Are two lemons better than one?
Robert Gottliebsen penned an interesting piece in the Business Spectator today. Using data provided by James Stuart of Ferrier Hodgson that revealed Internet penetration – as a portion of sales for large US retailers – as high as 18% and comparing that to average penetration of online sales from retailers in Australia of 1%, Robert concluded that time is ticking for owners of commercial property.
I agree with Bob’s conclusions. Oroton’s online store is now its biggest store in terms of sales and sagging bricks and mortar retail growth will force many retailers to also move online and embrace the structural change or go the way of the dinosaurs.
Tight margins, expensive staff and exorbitant rents spell trouble for any business that cannot maintain prices in the face of an online and overseas onslaught.
The impact on rents of commercial buildings such as shops will ultimately be negative And on this point I agree with Bob. But we can add one more step to the scenario. Either a new generation of offerings replaces the old school tenants who are departing and rents are maintained or declining rents lead to lower real estate prices which encourages buyers who are both retail operators and store owners rather than tenants.
Incidentally, at Montgomery Investment Management we cannot find a single listed property trust that meets our criteria. If you can find value in the listed property sector do let us know, but we cannot.
I feel for those who bought shops in strips like to Toorak Road, Chapel Street and Oxford Street on capitalisation rates of less than 3% or 4%.
I also feel for fruit and vegetable growers in Australia who are about to find out what grocery suppliers and milk producers have recently experienced. Many farmers have told me of the mere cents per kilo received by them from major supermarkets who in turn sold the same produce at multiples of 10 and 11 times while explaining to farmers that they needed to charge such high multiples to cover the cost of business. The announcement on Today Tonight last night by Coles staffer Greg Davis of 50% cuts in the prices of fruit and vegetables, suggests the real cost of doing business is much lower than what the supermarkets have been telling farmers.
And if they’ve been dishonest with farmers then perhaps it’s a little disingenuous for Greg Davis to say on national television “We’re investing in prices as well, but our growers are working with us to plan our crops, to ensure that we’ve got certain year-round volumes. We buy in such huge volumes, it brings down the cost of the produce, so customers benefit and growers benefit, because we can move stock really quickly”. Do we reallyt need ore food to be produced? It seems Coles would like us to forget just how many thousands of tonnes of fruit and veg is thrown out by each of the supermarkets each year. According to the National Waste Report 2010, food waste constituted 4.5 million tonnes or 35% of municipal waste. When Coles talks about moving more products at lower prices are obviously not referring to us eating it!
Bruno writes in the comments below:
“Hi Roger,
Just a comment on what farmers are getting for their produce. Being a farmer I can tell you that the very most we have received for citrus is 40c per kg, but on average we get about 20c then we must pay 10c of that just to have them picked. My next door neighbor grew onions this year and also received 20c per kg. pumpkins are the same price. Rice is being sold by farmers for 18c per kg. wine grapes are being harvested right now for an average price of about 24c per kg (1kg is the amount of grapes needed for one bottle of wine) most if not all these crops cost about 10c per kg just to harvest! Of course farming is a cyclical business, and sooner or later what us farmers are paid will have to come up, otherwise there won’t be any farmers left. Where I live we are starting to see banks foreclose on farms, the irony is that no one is willing to buy a business that makes no money. So banks are forced to either lend more money, or spend their own cash to run the farms so the property value isn’t destroyed as fruit trees die. While we worry about the Europe crisis effect on the banks balance sheets we have a very big problem much closer to home which, if farmers don’t start to make a profit soon, will most defiantly effect the share values of the banks as bad debts get written off. if my wide went to work at woollies and at the end of the day she was given a bill from her boss for a days work, there’d be outrage. But when farmers are left in that exact situation, politicians and the like tell us “there’s healthy competition in the market place which benefit consumers” maybe in the short term but as more farmers abandon their farms which is happening, the price of all fruit and vege will definitely go up in the medium term as more and more farmers leave their land.”
Further, the wholesale buying of arable agricultural land by foreign interests, the decimation of profitable agricultural enterprises due to irrational competition of the major supermarkets and the replacement of their product by foreign alternatives will not ultimately produce the best outcome for Australia.Australians cannot buy freehold land in China and foreigners are banned from owning the ground floor apartment in any building in Singapore so one does wonder whether our generosity is well placed all in the name of pursuing lower prices for short sighted consumers.
Posted by Roger Montgomery, Value.ableauthor and Fund Manager, 31 January 2012.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Steve
:
I’m surely not the only Skaffold subscriber to notice Westfield is a business in very bad shape, plus it’s almost 50% overvalued. On 2010 reporting numbers, they had a massive net debt to equity ratio plus a negative cash interest cover ratio. With the worsening retail climate in 2011, it will be interesting to see how their upcoming numbers look. With rental income under pressure I can’t see how they can get this debt under control. Despite this, I note many brokers have buy ratings out of Westfield with 12 month “targets” up to $10. Will be interesting to see how much they get it wrong by. I’ve also looked at some other property trusts and none look like the place to be. Definately a sector to avoid.
Roger Montgomery
:
Have never owned Westfield in its new guise as a result. I wrote a piece on Westfield (ASX: WDC, $8.79) here:
ValueLine: Westfield
By Roger Montgomery
November 10, 2010
Price: $9.91
PORTFOLIO POINT: Demerging Westfield is unlikely to bring back the good old days strong returns.
If your goal as an investor is to buy businesses that produce good rates of return on equity, then over time you will do well. This is because share prices tend to follow the economic performance of a business. Provided those profits are being reinvested in the business and generating the same returns, the share price will track what is known as the implied growth rate.
Ben Graham first described the relationship when he said in the short run the market is a voting machine but in the long run it is a weighing machine. Then Warren Buffett capitalised on it. In Australia few companies have ever been able to meet the expectations of Warren Buffett but one that did was Westfield. Or at least it did until 2004.
This brings us to Westfield’s current proposal to spin off half of its Australian and New Zealand assets (about $12 billion) into a new vehicle called the Westfield Retail Trust (WRT).
It also plans to raise $3.5 billion worth of equity to pay down debt associated with the original vehicle Westfield Group (WDC), which will own the remainder of the assets and stay listed.
But in order to understand why the restructuring is taking place, and the prospects for the divisions going forward, we need to consult the history books and find out where things went wrong for Westfield in the first place.
In 2004 a proposal was put forward to merge the shares of the management business Westfield Holdings with the units of the property trust businesses Westfield Trust and Westfield America to create a single, internally managed group.
That was a shame because the management business was producing a return on equity (ROE) at the time of around 18.7% compared with much, much lower rates of return from the property trusts.
I reckon it was at the very moment of signing the merger documents that Frank Lowy must have started wondering – privately, if not aloud – when it would be unwound.
Citing about $220 million of savings as well as a superior and larger capital structure – ostensibly to allow more leverage and avoid being forced into joint-ventures or being pipped for acquisitions by bigger rivals like the US property group Taubmans – Lowy was quoted as saying “The three Westfield entity boards … have unanimously backed the proposal and believe that this is a win, win, win for all the three entities.” The 2004 annual report revealed “The rationale for the merger was to create a global operating platform with the financial structure to efficiently pursue global growth opportunities.”
Conventional wisdom at the time backed that judgment, and analysts pointed to economies of scale; the 3% index weighting that would force large local and international index-hugging funds to buy; and the hitherto superior sharemarket performance of combined management and trust entities.
But the pursuit of growth at the expense of return on equity is a mistake.
Share prices over the long-term are more strongly correlated to returns on equity than earnings per share, so the lower rates of return on equity offered by a property trust would inevitably dilute the magnificent returns offered by the management company. That is precisely what transpired. Irrespective of the logic at the time, doing anything that produces lower rates of return on equity will ultimately produce lower share price returns.
Take a look at Qantas: single-digit returns on equity and a share price that is lower than it was 10 years ago. Look at Amcor and Primary Health Care: low or declining rates of return on equity and – you guessed it – low or negative 10-year share price returns.
The following chart reveals the underperformance of Westfield Group securities since 2004 that would no doubt be a source of huge frustration to management.
Capitalism is pretty brutal. Since 2004, Westfield has invested more than $22 billion but despite this, Westfield Group securities have underperformed. The All Ordinaries index is well above its October 2004 level, but Westfield’s security price is below.
Despite all the hard and smart work put in by the Lowy family and their staff, the capital structure that may have been suited to the pre-GFC environment would require a Herculean effort to sustain double-digit returns on equity. Forecasts for the next three years suggest returns on equity of just 7.5%.
Hard work for little return or recognition is the one of, if not the most, aggravating outcomes for highly regarded entrepreneurs and there is no doubt the thought of “a few more years of this” (gesturing all of the group’s present structure and returns on equity) just doesn’t appeal.
While it may be said I am being simplistic for ignoring the impact of the global financial crisis on retailing in the US, the volatility in access to funding and the massive derating of the REITs and their model worldwide, you can be certain a valuable lesson about return on equity has been demonstrated.
In six of the eight years prior to stapling, Westfield earned returns on equity of 20% or more and, not coincidently, its shares generated returns for investors that were virtually peerless (see below).
The average rates of return reflected the solid performance of the Westfield Holdings business that was, that is, a fee collecting powerhouse with profits almost entirely uninhibited by the capital expenditure and maintenance requirements endured by so many other business.
Six years on, Westfield Group is having another crack at restructuring to unlock value, spinning off a 50% share of its Australasian portfolio to create Westfield Retail Trust (WRT), which is raising another $3.5 billion of equity and, through a series of transactions, will be used to pay down debt.
My concerns are threefold. First, the new structure doesn’t completely separate the return on equity powerhouse – the management company – from the property portfolio. The true wealth creation machine isn’t been completely released from a high level of tangible assets and that will limit just how high the return on equity can be.
Second, the return on any equity raised to pay down debt must be equal to the interest rate on the debt being paid down. In other words, very high rates of return – the kind I seek for the ValueLine portfolio – are not expected to emerge. This brings me to my third concern which is why do it?
It appears that in aggregate there may only be marginal benefits for current Westfield Group investors. But aggregate benefits are not the same as those that may accrue to the Westfield Group shareholders, after the split.
The investment community will buy the story and back the players because their ability to perform cannot be overestimated, but I suspect greater benefits will accrue to Westfield Group holders rather than those shareholders of the 50% of Australian assets spun out into Westfield Trust.
Further, the relative failure of the previous structure to deliver anything other than increased needs to be kept in mind when measuring the success or otherwise of the current strategy. ValueLine will revisit the entities and their returns on equity after a year and at that time may cease its fence sitting.
A year of so earlier another analyst had written a completely different view:
10 reasons to buy Westfield
by Charlie…
July 31, 2009
Price $8.84
At 2.47% of the ASX 200, Westfield Group is one of the last big index weight stocks sitting there doing nothing despite being past the bottom of its earnings and valuation downgrade cycles. I am keeping ideas very simple at the moment, not trying to go down the “over-analysis leads to paralysis” route. This idea is pretty damn simple, so here goes.
Call me simplistic, but if you are sitting there in Main Street, USA, watching your house go down in value month after month you aren’t likely to head for the mall to blow the doors off in a spending spree. With 50% of its assets and earnings in the US, Westfield is leveraged to the US housing market.
Look at the chart of Westfield (orange) versus the Case-Schiller 20 City Index of year-on-year property prices. For years you got 5–10% price rises, and look at the last few years: it’s been price decreases, and big ones at that.
Earlier this week we saw the first rise in the Case-Schiller Index in 34 months, and to my way of thinking that is a buy signal for Westfield.
Here are 10 more reasons to buy Westfield:
1: Do you think US consumer sentiment and spending has bottomed ? Yes.
2: Do you think US unemployment will peak in the next six months? (Restocking includes headcount after the raw materials phase). Yes.
3: Are comparable Tier 1 mall properties trading on the doomsday 9–10% cap rates? No.
4: Is a bank anywhere going to fund a rival to build a big $US1–2 billion mall near term? Not for a while.
5: Do you think the Lowys are the smartest guys in the field in their space? Yes.
6: Are US home prices bottoming? Yes.
7: Is just about every domestic institution underweight? Yes.
8: Has the Australian economy bottomed? Yes.
9: Has Westfield London turned the corner? Yes.
10: Has Australian retail spending bottomed? Yes.
Interestingly, the vast bulk of fund managers I speak to don’t disagree with these points; they just feel the stock is cum issue and are waiting for an equity issue to increase Westfield weightings. Holding off on the old fear of a capital raising is no reason not to buy the stock. That is a flawed strategy, particularly when it’s far from a certainty that Westfield will issue any new equity at these prices.
The Lowys know the stock has tracked sideways while this capital raising speculation is around; they don’t strike me as the types to do a placement at a discount when they know their own stock would be happily trading at $13–14 if the speculation wasn’t around.
Unlike the rest of the A-REIT sector, which seems to get bullied by investment bankers into lowering gearing levels at the bottom of the property valuation and economic cycles (great advice … not), I am not sure the Lowys will feel pressured to lower gearing levels any further.
The point is that Westfield is trading at a discount to any sensible through-the-cycle valuation of its Tier 1 irreplaceable mall assets and we are past the bottom of the US, UK and Australian retail spending cycles.
Ken Giltrow
:
The real question should be how long ago did producers recieve a drop in prices or for how long have consumers been milked before the two big retailers made hero’s of themselves.
The banks have a nasty habit of a simular practice, then tell us how much they value you.
Bruno
:
Hi Roger,
Just a comment on what farmers are getting for their produce. Being a farmer I can tell you that the very most we have received for citrus is 40c per kg, but on average we get about 20c then we must pay 10c of that just to have them picked. My next door neighbor grew onions this year and also received 20c per kg. pumpkins are the same price. Rice is being sold by farmers for 18c per kg. wine grapes are being harvested right now for an average price of about 24c per kg (1kg is the amount of grapes needed for one bottle of wine) most if not all these crops cost about 10c per kg just to harvest! Of course farming is a cyclical business, and sooner or later what us farmers are paid will have to come up, otherwise there won’t be any farmers left. Where I live we are starting to see banks foreclose on farms, the irony is that no one is willing to buy a business that makes no money. So banks are forced to either lend more money, or spend their own cash to run the farms so the property value isn’t destroyed as fruit trees die. While we worry about the Europe crisis effect on the banks balance sheets we have a very big problem much closer to home which, if farmers don’t start to make a profit soon, will most defiantly effect the share values of the banks as bad debts get written off. if my wide went to work at woollies and at the end of the day she was given a bill from her boss for a days work, there’d be outrage. But when farmers are left in that exact situation, politicians and the like tell us “there’s healthy competition in the market place which benefit consumers” maybe in the short term but as more farmers abandon their farms which is happening, the price of all fruit and vege will definitely go up in the medium term as more and more farmers leave their land.
Matthew R
:
I believe that when most people make comments related to the demise of retail in response to internet shopping they are too generic.
For example, I can see where DJs/Myer are in trouble with the sale of many brand name consumable goods (ie Clinique, Dior, Chanel etc). My wife for example can buy all her personal items online for half the price. We also went looking at pots and pans in Myer, and once we had made our choice bought them online for much less.
However, and it may change but I don’t think you can do this as easily with big once-off items. For example, buy a fridge or a washing machine – doing this we found that online prices were the same as in store prices. Also, large items are much more expensive to ship. If you are “window shopping” at the local white goods shop (which these days generally aren’t local, they are out of the city in large multi-channel “homemaker centre” type developments (ie warehouses)) you are already there with your car. Maybe your car isn’t big enough to carry a fridge, but it is big enough to carry a 42inch plasma TV or a microwave. When we bought our washer and dryer they delivered them for no extra charge.
So what I am seeing is that these large warehouse type shops incl Bunnings, JB Hi-Fi, The Good Guys, Radio Rentals, IKEA etc will stay in business. They are essentially running a warehouse operation already. If they sell stock online it goes out the side door in to a delivery van but they also have a retail presence to display and promote their stock and provide a retail experience (don’t underestimate it). If you look online you will be hard pressed to find cheaper items than what is sold in these warehouse type stores because these businesses are already very efficient.
If you want to start an online business you need a warehouse too. You will be able to put it on cheaper land if you not going to have a retail component, but you also have to be able to source your product cheaply. The warehouse type retail stores are already getting their stock very cheap, and have established efficient inventory management. How are you going to easily compete with that? I don’t think you will be able to.
DJs/Myer on the other hand are making huge margins on small postable items. It isn’t difficult to see how competition can quickly set up profitable businesses online selling the same branded items.
I don’t need to add anything about the likes of Oroton, their type of business has been well covered already. I agree that for those businesses which own their brand, the future won’t change that much. If you want Oroton, you have to buy from Oroton. The same goes for Apple Computers. They have the market cornered because in these cases they own their brand.
To give an example of another industry which has already gone through the internet cycle, let’s look at insurance. The internet is a medium, just like TV, postal mail and telephones. When the internet came along the insurance companies did not go broke because new insurance companies started up online. No, the incumbent insurers just started selling their product online as well as by the phone (and less by postal mail). The internet lowered the cost of doing business for the big insurers. (not so good if you were an insurance broker however)
To summarise: retail has a multitude of individual aspects. Not all will be taken out by online. Sure, the landscape will change, but not as much as many people would lead you to believe. Brands and low costs of doing business have and always will be strong competitive advantages, no matter what the future brings.
Mully
:
Nice post Matthew. Regarding the setting up of an online business, it’s one thing to have a terrific website and product but quite another to get traffic to it as in website optimisation. Achieving the latter takes both time and a huge investment in advertising and marketing without which, it’s just another website.
lindy lu
:
Matthew: Retail CRE prices in general will decline; but some segments as you suggest will continue to hold up quite well. Consumer electronics retailers will continue to be under pressure. Comments in US Best Buy CEOs blog were telling on how people who needed an electronic gadget now would buy it from the bricks and mortar retailer for immediate use then order the same item off Amazon for 40% less then return the unopened Amazon item for a full refund from Best Buy demonstrate yet another industry issue to contend with. That’s an interesting aspect of time arbitrage and show-rooming the bricks and mortar stores have to contend with. Target US is trying to address these issues by asking their supplier base to develop unique custom minor modified items only available to Target.
A grade locations for Fashion not so much downwood rent pressure. Zara, TopShop and looks likes soon to be H&M are all looking for good retail locations. B grade retail that Premier Brands/Dick Smith etc are looking to close from high rents will suffer though as rents reset down to a new market clearing price that is profitable for a new bread of retailers.
@ Roger: The farmers are in a price taker market. That’s the economics of a commodity business particularly one where the the industry structure is dominated by power of buyers under Porter’s five forces framework. No sympathy for the farmers, consumers are the winners here. Farmers know the deal and if they are not happy sell out the the larger more efficient agri-business players.
As to ‘Foreign interests’ buying up all of Australia, which foreign interests? surly not China – “A report on foreign investment shows China’s investment in Australian farms and mining assets is tiny, contrary to popular belief.
The report’s author, Dr Chunlai Chen has told Radio Australia’s Asia Pacific program direct investment by China amounts to less than one per cent of total foreign investment into Australia from all sources.
“In reality, Chinese investment in agriculture, for example, is only 0.3% of total investment in Australia,” he said.
“It’s really, really small. It’s not a big deal.”
”
The Chinese owning Australia hysteria reminds me of the Japanese owing All-Of-Australia in the 80s.
Kisses, LL
Roger Montgomery
:
Food security trumps consumer short termism. Buy, I am glad you aren’t setting policy for rural Australia. I understand China now owns more than 10% of Victoria’s arable farmland.
Ash Little
:
Just my view but climate change and current prices equals sell them the lot!!!!!!
Tony Connellan
:
A Happy and prosperous New Year to all.
Ownership of land by foreigners, what an emotive and political hot potato.
In the area in which I live and farm there have been numerous waves of different ethnic groupes move in and farm the land. Including the Brits,there have been waves of German (a long time ago), South African , Rhodesian , and just recently a few Indian.All have come to work the land ,and most have succeeded. No Chinese so far (Pauline H hasn’t told us yet,and we have Bob K keeping a good look out for us as well)
How many Value.Able investors would invest in Agriculture?I did, but that was many years before I bought “THE Book”.The ROE is lousy.Over a very long period (say 20-30 years), you MAY get 5% compound on your purchase price and 2-3% return on your production/purchase price.Like most small business owners you buy a job and work long hard hours to make a reasonable income.
Over the last few years , Japanese,Italian,Singaporean,Thai,French and Americans have invested heavily in the processing side of agriculture (milk,sugar,juice ,fruit,vegetables wine fibre & beef processing). Possibly the Chinese have recently joined this queue. I guess what I am trying to say is overseas ownership is not new.They come and they go.Unlike a patent or copyright or knowhow, they can’t take the land with them.
If the Chinese invest in Australian farms as absentee landlords intending to actually farm ,they will probably learn that profits are hard to come by,especially when mother nature doesn’t smile.The long term profitable history of corporate farming is dismal (Look at the history of the AACOY). If they buy as an overseas safe haven for money ,I think that also will be short lived. The vast majority of Australian farms ,like many other small businesses ,provide a reasonable living to their owners by them working smart & long hours. They don’t generate great accounting returns.
Perhaps we have more to fear from Woolies & coles.
Roger Montgomery
:
great insights Tony. Thank you.
Matthew R
:
Exactly Tony. You are spot on with your observations
Ash Little
:
Good post Tony..Thx
Ash Little
:
Great post Matt
Everyone here shoud read this
Thanks
Rainsford
:
Hi Roger. Great to have you back. Happy New Year.
A fascinating start to the year with your article on share prices related to baby boomers. And then Eureka Reports article on the US economy doing better than China.
Your comment on land ownership is interesting. In NZ we have just let a Chinese company buy 16 dairy farms for $200million and there is public outcry about foreign ownership of productive land, As you point out we can’t buy land in China. NZ has a free trade agreement with China (whatever that is worth and probably everybody does) so it is a sensitive issue. Change the law I say.
I query your article on the recent IPO of Trade Me (TME) in Eureka Report recently. And, dare I say it, I’m not sure the figures in Skaffold are correct. I have the prospectus for TME and my interpretation is that Equity is $NZ680mill and forecast profits for the next 2 or 3 years is around $70mill. So ROE is approx 11% not over 100% as Skaffold has. Also the company has Goodwill of $720mill and Debt of I think $120mill,
My calcs using Value,able of the IV bring it way under $2,
So while I appreciate your comments about TME prospects I’m not sure the numbers are all that great?
Keith
I .
Roger Montgomery
:
Hi mate,
Skaffold has a valuation of $1.26 at best and 44 cents using the conservative valuation. Just a different treatment of pre-float definitions of contributed capital.
Andew Rowan
:
Roger I’m interested in how all this plays out, so I hope you understand where I’m going with this.
If people buy online, and/or do business online, then the result is that traditional or smaller retailers cannot compete and either downsize or close.
The net result is jobs lost.
Also in other sectors of the economy the internet provides business with such efficiencies whereby they can also shed jobs.
Prices being driven down also means that remaning businesses have to go overseas to manufacture to get prices down or buy from say China so they can compete, which means a loss of jobs here.
And so it goes.
All this seems like a self perpetuating black hole, however if the people don’t have jobs they can’t or won’t buy the things that the “smart” web based business thought they would.
Also is it not the case that the smarter people are in chasing down getting an internet bargin, the closer they move themselves to the unemployed cue.
So my question is how does this play out, is there a study on this.
Obviously thi can’t continue……………….or am I missing something?
I hope you and other readers get my point.
I’d be happy for your coments here.
Roger Montgomery
:
perhaps its called deflation.
Matthew R
:
I’m not sure that internet retail will increase unemployment substantially. This is not the first, nor will it be the last time that an industry has undergone sweeping change with loss of jobs. Those jobs have previously been transferred to other industries. Think of the removal of horses and buggies, the changes in railways, the automation of production lines etc. Meanwhile there has been expansion in areas like finance, government and health.
Unemployment could increase if the change was rapid – ie too quick for employees to retrain – but I don’t think that will be the case with the change to internet retail. The change to internet shopping is in the most part a generational change.
Peter Kruckow
:
I agree totally Matthew, the orders still have to be taken, the goods still have to be packed, and they have to be transported. So in the big picture there will still be employment to be had from the change to internet shopping.
Cheers
Pete
Chris
:
Roger, Leon Byner on 5AA has been championing the cause AGAINST foreign ownership of our lands…his facebook page “Don’t Sell Australia Short” reflects this.
Graham
:
Clearly looking at our own lives and our own changing habits, i can see a segregation of where products that lend themselves to online purchasing (i.e. i dont need to view it in person, i dont need advice, i dont need to try it on etc) will be dominated online, where its all about price and squeezing the margin.
But of course there are those that do not lend themselves to this type of buying experience. There are some products that just require a live, in person viewing/experience to see if you actually want it or like it. And of course some diversified businesses will be a bit of both.
So from an investment perspective, its really about keeping the eyes wide open, and just taking the time to understand how your potential new fractional business investment (ummm, i mean your shares) will be affected by whats happenning around us in real life.
Now……that reminds me, what did i do with those shares in that company that made typewritters ?? I’m a long term investor, right ?
Roger Montgomery
:
excellent observations Graham.
Michael Horn
:
If that typewriter company in which you had shares also made employee-clocking-in devices, punch-card processing machines, punch cards and business scales earlier, and it was called International Business Machines run by a guy called Tom Watson, you would struggle to wipe the grin off your face. IBM triumphed by switching its revenue streams over the decades, and being prepared to ditch lines of business that ran out of puff.
Peter
:
ZGL have taken a big hit today. Another A1 business falling over. It’s a bit like MCE all over again.
Peter
Roger Montgomery
:
Keep up Peter. We haven’t owned ZGL in a very long time. Wrote about that here and elsewhere. Move on mate.
Peter
:
Roger,
It’s not whether you own it or not, but rather that your MQR system seems to have a few holes in it.
Peter
Roger Montgomery
:
Perhaps better if you try and understand what the MQR system is doing. Your linking it to short term share price changes or even earnings downgrades is erroneous. My experience is that the MQR has done a superb job of revealing where to look and where to avoid.
Andrew
:
Plus if i remember correctly it was never an A1. I think it was B rated. Maybe Skaffold has updated but thats how i remember it.
Parag
:
Roger, will we be seeing the value line portfolio on ER this year?
Roger Montgomery
:
Its going through some changes to its presentation to reflect what it is meant to convey. There needs to be a break before a relaunch. It will reflect what it was always intended to show – 4 separate portfolios.
John C
:
It was a B2 last week – still is – has been for a while. I still hold ZGL, and I don’t think it’s falling over. The profit downgrade is not good, but not entirely unexpected either. I think they’ll be in good shape in a couple of years, and I’ve got plenty of time… The 12% SP rise on Tuesday is a little strange though. Maybe some people thought this was going to be a profit UPgrade today…
Andrew
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I have observed that if you are to ask most Australians whether they would prefer to buy Australian made products, they will say without hesitation, YES! If you then follow up asking if they would like to pay a premium for Australian products, they would probably say yes as well. However in reality, customers buying staples will go for the cheapest price. The wallet or purse comes before patriotism. Who would want to be a diary, fruit, vege etc farmer in Australian in this current market.
I liked your comments about retail space as well. I have become a greater believer that there will be a bit of downsizing for retail companies in reference to physical floor space and shop fronts except for those that offer staple or perishable products like Woolworths and Coles.
Clothing, electronic and other similar retailers will progressivley move online and i feel as this online store grows in sales, lesser performing shopfronts will dissapear. Another phenomenon i believe and have written about here before is that the size of stores will be downsized and instead of being a marketplace to buy that company’s products, it will instead be more of a concept store giving people a brand experience.
I have been quite down on property trusts and i believe that shopping centre companies like Westfields who have a large amount of discretionary retailers will be coming in for tough times. Rumours are that some retailers are already struggling with the rents charged, as online stores increase and demand for physical shopfronts decrease, these companies will make the decision to reduce the number of physical stores. That will mean that vacancy rates will increase as well but the demand isn’t there for others to take the formers place. If the demand isn’t there then they will need to reduce rents to attract tennants and so forth.
The above is speculation and nothing but my gut feel after seeing what is happening out there in shopping centres. I could be completley wrong.
Roger Montgomery
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thanks Andrew.
Glenice A
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even the supermarkets could reduce their floor space – we have the new generation of young family (pre-school children) moved in next door, and they do their supermarket shopping online. I believe this trend is in its infancy, but it could grow.
Matthew R
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My wife and I work fairly long hours so buying groceries online is very convenient. My wife can build up the order list slowly over a few days, add items at work etc and then they are delivered to our house in the evening when one of us is home (the driver stacks them on the kitchen table!).
I always ask the driver what kinds of families he delivers for and the response may surprise some. They consistently say that busy couples like us are unusual. They say that mostly their deliveries are to single income families where the stay at home parent doesn’t want to have to take all the kids to the supermarket/shopping centre.
In terms of the quality of the produce, we don’t have any complaints. The only time we can go shopping is late at night anyway when the stock has been picked over. Buy online and the supermarket packs our order first thing in the morning with that day’s new deliveries. We can’t complain about that.
John C
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My experience with Coles Online is similar Matthew. Fresh produce like Avocados are always top quality – they don’t want to generate complaints, and they haven’t yet from me. All ice-cream and other frozen food is always delivered in top condition also – certainly worth the $8 or $9 delivery fee for $150 to $200 worth of groceries. I buy on-line a lot: food & other grocery items (from Coles), healthcare & pharmaceuticals (from ePharmacy mostly, plus Pharmacy Direct & Golden Glow), toys for the kids (ToysRUs), computer gear and printer consumables (Megabuy, Dick Smith, etc.), and I use Scoopon and other similar sites for discount restaurant deals, gifts and heaps of other stuff. I have very rarely had any issues and when I have, they have always been rectified quickly to my complete satisfaction. I can’t recall ever having an order getting lost (although a few have arrived late). My on-line shopping experiences have actually been better than many of my face-to-face shopping experiences where I’ve often been overcharged, charged for the wrong item, given the wrong information, or had to wait for a long time to get served. Many companies that don’t have an effective e-strategy are not going to thrive or even survive in the future.
Gabe
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You cant believe what the two big retailers tell you – I suspect it is all
smoke and mirrors once again and the growers are the meat in the sandwich – Did you know that after purchase prices are settled on they take a further 2.5% disc. for paying on time – yes on time – Not before its due. We need more competition “<
Peter
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Gabe,
It’s known as settlement discount and it is common throughout the business world.
Peter
Matthew R
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A friend manufactures and imports all of his stock from China.
A few points of interest he made recently
1) the Chinese will not ship the stock to him until it has been paid for in full. He then ships the stock to the stores and he may wait for anything up to 90 or even 120 days for payment. The Chinese ask him “how can you run your business on these terms?”, the answer is that there is no choice. The chinese think it is crazy.
2) the cost of manufacturing in China is climbing. There used to be an abundant amount of cheap labour but the chinese keep upskilling and they quickly want to go from working in a factory to something better, and along with that they want to be paid more. He has said that he may eventually have to move his manufacturing to Thailand or equivalent to keep his costs down. Of note is that companies like Oroton and ARB Corp are already in Thailand, and have been for some time.
Peter
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And if your friend was a larger business, he would be extended credit by his Chinese suppliers. Up to 60 days in some cases, but 30 days is typical.
Peter
Matthew R
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interesting, thanks. I’m not surprised, it is a tough industry that he is in – no competitive advantage and people are regularly setting up in competition. He hasn’t read Value.Able :)
Liz
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Thank you Roger; I agree. In terms of online retail, as a baby boomer, I’m a relatively ‘new’ shopper. When I reflect, I spent more online for Xmas gifts than I did via traditional retail. I’ll continue because I like the goods being delivered direct to my door. Easy, no fuss, no queuing at retailers desks, and, it’s often cheaper. As well, I’ve bought quality specialty products from the UK and US much cheaper than I can buy in AU.
Coles intent re fruit and vegetables – well here’s some feedback for Coles. Stone fruit, for example white peaches and nectarines, is the cheapest I’ve seen for a long time. The fruit looks good but its rock hard so it’s back to the green grocer shop where it’s more expensive but edible.
The 50% reduction can’t be good for farmers. Does it mean other items become more expense to maintain margins? We all know what happens when ‘price’ becomes the primary differential.
Our arable agricultural land was a subject around the dinner table tonight. The FIRB rules make it so easy for foreigners to buy when the price paid for the agricultural property is below the FIRB threshold for review. Many people think this but are enough people expressing their concerns around the dinner table publicly?
The other aspect of ‘China buying’ is that it’s so prolific that it is fuelling ‘anti-chinese’ sentiment (judging the actions of some and transferring the sentiment to all) and who knows what consequences of that may bring.
Roger Montgomery
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Thanks Liz. Over the hols we did a side-by-side test of a number of fruits and there was no doubt the fruit from the family run grocer was better than the supermarkets.
Michael Horn
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Producing fruit and vegetables is unlike producing widgets, where one can cost the inputs, add a margin nuts and, voila, one has a price. It costs farmers just as much to produce a poor crop as a bumper crop. If farmers generally have poor crops in a period, than to some extent the disaster is mitigated via higher prices that a small supply engenders, and vice versa if all farmers have bumper crops.
After years of drought, Australia is now in a position where we can expect bumper fruit and vegetable crops, and wholesale and retail prices were set to drop anyhow. Coles is pretending that the prices are going to drop because of them, and commentators are goping along with that fiction. Coles is cleverly saying that this is limited-period campaign, so when bumper harvest is over, they can bring the campaign to a close.
I recall buying capsicums at 68 cents a kilo in Canberra for a period of months in 2008, and since then I have seen them selling for twelve times that (not that I buy them when they are expensive). I mention this to highlight that fruit and vegetable prices are substantially set by the dearth or glut of supply, not a input-cost-driven dynamic.
Roger Montgomery
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And woolies already offers cheaper prices than Coles is proposing…
John C
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Hi Roger. Nice post. They’re not an LPT, but in the residential property development space, I see value currently in CWP, and yes, I do hold the stock.