all clear to the two suitors. "These competition issues are difficult, and it's the hard cases that go to court," said Tony Dellow, competition lawyer at Buddle Findlay. To me I always thought that they would get the clearance. We've got to see the reasons I guess but to me, the High Court decision was very factually-based and they're hard to turn over, so I suppose the commission's done well in that sense. That being the case, there must be a fair prospect of an appeal."

The reasoning behind the decision has yet to be made public, as lawyers for Foodstuffs, Woolworths and The Warehouse are still to appear before the court again to be heard on what commercially sensitive information should be deleted from the judgment that is to be made publicly available.

Simpson Grierson senior associate James Craig said the parties also needed to work out if an appeal to the Supreme Court was an option.

The Warehouse founder Stephen Tindall may relaunch his bid to buy back the Red Sheds after a court decision to prevent the supermarkets from initiating takeover bids. The Court of Appeal's move to overturn the High Court judgment clearing suitors Woolworths and Foodstuffs to acquire the country's largest listed retailer means Tindall could resurrect plans to take back the business he started 26 years ago.

Tindall, who already controls 53 per cent of the company, announced plans on September 14, 2006 to reprivatise the group in order to pursue ambitious plans to spread super-stores offering a total retailing mix including groceries and general merchandising. Back then he and Australian private-equity firm Pacific Equity Partners were offering shareholders $5.75 a share - representing just a 12.5 per cent premium on the $5.11 closing price on the day. Weeks later he was trumped by Woolworths, which swooped on a 10.1 per cent stake at $6.50 a share.

But market experts say yesterday's development could see Tindall's grand plan back on the table.

Tindall and PEP managing director Tim Sims are understood to still hold each other in high regard, and the Red Sheds' share-price plunge yesterday to $3.22 means buying up the remaining 43 per cent becomes an entirely more attainable option. Based on his 2006 offer premium, Tindall may need to offer only $3.62 a share, given the state of the markets.

Deutsche Bank analyst Kristan Walker said Tindall and PEP could well make an offer for the 20 per cent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands - that's an extra 20 per cent that sits alongside his 50-odd per cent, and then it's not so much of stretch to get to the compulsory acquirement level." But he cautioned that a private-equity investor would also be contemplating its exit strategy. With the two major players Foodstuffs and Woolworths unlikely candidates for a trade sale, the offer price now would have to factor in an attractive rate of return. "It comes down to price now."

Market commentator Arthur Lim said funding such a move would not be an issue, with Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. "The ability to source funding might not be as readily accessible as before, but a 53 per cent shareholding accounts for a lot of underlying equity."

Lim said there was nothing stopping Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal such a move would be premature. "If Stephen makes his move he would have to be comfortable that they are not going to frustrate the process."

Head of research at ABN AMRO Craigs, Mark Lister, said the potential for Tindall to revive his privatisation plans was still there, but the prospect might be even more attractive in future. "The outlook for the domestic economy doesn't look like it's hit the bottom yet, so while it's at the low point, it still could go even lower," he said. "Retail's a sector that we're still all fairly cautious of, despite things having come back a fair way. There's still probably going to be a tough road for retailers in the short term."

With the two court decisions going either way, Lister believed there was a fair chance the suitors could appeal. "Either way, it sounds like that it's going to be reasonably drawn out, whether they do anything or not. "It still could be a little while before you get a final, final resolution on what ends up happening with The Warehouse," he said.

Deutsche's Walker, who had been favouring Woolworths to be the successful bidder, believed an appeal was likely. "I think it's going to be difficult, if not impossible, to replicate the same floor space that The Warehouse has in relation to Woolies wanting to be a major player in the general merchandise category in New Zealand. "It really does leave little options [for Woolworths] on the table."

Woolworths and Foodstuffs were reviewing their options after the decision.

Foodstuffs managing director Tony Carter said it was difficult to comment further or make a judgment on a potential application for leave to appeal, as they had yet to see the reasoning behind the decision. "There is a statutory 20-working-day period for an application for leave to appeal to the Supreme Court. We will be utilising this time to digest the Court of Appeal ruling before making any decisions."

The Commerce Commission, meanwhile, called the decision a victory for market competition and supermarket consumers.

THE STORY SO FAR
* The Warehouse has been in play since September 14, 2006, when founder Stephen Tindall revealed plans to privatise, offering $5.75 a share in partnership with Pacific Equity Partners.
* Later that month he was trumped by Woolworths, which bought a 10.1 per cent stake at $6.50 a share.
* In December 2006 Foodstuffs - already a 10 per cent owner - declared its intention to bid for The Warehouse. Foodstuffs and Woolworths applied for Commerce Commission approval to proceed.
* In late June last year the commission declined their applications.
* An appeal against that decision was heard in the Wellington High Court in October.
* On November 30 the High Court overturned the commission's decision.
* The commission applied for leave to appeal the decision and on January 31, the High Court granted it.
* The commission's appeal was heard in late April in the Appeal Court.
* On May 2, Woolworths and Foodstuffs agreed to a moratorium on bidding until 48 hours after the Court of Appeal issues its judgment.
* The Court of Appeal yesterday overturned the High Court decision, preventing Woolworths or Foodstuffs from launching takeover bids.

Updated 10:15AM

The Court of Appeal has stopped supermarket giants Woolworths and Co-operative Foodstuffs from bidding for The Warehouse.

The Commerce Commission's appeal against a High Court decision allowing the two retailers to lodge takeover bids has been successful. In an announcement to the stock exchange, The Warehouse said it would not be making any comment on the court's decision until it had received the full judgement and "considered its implications."

New Zealand-owned Foodstuffs and Australia's Woolworths each have 10 per cent stakes in The Warehouse, and successfully went to the High Court to overturn the Commerce Commission decision to block any potential takeover. The commission has now won this appeal. It has just released a statement on the case, saying the decision was "a victory for supermarket consumers and competition in markets. The Commission's case has focussed on its concerns about competition in the supermarket sector where there is, in effect, a duopoly at present, except in the three regions where The Warehouse has opened a super centre."

Commerce Commission Chair Paula Rebstock says in the statement "New Zealand consumers know that more competition is needed in the supermarket sector. In coming to its decision to decline the acquisition the Commission considered that The Warehouse had already brought important new dimensions to supermarket competition, and potential competition, through its innovative super centre stores.

"The Commission was prepared to leave it to the market to decide whether The Warehouse super centres would be viable. We did not consider that the Commission could rule out The Warehouse as a significant supermarket competitor, either now or into the future. The Commission considered that the presence of an innovative third party - such as The Warehouse - had the potential to increase the level of competition in this important market," said Rebstock.

"New Zealand consumers and competition are the winners today," she said. "The Commission declined clearance in mid-2007 for acquisition by either Foodstuffs or Woolworths, because New Zealand's supermarket retail market is already highly concentrated. There are high barriers to entry in the industry, yet The Warehouse is uniquely placed to compete with the supermarkets because of its existing property portfolio, extensive distribution networks and established brand."

Woolworths and Foodstuffs argued that if either was successful with bids, grocery competition would remain strong.

Between them, Woolworths and Foodstuffs account for about 99 per cent of the grocery market, but despite the duopoly, margins have been described as slim and competition intense. Foodstuffs, a co-operative, runs the New World, Pak 'N Save and Four Square brands. Woolworths bought Progressive two years ago and runs the Foodtown, Countdown and Woolworths brands.

The Warehouse had planned to roll out 15 Warehouse Extra stores, which have a grocery component. Three were opened but further expansion was put on hold in September to allow the company to assess their performance.

Forsyth Barr analyst Guy Hallwright said that he had thought the Appeal Court's decision would be an "each-way call", and was not surprised by today's outcome. "If the decision had not gone this way then firstly it would have basically made the Commerce Commission into a toothless body," he said.

Most people would have thought that any ruling made by the Commerce Commission could be taken to court where it would be overturned. That would have put parties in a strong bargaining position with the commission. "Secondly it (a decision in favour of Woolworths and Foodstuffs) would open the way for duopolists in any area of business to overtake new entrants in the early days on the grounds that competition is not substantially diminished because there's not much competition there yet. So, you would basically entrench duopolies," Hallwright said.

There could be further appeals, but in the meantime The Warehouse was takeover-proof against the supermarket operators. The Warehouse's share price was already somewhat reflecting that position, but he expected it to fall a little further today. "If you look at the share price, it has fallen away very, very substantially and the longer it took for the decision to come out, the more it fell away, which means people have been thinking `it doesn't look good for a clearance for the takeover'."

The Appeal Court hearing was held three months ago, when the company's share price topped $6. The price was $3.82 when the market closed yesterday. The Court of Appeal, along with setting aside the High Court decision, has also ordered the two supermarket chains to pay costs to the Commerce Commission.

Reports of delays in employer contributions coming into KiwiSaver schemes has some questioning whether money is being lost in the system. Matt Baker, associate director in the tax department of Staples Rodway, which runs a KiwiSaver scheme, says the irregularity of contributions coming from the tax department mean it is a major challenge for providers to reconcile KiwiSaver accounts.

Baker reckons almost half of the employer contributions coming in since January have not yet made it to his scheme and since the compulsory employer contribution started in April the problem has worsened. "It's the result of double the number of people joining than what they expected. The IRD have been overwhelmed by the sheer number. The result has been effectively lost money. But they say it will balance over time."

He is hoping it will all be sorted by the end of this year but in the meantime he recommends people sign up to the Inland Revenue's account balance service to check how much money is getting to the IRD and if there is a problem to talk to their employer about sorting it out. However Inland Revenue says there are no delays that it is aware of in regards to employer contributions and people should be aware that it takes time to process payments.

Inland Revenue collects contributions for KiwiSaver members via the Employer Monthly Schedule, a system which has been in place for several years. This schedule is lodged with Inland Revenue either twice monthly or monthly for the payment of PAYE and now KiwiSaver contributions. These are lodged a month in arrears, so there is always a time lag between the contribution being deducted from salary or wages by the employer, and then passed to Inland Revenue for processing, and then on to the scheme provider for investment for the KiwiSaver member. You can sign up to get the account balance service with the IRD on www.kiwisaver.govt.nz.

FAIR PLAY
Moves by the Government to stop employers from paying those who join KiwiSaver less than their colleagues have been welcomed by some, but others say the changes will introduce even more headaches for bosses. Labour Minister Trevor Mallard has announced plans to amend the Employment Relations Act to make it illegal for employers to offer lesser terms and conditions to KiwiSaver members.

Mallard had become concerned following a number of employers who had docked the pay of staff members by using their money to pay for the employer contributions to KiwiSaver while pocketing the $20 tax credit given to employers by the Government.

Michael Chamberlain, principal of KiwiSaver provider Aventine, says he agrees with the minister that reducing the pay of employees who join KiwiSaver to cover the employer contribution is against the spirit of KiwiSaver but the changes may cause even more problems. "I have real concerns that the proposals announced by the minister may lead to major complications and unintended consequences with managing employment relations and remuneration strategies. "I believe the changes will penalise the good employers by the imposition of additional compliance and system costs."

Chamberlain says the Government should allow employers to go ahead with building KiwiSaver into total remuneration packages but should focus on stopping employers that have docked the pay of their staff to cover KiwiSaver contributions. He says if the minister proceeds with the changes the worst case scenario is that costs to employers will increase significantly while those who can't afford to join KiwiSaver may be discriminated against because those who can join have to be paid 4 per cent more. "I am concerned the minister is using the proverbial sledgehammer to crack a nut."

Staples Rodway associate director Matt Baker says the new policy will completely contradict legislation brought in by the Government in December allowing employers to offer staff a total remuneration package. "As long as the agreement was entered into on or after 13 December 2008, and the agreement was negotiated in good faith, this was entirely lawful. In fact the legislation was passed specifically to allow this option, via amendments to the KiwiSaver Act."

He says if Mallard's proposed changes go ahead there will be a clear conflict between the Employment Relations Act and the KiwiSaver Act. A date has yet to be set on when the act will be amended in Parliament.

SAVERS FEEL PINCH
Finance Minister Michael Cullen takes the opportunity to trumpet the growing numbers of people joining KiwiSaver at every opportunity he gets. At a function last week he slipped in a line about KiwiSaver numbers reaching nearly 770,000 and just a few weeks ago he told a room full of bean-counters he believed the number joining could top one million by the time the election comes around.

But what Cullen doesn't mention is that some people are also being forced to pull out of the Government's savings scheme because of tougher times and higher living costs. Figures for the first year of KiwiSaver show 3506 people have had to take a contribution holiday because of financial hardship.

Sure, that's just a small number compared to the total but now that KiwiSaver has been around for a year predictions are that more people will join them.

Only those who can prove they are under financial hardship are allowed to opt out after being in the scheme for less than a year. But after a year in KiwiSaver anyone can opt out for up to five years - renewable as many times as they like.

The Retirement Commission has already been fielding questions from people worried about how they can afford to stay in KiwiSaver and has recently updated its www.sorted.org.nz website to answer questions like "Can I still afford KiwiSaver?" and "Should I change schemes?"

TAX CREDITS COMING
Those waiting to see when their $1043 Government tax credits will hit their KiwiSaver accounts can be assured it could be anytime now. According to Inland Revenue KiwiSaver scheme providers will apply for the tax credits on your behalf and can do so from July 1 onwards. The IRD then has 30 days to process the application. Those who contribute at least $20 per week are eligible for the tax credit, up to $1043 per year.

CROSSING THE DITCH
Those thinking of moving across to Australia will be glad to know the Government is happy for you to take your retirement savings with you.

Officials from both countries are expected to finalise a deal by the end of October that will allow New Zealanders to take their retirement savings - including KiwiSaver - with them when moving across the Tasman and vice versa. The basic framework has been agreed to but the details still have to be worked out.

In a move which flies in the face of the economic downturn, Australian home improvement chain Bunnings says it plans to open six new stores in New Zealand, investing $90 million and creating 500 jobs.

The big-format retailer has announced expansion plans which show its retail outlets could grow from the current 16 to 22 stores - and then to 26 in the near future. Brad Cranston, general manager of Bunnings in New Zealand, said the business would open at Westgate in Auckland, increasing its footprint in Auckland to five big stores. West Auckland was a significant growth area, and the new store would have a hire shop, free DIY clinics, a children's playground, a cafe and two levels of carparking, he said.

Cranston was not concerned about the economic slowdown. Sales turnover was down on last year and same-store sales had dropped within the last two months, but Bunnings views New Zealand as an area of high growth, he said. The sales downturn was "something of a blip" and did not affect the firm's expansion drive.

Bunnings had invested more than $250 million in New Zealand this decade, Cranston said. The business started here in 2001 following the purchase of the Benchmark Building Supplies stores and now makes annual sales of more than $500 million, Cranston said.

Bunnings owned a new Nelson store and would own the new Westgate store, he said. The Westgate deal comes after a new large-format Bunnings store was developed in Nelson, where the retailer opened yesterday. Previously, the chain announced plans to develop stores in Gisborne, Wellington's Lyall Bay and Upper Hutt, and Dunedin. Some of its new stores cover more than a hectare.

Cranston said the business was also examining establishing a further four stores after that. Outlets in Hawkes Bay, Taranaki, South Auckland and the North Shore were quite on the cards, he said. However, plans for those areas were not yet finalised.

Cranston said Bunnings was showing confidence in the market with the new projects. Retail sales have been falling, in line with the shrinking economy, but he is confident about the retail niche Bunnings has carved out since coming here seven years ago.

"The creation of these 500 new jobs will have a positive impact on the community," he said. "As well as offering new employment, Bunnings Warehouse team members are encouraged to play an active part in their local communities by supporting local community groups.

Last year, Bunnings completed the sale and leaseback of 11 retail warehouse properties in Australia and New Zealand, netting A$203 million ($229.5 million). Auckland-headquartered Dominion Funds Management bought five New Zealand properties, while Australian fund Charter Hall bought the remaining six properties in Australia.

Bunnings is owned by Australian conglomerate Wesfarmers, and its main competitor in New Zealand is Mitre 10 Mega, which is also still expanding and aiming for 20 large-format stores.

Mitre 10 has been in New Zealand since 1974 when it was introduced by 15 hardware retailers who had watched the success of the retail formula in Australia. They felt it was time New Zealanders, too, were offered the cost savings achieved when retailers could pool their orders, buy in bulk and promote nationally, Mitre 10 says. More than 120 stores are operating under the Mitre 10 banner including more than 15 Mega stores.

BUNNINGS
* Opened in New Zealand in 2001.
* Has 16 large-format stores.
* Plans to have 22 stores soon.
* Melbourne-headquartered business.
* Became a public company in 1952.
* Founded by migrants from London.

New Zealand's biggest retailer, the Warehouse Group has revised downwards expected annual after-tax earnings by about 10 per cent.

The key contributing factor was a marked downturn in consumer spending since the latter part of May, which had significantly reduced the company's sales and margin expectations for the remainder of this financial year, the company said today.

After-tax earnings for the year ending July 27 were now expected to be between $84 million and $88 million, including reversal of warranty provisions of $7.2 million. The previous range was $94 million to $98 million.

For The Warehouse stores, sales for the month of May were 4.8 per cent ahead of last year on a same store basis, reflecting an expected improvement in performance following a difficult third quarter. Customers responded well during the period to a strong seasonal offer in both apparel and home products, the company said. But consumer confidence and retail spending had deteriorated markedly in recent weeks in response to increasing inflationary pressures on fuel and cost of living.

The company's June and July sales were now forecast to fall well below previous expectations. At Warehouse Stationery sales for May and June month to date were 7.7 per cent below the same period last year.

The Warehouse downgrade comes one day after number two retailer Briscoe Group warned shareholders to expect up to an 80 per cent drop in half year net profit after tax.

In an update to the market yesterday, the operator of Briscoes Homeware, Living & Giving and Rebel Sport stores said it expected net profit after tax for the six months ended July 27 to be between $2 and $3 million. The group had posted a $10.5 million profit for the same period last year. Managing director Rod Duke said like other retailers, it has been experiencing extremely difficult trading conditions, with consumer confidence at its lowest in 17 years. Duke expected the challenging times to continue, with second half results expected to be lower than last year's. But the percentage decline would not be nearly as large as the first half's, he said. Briscoe shares ended yesterday down 11c at 99c.
***
As retail trouble spreads across the country, one big firm has announced expansion plans. Hardware retailer Bunnings Warehouse, owned by Australian conglomerate Wesfarmers, it has six new stores planned, which should mean 500 new jobs.

Company general manager Brad Cranston said the fifth of its Auckland stores will be built in Westgate, Waitakere City. "We are pleased to announce plans for this new store for West Auckland. Westgate and the wider West Auckland region is certainly an area of constant growth," Crantson said in a press release.

Bunnings Warehouse has recently unveiled development plans for four further stores in Wellington, Upper Hutt, Gisborne and Dunedin. "The New Zealand market is extremely competitive," said Cranston. "But we have a proven and robust business model that enables us to deliver value to customers. The success of recent new stores in Christchurch and Auckland's Mt Roskill is encouraging and fuelling our commitment to continue at least open three new stores per year," he said.

Cranston said that while plans and locations are not finalised, Bunnings see the Hawke's Bay, Taranaki, South Auckland and Auckland's North Shore as potential areas for further stores.

Briscoe Group expects a potential fall in first half profit of more than 50 per cent as a retailing malaise sets in and says other firms face a similar prospect.

The sporting goods and homeware retailer, widely seen as a barometer of the industry's general health, yesterday reported a 9.66 per cent drop in same store sales for the first trading quarter, ending April 27.  But the announcement came as Wellington listed department store Kirkcaldie & Stains reported a near 13 per cent increase in half-year profits on the strength of a stellar summer. However it also warned of darker days ahead.

Briscoe managing director Rod Duke said rising interest rates and petrol prices were putting the squeeze on households, which would affect the wider retailing industry.  "Being relatively the first cab off the rank, you'll find this particular trend that's being shown in our numbers will be relatively widespread."

Unaudited sales for the quarter were $90.3 million, 6.4 per cent lower than for the same quarter last year.  Sporting goods sales were hardest hit, falling 10.3 per cent to $29.5 million, while homeware decreased by 4.3 per cent to $60.7 million. On a same store basis, sporting goods ales were 15.1 per cent down, while homeware fell 7.1 per cent.

Duke said the retail market for this quarter was "markedly more challenging", with a continuation of the difficult trading conditions experienced during the latter part of last year.  The group expected to report a significantly lower profit for the half year ending July 27, with an estimate of between $5 million and $7 million - down from last year's $10.5 million.

Kirkcaldie & Stains, meanwhile, has overcome the sluggishness reported by the likes of The Warehouse and Briscoe, reporting a net profit for the six months ending February 29 of $829,000, an increase of 12.8 per cent. Sales were up 2.4 per cent, while revenue was up 1.9 per cent to $24.4 million, aided by strong apparel sales.  Managing director John Milford said a hot summer helped fashion sales. A larger gross profit was achieved by making sales at normal margins during the early part of the fashion season. More product was also sourced directly from overseas.

But he was circumspect on the outlook.  "I think we are going to have to work a lot harder to maintain that sort of performance.  "My perspective is that customer confidence is being eroded ... the focus within everything seems to be about the economic conditions.  There are people I could argue who actually have more money to spend because there are people in the country who actually have savings and are earning more interest. Obviously factors like petrol increases and food increases do hit everyone."

An unseasonably long and warm autumn could also work against them, he said.

Forsyth Barr retail analyst Guy Hallwright said while retailers did not all perform in the same way, a drop in sales of 4 per cent - like with Briscoe's homeware business - was a possibility across all store types. He said clothing retailers were very dependent on seasonal weather patterns.

Shares in Briscoe Group closed down 11c at $1.12, while Kirkcaldie & Stains ended up 5c at $2.85.