Innovation key to survival amid retail cutbacks

Lisa Macnamara
The Australian
February 06, 2012

IT all began with a phone call: Kmart told McPherson’s it was dropping some of its houseware products in favour of its own private label.

The game had changed and traditional links between supplier and retailer were about to be challenged.

“Guy Russo took over Kmart and took a lot of brands out of the range. He put a lot of his own private label brands in over the last 18 months,” McPherson’s chief executive Paul Maguire says.

“We lost some housewares business in Kmart, so it has had an impact on us and other companies,” he says.

Pacific Brands is another example.

The current focus on private labels by Woolworths chief Grant O’Brien, who has declared he wants to double sales growth, as well as Kmart and Coles flows from a need to boost margins in a weak retail market, but suppliers have taken a hit. The Kmart decision alone cost McPherson’s $4 million over a year.

“There has been heightened pressure in the last 12 months,” Maguire says.

“We lost about $12m in revenue due to private label initiatives.”

Not many would dispute that retail is one of the toughest games in today’s market.

Cautious consumers who prefer to save their cash, as well as the rush to buy cheaper online goods, has left many players reeling.

McPherson’s range includes personal care brands such as Manicare and Lady Jayne, houseware brands such as Wiltshire and Stanley Rogers, and household consumables like Multix.

Many of them are essentials, and that has provided some protection for the $300m business, but as the big retailers resort to price wars and reducing stock selection to drive up profitability, McPherson’s strategy is now more than ever based on reacting to its retail customers’ tactics.

“They are all endeavouring to introduce more private label ranges within their offering and we see that leading to a rationalisation of brands,” Maguire says.

“Our goal is to always be the retained brands in these stores.”

The top priority is innovation in his own proprietary labels in a bid to retain its shelf space. “We need to innovate more rapidly.

“We need to add value and to provide brand support, and also outperform our competitors,” Maguire says.

“We also supply a lot of private label — we supply $40m in revenue to the marketplace in private label — so it’s swings and roundabouts to some extent.”

The private label push is only one of a number of strategies being pursued by the retailers.

A “clean aisle” initiative by Coles led it to remove impulse purchase items that had previously dangled enticingly from supermarket shelves.

An increase in promotional discounts has also had an impact.

Last month, McPherson’s reaffirmed its guidance of a 20 per cent shortfall in profit before tax for this financial year.

Supermarket strategies are not the only problem.

Other challenges include currency issues, rising labour costs in China, where most of the products are sourced, and the soft retail market.

“By the same token we’ve grown our pharmacy business in the past year,” Maguire says. “We deal across lots of categories and lots of channels.

“But there’s no doubt that the supermarket channel has proven more challenging for everybody in a weak retail environment.”

These obstacles confront Maguire as he pursues a very clear vision of where he wants to take McPherson’s: a slick business with cost-effective, innovative products for the consumer both here and offshore.

Taking US consumer products giant Procter and Gamble as a rough blueprint, Maguire is embarking on a strategy of product innovation, acquisition, international expansion and increasing its agency representation of other companies’ brands.

The first major step in the company’s plan was last month’s demerger of the MPG Printing business.

Subject to shareholder approval, MPG has entered into an agreement to acquire Opus Group — a diversified printing and communications business.

McPherson’s had been looking to do something with its printing arm for some years after it unsuccessfully attempted a merger with PMP in 2006, only to be blocked by the Australian Competition & Consumer Commission.

Maguire says the demerger was the first step in transforming McPherson’s into a company totally focused on consumer products.

“The printing division was a small part of our profit but a reasonable chunk of our revenue.

“I don’t like to use the word ‘distraction’, but as a managing director I had to worry about both businesses,” Maguire says.

“They are such disparate businesses. It’s pleasing to be entirely focused on consumer products — because that’s our future.”

In preparation for the demerger, an independent report said the move could make McPherson’s and MPG Printing targets for private equity.

Despite the interest in Pacific Brands, Maguire says, he would be surprised if parties were circling.

“It would be attractive if you believed you could strip excessive costs out of the business — which I don’t believe they could — or they believed they could put this business with another business and extract synergies,” he says.

“We think we can do very good things with the current business pursuing our own growth strategies.”

Acquisitions are one of the main ways to achieve this growth. The company has just paid $5.8 million for haircare brands Moosehead and Davinci from haircare and beauty products distributor Cosmex International, as well as the Australian distribution rights for international brands Eylure and Montagne Jeunesse.

Another possible acquisition is in the due diligence stage and Maguire is searching for more.

Promoted internally to chief executive from a senior management role more than two years ago, Maguire immediately made some decisions to position McPherson’s for the road ahead.

Closing offices in Melbourne and reducing its debt-to-equity ratio from 67 per cent to 28 per cent has won him admiration.

“He has got the business into a better position,” one analyst says.

“He got rid of the printing business and is now talking about advancing the top line and to get leverage out of the business. He is doing things slowly and methodically.”

Maguire is determined to steer McPherson’s to growth, despite pessimism in the sector. “I’ve been in this business for a long time in consumer products and there are swings and roundabouts.”