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During the year a Group Executive team was established around the companys core competencies of Retailing, Human Resources, Merchandise, Finance, Information Technology and Marketing. This new team is responsible for the development and implementation of the Groups key strategies and will ensure this is executed consistently across all countries. The existing management structures have also been realigned into functional and cross-functional support teams to improve communication, speed of decision-making and provide support for the retail activities of the group. During the year we appointed the following Group Executives. Ross McKinnon was appointed as Group I.T. Manager, Paul Williams as Group Merchandise and Supply Chain Manager, Kevin Stock as Retail General Manager (Australia), Tina Radford as Group Human Resources Manager, and Emma Hill as Retail General Manager (Canada). At this time the only position still to be appointed is a Group Marketing Manager. This strategy has been an exciting one due to the opportunities that have been created for our people to take on new responsibilities within the business and for the expertise we have been able to bring into the organisation to complement existing skills.This new structure will allow us to unlock numerous benefits in the coming years, including the sharing of knowledge, development of our people, rapid application of best practices, access to major international manufacturers, improved product development, lower costs for products, availability of timely group data and the consistent development of our brand platform. These appointments and the new structure have already provided a positive benefit and will further strengthen the companys competitive advantage as we develop into a truly global retailer. We have taken the Michael Hill Brand to a new level In December 2000, we began the process of elevating Michael Hill Jewellers brand position. The strategy involved a complete review of our traditional advertising methods, store design, packaging and display, to align us more closely with our target market. Our objectives were to improve sales by attracting new customers to the brand, and to improve the perception of the brand, particularly in the areas of product quality. We also wanted to position the brand for international expansion. Over the past year we conducted a research study through numerous focus groups in New Zealand, Australia and Canada. These were carried out to check on the progress of the groups marketing strategy and objectives. This research has shown we have made strong progress towards these objectives. The new advertising campaigns have rapidly raised our market perception and improved our brand equity. This improved brand perception has greatly assisted us in delivering same store sales growth and improved margins during the year. The study groups in Canada have also indicated our strategy can be executed consistently across all countries. More importantly, the Canadian groups reacted very favourably to our advertising and communication material, which will have a strong point of difference to the local competitors. Our new store design is a critical part of our brand strategy. This year it has been further refined to include more innovative lifestyle features, which have proved so popular in our large format stores. These include comfortable sofas, table and chairs, the inclusion of a more compact diamond laboratory for our customers education, and cappuccino machines. The number of these features used depends on the demographics and size of each store. Our aim is to create the ultimate jewellery shopping experience and to further set our stores apart from our competition. This year, 19 stores were upgraded to the new image, including five in New Zealand and fourteen in Australia. The capital expenditure invested to 30 June totalled NZ$2,318,476. The refurbished stores contributed positively to the sales growth of the existing stores. We began to buy better as well In December with the appointment of the Group Merchandise and Supply Chain Manager, the company commenced a co-ordinated approach to the planning and buying of stock for the first time. The key objective of this decision is to commence leveraging the groups buying functions to deliver increased margins. This will be achieved through consolidated ranging and buying as an international group, rather than on a local basis. This will take three years to fully implement and maximise the benefits. The first six months has already had a positive impact, particularly in Australia where margins had fallen in the first half due to the implementation problems of the groups new computer system which prevented us from reacting quickly enough to the strengthening US dollar. To a large extent this was recovered in the second half through improved pricing management and renegotiation of supplier contracts. Our manufacturing operations continues to provide us with substantial cost savings, the ability to respond to new design trends and control quality. Last year the Australian division invested in new casting technology. At the time we predicted a payback on the investment through additional cost savings within two years. I am pleased to report this occurred within the first 12 months. We invested for future growthSeven new stores opened during the year. This was short of our objective however as mentioned in previous years, we observe a strict set of criteria when selecting new locations. If the locations are not available at the appropriate commercial terms and in the right positions, we continue to look for locations that are. Therefore the number of stores opened each year may vary to our plan, but this averages out over time. Two stores were closed in Australia during the year due to lease issues. The total number of stores in the group increased from 115 to 120 at June 30.
New Zealand has exceptional year OPERATING RESULTS-NEW ZEALAND (NZ $000s)
Two new stores opened during the year. Bayfair at Mt Maunganui opened in September 2001 and Taupo opened in December 2001. Both stores are trading well. These openings took the number of stores to 43 at June 30. Given the strong performance of Taupo, we have now identified further opportunities to increase the total number of stores in New Zealand to fifty over the next five years. Australia had a solid year OPERATING RESULTS - AUSTRALIA (NZ $000s)
Our West Australian operation has not yet reached the scales of economy necessary to provide a return as yet. This will occur by June 2004. Two stores were closed during the year due to property issues. The first was Bondi Plaza in Sydney due to a complete redevelopment of the mall, and Cavill Avenue Surfers Paradise due to the centre being partly destroyed by fire. There were 77 stores open as at June 30. Our objectives in Australia are to continue our store expansion, particularly in Western Australia, and Victoria where the company has many opportunities. We plan to open six stores in the coming year, depending on site availability. With a larger store base and less experienced store teams there is also enormous potential to improve the performance of existing stores, which is the primary focus for the Australian management team. The large format stores have performed to expectation in New Zealand. The total return on assets employed reached 32.2% for the last financial year. At this stage the potential for further openings in New Zealand is limited. However, any new opportunities that arise will be investigated. In Australia the concept has proved more difficult to realise the 30% return on assets that we require (before corporate overheads). Having said that, the two initial businesses have improved significantly over the past year. Our aim is to continue experimenting with and developing these businesses as potentially they provide us with a more diverse growth strategy for the future. Canada the New Frontier During the year a feasibility study was completed on the Canadian Market. Our objective was to identify a new market with low barriers to entry, relatively low risk, with strong potential to grow a substantial business over time. Our early investigations identified Canada as the best fit to these objectives. The detailed investigation revealed the population of Canada is 31.1 million people. The size of the jewellery industry was $1.58 billion in 2000, which is similar in size to the Australian Jewellery industry. Australia, however has a population of only 19.6 million people, meaning the comparative spend on jewellery per head is much lower in Canada. The retail environment is primarily shopping centre based due to the climate, which also fits well with our current operations. Our market research confirmed the design and styling of our merchandise, our store layouts and our advertising strategy would be well accepted. There is potential to open well over 100 stores over the next 15 years, even with Quebec (which is French speaking) left out of the plan. A team led by Emma Hill moved to Vancouver in August to establish a small support centre and open the first stores. This team consists of Sarah Barnes, as Financial controller, and a highly experienced retail team from both countries. They include Adam Bierman, a Regional Manager from Sydney, Teresse Bierman, manager of our most profitable Australian store, Leah James manager of our New Plymouth store in New Zealand, and Jodi Warner, manager of our store in Tweed City, Australia. This highly capable team has also been further strengthened by a number of management trainees. Our objective is to open four stores by June 30 2003. Three of these stores are due to open in November and negotiations are advanced on a fourth store due to open in May. These stores are located in Vancouver with one on Vancouver Island. This year will no doubt involve a steep learning curve in a new international market. Our objective is to break even by the second full year of trading. Depending on the achievement of our investment hurdles, we plan to open a further four stores per year in line with our philosophy of controlled profitable growth. Our priorities for the future Our priorities for the future and for the next 12 months are as follows:
Michael Hill made a Companion of the NZ Order of Merit We congratulate Michael who was recognised in the New Years Honours List, becoming a Companion of the NZ Order of Merit for his services to the Arts and business. Michael, as most people know, is a very proficient violinist and took his love of music to a new level by instigating and funding a biennial world violin competition. The competition attracts top artists to New Zealand and gives homegrown talent the opportunity to shine on the world stage. My thanks to the entire team We have included a special section in this report to introduce you to the people who have made this company so successful over the last twelve months. Without their dedication, enthusiasm and passion for both the company and our customers, we would not have achieved these outstanding results. I would like to sincerely thank each and every one of the 1500 people in our team, who are all listed on the back cover of this report for their magnificent contribution to making Michael Hill Jeweller a truly great company.
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