market share

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.

New Zealand billionaire Graeme Hart is hatching a deal for his Carter Holt Harvey cardboard box business to join forces with its counterpart at Amcor, in a play aimed at challenging the dominance of Richard Pratt's Visy.

Mr Hart has been been in talks with Amcor for two months to form a joint venture between the separate corrugated and paper businesses of his forest products company and the Australian packaging giant. A combined operation would have revenue of about $A1 billion a year. Amcor has run a knife through the hierarchy of its cardboard box business over the past few weeks, making redundant at least three senior executives including its boss, Darryl Roberts. The Victoria-Tasmania general manager, Andrew Harris, and another senior executive, Walter Gross, departed almost immediately last month.

A former Amcor executive said the latest redundancies were aimed at lowering costs to a level that would eventually determine the shareholdings of both Amcor and Carter Holt in the joint venture. "Hart looks like he is going to take management control of it," the executive said.

The deal, expected within months, will raise concerns about a duopoly in Australia's $A2.2 billion cardboard box market, which is still reeling from the record $A36 million fine imposed on Mr Pratt and Visy for a price-fixing cartel with Amcor. The former Amcor executive claims the Australian Competition and Consumer Commission has given tentative approval to an Amcor-Carter Holt joint venture.

Mr Hart has gone on a spending spree since taking full control of Carter Holt early last year for $NZ3.3 billion, buying Swiss packaging giant SIG, Blue Ridge Paper Products of the US and beverage packaging assets from International Paper. But New Zealand's richest man will still have an estimated $A2.5 billion-plus to spend after selling a 20 per cent stake in Goodman Fielder in October and from a yet-to-be completed auction of Carter Holt's timber products business.

"They may be looking at it," another Amcor executive said late last week of Mr Hart's intentions for Amcor. "There's a rumour about Carter Holt Harvey every week - Graeme Hart has run the ruler over Amcor." Amcor executives will brief investors in Sydney on Tuesday next week about the overall business.

A New Zealander, Greg Beatty, the former boss of Fonterra Australasia, took over as Amcor Australasia's managing director in October from Louis Lachal, a 27-year veteran of the company who will retire next year. Also departing Amcor Australasia are Melanie Huson, the human resources chief who leaves next week, and another executive, Shay McQuade. Before Mr Hart took over Carter Holt, the company is understood to have offered the Amcor board about $A1.3 billion for its fibre packaging business about three years ago. Sources say Mr Hart has since made several approaches to Amcor for the business, to no avail.

Carter Holt is the third-largest cardboard box company in Australia behind Richard Pratt's Visy Packaging - which has about 47 per cent of the market - and Amcor (less than 40 per cent). Between them, the three control the cardboard box markets on both sides of the Tasman. Amcor's cardboard box businesses in Australia and New Zealand have struggled from a lack of investment.

Freightways' first-quarter profitability was flat as the express delivery company continued to be shackled by the sluggish economy. Managing director Dean Bracewell told shareholders at the annual meeting in Auckland yesterday that operating earnings for the three months to September 30 were up by 4 per cent. But higher interest rate costs meant net profit was flat at $7.7 million, he said.

Mr Bracewell declined to comment on mounting takeover speculation. Freightways, which shares the New Zealand express package market with NZ Post in a near-duopoly, has long been touted as a likely takeover target. Suggestions that Toll Holdings might launch a bid have been around for a couple of years. This month, the Australian Financial Review reported that as well as Toll, Qantas, FedEx and Deutsche Post's DHL were interested.

"I have no doubt that it's on at least a couple of companies' radar screens," First NZ Capital analyst Andrew Mortimer said. "I certainly wouldn't discount it but it's a question of timing. It's got an open register and it's vulnerable."

Mr Bracewell said he saw no short-term let-up in the challenging New Zealand conditions. "We said at the full-year we expected a flat environment and that's what we've got," he said. "It will come back; it always does. And when it does we'll be ready with good-quality capacity and we'll reap the benefits of it then, but I couldn't put a time frame on that."

At close the Freightways share price was down 15 cents at $3.80.

Growth in the business mail and information management businesses continued to outpace the core express business, Mr Bracewell said. Capital investment of $15 million would be spent during the 2008 year including the initial development of a recently acquired information management site in Wellington.

Freightways' largest shareholder is Fisher Funds, which has a 9.8 per cent stake. Fisher Funds chief investment officer Warren Couillault said Freightways was doing well relative to the conditions it was operating in. "It does feel to me that the underlying barometer of the economy, in moving freight around the country, has been weak for about a year and a half," he said. "The fact that they're holding their bottom line is good, given that they've got huge cost increases in labour, occupancy and energy. "The little nibbling acquisitions they are making in data and storage are good as well. That will give them a springboard in Australia and it's exactly what we want them to be doing."

Directors Sue Sheldon and Sir William Birch were re-elected to the board at the meeting. Directors' fees were increased from $225,000 to $336,000. This includes $52,000 to be available if a sixth director, likely to be an Australian, is added to the board.

Competition concerns are likely to prevent Fletcher Building from buying all of the wood products assets put up for sale by Carter Holt Harvey (CHH), analysts say.  However, Fletcher Building could end up with most of the New Zealand businesses, paying around $800 million and staying within its debt comfort zone.  Auspine, Hyne or Weyerhaeuser are the likely buyers of the Australian assets.

CHH's wood products businesses, put on the block by Graeme Hart's Rank Group, have a price tag of $2 billion to $2.5 billion.  The Commerce Commission and its trans-Tasman counterpart, the Australian Competition and Consumer Commission, would balk at Fletcher Building swallowing all of the operations on sale - Wood Products NZ, Wood Products Australia and the Carters retail chain, First NZ Capital analyst Andrew Mortimer said.

Fletcher Building owns the Placemakers chain, which buys more than half of CHH's domestic lumber. It therefore has a strategic opportunity to lock in security of supply, Mortimer said.  But the potential for vertical integration would worry the Commerce Commission.

A bigger hurdle was the particle board market which would be 100% owned by Fletcher Building if it subsumed CHH.  The companies dominate the medium density fibreboard market between them and Mortimer said a combination of these assets was unlikely to be allowed.  Combining CHH and Placemakers presented fewer problems as consolidation would comprise only 36% of the building supplies market.

Fletcher Building might also not want to see CHH fall into a competitor's hands. The combined sales in the trade market, however, "might aggregate to around 45% within acceptable levels so as to not substantially lessen competition".  "Of more concern might be the consolidation of market share in certain product lines, including timber, insulation and wallboard."  The company faces a big hurdle if it wants to own both CHH's manufacturing and distribution businesses.

Nevertheless, Fletcher Building should be interested in the New Zealand wood products and distribution businesses, given the improved distribution capability and the ability to secure supply, Mortimer said.  More margin might be available in the supply chain under Fletcher Building ownership.  However, there was little value for Fletcher Building in CHH's Australian assets. "Fletcher would have no particular distribution advantage and would acquire only a modestly attractive market share."

US firm Weyerhaeuser, which has just sold its New Zealand forestry interests, was a more natural candidate for the Australian business. CHH, Weyerhaeuser and another company, Hyne, command around 60% of the softwood lumber market across the Tasman and the acquisition of CHH would present both with an excellent consolidation opportunity.

The Australian market is fragmented and the CHH sale presents a chance for one of these three players to consolidate. Interested parties are understood to be conducting due diligence and indicative bids for CHH are expected this week. Final bids are due by late November.

The Warehouse Extra lacks the economies of scale required to be a viable and effective competitor in grocery markets and would not achieve them in the foreseeable future, David Goddard QC told the Wellington High Court yesterday.  Goddard is acting for Woolworths in its appeal against the Commerce Commission's blocking of a prospective takeover of the company by Woolworths or Foodstuffs.

Goddard also said the Warehouse Extra "experiment" depended on the "halo effect" where selling groceries resulted in much higher sales of general merchandise in that store than in outlets devoted to general merchandise alone.  It was not clear that was being achieved.

Like much of the information which the court will hear over the nine-day hearing, Goddard's third key point was deemed to be commercially sensitive and will not be made public.  The hearing should not be "a clearing house for commercially sensitive information", Goddard told Justice Jill Mallon and lay member, Professor Stephen King of the Australian Competition and Consumer Commission.

Woolworths, Foodstuffs and The Warehouse are all involved in appeals against the commissions' June decision disallowing a takeover of The Warehouse by either of the other two.  Woolworths and Foodstuffs each have a 10 per cent stake in The Warehouse which is 51 per cent owned by founder Stephen Tindall. A successful appeal against the commission's ruling would likely be followed by a full takeover bid worth about $2.5 billion.

In July, commission chairwoman Paula Rebstock said that without the "competitive threat" offered by The Warehouse's fledgling move into grocery retailing via its Warehouse Extra stores "Foodstuffs and Woolworths would not face the same incentives to reduce prices, and increase quality, service and innovation".

Foodstuff's share of New Zealand supermarket sales is about 56 per cent against Woolworth's 44 per cent.

The commission was not satisfied a Warehouse takeover by either of the duopoly members would not lessen competition.  However, since the commission's initial decision, The Warehouse has said its three Extra stores, at Sylvia Park in Auckland, Te Rapa in Hamilton, and Whangarei , were underperforming and it had put plans for further Extra stores on hold for the current financial year.

Much of Friday's court session will be dedicated to an update of relevant information, which Goddard confirmed would deal with The Warehouse's postponement of a further rollout of Warehouse Extra stores.  "The game has moved on," he said.  That additional information, also to be heard in a closed session, would be central to Woolworth's appeal.

The court will hear opening submissions from Foodstuffs and the Commerce Commission today. Testimony from expert witnesses, principally economists, will be heard early next week.

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.

Woolworths, Australia's largest retailer, said yesterday it has talked with other parties about a possible joint offer for some assets of rival retailer Coles Group.

Woolworths told analysts it has lodged an expression of interest for Coles' general merchandise assets, the first time it has confirmed its interest.

So far, Coles has attracted an A$19.7 billion ($22.5 billion) takeover offer from conglomerate Wesfarmers, which faces a potential bidding war from a consortium of private-equity firms led by Kohlberg Kravis Roberts .

Woolworths chief executive Michael Luscombe told Reuters the expression of interest was on Woolworths' own behalf "at this stage". However, it could join with another group in the future.

"We have had and continue to have discussions with a variety of interested parties, but that's the extent of progress so far," Luscombe said.

Some market watchers have speculated that Woolworths could team up with KKR, although it would be prevented from acquiring Coles' core food and liquor business because of competition concerns.

Analysts have said Wesfarmers has a distinct advantage with shareholders since the scrip portion of its bid offers capital gains tax relief, which a cash-only bid by KKR could not match.

A joint bid between KKR and a listed Australian company such as Woolworths would be critical in helping overcome that disadvantage.

Luscombe said the company would advise shareholders "at the appropriate time" if it decided to conduct due diligence on Coles assets. He declined to specify whether Woolworths was interested in Coles' discount retailers Kmart and Target, or business supplies chain Officeworks, and saw no competition concerns.

Luscombe said Woolworths, which was also interested in New Zealand's Warehouse Group, could make more than one acquisition.

"We have room in our balance sheet to make the acquisitions that we would potentially like to make," he said.

Earlier, Woolworths reported an 8.8 per cent increase in third-quarter sales as it continued to gain market share in food and liquor at the expense of Coles.

Citigroup analysts expect the trend to continue, with much of the sales losses at Coles due to disgruntled shoppers shifting to the competition after the conversion of Bi-Lo stores to the Coles brand.

"It's a fair assumption. I'm sure we're getting some of that business," Luscombe said.

Citigroup estimates Coles has forgone A$350 million in sales from Bi-Lo, and that Woolworths has picked up about 45 per cent of those sales.

Woolworths said its sales for the 13 weeks to April 1 rose to A$10.56 billion from A$9.71 billion a year earlier, and it maintained its forecast for full-year sales growth of between 8 per cent and 12 per cent.

Woolworths' sales in the core Australian food and liquor business rose 8.3 per cent and comparable store sales were up 6.6 per cent.

In general merchandise, which includes the Big W discount chain, total sales rose 16.5 per cent. Comparable Big W sales, after adjusting for the timing of Easter, were up 6 per cent, far stronger than the recent performance by main rival Kmart.

Woolworths said its sales from continuing operations for the nine-month period were up 13.5 per cent from a year earlier.

New Zealand consumers spent more than $1 billion at Woolworths' supermarkets in the third quarter, as the Australian retailer works toward grabbing a bigger chunk of the Kiwi market.

The group, which is waiting to hear if the Commerce Commission will clear it to bid for discount retailer The Warehouse, reported yesterday a 3 per cent rise in sales at its New Zealand supermarkets for the 13 weeks to April 1.

Sales hit $A1.022 billion ($NZ1.15 billion) for the period compared to $A992 billion for the same time the year earlier.  In New Zealand-dollar terms sales were up 4.9 per cent on the comparable period.  Total third-quarter sales for the Australian group were up 8.8 per cent at $A10.559 billion.

Chief executive Michael Luscombe said Woolworths knew when it bought its New Zealand business in 2005 it would take two to three years to get to a point where it was truly competitive.  "We're on the right track, but we've still got a lot of work to do," he said yesterday.

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

It accounts for just over 40 per cent of New Zealand's supermarket trade.  Mr Luscombe said while first-half sales growth was largely driven by fresh food sales, growth in the third quarter was more across the board.

Looking ahead to the rest of the year, Mr Luscombe was expecting continued steady growth.  "From our viewpoint in the basic commodities, we think there'll be more of what we've seen in the third quarter. We don't see any major icebergs on the horizon."

He said further interest rate increases by the Reserve Bank were unlikely to have a negative impact.

"With our present business, because it's very much based on the basics of life, our experience to date has been that interest rates have more effect on discretionary spending."

Woolworths has just started to upgrade its New Zealand stores, and executives have just signed off about eight to 10 stores for major refurbishments. That number would steadily grow, Mr Luscombe said.

"Each month we'll have more stores where the necessary plans have been completed and the necessary applications for development changes have been put in place."

Woolworths is still waiting to hear if the Commerce Commission will clear its application for permission to bid for The Warehouse.

A decision is expected on April 27, but the commission has already extended its deadline twice.  Mr Luscombe said there had been no indication that there would be further delays, but he understood the commission's need to be thorough.

"It's a very important transaction for New Zealand and it's important that they (the commission) have the appropriate time to give it due consideration.  If they ask for a little bit of extra time then we'd certainly respect that need," Mr Luscombe said yesterday.

Woolworths is also looking to expand its general merchandise footprint in Australia.  Mr Luscombe confirmed yesterday that Woolworths had lodged an expression of interest for the general merchandise assets of Coles Group.

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

Coles Myer to drop brand next year from its general stores in Australia

Kmart will keep its name in New Zealand despite changes at the discount department stores across the Tasman, owner Coles Myer said yesterday.

Coles Myer, Australia's second- largest retailer, plans to drop the Kmart brand from its general merchandise stores as part of an A$910 million ($1.13 billion) revamp next year.

It will then bring its businesses under the one Coles brand in a bid to increase its 35 per cent share of Australia's A$70 billion-a-year market for food, liquor and groceries.

The company said yesterday that the name would remain at its 13 New Zealand stores, but did not rule out a change to Coles in the longer term.

``Over time, every format within the `everyday needs business' will in some way reflect the new Coles brand,'' it said.

Macquarie Equities investment director Arthur Lim said while rebranding the Australian stores made good business sense, the Kmart name was better in New Zealand where Coles was unknown.

``Until such a time as Coles has a bigger presence here,'' Mr Lim said.

Confirmation of Kmart's continued presence in New Zealand implied it had recharged its batteries since four years ago when Coles tried to offload the business which was struggling to match up to The Warehouse and Farmers.

It came close to selling the 11 stores it then owned to The Warehouse in 2001 but a deal was never reached.

Although Coles does not comment on profits in New Zealand specifically, Mr Lim said Kmart now appeared to be holding its own.

Having made the decision to stay, the chain would be looking for the best way to leverage the business here.

Mr Lim also believed that New Zealand's discount retailing industry was due for some consolidation in the short-term.

``We have a situation whereby The Warehouse's move into grocery is prompting moves by Foodstuffs, for example, to look at how to position themselves into that space.

``In the face of those kind of moves I don't see any new entrant into the industry.

``If you take Kmart as an example, finding locations is difficult. The more logical way for them to grow is through acquisitions and that's easier said than done.''