Just about every firm is complaining about how hard it is to get and keep staff
It’s feeling very much like “batten down the hatches” time in the business world, although this is very different from what we normally see when we’re heading into a recession.
If we were following the same pattern as in previous recessions, we’d be seeing lots of headlines about major staff layoffs and rising unemployment; this time around, just about every firm is complaining about how difficult it is to get and retain staff and the Reserve Bank of New Zealand (RBNZ) is telling us the labour market is unsustainably strong.
From bus drivers to cafe waiters and chefs, a host of businesses just can’t find any — Wellington commuters can attest to how horrendous it is to try to get to work by overcrowded bus right now, while one of my favourite restaurants has chosen to stop serving lunch four days a week.
Briscoe Group managing director Rod Duke said it’s no different for his company, which owns the Briscoe’s homewares chain and the Rebel Sports chain.
“We’re probably in a slightly better position than most because we’ve shown extreme loyalty to our people over this tragic period,” Duke said. Staffing situation
Through the pandemic, the company kept all staff employed and paid in full through the various lockdowns when it couldn’t trade at all or was restricted in how much it could trade, including the first lockdown when almost all economic activity in the country stopped for 55 days.
“I’m still bewildered at the difficulty in trying to fill retail positions. It’s very, very, very difficult,” Duke said.
Even the students and backpackers who normally take holiday jobs over the busy Christmas period just weren’t there this time around, he said.
But there are headlines aplenty, both here and abroad, signalling that the NZ and global economies are slowing sharply.
“Retail card spending falls in December”, “Westpac Bank sees more pain ahead for households”, “Inflation vs recession: Who’d want to be a central bank?” and “Business confidence falls off a cliff”, to cite but a few recent BusinessDesk headlines.
The signs in the United States, from the inverted yield curve (meaning short-term interest rates are higher than long-term rates, a classic portent of recession) to the plunge in leading indicators to falling business confidence to falling retail sales and declining manufacturing output, are telling us the same message.
Fatter margins
Duke does have the luxury of a comfortable starting point: In the six months ended July 31 last year, Briscoe reported gross margins of 45.64 per cent.
That was an extraordinarily high 621 basis points up on 39.43 per cent it reported for the year ended January 26, 2020, the last period before Covid hit.
Some of that margin expansion reflected the boom in post-lockdown spending; while we were constrained from spending on some experiences, including overseas travel, we all compensated by buying stuff.
That meant retailers had less need to discount.
Duke pointed out that Briscoe’s very strong results also reflected careful stock management — there was no point discounting a line to send stock flying out the door, only to be left with empty shelves when replenishing stock was taking much longer than usual.
Jarden analyst Guy Hooper, in a report initiating coverage of Briscoe, described Briscoe as “a well-run business with an enviable track record of sales growth” and noted it faces “a challenging backdrop”.
Hooper acknowledged that the company has been taking a number of steps to improve margins in recent years, including upgrading its IT systems and doing some hard yakka on analysing sales patterns and adjusting stock accordingly.
And it’s difficult to separate the impact of such “self-help” measures from the benefits of the macro environment, he said.
Shaving margins
Nevertheless, Hooper is expecting Briscoe to give up about half of the Covid margin gains over the next couple of years.
Duke confirmed this is a reasonable assumption: “Our aim is we should be able to retain about half of that.”
One factor that will somewhat cushion the pain is that the supplychain disruption that plagued the pandemic years has now all but dissipated.
“I would be back into stock and able to replenish stock sold in the high 90 per cents of my inventory,” he said.
As the company held more stock to cope with the supply-chain disruption, Briscoe’s inventory blew
Rod Duke, Briscoe Group
out from $87.4 million at January 26, 2020, to a high point of $119.5m at January 30, 2022, but had dropped to $113m by July 31 last year.
By the end of this month, that inventory figure will be “significantly” lower, although not back to the early 2020 level, he said, and it will remain significantly lower, maybe $3m or $5m lighter than the end of January level, through the 2024 financial year as Briscoe matches inventory to its expected lower sales.
Duke said that’s how he’s seeing conditions right now, although that may change through the year with the changes recorded in each of his customary quarterly updates. Cash-rich
Another reason Briscoe’s starting point is more comfortable than most is that it had $98m in cash at July
31 — Duke won’t be drawn as to what he plans to do with this, saying it’ll be up to the board, but since he owns 77 per cent of the shares, I’d say it will be entirely his decision.
Hooper is predicting that Briscoe’s dividends will be more stable than its underlying earnings through the cycle — the company’s policy is to pay out at least 60 per cent of earnings in dividends.
The company paid a first-half dividend of 12 cents per share out of earnings of nearly 20.5cps.
Hooper estimates taking the payout to 84 per cent of earnings would be sufficient to hold the dividend steady, even if his forecasts prove accurate of a 3.8 per cent fall in fourth-quarter sales in the current year and a 2 per cent drop in sales for the following year.
If that eventuates, it will be Briscoe’s first annual sales decline since 2009 when the economy was weighed down by recession and the GFC (global financial crisis).
Beyond January 2024, the analyst expects Briscoe to resume same-store sales growth, but at a slower pace than before Covid — he expects the company will continue opening new stores at the rate of one a year for the next four years, matching the average over the past 10 years.
Hooper’s expecting 3.5 per cent compound average annual growth for the next four years compared with the 5.1 per cent rate Briscoe demonstrated between its 2014 and 2020 financial years.
Increasing competition? “Briscoe’s history should support a higher sales growth rate, although we note increasing competition is from offshore retailers and e-commerce.”
Briscoe is increasing its own e-commerce — online sales accounted for 19 per cent of group sales in the nine months ended October 30, up from 11 per cent in the 2020 financial year before Covid hit.
But Duke sounds relaxed as he discusses his competition on the ground.
In his view, the Warehouse and Kmart are direct competitors of each other, but not really of Briscoe’s — although the other two chains carry similar categories such as irons and toasters at very cheap prices, they don’t stock the well-known brands, such as Sunbeam, Breville and Jamie Oliver that Briscoe’s does, he argued.
And he doubts that Farmers, which these days seems to concentrate more on apparel and cosmetics than homewares, is particularly focused on trying to compete with Briscoe’s.
“They’ve probably got more to worry about with Chemist Warehouse,” Duke said.
And Harvey Norman isn’t a threat either, he argued, because its sales staff sell on commission.
“You don’t get a lot of commission selling an iron or a toaster.”