The O'Brien Column: Life overseas can prove tough for Kiwi firms

Friday 4th May 2001

The strong desire of New Zealand companies to expand into other countries through physical overseas-based operations has taken a few knocks recently, particularly in Australia.

Discount retailer The Warehouse Group was the latest to report that life overseas can have difficult periods.

A statement last week said the company's Australian subsidiary Clint's Crazy Bargains had a deterioration in trading in March and April owing to the continued weak retail environment and a fall in gross margins.

The weak Australian dollar was compounding margin pressure because a significant portion of Clint's merchandise was imported.

There seemed little prospect of an improvement in the general Australian economic environment in the near future.

The Warehouse chairman Keith Smith said the company suggested the current market consensus for after-tax earnings of the company for the year ended July 31 were in the region of 15% too high.

The statement had an immediate effect on the share price which closed last Friday at $5.52, down 65c on the week.

On the same day Air New Zealand said it would not proceed with a planned capital notes issue and would sell Ansett Australia planes and replace them with new aircraft though to 2004.

Grounding of Ansett's aircraft will affect Air New Zealand's profit this year, a situation already under pressure from other factors including what was described in the report for the six months ended December 31 as "operating capacity deficiencies and the deterioration in market share on key routes in Australia."

While the grounding of Ansett's fleet was not a result of the Australian trading environment, it happened in that country and was another burden to add to the pile already on Air New Zealand.

Earlier in April Carter Holt Harvey's preliminary report for the year ended March 31 said the company had to deal with a dramatic reduction in Australian construction activity after the introduction of GST last July and the subsequent drop in overall economic activity in Australia in the second half of the year.

Australian housing starts were estimated to be 27% lower than last year and down 35% in the quarter ended March 31 when compared with the corresponding period of the previous year.

Carter Holt said the immediate outlook for the next two quarters was for difficult trading conditions.

Residential construction levels in New Zealand and Australia were at cyclical lows and were not expected to recover until the spring when lower interest rates would encourage new investment in housing.

Retail jeweller Michael Hill International was another retailer to report difficulties in the Australian market, as noted in a review of the sector (NBR, March 16).

The company's report for the six months ended December 31 said a general slowdown in the Australian economy, the introduction of GST in that country and the effect of the Sydney Olympics influenced profit growth.

Other companies are doing reasonably well in Australia but having difficulties in other places. Brewer Lion Nathan's annual meeting in December was told the company's business in China was a disappointment last year.

"Despite a lot of hard work and commitment from our China team, difficult trading conditions and an unattractive industry structure meant we did not see the improvements we had hoped for."

The board recognised it would be difficult to generate adequate returns in the foreseeable future and took a $120 million charge to cover the costs of restructuring and rationalising of the business.

Going into another country is attractive in the sense that entry gives access to bigger markets than New Zealand, but companies are subject to the particular economic situation in the new location.

Overseas operations are another factor sharemarket investors have to consider when looking at listed companies.

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