Thirty-Six Better to Live With Them than Fight Them 1986

CHAPTER THIRTY-SIX

Better to Live with Them than Fight Them

The difficulties within the Farmers’ Co-op became a matter of public record when Derek Evennett was quoted in the Hawera Star in 1986 as having said: ‘The Farmers’ Co-operative Organisation Society company had too many staff, and was top heavy in its administration structure.’

This statement followed the shock announcement of forthcoming redundancies within the company. Evennett said that in conjunction with the redundancy moves the company was being restructured. While previously organised into four districts, centred around New Plymouth, Stratford, Hawera and Wanganui with a separate motor division, the company was now to operate on a three-area basis (including the retail stores and motor division) – New Plymouth, Hawera and Wanganui. ‘The need for rationalisation was recognised by the company’s board of directors before his appointment’, he said, and went on: We regret the need for making people redundant and are aware of our social responsibility. However, we believe that the Company is in good shape to continue serving the region as is has done in the past, and the people of Taranaki and Wanganui will continue to support us. He continued by stating that many of the 60 redundancies and 15 retirements brought about by restructuring involved management as well as clerical and sales staff: ‘It has obviously been a shock to staff. … As far as possible we have applied the ‘breadwinner’ concept and staff over 60 years of age have been asked to retire.’

There had been criticism about the company’s failure to warn staff of impending redundancies, but Mr Evennett said he believed that the way it was done was correct and that it was ‘a once and only pruning – there was no question of additional lay-offs’. Reaffirming the Farmers’ Coop’s success over a 71-year history as a Taranaki and Wanganui privately owned company with 8,500 shareholders, he said: ‘We believe we provide a service to customers not matched by national operators. … We want to remain as a private co-operative society, and it is a matter of remaining competitive.’

Employee numbers as at the end of March 1986 were as follows: February March

Retail Branches: South Taranaki Area 186 193 North Taranaki Area 211 212

Area Offices: South Taranaki North Taranaki 20 15 24 20

Livestock: South Taranaki North Taranaki

Marketing & Technical

Services: 15 17 13 13

13 13

Head Office: 19 19 Finance Company: 4 4 Wool Company: 17 17

522 523

Throughout the year the financial situation of the company did not significantly improve although redundancies, restraints and other measures were helping to lessen the impact of a volatile economy, the serious situation facing many hill-country farmers, and a depressed motor industry throughout the country. Wanganui farm supplies, and the operations at Feilding, Marton and Waverley, including all motor departments were negatively contributing to a reduction in turnover. Investment bankers FASMacquarie Ltd had now been employed to assist improving profitability and to revise the company’s financial structure and reduce the level of debt. The sale of unprofitable assets was now being seriously considered. At a meeting of the board on 7 November 1985 a motion was unanimously carried that: The executive committee recommends to the board that the Company commence negotiations with a view to obtaining the sale of assets in the Wanganui area, including Feilding etc, at the best possible price and in the best interests of the Farmers’ Co-op Society of N. Z. Ltd. The negotiating team assigned to the task of selling the assets comprised the chairman, deputy chairman and general manager. At the same meeting a confidential paper was presented which summarised the discussion at the executive board meeting on 30 October 1985 following a recent conversation between Elders Pastoral Limited and the chairman, deputy chairman and general manager of Farmers’ Co-op. It was a quantum leap from topics the directors were expecting to deliberate on. Elders Australia had recently entered New Zealand through the acquisition of established New Zealand companies, including what was then known as Allied Farmers, and J. E. Watson had confirmed that plans were in hand to become a nationwide company, purchasing the remaining ‘independents’ or at least coming to some other arrangement with them to achieve that goal.

In essence the paper drafted by Mr Evennett for the board outlined the Elders Pastoral offer, including a variety of options to purchase all or part of The Farmers’ Co-operative Organisation Society of New Zealand Limited: Elders Pastoral are prepared to pay us cash for: – Our entire business, or – Cash for those parts of it that they really want, i.e. 1. Saleyards and commission business 2. Wool Company 3. Possibly some farm outlets, or – A share/selling on behalf of arrangement for our commission business, including wool. Elders would be contacted after discussion with our board.

Elders indicated that although they were not interested in the company’s motor branches and retail businesses outside farm supplies, they would nevertheless purchase the entire Farmers’ Co-op group and on-sell any unwanted parts of it. This would, however, mean that the total price would be somewhat adjusted to take these unwanted departments into account, which in the end would bring down the overall purchase price considerably. With these firm offers on the table, the paper concluded by setting out a number of possible ‘tactics’ for the company to consider: 1. To agree to sell everything. 2. To say no outright to Elders. 3. To allow Elders some restricted entry on the basis that it will be better to live with them than fight them. (Selling on behalf for the Wool Store is a possibility.) 4. To turn the situation around and use it to our advantage to rid ourselves of non-performing operations, e.g. Wanganui area (excluding Londontown), at no loss to ourselves. Strategically this has much to commend it in that: – It does not alter the number of significant operators in the Wanganui area. – It leaves Elders own options open for nationwide expansion. – The ‘protecting our back door strategy’ is outdated and will not work against a determined competitor. – FCOS at book value, would rid itself of $5 million of funds employed on which (at marginal rates) it is currently paying $1.25 million in interest with a negative return.

Schedules detailing profits/losses in the Wanganui area and book asset values were attached to the report.

Negotiations with Elders commenced immediately, the directors requesting that ‘as hard a bargain as possible be struck with the Wanganui Motor property’, although they made the point that the negotiating team should make sure ‘that the main deal was not lost due to the intractability on one or two minor points’. The directors found themselves on a rollercoaster ride throughout the next 15 months, with few matters relating specifically to day-to-day trading other than the presentation of financial statements and discussions on profit and loss reports. They were now totally consumed with meeting budgets and dealing with the shedding of assets to maintain liquidity. By early February the sale of certain Wanganui assets to Elders Pastoral had been satisfactorily concluded and approval in writing had been received from Dalgety Crown and Wrightson NMA for the assignment by Farmers’ Co-op of its shareholding in the Fordell and Feilding saleyards, with the settlement date 1 March 1986. In the meantime Farmers’ Co-op was committed to managing the areas until the settlement date. In addition an agreement was reached to sell the Marton motor business to the Ford dealers in Marton, and Elders had agreed to buy the Marton site should no other purchaser be found. A number of other proposals and negotiations were under consideration to divest the company of unprofitable outlets and properties in the Manawatu and Wanganui districts as quickly as possible. At this stage it did not include the departmental store Londontown.

In spite of the measures being implemented to correct continuing losses, the company was still failing to meet satisfactory and sustainable profitability. A storm was now gathering on the horizon with ominous intensity. Naturally, having assumed the role of general manager only six months earlier, Derek Evennett did not have the inherent passion of a lifetime of Farmers’ Co-op culture, yet neither was he shackled by the introverted parochial philosophies of the past, and that allowed him to institute some of the harder decisions that others, with longstanding loyalties, were unable to prosecute. By April matters had worsened and the now chief executive officer’s report to the board had a tone of resignation about it. Saving the company in its present form under the weight of difficulties now prevailing seemed almost impossible. He conceded that: ‘the report had been prepared to demonstrate the extremely difficult circumstances that the Group is experiencing and is likely to face for the foreseeable future.’

The report addressed the options available and recommendations on a course of action. The month of February 1986 showed a loss of $360,000 over the previous year, with turnover 27 per cent down. The seven months turnover to 28 February 1986 was also down 20 per cent on the budget. In addition the turnover for seven months ended 28 February 1986 was 11 per cent down on the corresponding period of the previous year. Although the effects of a variety of measures adopted to remedy the matter had yet to kick in, such as redundancies, the sale of the Wanganui assets, the Wanganui motor property and structural reorganisation, and the commencement of negotiations to break free of a number of unprofitable units and assets, it still appeared that, on its current level of trading, the group would not be able to correct the deteriorating financial situation. Taking into account the benefits of the sale to Elders and the removal of loss-making activities from the group, projections showed that the company was still expected to lose $300,000 per month. Five options for consideration were placed before the board with a brief explanation: OPTIONS: 1. Further immediate improvement in operational efficiency in the following ways: (a) increase market share. (b) reduce staff levels again. (c) accelerate the sale of unwanted assets/non profitable operations. (d) further refinement and immediate action in terms of our selling philosophy, products, stock levels, and purchasing arrangements. (e) expenditure of capital amounts to reduce operating costs, e.g. in terms of reducing the number of points of sale in our stores and providing direct computer access. (f) abolition of advertising. 2. Immediate diversification.

3. A public appeal to the people of Taranaki to support our Group. 4. Merge with one or all of the remaining independent Stock and Station Association industry members.

5. Sell the entire Group.

Option 1 had been discussed in detail with the management group. All individual items were currently under review and substantial progress has been made in this area. It was considered that either acceleration or the immediate implementation of other items in the short term, i.e. less than one year, would be impracticable. The management group further considered that the current economic situation and depressed market conditions would continue for at least a further year and therefore the losses would continue, or at best a substantial proportion of them. It was unanimously agreed that the board could not allow the situation to continue because the group could not sustain a loss factor of at best $2.5 million per annum and at worst, $4.0 million per annum.

Option 2 required immediate diversification on a level substantial enough to turn around the total group’s situation and was considered by itself to be a non-viable option because of constraints on raising the necessary capital. However, in terms of retaining a substantial Taranaki-based organisation it was considered to have merit and could be discussed further in conjunction with another option in the report.

Option 3 related to organising a planned public appeal. This would take the form of appealing to the people of Taranaki to further support Farmers’ Co-op and to admit that it is the only way that it could stay in business. This option would require further consideration and opinion of the board of directors. It was, however, the opinion of most members of the management committee that in the end result customers would be looking after their own needs and that the local company sentiment would not take precedence. It had been tried in the past by various local organisations and in most cases had not succeeded.

Option 4 suggested a merger with other independents and illustrated a situation that if the five independents formed one company it would be approximately equal to the size of the Dalgety Crown organisation which was to be taken over by Wrightson’s. The management committee had considered that this was not a preferred option because very few benefits could be foreseen, especially as all companies are already members of The Farmers Co-operative Federation which essentially acts as a buying organisation. In any case we would lose the true local identity factor from such a move.

Option 5 was placed last because the management committee agreed that it was the leastpreferred if they wished to retain the traditional values of the organisation. It was agreed, though, that the major responsibility was to ensure that any subsequent owner would carry on and provide employment for staff, who currently numbered around 540. The company’s weak financial position and the depressed market conditions that were likely to continue for some time left the board with no other viable option and it was therefore recommended that the Company pursue Option 5. If sale of the entire organisation was achieved it was thought that a figure of around $12 million may result. When considering the diversification option, the question arose as to whether the present shareholders, numbering 8,500, would be interested in continuing a substantial locally based organisation using the capital from the sale of the existing business. The chief executive stated that: ‘There was no question that there was a future for substantial regional based organisations especially when they are not dependent on acquiring the financial muscle to compete with national organisations.’

Mr Evennett’s report concluded with the following recommendation: Therefore it is suggested that this option be extended to investigate immediately an alternative base business that current shareholders of our group could be involved in. We would use our investment advisors to first of all establish likely activities and then if these recommendations were accepted, to look at acquiring them with the capital gained from the sale of our existing assets. In addition, we could carry this out with the partial repayment to shareholders of their existing shareholdings which in the majority of cases would be substantially more than their original investment in our Group. CONCLUSION: It is requested that the Board gives the company management the authority to pursue the course of action of seeking a buyer for the current Group operations, and at the same time look for an alternative business that will be based in Taranaki and will provide a healthy return for existing shareholders.