Take-away pizza and chocolate truffles are not so much the must-have accessories of the economic downturn as the can-afford consumables. Consumers tend to trade down in times of economic hardship, but they will indulge in a regular treat, if only for the sense of comfort.
It happens in food, holidays and transport. And even if Australia is not yet officially in recession and the jobless queues still supposedly short, the trend is unmistakable.
Haigh while the sun shines
Alister Haigh, CEO of the Adelaide-based Haigh’s Chocolates, says his fourth-generation confectionery business has experienced many economic downturns in its 90 years, and has always resisted them. “We’re more affected by climate than the economy,” he says in reference to the heatwave that struck Melbourne and Adelaide this year, where most of the group’s 12 stores are located.
But even if people are not eating out so much, they still enjoy small indulgences, whether they are eating at home, going to the cinema or visiting friends. “Truffles are definitely the most popular,” says Jemima Cridland, the manager of Haigh’s Beehive Corner store in Adelaide. “And we’re selling a lot of creams.”
Industry research group IbisWorld recently conducted a detailed survey of how different sectors of the economy would be affected by the downturn. It found that of 477 different business categories, one third would not be affected, 58 per cent would suffer a negative effect and 5.5 per cent faced “disaster”.
That leaves just 3.8 per cent, or 18 business categories, with a positive outlook in a downturn. According to IbisWorld industry manager Mark Ganz, they include those likely to benefit directly from government stimulus packages, such as road and bridge construction. And there are those categories that traditionally benefit from the pain of recession and the litigation that inevitably follows – corporate recovery experts, accountants, debt collectors.
Ganz says higher education also will be a strong sector, as more people pursue studies. And some businesses will benefit from changing spending patterns – cinemas, DVD/video outlets, secondhand stores, car and computer maintenance services, discount retailers and fast-food outlets. The health industry – because people will always get sick, and maybe even sicker in a downturn – was likely to be a star performer, even if elective surgery will decline because of cost.
Deutsche Bank economist Phil O'Donaghoe says the national accounts data illustrate the distinction between discretionary and non-discretionary spending, and a general trading down in spending patterns. “If you eat out, you eat cheaper food. That’s a sensible reaction to households worried about their income. You go to Maccas, not to Otto’s.”
So while some of the ritzier nosheries are starting to feel the pinch, cut-price food retailers do well. And this is a world-wide phenomenon. McDonald’s is the classic example. After several years of decline or stagnant growth, the global fast-food chain nearly doubled profits in 2008, and its stock swam against the tide to post a 6 per cent gain for the year. (But 2009 could prove problematical, though, with sales starting to decline in parts of Europe and Asia.) KFC has reported strong profits and announced major expansion plans.
It’s a similar story at Retail Food Group, a listed Australian company that owns the Brumby’s bakery, Donut King and Michel’s Patisserie franchises. RFG reported a 20 per cent increase in profits in 2008 and expects a similar gain this year.
“The franchisee performance is very resilient to what is occurring in the current market,” director Nigel Nixon says. “We put that down to a low average transaction value – $4.70-6.50 – which makes us a very affordable offer, even if they are treat-related products. Given the current market, in a sense people are trading down to the price-point we are offering.” While other retailers are closing stores, the likes of McDonald’s, Dominos and RFG continue to expand. RFG plans 59 new stores WHERE?
And at the other end of the food chain is Mandy Foley-Quin, who last month won the 2009 Veuve Clicquot Business Woman of the Year award for Stedmans, the hospitality company she began 23 years ago as a single mother. She has 1500 casual workers on her books and an annual turnover of $5.5 million.
“Clients are holding events with smaller numbers and are more specific in targeting their audience,” she says. “That’s why I’ve diversified, to keep everyone employed.”
How to spot the opportunities
When the going gets tough, expand. Foley-Quin’s two bright new ideas are: Q Casting which provides film extras, so actors “resting between engagements” can work as waiters and vice versa; and Smith & Jones, a talent management agency. It’s an obvious solution, and the production companies love it because instead of having to sign individual contracts they sign one – with Foley-Quin – who takes care of insurance, workers compensation, superannuation and so on.
Amid the crisis and the pockets of resilience, however, there are one or two real boom-time sectors, and sometimes it just pays to be in the right place at the right time. While asset prices have plunged across the board on the Australian stockmarket in the past year, the lucky investors in a few chosen commodities have enjoyed massive gains.
Steve Beardsall has been in the oil and gas industry for more than 20 years, and in 2005 he and three business partners picked up a bunch of acreage WHERE? for next to nothing and an undertaking to spend about $10 million on a drilling program on a prospect known as AP852. They hoped, maybe, to make a few million.
Their new mining vehicle, Pure Energy, was brought to the ASX boards in late 2006 with a value of $12 million. It is now the subject of a takeover battle, with the British natural gas giant BG laying an offer of $1 billion on the table. That’s a return of 7400 per cent, at a time when the overall market has plunged by more than half, and some mining assets such as coal and iron ore have lost more than 90 per cent of their peak value.
When the four partners – Beardsall, Terry Primeau, Tom Fontaine and Karl Meade – were trying to put the company together a few years ago, they literally had to beg for money from brokers and investors. “We tried to get this company running for a year and a half, and it just about folded several times,” Beardsell says. “But it turned out we were in the right place at the right time.”
Theirs is just one in a series of transactions which have delivered huge gains to shareholders, including Queensland Gas Corp (bought by BG for $5.6 billion), Origin Energy (sold a half-share in a coal-seam gas venture to ConocoPhillips) and numerous other small companies. This is despite the fledgling nature of the industry and the massive infrastructure investment in infrastructure required.
“We have all been in the industry for 20 to 25 years and we’ve never seen anything like this, at least not that I have been involved in,” Beardsall says. He stands to pocket more than $37 million, Primeau up to $60 million, Fontaine more than $50 million and Meade about $40 million. But there seems to be no plans to sit on a beach and fritter it away. “We could do that too, but why not do it again? So yeah, we're looking to co-invest again. It’s been fun.”
Coal-seam gas is not the only commodity experiencing boom times. Gold has also enjoyed a renaissance in the past five months, embraced as a safe haven, and, by some, as a hedge against the inflation many anticipate if global pump-priming packages have their effect. Bullion jumped from $US720 in November to a peak of just over $US1000 in mid-February, but the fall in the Australian dollar meant that it surged from $950 in September to more than $1500 in mid-February.
For several weeks, the Paulsens mine in Western Australia, owned by Intrepid Mines, achieved a profit margin of $1000 for every ounce of gold it produced – a near miraculous figure for an underground gold mine.
“I’ve been in the industry for more than 20 years and it’s the first time I’ve seen it,” Intrepid CEO Brad Gordon says.
Still, it’s not like the price of gold stocks has gone into orbit. The share price of Intrepid, a relatively unfashionable gold stock, has quadrupled since its lows of October, although it is still just one third of its share price a year ago. Such is the loss of faith of investors in listed stocks that this is an oft-told story across the sector. Perth-based broking house Hartleys says the overall market fell 10 per cent in the first two months of the year, and was down 38 per cent since the start of the financial year. Gold producers are up 18 per cent over the first two months of 2009, but are still down 15 per cent for the financial year.
Still, Mark Bojanjac, CEO of Perth-based miner Adamus Resources, is confident he can win investor confidence and financing support as he tries to bring a potential 2 million-ounce mine in Ghana into production.
“The fundies (funds managers) are saying that though they haven’t looked at gold stocks for years, there’s not much else to look at, and we are one of the few companies that have a project ready to go.” Larger, established gold miners such as Newcrest and Lihir have raised several billion dollars in recent months to take advantage of buoyant gold prices, and Bojanjac is confident that will trickle down to smaller stocks such as Adamus. “I haven’t seen that sort of interest in gold for a long time. Gold is having its heyday.”
A profitable change
Another boom sector, and one predicted to do well for a long time, revolves around the climate change debate. Carbon traders and carbon funds are slowly emerging, and clean energy companies will surely follow, but for the moment the sector seems to be focused on the armies of lobbyists and consultants deployed as the government introduces its plans for reducing carbon emissions and as 1,000 major companies prepare for a new regime of carbon reporting and trading.
Tony Cooper, the head of energy efficiency specialist Energetics, says the firm is looking at 50 per cent revenue growth for 2008, and more growth this year as the government’s Carbon Pollution Reduction Scheme comes into law. “Obviously we’re boosted by the need of businesses to protect their bottom lines when they are losing top lines by looking at energy efficiency gains,” he says.
It’s been a long struggle since the company was founded in 1983. “We wore out a lot of shoe leather walking the streets and making phone calls trying to talk to someone about improving efficiency. After 25 years, it's our time in the sun. We are at the beginning of what will be significant change. Climate change is very much front-of-mind. There are still organisations out there with little or no appreciation of this.”
Energetics is no longer alone in the space. Cooper says the sector has something of a “dot.com” feel about it as new players rush in to hang their shingle and peddle advice. “There’s many a new business setting up on the street, hoping for passing trade. The competition is good and we welcome that. We’ll seek to continue to grow and navigate the troubled waters of the global financial crisis, and come out a lot strong and a much better position than when we went into it.” Among those recruiting heavily are the big four accounting firms and major legal practices, all of whom have invested heavily in climate change teams over recent years.
“Green has moved from premium and niche to a fundamental requirement for business,” says Andrew Peterson, who heads the climate practice for PricewaterhouseCoopers. He says business and consumers are starting to come to grips with the fact that the price of carbon will affect all goods. “They want to know what efficiencies and cost reductions can be found, and what goods and services have less carbon intensity and less water use.”
Back in the traditional economy, mechanic Stephen Brennan, owner-manager of Stevens & Brennan Automotive in Sydney’s Inner West for nearly 30 years, is encountering a familiar pattern.
“When I ring people up to tell them they need to do this and this to keep the car, two years ago they would say, ‘Don’t worry about it, I’ll be selling it.’ Now they say, ‘Go ahead, I will be keeping it.’ When money gets tight, people realise they are better off maintaining a car than buying a new one.”
But while the private car-repair market has picked up dramatically, work with his commercial transport clients has slumped, and Brennan says the pessimism of his clients is striking. “This is the worst talk I’ve heard. It’s so up and down, it’s bloody nerve-wracking.”
But in the end, the perverse mechanics of a sharp downturn mean the big winners could be those that keep their jobs, and don’t have to fret so much about their budget.
Oliver Hartwich, an economist at the Centre for Independent Studies, says falling asset prices, deep discounting by retailers and incentives such as the first home buyer scheme mean some people will benefit from the downturn. “We’re not in deflation yet, but we’re getting close to that. Those that keep their jobs and can afford to spend are likely to be better off at the end of it.”