Pumpkin Patch Ltd move downmarket

The announcement yesterday that Pumpkin Patch Ltd [PPL.NZ] are introducing another brand with stand alone stores in Australasia has the market excited but as PPL shareholders we shouldn't count the dollars before the product goes out the door, or before the cash is received, the cheques are cashed and credit cards debited.

The stores are going to operate in what PPL call the "playwear" market, that makes up around 70% of the $NZ 3 billion Australasian childwear industry.

"The introduction of a dual brand aimed at a different segment of the market is a model that has been successfully followed by numerous international clothing companies. This move will allow us to leverage our existing infrastructure and retail expertise for the benefit of both brands". PPL NZX release.

I suspect that the "different segment of the market" will be at the lower end of the childrenswear market where the BabyCity brand from the Postie Plus Group [PPG.NZ] T& T, The Warehouse Group Ltd [WHS.NZ] and others operate in.

The company currently sells a trendy range of children's clothing at the mid to high end of the market and does it well in all the markets it operates in except for the USA and the UK where the brand is currently a money loser for PPL shareholders.

Clearly PPL have been feeling the pinch from their lower priced rivals in this depressed retail market and moving to the lower end of the market will take away custom from those aforementioned retailers if the store roll out, buying and marketing is done well.

Separating the Pumpkin Patch Brand from a lower priced stablemate brand into a totally different operation is the wise way to go. A lower priced brand sold in Pumpkin Patch stores would have ruined the image and eventually sales of that brand. It is funny how consumers are but that is the way some of us shop - not my good self I hasten to add.

Margins will probably be lower but I would imagine volume will be higher. As a couple we buy from both the Pumpkin and those other stores and the sheer volume of stuff at the lower end is probably more than twice (I haven't taken a good look I just pay for it) that of the Pumpkin Patch clothing our girl has. Our infant spends alot of time indoors as she is 8 months old and the "Playwear" she has (who knew it was called that) is abundant.

If the roll out is done badly shareholders stand to lose millions. When PPL Chairman Greg Muir was CEO of the Warehouse he was in charge of a low cost roll out of that company in Australia and it all ended in tears and hundreds of millions in lost shareholder moola so PPL shareholders have reason to be cautious of this new venture - lets hope he isn't anywhere near it.

Pumpkin Patch was established in 1990 and was expanded in similar economic circumstances to the current day during the early 1990s but that provided good opportunities for company expansion and the same opportunities exist for expansion of PPLs new brand today.

The biggest costs, leasing and store fit-outs, will be considerably cheaper than a few years back due to economic circumstances. Empty retail outlets and gaps in malls could be easily and cheaply filled with eager landlords providing incentives for PPLs new offering to use their space.

I will reserve my judgement on the new venture until I see some concrete figures on paper and I want to see profit quite quickly (excluding the one-off establishment costs) and a year of trading should give shareholders a good idea of any future success or god forbid failure.




Pumpkin Patch shares closed up nearly 1% on the news.


Disclosure I own PPL, WHS and PPG shares in the Share Investor Portfolio.


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c Share Investor 2010

The Warehouse: Big Brands, Big Opportunities

While doing some largely unwanted retail therapy over the Christmas/New Year period my thoughts were naturally drawn to the New Zealand retail sector and specifically The Warehouse Group Ltd [WHS.NZX] and its stated intention at the end of 2009 to sell more "branded products" in its nearly 90 big red sheds.

This indication to the market and Warehouse investors that the company is to go beyond its current retail realm and or perception by consumers that it sells "cheap junk" poses a number of questions rather than answering any.

The Warehouse itself as a brand is currently stuck with the image of a company that sells cheap and nasty stuff that breaks and it does well in this sector.

That image was more ingrained many years ago when the company first started but the perception by consumers is that that image is tardy and that the fact that they sell "junk" still remains.

Incidentally this is also true of a host of other retailers that compete with the Warehouse but the big red sheds seem to be permanently stuck with the moniker of a seller of crap.

This is where the problem of moving the company more upmarket and selling bigger and better brands begins.

The company already sells a number of branded products like Apple's Ipod, Sony Playstation, Microsoft Xbox, but also sells a number of other "brands" that are unique to the company and are in fact inferior rubbish.

However it lacks a full range of branded product across the diverse number of retail sectors it operates in and that presents a problem for the company. Few people are going to go into a Warehouse store to buy a branded product if they know there isn't a full range to choose from or a consistent supply of that product on a day to day basis. Of course this dilemna can be got around by simply supplying a full range of branded product to its customers but so far this has proven difficult for the company to achieve for a number of reasons.

Big name brand suppliers in the main have been reluctant to supply their sought after consumer products to the Warehouse simply because of that image of cheap and nasty and damage that may occur due to an association with their brand and the Warehouse's poor image in some consumers minds. In addition, the discounts that The Warehouse would want to negotiate with brand owners for the large volumes that they would sell often make suppliers baulk because of the lower margins made. This of course would be ameliorated by the volume of their goods that The Warehouse could sell.

This can hurt brands as a whole because the owner of that brand would have spent considerable time and money on an image that fits their target market and to place that product in the shelves alongside a perceived or actual inferior brand can have deleterious consequences for the long-term viability of that brand and the product or products that are sold under that branding.

As I said above though The Warehouse has managed very slowly to garner a few well known and loved brands to stock their shelves. This has taken many years to achieve on the part of CEO Ian Morrice and his management team and it will probably take many more years to get a good range of branded product throughout the Warehouse's range of goods.

An indication of how successful branded selling at the company could go in the future can be seen in the Warehouse' toy department. The company has long been the seller of a large range of toys from all of the big brands and as a result has become New Zealand's biggest seller by far of toys.

This is because that long ingrained image that the company sells cheap and nasty stuff has been replaced by the image that indeed the their toys are cheap but because they are selling branded toys consumers know that The Warehouse is the place to go to buy the best toys at the best price.

The company also has a large range of quality goods in the CD/DVD ("software" rather than "hardware") and book departments and the company has also become the largest book and CD/ DVD retailer.

My point is, even though it is going to take a long time for The Warehouse to shake the tag of cheap and nasty, judging from their track record in specific areas of the retail sector there is no reason why the company would not eventually be thought of as the retailer that sells the best branded goods at the best possible price overall.

This will be good news for consumers but especially good for shareholders as it will provide a boost to revenue and with good management, a boost to profit as well.

Happy shopping.


Disc: I own WHS shares in the Share Investor Portfolio

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NEW - From Fishpond.co.nz | Think Bigger, By Michael Hill

c Share Investor 2010

"Government Motors" unlikely to survive

Even big companies with "enduring brands" that have been around for a long time die.

Being big and around for 100 years certainly didn't help General Motors or what is now being cleverly dubbed "Government Motors" from heading towards the abyss.
No matter which way you cut it the big GM is certainly in an abyss it will find its way impossible to climb out of, without even more massive amounts of cash to keep it afloat.

Lets face it, the company has been a basket case for a long time and hasn't made a profit for around 5 years. The nail should have gone into the coffin eight months ago but that great economist Barrack "I have a Plan" Obama decided he knew more about cars and how to build them than Henry Ford and proceeded to sink 10s of billions of American taxpayer dollars into it in the hope that doing the same thing it had been doing over the last few decades was going to turn the company around - amazing how resuscitive other peoples money is eh folks!

Ain't socialism a wonderful thing.

Here we are now 8 months later and there is talk of sacking thousands of highly overpaid car workers, killing multiple brands, ditching 2000 dealerships and even selling the car that beats the Toyota Prius for being ecologically sound, The Hummer, to a Chinese company.

But is that going to save it?

Short answer, NO.

But why?

For a start dropping 2000 dealerships simply isn't enough, they have 6,426, to be exact, to Toyota's 1,461, so try dropping another 2000 to reduce those massive overheads that are dragging GM down. Start with that and in combo with some of the other cuts - especially the gold plated pension plans - that just might work.

The big problem that GM has though is that it is now effectively a Government department and we all know that politicians and business equal failure with a capital F.

Some of us my age (43 years young) remember British Leyland being "rescued" by British taxpayers in the 1970s. Where is it now ?

It no longer exists.

It made poorly designed and built cars that politicians had influence over building and nobody wanted to buy them.

Mr Obama wants cars to be built that are "greener", whatever the hell that means and instruction on high from mad socialists like him will result in the same fate that was visited on BL 30 years ago.

Success for GM is almost impossible under its present ownership and Obama's "plan" to get the company out of the crapper seems to be a combination of the ability to sell cars to Americans that they don't want from a company that they already own by using taxpayer money(again) to bribe them to ditch their old cars, so they will buy the new ones from Government Motors.

This will apparently allow the company to sell 10 million cars a year, make the cash flow (out and in and out again of taxpayer wallets) and then they will be able to make a profit.

Again, ain't socialism wonderful!

No plan yet from Obama about just when that 50 billion loan is going to be paid back to Americans.

It never will.

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Charlies juices through the shareholder cash

I have never liked Marc Ellis or his schoolboy type self promotion. It is very hit and miss.

While managing to garner alot of attention for short period of time, Ellis' promotional activities lack substance and I doubt do well in the long term for the business or product being promoted.

His university degree is in commerce at Otago University, majoring in marketing and management, so there is no surprise as to why marketing is at the forefront of his business regime.

His Charlies Group Juice Company [CHA.NZX] seems to be a case in point.

The announcement last week of a NZ$425,000 FY loss to June 2008 mounts on top of other losses incurred since it listed in 2005.

Charlie's was started in 1999 by Stefan Lepionka, Marc Ellis and Simon Neal and has grown rapidly in sales since its listing but has failed to sustain any profitable growth.

Its sales come from its Charlies brand juices and a number of other brands, in New Zealand and Australia.

Charlies seems to have the Burger Fuel or 42 Below approach to business-growth without profit- but that runs at odds with the way most business operates and the way I like the businesses that I own to run-at a profit, for the majority of the time.

I might have this all wrong though, as I could with Burger Fuel.

Charlies might be a big company in the making or a business that Ellis and his mates will flog off to a large conglomerate like Coca Cola Amatil [CCL.ASX] as one of Marc's fellow directors Stefan Lepionka did with his Stefan's Orange Juice which was purchased by Frucor Beverages in 1997.

However, there has been little sign of a good sustained profit thus far and they seem to be chewing through shareholder funds rapidly in the objective to grow yet bigger.

I would love to be proven wrong.


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Stock's I'd buy, at a price: Burger Fuel

Now I have given Burger Fuel Worldwide [BFW] a LOT of stick over the last year or so about some of their decisions and their initial IPO being way overpriced.

So much stick in fact that one of the directors that I had a friendly acquaintance with and could contact him about company progress no longer returns my calls.

Tough luck, never mind Mr Rickard, get over it!

Well, I don't really have anything to get over, never had Josef Roberts , I really love the concept, brand and company. I just don't like the value that you place on it.

The initial IPO put the capital value of the company at NZ $60 million, it is now worth less than half that at today's share price. I would personally value it at around $10 million, roughly a third of today's value, as a purely speculative play, rather than a solid business investment.

Sales for the franchisee outlets run at approx $20 million of which BFW, as the franchisor, have around a 10% gross cut of that figure, for royalties, group advertising spend ,management and training and other fees. Around $2 million gross.

Company start up costs and early expansion have chewed up a value meal sized portion of that $2 million plus the same sized portion again, making for a just over $2 million loss.

Theoretically these costs should be proportionally smaller as the company grows and so does revenue but if you were looking at putting a value on the company today, you would have to discount today's capital value down from $30 million to $10 million because of uncertainty over those continued expansion costs.

As an investor you would have to ask yourself how much would I pay to get $2 million of gross revenue per year? Personally I wouldn't pay more than $10 million bucks.

Wheres the present and future value of Burger Fuel though?



Burger Fuel: Yummy Burgers, but a highly
over-valued Brand.

Well. I reckon BF management put most of the value in their company in its brand, which is a strong one, and one that management relied upon to get investors interested in the IPO, but as I have mentioned before I think they put too much value in that brand.

Which leaves me with a more realistic valuation based on a dollar return and high risk, rather than possible worldwide domination of Burger Fuel's fast food outlets.

I'm interested therefore at buying at anything around 17c per share, it is at 40c today and its IPO price last July was $1.

I must note the share price has been down to a low of 11 c.

Are we friends again Josef? I love your Bastard Burger.

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c Share Investor 2008

Wrigley/Mars passes Warren Buffett's taste test

The merger of Mars Inc with Wrigley Jr Company and Warren Buffett's interest in helping fund the purchase, and having a subsequent minority stake in the merged company, to be held by his Berkshire Hathaway investment vehicle, is Warren Buffett in his element.

Wrigley and Mars as one, will make the largest confectionery business in the world and its combined brands, like Mars chocolate bars, Snickers, Doublemint and Juicyfruit will make Buffett a very happy man indeed.

Warren Buffett already owns outright or portions of some of the worlds biggest food, consumer and beverage brands: Coca Cola, Gillette, MacDonald's and America's Sees Candies among them.

He sees in Mars/Wrigley what he sees in his other holdings, companies and brands with strong histories and dominant positions in the marketplace that will survive through the turbulent times and good times alike.

He calls companies like these "Economic Moats", companies that have products to sell that have a point of difference, cannot easily be copied and are hugely dominant, and therefore see off competitors year after year. Mars/Wrigley strong brands easily fulfill this investment requirement.

Another requirement that fits Warren Buffett's investing criteria is the fact that Wrigley/Mars is a very easy business to understand. There is nothing complex about making chewing gum and chocolate bars and therefore huge continuing capital expense involved in such in industries as computing, in coming up with new technology to stay ahead of competitors isn't going to hurt the food-makers bottom line.

One thing I am not sure of, is if Buffett's main criteria for investing is being fulfilled in the Wrigley/Mars tie-up. That is, the value investing part of his investing principles. Whether he is paying too much for his stake in the merged company will only be known by the man himself and by the rest of us in time, as the merits and performance of the merged giant reveal themselves.

He is famous for making good investment decisions and I personally doubt he has made a mistake to get involved in this monumental marriage of these two sugar pushers.

In New Zealand the closest thing we have to a Wrigley/Mars is Goodman Fielder Ltd[GFF] , an Australasian food conglomerate with very strong dominant food brands and a long history of loyalty among consumers. Its brands are staples, its business easy to understand and its products consumed for breakfast lunch and dinner.

It definitely fits my investment criteria and I have a holding.

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• WSJ BLOG: A Sweet Deal for Warren Buffett
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• BLOOMBERG:Mars, Berkshire May Acquire Wrigley for ...
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c Share Investor 2008

Goodman Fielder a hedge against an economic slump

Consumers still eat, even during economic downturns. Goodman Fielder is well
placed to weather the storm.



A stock likely to do well over an economic slump, a slump looking more likely than not, is the Australasian food giant Goodman Fielder (GFF).

With operations in Australia, New Zealand and throughout the Pacific Islands, Goodman has a business with food staples such as bread, milk, butter, flour, and highly branded packaged and processed foods for breakfast, lunch and dinner, and the snacks in between.



Wonder White, a strong
Australian brand.


Consumers are loyal to their brands and tend to stay true even when prices rise. Having said that there have been some large price increases of their products on the retail floor because of higher commodity prices, like wheat and sugar and increased labour, packaging and energy costs.

Unlike other companies, in less consumer essential businesses, Goodman Fielder has been able to pass on much of their increased business costs, so margins havent been affected on the downside too much.

Margins have been under pressure though and prospective buyers must be aware of this caveat.

Goodman does have competition, although Goodman does tend to dominate allot of food staples and brands: Vogels bread, Tararua, Kiwi, Edmonds, Meadowlea, Quality bakers, Irvines, anchor and a whole host of other recognised brands.

Goodman's share price has suffered of late, down to a low of NZ$ 1.78 last week from a high of $3.20 at the end of last year and finishing up 3c at $1.93 today.


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Disclosure: I own GFF shares


C Share Investor 2008