Back in January I presented the argument that chocolate was income inelastic and thus recession-proof.
Well, it seems that theory is a bit overstated. Swiss bastion of sweet-brownness, Lindt & Sprungli, has announced it is closing two thirds of its US stores. It seems spoiling oneself is not as big a priority as some would have us think.
The last couple of days has seen topics of a few previous International BS Blog posts back in the news. In reverse order of when we last spoke about them:
1. The spotlight has been turned on supermarket bargaining power again. Instead of Belgian chain Delhaize, this time its Aussie giant Coles who is squeezing its long-suffering suppliers even more:
“Buyers from Coles have been contacting suppliers to tell them of a 4 per cent increase in trading terms, the percentage of the cost of each item the supplier must pay back to the retailer. For many suppliers, this figure was in the mid-teens but it is being pushed closer to 20 per cent.”
Not a huge surprise in a virtual duopoly, particularly when Coles is under so much more pressure to economise than Woolworths.
2. Australian high-end menswear fashion house, Herringbone has been rescued by a German suitor. As we noted back in December, it is a lot harder to target this segment when incomes are under pressure. van Laack presumably scored these guys at a bargain, another instance of the scope to rationalise (and internationalise) in the current economic crisis.
3. And finally a firm we’ve lauded as the prime mover in the electronics hardware and software retailing pace, JB Hi-Fi has made some waves this week, en
tering both the ASX100 (i.e. the largest 100 listed firms in Australia by capitalisation) and Australia’s top 20 most valuable brands, both for the first time. Being a highly efficient, low-cost producer in the current climate seems a winning strategy indeed.
Further to the question about the implications of the Global Economic Crisis on firm boundaries, it would seem that we may be seeing an increase in concentration. As more firms become distressed, the bigger (or more financially sound) players are starting to circle, hoping to pick up some juicy morsels in a fire sale (how’s that for some crude mixing of metaphors?).
A quick perusal of today’s Aussie business headlines throws up some predatory characters:
– Cashed-up Woolies on the prowl (Retailer Woolworths on the lookout)
– Mitchell returns to acquisition mode (Media planning etc giant Mitchell Communications also)
– Hart set on more package deals (NZ billionaire Graeme Hart sniffing around Rio Tinto’s packaging business (and others))
And a more international one:
– ANZ prepares bid for Asian wing of Royal Bank of Scotland
This will not be the end of such manoeuvres. There is clearly a reshaping of competitive environments afoot.
The sky is falling, the sky is falling…on to the Australian economy.
So we are told on an almost hourly basis by the media herd and any economist keen to get his mug on the TV.
How strong is the evidence? And might these folks merely be extrapolating from a much more severe US experience?
The recent rounds of layoffs by various Aussie firms have been presented as irrefutable evidence of impending doom. News of firms hiring is much less exciting of course. Any chance this is more a case of searching for bad news than all news being bad?
One pretty solid piece of data snuck out yesterday amongst shopping centre giant Westfield‘s full year results. These were the annual sales growth figures for assorted categories of shops in their malls in Australia (p.33 of results):
Versus those for their US malls for the same period (p.34 of results):
Unless the firm’s catchment of consumers is startlingly different from Australia to the US (and there has never been much evidence of that), it would seem reasonable to say the Aussie numbers don’t show much correlation with the dire US figures. Conceivably our slowdown is lagging considerably, but again, where is the contagion in the story?
The stronger case could be made for Aussie retailers doing quite well, and antipodean consumers still flashing their money around.
Moral of this post: get beyond the media and check out the real numbers…
Big news down under this week has been the announcement that our largest clothing/textile firm is shutting down its local manufacturing and shifting all such activity offshore, principally to Asia. Pacific Brands which controls a huge portfolio of household names in Australia, has conceded that it can’t compete with lower cost environs.
At the same time it has indicated it will be paring back its range of offerings very considerably, as it has a very unbalanced portfolio. The top 20 brands make up two thirds of sales, the Top 10, 49 percent, the Top 5 a third. More than 200 make less than $0.5m a year each.
It has been asked what the impact of the current financial crisis will have on firm boundaries (i.e. how far they stretch themselves in terms of range of products and activities). Pacific Brands look to be reducing their extent of horizontal reach (or perhaps their extent of duplication within existing product markets). Carrying slow-moving product is a lot harder to justify when your financiers are looking over your shoulder and are nervous about debt levels.
What is missing in the above linked discussion about boundaries, is the actual physical dimension – namely whether firms might be more or less likely to redistribute activities in the current climate. It would seem Pacific Brands have been contemplating this shift for quite a while. Australia has been pretty ruthless in cutting protection of the textile, clothing and footwear industry (although there was a stay on proceedings for a few years), and the firm can now very easily bring in overseas product. The rapid drop in the Aussie dollar during the crisis could have justified a delay, but it would be simply postponing the inevitable. It may well be a good time to lock in any necessary asset purchases, supply contracts and the like in Asia as firms there also deal with high uncertainty about some of their key export markets.
Such relocation to a substantially lower cost location could be seen as a de facto substitute for the sort of vertical specialisation Lien predicts. The firm might be more comfortable substituting one hierarchical governance arrangement with another, even if the new FDI-driven one is presumably more complex, rather than taking on the vagaries of market transactions (especially as the latter will shift in nature as the economy inevitably recovers).
I will keep an eye out for more instances of substantial readjustment of firm boundaries in these tumultuous times. Feel free to share your examples too.
International BS Blog 
