NBR has a look at Whitcoulls parent

NBR Editor's INSIGHT 5/11/2009

The right timing

The recovery in world sharemarkets since they bottomed in early March has mainly benefited existing stocks.

Apart from Hong Kong and the US, initial public offerings have been thin on the ground. Private equity funds, too, have been slow to absorb investors’ new appetites for risk.

This is partly due to the counter-intuitive nature of these funds and the people who run them: they buy at the top of the market and wait too long to make their exit.

By contrast, the old Brierley-style raiders preferred to buy when assets were cheap and sell before the market peaked.

So the investors who have been making money this year have been those used to playing the market cycles, rather than those born yesterday who have to sell over-priced goods to wary buyers.

Just how some of these private equity players will be able to break even remains a mystery.

The bad news on Myers is already in: the shares fell 8.5% on their debut, after listing at $A4.10, opening at $A3.88 and closing at $A3.75.

Everyone agreed it was over-valued and that the future of retail stocks is far from certain.

Two other retailers are waiting in the wings: Kathmandu, which already has its former owner lining up with a rival business, and Ascendia Retail, which owns the Rebel Sports chain.

None of these companies is likely to be a dog. But asking investors to buy retail stocks when there is more money to be made elsewhere is dumb.

The main reason, of course, is that the equity funds need to get out, after buying into the sector during boomtime euphoria.

Are books different?

Retail figures are the last to recover in any economic cycle, and the logic hasn’t changed. Yet talk is of yet another float from a part of retailing that can hardly be called defensive – bookselling.

REDgroup Retail owns the biggest book chains in Australia and New Zealand – Whitcoulls, Borders and Angus & Robertson (Australia) – and has had a succession of corporate owners with varying success.

In the past year, its owner, Pacific Equity Partners (PEP), has concentrated on consolidating operations, boosting revenues and margins, and running a previously disparate outfit as a single entity.

It’s the supermarket approach compared with the corner store in a commodity that many customers feel passionately about, and generally favours the niche operators over the generalists.

Of course, that is not to say the supermarket approach won’t work. In the US, Wal-Mart, Target and Amazon – which all target different parts of the market – have launched a price-cutting war based on selling popular and hyped pre-orders titles at steep discounts – for example, hardbacks for as little as $US9 a copy instead of $US20.

Naturally, specialist, local and independent bookseller are horrified, not just in the US but around the world.

In New Zealand, price-cutting is not such an issue but some publishers tell me they are more than a little worried by the PEP's re-engineering of two of the market's biggest buyers.

Predictably enough, not just the management but the buying decisions are moving to Australia, will the consequent loss of local customer knowledge, a fear locally produced titles will disappear from the shelves, and more cost to smaller publishers who will have to pitch their wares to (horror!) Australians.

Industry processes such as firm sales and sale or return are also likely to be affected, reducing the choices for both publisher and book seller, as well as adding generally to their costs.

More at NBR

Footnote:

As one senior book trade figure commented to me this morning after reading the NBR story:

....... really interesting as I believe his comments are pretty much on the mark. It is hard to believe REDgroup could be happy when their market share has gone from nearly 50% to not much more than 30%. I’m not sure how the very bullish public announcement on the result stackss up when compared with the full accounts.(the links are in the NBR article) Maybe be this is what is wrong with the financial world. In any case it is certainly a major issue for all larger publishers/distributors in New Zealand and puts their New Zealand future in jeopardy.

I’m pleased your blog concentrates on what we all love – the books and more importantly their contents –however this is all pretty serious stuff.