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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