BGR - Managing Director's Address to Annual Meeting
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Briscoe Group Limited (BGR) | 11:14 am, Friday 23 May 2008 | BGR | 0.800 |
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Briscoe Group Limited
Annual Meeting of Shareholders
23 May 2008
Thanks Rosanne. Ladies and gentlemen I too would like to welcome you to our
2008 Annual General Meeting. Thank you for coming. We certainly live in
interesting times!
A couple of weeks ago we released our 1st quarter result. Sales for the
quarter ended 27 April 2008 were $90.3 million, some 6.39% lower than the
$96.4 million for the same quarter last year. On a same store basis, the
Group's sales were 9.66% behind the first quarter last year.
Our gross margin performance for the first quarter of 2008 was also below
last year. This is to be expected given that we have had to fight harder for
what sales we did achieve.
I have never been in a position where I have had to announce such
disappointing sales and margin performance and I want you to know that I find
this situation unacceptable and untenable.
There is no question that the New Zealand economy is having a severe impact
on the Group's trading performance. Drought, tight credit conditions, falling
house prices, and the rising cost of living are currently hitting customers
where it hurts and our retail businesses have been sorely affected. Sales for
our homewares business in the first quarter of 2008 fell by 4.34% to $60.7
million while sales of sporting goods were even more concerning, down 10.34%
to $29.5 million.
According to economists I talk to, you have to go as far back as the early
1990's to find a time when consumers felt worse about their current and
future financial position. Domestic demand will continue to fall in the
months ahead and you can't blame consumers for their pessimism when you
consider they face such daunting pressures as climbing debt servicing costs,
petrol costs, energy costs, substantial food cost inflation and the declining
value of their homes.
No wonder our customers have reduced their spending in our stores. In fact,
consumer spending is expected to slow markedly from 4.3% at the end of 2007
to just 1.5% at the end of 2008. If this happens, this will be the weakest
growth in household disposable income since 2001.
Some economists are predicting that the downturn will be relatively brief. We
don't necessarily agree. Our view is that the slowdown we're currently
experiencing will be protracted. Retail will be the hardest hit of any sector
and will take the longest to recover. And this is a global phenomenon, not
just isolated to New Zealand. According to Carrefour CEO Jose Luis Duran, 'we
are seeing the emergence of structural changes in retail, the scale of which
we've not seen in decades or even in our lifetimes. Never before has the
industry faced so many challenges at the same time' he said, and I agree. The
return of inflation, the pressure on supply of basic products and the growing
costs of doing business are structural rather than cyclical pressures are
creating volatility, and in some cases confusion for retailers, suppliers and
customers alike.
Our cost of doing business in New Zealand has never been as high and we don't
expect this to change anytime soon. We've been hit by significant staff cost
increases, both in terms of wage inflation, the increase in minimum wage
rates, the abolition of youth rates and the Holidays Act by increasing annual
leave from 3 to 4 weeks. All of these costs directly affect our weekly wage
bill.
Store rents are increasing right across the country, transport costs are
through the roof, as are our operating costs such as power, heat and light.
So much so that myself and our COO, Pete Burilin have taken up the challenge
to significantly reduce our costs. Working closely with the functional heads
we are targeting every sector of our business with the goal of taking every
ounce of waste out of our business. Our Board is fully supportive and has
agreed some fairly hefty cost reduction targets.
We are focused on retaining market share of all of our retail brands but
believe there are some activities we can reduce or defer without impacting
sales in the short term. In other instances we can be more efficient to avoid
cost. Examples are store labour, repairs and maintenance, travel expenses,
contracted services, stationery and consumables, power usage and supply chain
costs.
Every function head has a plan detailing the cost reductions that they will
achieve in their area. Achievement of these plans will be monitored monthly.
Another significant influence on our business is the China factor. As many of
you know, Briscoes sources a large amount of its merchandise from China, a
country once known for cheap goods - no longer. There have been major changes
to China's labour laws which combined, have increased the cost of labour by
at least 20%. We understand those changes include a 40-hour week and penal
rates for hours worked in excess of 40 hours. Labourers who work for one
employer for over 12 months are now deemed permanent, a law change that has
severely impacted on the seasonal factories, such as those from whom we buy
our outdoor furniture. Add to that the fact that the Chinese currency is
appreciating at a rate of 5% a quarter against the US dollar, substantial
increases in raw material and distribution costs all of that means you have
significant increases in the cost of goods sourced from China.
Inevitably, retail prices will lift noticeably, which could eventually cause
demand to burn off. Where we can, to hold to a particular price point, we
will re-engineer product. Take for example frying pans. Steel has increased
in price 50% on a year ago. Add to that the impact of China's labour laws and
appreciating currency against the US dollar and the retail price of frying
pans may well increase sufficiently such that sales volumes will fall away.
We've looked at ways of reducing the steel content by changing the lid to
glass for example, in order to hold the retail price down at a level where
sales volumes are maintained.
So, how do I feel about all this doom and gloom - I have to say, on the
whole, I'm more excited and optimistic than ever. I have never allowed
adverse economic conditions to stand in the way of our performance and I
don't intend to start now.
I've not long been back from attending the World Retail Congress in
Barcelona. In my view, it's absolutely vital that New Zealand retailers and
in particular Briscoe Group stay abreast of the latest retail thinking. It's
gratifying to learn that most global retailers we talked to, are experiencing
the similar sorts of trading difficulties New Zealand retailers are going
through. The chance to hear first hand how they're dealing with this, was
invaluable as my management team and I guide Briscoe Group through these very
challenging times.
I was especially impressed with a view expressed by Ikea CEO Anders Dahlvig
who conceded that his business was noticing a 'pronounced slowdown' as he
expressed it, namely in the US, UK and Germany. This slowdown will accelerate
Ikea's move to expand into emerging markets such as China and India. However,
he did say that slower times represent an opportunity not to be missed for
business to focus back on making sure they are as efficient as possible,
concentrating on opening up a gap on competitors who may be struggling more
than you. Tough times, create the motivation to improve cost effectiveness
and I am determined Briscoe Group won't miss this opportunity to fine tune
our business so that it's well positioned to take full advantage of a more
buoyant economy in the future.
Here are some of the key themes guiding Briscoe Group, which will guarantee
we're well positioned for future growth:
1. Online. We've recognised for some time that the selling journey is
taking way longer that it used to. We need to grab the customer at a much
earlier stage, recognising the huge amount of online research our customers
are doing before they come into our stores. The internet is a huge
opportunity to grab customers before they've made their purchase decision and
we aim to have an online presence that will ensure customers are looked after
from the moment they start searching for information.
2. Buying decisions are not made when they used to be. Once, and until
very recently, mass advertising in the form of television and mailers were
all that was required to drive customers into our stores. While they will
continue to form a vital part of our media mix for many years to come,
Briscoe Group must get our message out to customers across as many channels
as possible.
3. Briscoe Group will continue to expand its store network as good sites
become available. Briscoes plan to open a new store in Masterton, a
substantial catchment we've yet to address. In addition, the new Briscoes
large format in Panmure has been a huge success and will be rolled out around
the country as suitable sites become available. Briscoe Group will however
remain cautious about its investments in new stores, certainly until the
economy shows signs of recovery.
4. Briscoe Group has for some time now been conscious of its
responsibility concerning protecting the environment. Until now, we haven't
talked about our initiatives in this regard. We acknowledge that our
customers are increasingly aware and knowledgeable about environmental issues
and we share these concerns. Our efforts are genuine.
In conclusion Ladies and Gentlemen, New Zealand retail is in for a long, hard
slog, no question about it. March quarter retail sales were flat in dollar
terms, and down 1.2 per cent in real terms. March was weaker than February,
which was weaker than January. But we're determined to ensure our business is
fit and healthy, for when better trading conditions come. Our brands will be
stronger, our costs leaner, our offer more compelling.
As Warren Buffet once said:
"For it's only when the tide goes out, do you see who's swimming naked".
Thank you very much for coming.
