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.

Transtasman drift

If this vicious cycle occurs, the local arms of the multinational publishers (Penguin, Hachette. Random House, HarperCollins et al) will shrink accordingly. They are all big supporters of New Zealand writers and photographers, who may find it harder to get commissions.

But while such changes are being greeted as negatives by many in the trade, it also offers opportunities for others. Independent booksellers, it appears, are more than happy with their sales, given the recession, while the co-operative chain Paper Plus has rebranded its stores and will focus more on service to its book-buying customers.

Online retailing and e-books, still in their infancy here compared with overseas, are adding to this mix. The transtasman flow may look one-sided at the moment, but the industry is not sitting still, I’m told.

A new grouping is being formed and you are likely to hear more of these issues in the near future.

Meanwhile, if there is a REDgroup float, here is the company’s latest announcement on its result and the full year accounts (pdf) to August 30, 2009, filed with the NZX.

They show total revenues are around $A645 million but a $A15 million loss after writeoffs. It’s a little early, I suggest, to float until the revenue flows through to profit.