Ashford Meikle, Staff Reporter
Left: Hardware & Lumber Chairman, Douglas Orane, addressing the company's AGM on Monday. - JUNIOR DOWIE/STAFF PHOTOGRAPHER. Right: Hardware and Lumber's flagship store on Spanish Town Road. - ANDREW SMITH /PHOTOGRAPHY EDITOR
DOUGLAS ORANE has conceded that a failure to properly integrate the entities that merged to create the expanded Hardware & Lumber (H&L) contributed to last year's 62 per cent slump in the group's operating profit.
But company officials also blame back-to-back hurricanes, competition from megastores and the success of law enforcement agencies against drug trafficking in newly-affluent communities contributed to the performance by the company - suggesting in the latter case, that there was less to cash to launder by drug dealers, who often turn tainted cash into fancy homes.
"The people who are involved in [drug trading] are major developers," the group's cheif executive officer Anthony Holness, told shareholders at H&L's annual general meeting on Monday. "They build large houses, they build shopping centres, and they do townhouse development and we benefit from that business. Unfortunately, it is the environment in which we live ... It's just the reality."
HARD HIT
Later, he explained to Wednesday Business that his company's sales were particularly hard hit in Montego Bay, starting in early 2005 when the police launched Operation Kingfish, the anti-drug, anti-gang task force that has been credited with substantial success against narcotics trafficking.
Several alleged drug kingpins were held and are now appealing extradition orders to the United States.
"There was a direct decline in our sales at the hardware stores in Montego Bay and [its] environs," Holness said, although he declined to give specific figures. "There is no question that it is significant, but I wont' attempt to quantify. I am not sure that is something we want to disclose."
THE LARGER PROBLEM
But while the attack on drugs and the grey economy may have hurt H&L, Orane, the group's chairman, conceded that the larger problem has been one of indigestion - the inability of the GraceKennedy's hardware and agro-chemical entities fit into a single whole and then absorb the Hardware & Lumber and True Value stores, which used to be owned by Pan Jamaican Investment Trust.
The process began in 2003 when PanJam's Hardware & Lumber Group merged with GraceKennedy's hardware operation, Rapid and Sheffield Ltd as well as another Grace company, Agro-Grace Ltd. GraceKennedy owns 58 per cent of the enlarged entity and PanJam 21 per cent of the publicly-listed company.
Initially, the merger seemed to have brought benefits. In 2004, the group revenue doubled to $5.5 billion, while net profit rocketed by 279 per cent to $169 million.
Last year, however, sales declined by three per cent to $5.33 billion, while pre-tax profit slumped by 62 per cent, to $100 million from $266 million the year before. Net profit was $69 million compared to 169 million in 2004, a 59 per cent decline.
Last year the group's direct and administrative expenses increased by eight per cent to $1.2 billion, helping to negate any attempt by the group to cut cost and improve the bottom line.
Orane, at Monday's shareholders' meeting, suggested that a failure to rationalise staff prevented the group from gaining one potential element from the merger. Staff cost, at $430 million, represented a nine per cent increase.
"If you are going to make a merger work you have to decide from very early who is going to be with the organisation and who it is best to [let go]," he told shareholders, conceding that he and the board erred in not making the tough decisions early.
"We decided to keep everybody on board and see how we can work it out together over time," said Orane, who is the chairman and CEO of GreaceKennedy. "In hindsight it was not the best decision."
He added: "I have to be plain with you as the chairman of this company ? we, the board and the management, have not done a good job of the integration of the people and the processes and it has reflected itself in the results of 2005 and that is the primary reason why the results are as poor as they are.
"?I am very unhappy about it because it reflects on [all] of us, including me, as chairman of the company."
Later, Orane told Wednesday Business that these failures helped to create an environment of uncertainty at H&L.
"It affected morale and it affected the decision-making process in making it clear who was responsible to make what decision," he said.
An additional problem, he said, was that H&L operated three different information technology systems which contributed to the company running high levels of inventory at $1.4 billion
" The management of the inventory and the technology that went with it (was a problem)," he said "We did our best to try and get the technology to work. It didn't work ? as quickly as we thought and it caused people, using their best judgement at the time to make purchasing decisions ? resulting in excessive inventory."
Assessing the group's prospects Holness highlighted a number of threats such as the cement crisis, the contraction of consumers' spending power, the flood of commodity products and new market players.
The cement shortage had had a significant impact on group, he said. "In some of our stores that deal with construction [material] the ? fall in revenue was as high as 30 per cent. In our home improvement stores the impact was much less, maybe about 20 per cent."
Two new players, MegaMart and Pricesmart, are now competing with H&L True Value for the disposable income of shoppers, he said. "It's not a direct situation of competing but there is an overlap of about 15 per cent of the products that we carry. However, because they have opened a new dimension in the market to the consumer, people are inclined to spend their money there so it takes away from the dollars that are available to spent in our stores.
To deal with the competition, Holness said they were aiming to expand the range of products offered and, "looking for more sources for supplies, such as China."
