There’s something about retail that seems to send the business press off on flights of fancy. Take the November retail sales data, Gerry Harvey’s latest revelation and the supposed interest by private equity group KKR in Pacific Brands this week.
“The approach by KKR, a significant private equity player and turnaround specialist, will no doubt have a ripple effect on other businesses, which are trading at a discount similar to [Pacific Brands],” one analyst was quoted as saying. “We think [retailers] David Jones, Myer, Harvey Norman and Ten [Network] Holdings are among the most attractive and could potentially attract similar offers from opportunistic private equity investors.”
But there are several important points about what is happening in Australian retailing and why private equity will be a flop that failed to make the yarns.
First, they failed to note what an appalling track record private equity has in buying and overhauling struggling Australian retailers and losing big bucks for investors who have been seduced into buying the shares in floats that saw the private equity mobs take their cash and run. Look no further than PacBrands itself. Nearly 11 years ago Catalyst Investment Managers and CVC Asia Pacific paid $730 million to buy PacBrands from its then parent, Pacific Dunlop. They sold it in 2004 in a float that valued the company at $1.3 billion, more than double what it is now worth.
And Myer went through the private equity mill (courtesy of the folk at TPG) and emerged a flop, listing at $4.10 in late 2009, and failing to trade above that price since. It currently has an earnings and sales downgrade in the market.
Recreational clothing group Kathmandu did a little better. It was bought in 2006 by private equity groups, Quadrant and Goldman Sachs JBWere Principal Investment, and sold in 2009 (a week after Myer). Its shares listed around 4% above the $1.70 issue price, and have been higher and lower in the past two years. It enjoyed a buoyant 2010-11, before the sales slowdown got it and forced an earnings downgrade before Christmas
And Collins Food, owner of about 200 KFC and Sizzler franchises in several states, listed at $2.50 early last year (its owners were Pacific Equity Partners, the same mob trying to takeover Spotless). But it distinguished itself when, three months after its listing, it slashed first-half earnings estimates, which saw the shares lose a quarter of their market value on the day of the earnings downgrade. They closed 2011 at $1.29 and $1.30 yesterday. Repco, the auto and recreational products group has been owned by three private equity groups (as well as a short stint as an independently listed company) in the past nine years.
Then there are the two blue-ribbon private equity examples: Colorado Group (owned by the Hong Kong-based Affinity Equity), which was taken over several years ago and collapsed in 2010 under the weight of too much debt, since revamped and rebooted (sorry) by its new bank owners.
And there’s Borders, Angus & Robertson and Whitcoulls under Pacific Equity Partners. Borders’ failure early last year set the alarm bells ringing in the minds of media, unions, politicians and others. But the blame rested with the owners who — surprise — loaded too much debt onto the group, as well as failing to cope with the rise of the internet (even though Amazon has been selling books since the 1990s) and the impact of the stronger Australian dollar.
One private equity purchase that’s looking good was the Rebel group. The sportswear and recreational products group was sold to Super Retail last year by the owners, Archer Capital, for a lot more than was paid. Super Retail says the buy has so far been good, but it hasn’t been fully integrated, so it’s too early to judge if the revamp by Archer was a success. But given Rebel will extend the existing range of recreational and outdoor products, the purchase could work.
A key part of this story is the doom-and-gloom theme peddled by the media and commentators. But consumer spending in Australia isn’t weak, as the national accounts data for the first three quarters of 2011 made clear and as the RBA pointed out at numerous times last year. Car sales, which are routinely overlooked, again were strong in 2011, despite the impact of the Japanese earthquake and tsunami on sales mid-year. Sales topped the million-unit mark for a fourth year and look like repeating that effort in 2012.
And as the Reserve Bank has been telling the markets since last September, Australians are changing the way they spend. As the bank said in its December Bulletin:
“The period between 2003/04 and 2009/10 was characterised by strong real household income growth and falling relative prices of goods due to the appreciating exchange rate. These developments have provided extra resources to households for spending on discretionary services, which are taking a larger share of household spending over time. There was also an increase in expenditure on housing, which was associated with rising dwelling prices and higher levels of debt.”
And apart from the high dollar and the rise and rise of the internet, there’s also the intensive price wars in consumer electronics thanks to the pace of technological change and the bitter price wars between mega producers, Samsung, Sony, Panasonic and LG, which are battling weak consumer markets in Asia, the US and Europe.
Monday saw that tribune of the people Gerry Harvey — speaking ex cathedra from the Magic Millions — tell the media that he would not be opening a new store in Australia in 2012 but looking to Asia (and Singapore, which is in a slump). That’s a huge change of tack for Harvey — this time last year he was moaning about the growth of online retailing, and joining the likes of Solly Lew in calling for Australians to be slugged GST for buying overseas.
Since then Harvey has overhauled his Australian website and started an offshore website and now says he will spend more on these sites this year as well as expanding in Asia. He’s been dragged kicking and screaming into the 21st century, but he’s finally here. It’s natural, sensible response to the longer-term changes to consumer spending patterns, and it’s one that will eventually be followed by others.
But for now, a lot of retailers are sticking to the old and now irrelevant certainties, criticising customers for using the internet and complaining that their staff are too expensive, although some have tripped over themselves using dodgy figures. They still think retail’s problems are nothing better customers and cheaper staff wouldn’t fix.
The key question is whether old retail will evolve quickly enough, or whether — as has happened in other industries — third parties (usually from the internet) will permanently move in on the opportunities ignored by traditional industries whose innovation skills have atrophied amid decades of easy profits from captive domestic markets. Private equity’s business model and skill set wasn’t suited to the old model of retail. It won’t be any better suited to the emerging shape of retailing here or offshore.