COMMERCIAL Learning To Succeed In Diversification

Press, Volume CVI, Issue 31114, 18 July 1966, Page 15

COMMERCIAL Learning To Succeed In Diversification

(By Our Commercial StaS.i

United Empire Box has to show how well it can handle diversification now that its bid for Ross and Glendining has succeeded. Managing the enlarged organisation will be a unique business problem for New Zealand. Some degree of diversification seems to be the rule among big companies these days, especially in the more advanced overseas countries, but in most organisations there is a limit.

Diverse units either have made minor contribution to total sales or else have been closely related to the company’s original products, technology or markets.

There are many temptations to diversify: company tax gives profitable companies a strong incentive to buy ventures with tax losses, and this also works the other way around. The Trade Practices Act makes it difficult to expand too far in a company’s own industry. Presumably United Empire Box felt freer to buy Ross and Glendining than it

would to buy, say, the Egmont Box Company. Some American companies have diversified simply because their original companies ( could not absorb their mount- , ing reserves of invisible cash. Gillette is an example of \ this. Beyond Control Some diversify because changing circumstances beyond management’s control have made their chosen fields relatively unprofitable, or may do so in the future. > In Australia, British Tobacco entered the bowling industry and, more recently, soft drinks and food. Some businessmen have built empires because of delusions of grandeur, often by financial manipulation and by incurring heavy debt charges in the acquisition process. These enterprises have usually failed sooner or later. The principle of diversification is sound and U.E. Box’s decision was probably prompted by most of the reasons just set out. But its take-over is financed 'by share exchange, not by ‘debt financing, and although the company must raise the profits of the new division to the level of the original company, expenses should not need to rise. G. M. Concept General Motors introduced the concept of relating the profit of any venture to the investment capital it required. Return on investment is important to a country like New Zealand with its chronic need for capital, its high interest rates and its high marginal efficiency of capital. This standard should be unsentimentally applied. U.E. Box has been earning 11.6 per cent on shareholders’ funds. The average for New Zealand is lower than 10 per cent. Ross and Glendining had an earning rate of about 3.4 per cent The management of U.E. Box is faced with the task of tripling the Ross and Glendining profits to bring them into line with the group. However, even if they do not a steady profit would cover the 11 per cent dividend on the new capital 1.9 times. Interesting points were raised by the chairman of U.E. Box, Mr J. N. C. Doig, at the annual meeting held on Thursday. Impossible Agreements reached some three years ago made it almost impossible for the company to expand in the paper converting industry by the normal method of vertical integration, he said. Everybody in the industry I was forced to buy the same materials, from the same source and on the same price | basis. Improvement in results through competitive or better buying was impossible and there was ho different range of materials. Margins between material costs and selling prices were very narrow, leaving little room to manoeuvre, he said. The company’s tax-paid profit on sales was only 4.3 per cent. The stage had now been reached where it was desirable to only maintain the company’s share of the market in this field, but not necessarily to increase it However, Mr Doig said, to remain successful a company must go forward. With expansion not desirable and vertical Integration not possible the company must, therefore, diversify on a substantial scale. Wider Range The New Zealand wool textile industry recently tends to produce a much wider range of products than before, but the diversification within ini dividual mills of too wide a : range had lost economies or ' scale compared with overseas. Productivity growth had been adversely affected, and ' labour productivity in the in|dustry had barely reason at I all in the last decade, in spite of a very high rate of real 'investment, he said, j This suggested that the ! benefits of new capital investment had been dissipated in under-utilisation of equip- ' ment through trying to cover too wide a range. Besides, all wage increases had been passed on in the ‘form of higher prices instead of being partially absorbed ; through higher labour productivity as it should have been. U.E. Box intended to specialise in certain fields, and I gain economies of scale to achieve maximum use of plant and to avoid internal freights where exports were con-

Group sales for the first three months of the current financial year were about 10 per cent above last year and profits were in proportion, he ndded. Little Heart Good news is still flowing rom companies, but it seems , o be doing little to put any eal heart into a jaded market. Early in the week Fletcher foldings released its full ac:ounts showing profit nearly !0 per cent higher at £l.2m. Fletcher broke its own proit record for the sixth year n succession. Turn-over rose 8 per cent :o £40.8m, and increases were shown in all sections except land development and miscellaneous, and construction. Better turn-over figures :ame from steel and enginseeing, manufacturing, builders’ supplies and timbers , Later in the week General Foods announced that it would pay an 11 per cent divi- : lend for the latest year and idd a 11 per cent bonus. Shareholders will get the bonus dividend because pretax profit was more than Elm for the first time. Directors said in a preliminary announcement that group profit before tax jumped 45.7 per cent and sales rose 12.2 per cent. General Foods is beginning to reap the benefits of consolidation after six years of take-overs. Dividend is ahead of the xO per cent forecast made at the time of the bonus issue announcement in March last year. Swap Planned J. Wattie Canneries and General Foods last week announced that they plan to swap directors in a novel liaison move. Wattie’s will be represented by two directors on the General Foods board and two General Foods directors will be on the Wattie’s board. Both organisations see this as a closer link between producer and distributor. It is possibly the first time in New Zealand such a link has been established between two companies in different branches of the same business. Such a step is not only logical, but there should be benefits for both shareholders and the publie in this liaison. General Foods and Wattie’s have both followed vigorous expansion policies in recent years. Since 1958 General Foods has absorbed ice-cream makers throughout New Zealand and is now the largest organisation in this industry. “Pop” foods are a feature of General Foods and during the last year it moved into potato chips. Potato Chips It took over Bluebird Potato Chips that has the biggest share of the market in and around Auckland. Bluebird has a new cooking and packing plant at Otara with a production capacity sufficient to supply the whole New Zealand market Since television came to this country snack foods have become more and more popular. General Foods latest move was the purchase last week of the Broomham Chicken Company at New Plymouth.) This company—New Zealand’s largest producer of chicken meat processes more than Im chickens a year. Major Gumer Wattie’s is a major canner of jam, fruit and vegetables and has substantial stakes in quick frozen foods, fishing, and can making. Wattie’s farms grow fruit and vegetables and the company has a fleet of harvesters and viners. It has developed export markets in Australia, Britain, Asia, the Pacific Islands and the West Indies. Wattie’s has come a long way since it was formed as a company in 1934 with a capital of £1250. Last Week Trading followed a brighter trend last week, and over-all showed 64 rises to 49 losses. The week before the market was exactly in balance with 47 rises and 47 falls. Turn-over of shares, notes and rights on the Christchurch Stock Exchange was 87,027—slightly down on the week before. Turn-over of industrials and retailers rose to 49,529 from 44,867 the week before, with second rank stocks contributing to the increase. There was less interest In breweries, frozen meats, insurances and woollens, but turn-over in the loan and