Pacific Brands

AGSM MBA Programs

Pacific Brands

Case No: AGSM-13-002

Authors: J. Peter Murmann and Chris Styles

This case has been compiled from public sources solely for educational purposes and aims to promote discussion of issues that surround the management of change in organisations rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright: AGSM MBA Programs prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from AGSM or any reproduction rights organization. To order copies or request permission to reproduce materials contact Academic Director, AGSM MBA Programs, Australian School of Business, UNSW, Sydney, Australia, 2052. Phone: (+612) 9931 9400 Facsimile: (+612) 9931 9206

Part 1: Introduction Let’s start with a recruitment video in which the CEO, Sue Morphet, describes Pacific Brands. It will give you insight into the company’s operations, culture and leadership.

To see video, hold CTRL key and click on picture above or go to: http://bit.ly/p1qG7c

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1a. Exercise Question: What impression does this give you about the company? What do you think of Sue Morphet as a CEO?

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Now let’s see how the company projects itself to potential customers, in this case corporate customers.

To see video, hold CTRL key and click on picture above or go to: http://bit.ly/nGdJ5X

Pacific Brands Case– Reading 19 3 1b. Exercise Question: What are the core attributes and values Pacific Brands is communicating to its customers? How compelling is the value proposition it presents?

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Part 2: The Company’s Strategy and Performance in 2004 We will now go back in time to see how Pacific Brands got to where it is today. The focus is on strategy, performance and the decisions management made. Let’s start with the company strategy articulated in 2004 in the IPO prospectus and the expected future performance.

Read Please read the following excerpt, The Pacific Brands business, from Pacific Brands Prospectus, 2004, pp. 48–62. Source: http://bit.ly/pBXzVd

4 Strategic Management 4 Pacific Brands Prospectus

The Pacific Brands business

4.1 Overview Pacific Brands is a leading manager of consumer brands in Australia and New Zealand, marketing some of the most recognised brands including Berlei, Bonds, Clarks (childrens), Dunlop, Everlast, Grosby, Holeproof, Hush Puppies, KingGee, Slazenger, Sleepmaker and Tontine. Pacific Brands’ commitment to market leadership has provided it with number one or two positions across its major product categories in Australia and New Zealand. These category leading positions have been achieved through a focus on being at the forefront of brand development (including acquisitions), product innovation, marketing and an efficient and effective supply and distribution network. Pacific Brands believes that it is one of Australia and New Zealand’s most informed companies on the “what, where, when and why” of a consumer’s branded everyday essentials. In November 2001, the Pacific Brands business was acquired by the Existing Shareholder from Ansell Limited (formerly Pacific Dunlop Limited). A number of key strategic initiatives, which had been identified by Senior Management, were embraced by the Existing Shareholder, including: • substantially increased brand development and marketing; • consolidation of “back-end” operations of sourcing, manufacturing and distribution; • continued development of strong relationships with key customers; and • exiting of unprofitable business. The implementation of these initiatives has led to a significantly improved operating and financial performance and has laid the foundation for further growth.

Table 4.1 – Summary financial information The following table of summary financial information should be read in conjunction with the more detailed discussion of financial information contained in Section 6, the Investigating Accountant’s Report on historical financial information in Section 7, the Combined Special Purpose Financial Report included in Appendix I, the Independent Review of Forecast Financial Information in Section 8, the Risk factors set out in Section 9 and other information set out in this Prospectus.

Pro forma Adjusted Historical1 Forecast3, 4, 5 Forecast5 6 months 6 months ended ended 31 Dec 31 Dec $ million FY2001 FY2002 FY2003 20022 2003 FY2004 FY2005

Sales revenue 1,331.3 1,482.8 1,489.1 796.3 811.2 1,563.1 1,653.1 Gross profit 421.3 472.7 531.0 278.0 303.1 585.1 647.1 Gross margin 31.6% 31.9% 35.7% 34.9% 37.4% 37.4% 39.1% EBITA 90.9 108.7 127.2 66.8 81.8 151.0 170.5 EBITA margin 6.8% 7.3% 8.5% 8.4% 10.1% 9.7% 10.3% Notes: 1. Adjusted Historical Financial Information (excluding the six months ended 31 December 2002) has been derived from the audited financial statements of Pacific Brands and its predecessor entities and has been reviewed and reported on by KPMG as Investigating Accountant in Section 7. Details of the adjustments are included in Section 6.16. 2. Adjusted Historical Financial Information for the six months ended 31 December 2002 has been derived from the unaudited financial statements of Pacific Brands. 3. Pro forma forecast financial information for FY2004 is derived from the Adjusted Historical Financial Information for the six months ended 31 December 2003 and Directors’ forecasts for the six months ending 30 June 2004 and reflects the full year impact of the new corporate and capital structures (details of which are set out in Sections 6.12 and 10.5) that will be in place upon Settlement, as if they were in place as at 30 June 2003. 4. The FY2004 Statutory Financial Results will differ from the pro forma forecast insofar as it will reflect Pacific Brands’ actual financial results from Settlement to 30 June 2004. 5. Forecast Financial Information is based on a number of estimates, assumptions and pro forma adjustments as described in Section 6.6.

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Pacific Brands has four Operating Groups: The Underwear & Hosiery Group, The Outerwear & Sport Group, The Home Comfort Group and The Footwear Group (refer Section 4.3 for Business Structure). The Underwear & Hosiery Group is Pacific Brands’ largest Operating Group, representing 41% of FY2003 sales. Approximately 95% of Pacific Brands’ FY2003 sales were generated in Australia and New Zealand.

Figure 4.1 – Sales by Operating Group (FY2003) Figure 4.2 – Sales by country (FY2003)

Underwear & Hosiery 41% Australia 87% Outerwear & Sport 22% New Zealand 8% Home Comfort 20% United Kingdom 3% Footwear 15% Malaysia 1% Other 2% United States 1%

Source: Management financial information Source: Management financial information

Since Paul Moore’s appointment as Managing Director in August 1999, a focused strategy has been developed to leverage the scale and category leadership positions of Pacific Brands to drive profitable growth. This strategy has changed Pacific Brands’ business model from autonomously operating sub-groups aimed at establishing product category leadership positions to a focus on enhanced Group-wide profitability, competitive position and future earnings prospects. Over the years, the Pacific Brands business has demonstrated the ability to change and adapt to differing operating environments, such as: • dismantling of protective trade barriers by the Australian Federal Government; • material fluctuations in exchange rates; • shift away from sourcing products solely from local manufacturing, to a strategic balance of local manufacturing and imports; • change in the retail marketplace, including the demise of major customers (eg Ezywalkin, Venture and Waltons); • major business acquisitions (eg Bonds, Clarks (childrens), Hush Puppies and Sara Lee Apparel Australasia); • change of ownership; and • significant divestments (eg adidas, Bonds Spinning, Sheridan, Tontine Fibres and owned China-based clothing manufacturing operations).

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4.2 Brands 4.2.1 Owned brands Pacific Brands’ most recognised brands, of which a number are icon brands in Australia, include the following:

In addition, a number of sub-brands are recognised by Australian consumers as icons. These include:

This icon status is demonstrated in part by the high levels of consumer awareness of the brands. Pacific Brands commissioned Sweeney Research, a leading independent market research company, to conduct a survey of its major brands in The Underwear & Hosiery Group and The Outerwear & Sport Group. Of the brands surveyed, the average prompted overall consumer awareness level was 82%. This confirmed that these are leading brands in terms of consumer awareness across product categories including underwear, intimate apparel, hosiery, socks, sporting goods and workwear. Since July 2001, Pacific Brands has significantly increased its level of brand marketing support, including advertising spend on owned and licensed brands. Pacific Brands considers that its increased advertising spend continues to enhance overall brand awareness and it is continually researching its product categories to identify and lead consumer trends.

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4.2.2 Licensed brands Pacific Brands has the right to manufacture, source and distribute certain brands within various product categories in Australia and New Zealand under licence agreements. Licensed brand sales represented approximately 11% of Pacific Brands’ FY2003 sales and are a valuable contribution to its overall brand positioning strategy. The major licences are:

Pacific Brands believes that it is an attractive licensee of brands due to its: • substantial scale; • leading category positions; • innovative product development; • creative and significant investment in brand marketing and advertising; • continuous consumer research; • strategic customer partnerships; • effective merchandising programs; • strong sales force; and • breadth of distribution. Consequently, Pacific Brands is often approached by potential licensors directly. Terms and arrangements of major licences typically range from five to 10 years with royalties generally payable based on a percentage of sales. The strength of Pacific Brands’ relationships with its licensors was tested during the acquisition of the Pacific Brands business from Ansell Limited (formerly Pacific Dunlop Limited) in November 2001. In all cases, licences were retained, reinforcing Pacific Brands’ commitment to the development of licensed brands. All material licence approvals required under the change of ownership proposed under this Prospectus have been obtained.

4.2.3 Brand development and product innovation Pacific Brands focuses on brand development and product innovation to enhance its category leading positions. This approach involves increasing advertising and brand development expenditure which in turn enhances the profile of the brands with consumers, strengthens product category positions and helps generate increased sales and profitability. Accordingly, Pacific Brands believes that this approach, and the range of brands that it can activate, provide positive growth opportunities for the Group. As part of its brand strategy to enhance margins and profitability, Pacific Brands has exited certain unprofitable sales in primarily unbranded products. Excluding divestments, Senior Management estimates that approximately $90 million of unprofitable sales have been eliminated, primarily in FY2003. In accordance with this strategy, Pacific Brands has significantly increased its level of advertising spend. From FY2001 to FY2003, advertising spend increased from $32 million to $45 million and is forecast to increase to $61 million in FY2004 and $73 million in FY2005.

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The Pacific Brands business

This increased advertising spend together with a focus on driving sales of branded products have contributed to a compound annual increase in sales (FY2001 to FY2003) for the following brands: • Bonds: 9% • Clarks (childrens): 12% • Hush Puppies: 31% • Slazenger: 15% • Tontine: 12%. Bonds is an example of the recent brand development strategy implemented by Pacific Brands. An icon brand in Australia for almost 90 years, Bonds was reinvigorated in 2001 by new products focused on the women’s youth underwear category, combined with a brand endorsement from Sarah O’Hare. Prior to this brand development strategy, Bonds had limited recognition as a contemporary clothing brand. Constant product innovation is also an important aspect of Pacific Brands’ business model in order to help it maintain its leading product category positions. Pacific Brands has a long-standing history of innovative product development and believes its design rooms are of world-class standard, using a combination of creative people and the latest design technology. Over the years, Pacific Brands has been at the forefront of innovation with the introduction of various products including: • Holeproof Computer socks • Berlei One fused bra • Bonds hipsters • Santoni seamless underwear • Hush Puppies Zero G comfort shoes • Tontine variable warmth quilt (marketed as “Venus & Mars”) • Dunlop Volley • LoveKylie range of underwear (developed • Holeproof Explorer socks in conjunction with Kylie Minogue).

Pacific Brands has a long history of elite sportspeople using certain brands including Australian legends such as Sir Donald Bradman, Evonne Goolagong-Cawley, Margaret Court, Ken Rosewall and Mark Waugh. Current identities actively endorsing various brands include Michael Clarke, Jamie Durie, Kristy Hinze, Kylie Minogue, Sarah O’Hare and Pat Rafter.

4.3 Business Structure To maximise differing sales and marketing opportunities that exist across its product categories, Pacific Brands is organised into four key Operating Groups:

Figure 4.3 – Operating Group structure

Underwear Outerwear Home Comfort Footwear & Hosiery & Sport

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The historical and forecast sales of these Operating Groups are set out below:

Table 4.2 – Operating Group sales summary

Pro forma Adjusted Historical1 Forecast2, 3 Forecast3 $ million FY2001 FY2002 FY2003 FY2004 FY2005

Underwear & Hosiery 541.3 597.6 612.0 671.3 718.8 Outerwear & Sport 257.7 329.8 322.8 327.1 348.6 Home Comfort 277.1 298.2 295.5 305.0 315.9 Footwear 246.9 245.4 224.7 225.2 238.3 Other4 8.3 11.8 34.1 34.5 31.5 Total 1,331.3 1,482.8 1,489.1 1,563.1 1,653.1 Notes: 1. Adjusted Historical Financial Information has been derived from the audited financial statements of Pacific Brands and its predecessor entities and has been reviewed and reported on by KPMG as Investigating Accountant in Section 7. Details of the adjustments are included in Section 6.16. 2. Pro forma forecast financial information for FY2004 is derived from the Adjusted Historical Financial Information for the six months ended 31 December 2003 and Directors’ forecasts for the six months ending 30 June 2004. 3. Forecast Financial Information is based on a number of estimates, assumptions and pro forma adjustments as described in Section 6.6. 4. Includes intercompany eliminations and clearance store sales. The increase in FY2003 resulted from a change in allocation policy relating to clearance store activities.

As mentioned above, Pacific Brands has exited certain unprofitable sales in primarily unbranded products. Excluding divestments, Senior Management estimates that approximately $90 million of unprofitable sales have been eliminated, primarily in FY2003. Refer to Section 6.5 for management discussion and analysis of historical financial information and Section 6.6 for a description of the Directors’ estimates, assumptions and pro forma adjustments on which the Forecast Financial Information is based.

4.3.1 The Underwear & Hosiery Group The Underwear & Hosiery Group is a leading marketer in the Australian and New Zealand TCF industries in each of its major product categories. It is the largest Operating Group within Pacific Brands with FY2003 sales of $612 million, EBITA of $66.9 million and approximately 3,400 employees. Sales are derived from a broad range of products, including underwear, intimate apparel, hosiery and socks for women, men and children, which are distributed throughout Australia and New Zealand and in selected international markets. The leading brands in The Underwear & Hosiery Group are:

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The Underwear & Hosiery Group has achieved its category leading positions through a strategy of: • substantial marketing investment to enhance brand strength; • capitalising on emerging product markets – as exhibited by the LoveKylie and Bonds ranges of underwear and intimate apparel; • extending key brands into new categories – such as Bonds into bras and outerwear (ie contemporary clothing); • licences to enable quick response to trends; • product innovation and development – as seen with the focus on seamless underwear for women; • efficiency in sourcing – the business is well balanced between third party sourcing and own manufacturing; and • effective distribution and strong customer relationships. The Underwear & Hosiery Group has invested in local manufacturing where it believes it has long-term sustainable advantages in production capabilities (refer to Section 4.6.2 for details of the benefits of local manufacturing). Major production facility investments have been made in: • underwear – Nunawading (Victoria), Cessnock (NSW), and Unanderra (NSW); • hosiery – Coolaroo (Victoria); and • socks – Nunawading (Victoria). The group also has manufacturing facilities in Christchurch (socks) and Palmerston North (thermal underwear) in New Zealand. The Underwear & Hosiery Group imports a significant proportion of its products from overseas sources. Approximately 65% to 70% (by value) of its products are manufactured outside Australia and New Zealand, with most goods sourced from China. The Underwear & Hosiery Group operates, and subject to the obtaining of the approvals referred to in Section 10.5, will continue to operate, an Indonesian-based intimate apparel production facility servicing both the Australian and overseas markets. Rationalisation of the supply network has been a key focus of The Underwear & Hosiery Group. Over the past 12 months, significant effort has been directed towards consolidating the number of distribution centres within the group. In conjunction with the consolidation of distribution centres, enhanced supply planning capabilities have been introduced in order to reduce inventory levels and customer delivery times.

4.3.2 The Outerwear & Sport Group The Outerwear & Sport Group is one of Australia’s leading suppliers of workwear, casual clothing, sports clothing and footwear, sporting equipment and hardgoods (bicycles and bicycle helmets) with FY2003 sales of $323 million, EBITA of $30.6 million and approximately 550 employees. Traditionally, branded products within the sports clothing and footwear category grew rapidly as products to wear while playing sport. However, this segment of the sporting goods industry is now centred on technology-based leisure products. These products are increasingly branded in response to international trends. The leading brands in The Outerwear & Sport Group are listed in Table 4.3:

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Table 4.3 – The Outerwear & Sport Group brands by product category

Sporting equipment Brands and hardgoods Clothing Footwear

✔✔

✔

✔ ✔✔

✔

✔ ✔✔

✔

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The Outerwear & Sport Group’s strategic focus is to: • continue to leverage its brands in existing and new categories; • drive efficiency improvements in its operational processes; and • identify and acquire strategic “bolt-on” branded businesses. A significant proportion of The Outerwear & Sport Group’s sales are through independent and specialty retail channels. The benefits of combining outerwear and sporting goods products into one Operating Group include the similar retail channel distribution requirements and the performance characteristics of the products. A recent example of these benefits is the integration of KingGee into this Operating Group following its acquisition in 2001. The positioning of KingGee within The Outerwear & Sport Group, combined with additional marketing support, has contributed to KingGee’s significantly improved performance resulting in sales growth of 12% between FY2001 and FY2003. The Outerwear & Sport Group sources more than 90% of its products outside Australia, primarily from China and Fiji. Its local manufacturing facilities are based in Hallam, Victoria (Rosebank bicycle helmets) and Bellambi, NSW (KingGee). The Outerwear & Sport Group manages the design, sourcing and distribution of its products. Warehouse and distribution facilities are located throughout Australia and New Zealand. As bicycles are bulky and expensive to transport, localised sites are maintained as distribution points to meet orders both in a timely and cost-efficient manner.

4.3.3 The Home Comfort Group The Home Comfort Group is a leading manufacturer and marketer of mattresses, pillows, foam and carpet underlay in Australia and New Zealand. In FY2003, it generated sales of $296 million, EBITA of $24.4 million and employed approximately 1,600 people. The leading brands in The Home Comfort Group are:

Pacific Brands believes that the vertical integration of The Home Comfort Group makes it well placed to consolidate its position, primarily through: • continuing to develop consumer loyalty; • strengthening relationships with retail customers; and • enhancing its technical expertise in its product categories. While the different customer distribution in this Operating Group (ie exposure to specialty stores and furniture manufacturers) spreads Pacific Brands’ risk, there are a number of commonalities that assist its performance including Group-wide brand marketing skills and supply chain capability. The Home Comfort Group has manufacturing operations in Australia and New Zealand (see Table 4.4 below) and, subject to the obtaining of the approvals referred to in Section 10.5, will retain a 50% interest in a joint venture in Malaysia which manufactures mattresses.

Table 4.4 – The Home Comfort Group Australian and New Zealand manufacturing locations Product category Location

Australia Mattresses and beds Brisbane, Hobart, Melbourne, Perth, Sydney Pillows Melbourne Foam Adelaide, Brisbane, Hobart, Melbourne, Perth, Sydney Carpet underlay Melbourne, Sydney New Zealand Mattresses and foam Auckland, Christchurch

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Products supplied by The Home Comfort Group are typically bulky in nature. The associated distribution and transport costs mean that import opportunities are less viable, and therefore, approximately 85% of manufacturing has remained within proximity to its major customers in Australia and New Zealand. Distribution is managed at each of the manufacturing sites, with product shipped directly to customers.

4.3.4 The Footwear Group The Footwear Group is the largest supplier of footwear in Australia and has a presence in the UK market through Pacific Brands (UK) Ltd. The Footwear Group has maintained its leadership position utilising its flexible sourcing and manufacturing arrangements throughout the Australian Federal Government’s dismantling of protective trade barriers. With FY2003 sales of $225 million, EBITA of $17.0 million and approximately 950 employees (including 650 employees in China), The Footwear Group offers a comprehensive range of casual, comfort and fashion footwear for women, men and children. The leading brands in The Footwear Group are:

The Footwear Group’s strategic focus is to become a leading marketer of branded casual, comfort and fashion footwear, primarily through: • developing a brand management focus; • acquiring and/or licensing national and international brands; and • increasing advertising spend to improve the awareness of its brands. Pacific Brands acquired the Clarks (childrens) and Hush Puppies Australian and New Zealand businesses in September 2000. These acquisitions have allowed The Footwear Group to compete at the premium end of the children’s and comfort footwear segments and gain access to international footwear product development. Clarks (childrens) and Hush Puppies were quickly integrated into The Footwear Group, complementing existing product offerings, as well as providing supply chain benefits. In addition, the June 2003 acquisition of Sachi has enabled The Footwear Group to improve its category position within the high-end women’s fashion footwear segment of the market. The Footwear Group’s products are sourced and manufactured overseas, mostly in Asia. In addition, Pacific Brands owns a China-based footwear manufacturing facility, which is used to supply its Australian and UK operations. In recent years, The Footwear Group has consolidated its distribution activities. The majority of Australian warehousing and distribution is centralised at the Altona (Victoria) distribution centre.

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4.4 Category Leading Positions With wide-ranging brands across the various retail channels, Pacific Brands leads the marketplace in its major product categories:

Table 4.5 – Selected major Australian category positions The Underwear & Hosiery Group The Home Comfort Group Underwear Mattresses and beds 2nd – Men’s underpants 1st Pillows 1st – Women’s briefs 1st Foam 1st Intimate apparel (eg bras) 1st Carpet underlay 1st Hosiery 1st Socks 1st The Outerwear & Sport Group The Footwear Group Sporting equipment and hardgoods Footwear 1st – Bicycles 2nd – Golf balls 2nd – Tennis racquets and championship quality balls 1st Outerwear – Workwear 2nd Source: Management estimate (based on market supply units) Pacific Brands operates across many product categories within the TCF, sporting goods, and household furnishings and equipment industries. In FY2003, no one product category accounted for more than 18% of sales and no one brand more than 14% of sales. Products are mostly positioned at value price points and the majority of products are everyday consumer essentials helping to ensure low sensitivity to changing economic conditions.

Figure 4.4 – Sales by product category (FY2003)

Underwear 18% Mattresses and beds 8% Intimate apparel 9% Pillows 2% Hosiery 3% Foam 8% Socks 7% Carpet underlay 2% Sporting equipment 6% Footwear 17% and hardgoods Other 5% Outerwear (workwear, 15% casual and sport)

Source: Management financial information

4.5 Diversified Customer Network Pacific Brands markets and distributes its products to the key participants in the major retail channels, with no single retail channel dominating its sales. The major retail channels include: • department stores; • discount department stores; • specialty stores; • supermarkets; and • independent stores. This broad customer network ensures Pacific Brands’ products are accessible to most Australian and New Zealand consumers while not being reliant on any single customer. No single customer accounted for more than 10% of sales in FY2003. Pacific Brands continues to strengthen its relationships with customers in a continually changing retail environment.

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The Pacific Brands business

Figure 4.5 – Sales by retail channel (FY2003) Major Australian retailers are embracing supply chain improvements. Pacific Brands views this as a positive as it can interact with major retailers with a scale not readily available to others. Pacific Brands is working collaboratively with its major retailers to improve their respective supply chain capabilities. Department stores 13% Discount 31% 4.6.2 Overseas sourcing and local manufacturing department stores Pacific Brands is one of Australia’s largest importers of consumer goods from Asia, while at the same time Specialty stores 10% retaining a strategic local manufacturing base in product categories where it believes Australian manufacturing will Supermarkets 5% provide a long-term competitive advantage. The flexibility provided by a combination of import sourcing and local Independents/other 41% manufacturing is a strength of Pacific Brands.

Overseas sourcing Third party sourcing encompasses a diverse product range and provides Pacific Brands with: Source: Management financial information • greater flexibility in changing designs and products; • a variable cost base and low cost of production; and In FY2003, Pacific Brands’ top 10 customers (listed in alphabetical order) accounted for 49% of sales: • greater efficiency. • Best & Less • Lowes Pacific Brands’ long history of product sourcing provides it with on-going benefits including: • Big W • Myer • expertise and skills acquired through experience; • David Jones • Payless Shoes • long-term relationships with quality suppliers who are accustomed and committed to Pacific Brands’ • Farmers (New Zealand) • Target requirements; • Kmart • Woolworths/Safeway • exclusive relationships with various overseas suppliers enhancing product quality, design protection, flexibility, 4.6 Supply Chain timeliness and responsiveness; • commitment to use of suppliers who comply with International Labour Organization standards; 4.6.1 Introduction • development of experienced sourcing personnel; and The strength of Pacific Brands’ supply chain underpins its brand and product category positioning. In recent years, • established credit track record which helps improve payment terms. Pacific Brands has emerged from a period of autonomously operating businesses. The Group has consolidated its sourcing, manufacturing and distribution systems to create supply chain efficiencies across its Operating Groups. Pacific Brands is continually consolidating its sourcing arrangements through its dedicated offices situated in Hong Kong and China. Pacific Brands has continually adapted its sourcing, manufacturing and distribution activities to accommodate and pre-empt changes in product category requirements and customer needs. Pacific Brands recognises the strategic Local manufacturing importance of a flexible supply chain to pursue new and different opportunities as they arise as well as being Pacific Brands has a substantial investment in Australian-based manufacturing, serving a strategic purpose of responsive to customer demands. balancing the needs of customers with Pacific Brands’ cost objectives. In particular, the Australian manufacturing Pacific Brands’ product category scale, together with the breadth of its infrastructure, allows it to: presence is maintained because: • meet customer requirements in a timely and effective manner; • it is more capital intensive (such as the production of socks and hosiery) allowing it to be cost competitive; • work with major customers on effective supply chain solutions; and • it offers a flexible, quick-response capability; • provide services that eliminate costs for itself and its customers through its various distribution and logistics • it allows the local manufacture of new products on a trial basis while design, demand and other requirements networks. are assessed (if required, overseas sourcing can then be utilised); • the flexible modular garment assembly processes and systems contribute to low cost and responsive Figure 4.6 – Annual product category scale (selected categories) production; and Scale of supply chain (indicative) • bulkier products (mainly those within The Home Comfort Group) need to be positioned within proximity of sources of demand to minimise freight costs and lead times. 60 million pairs of underpants/briefs 50 million pairs of socks 4.6.3 Distribution activities 9 million units of intimate apparel (eg bras) In Australia, Pacific Brands has 12 stand-alone distribution centres, with the major facilities utilising radio frequency 5 million golf balls (RF) technology for the management of inventory and the paperless picking of customer order requirements 25 million outerwear garments resulting in high inventory accuracy and labour efficiency levels. The integrated IT and RF technologies enable the 16 million kgs of foam picking of multiple orders simultaneously. Due to the extensive reach of Pacific Brands’ products, the distribution 490,000 mattresses and beds centres handle a multitude of customer requirements, with technology enabling customer service and support. 4 million pillows 11 sq kms of carpet underlay 4.7 Future Growth Opportunities 23 million pairs of shoes Pacific Brands’ growth strategy is founded on three core planks, being: Source: Management estimate • brand and category growth; • operational effectiveness; and • strategic acquisitions. 16 Strategic Management 4 59 60 Pacific Brands Prospectus

The Pacific Brands business

Major Australian retailers are embracing supply chain improvements. Pacific Brands views this as a positive as it can interact with major retailers with a scale not readily available to others. Pacific Brands is working collaboratively with its major retailers to improve their respective supply chain capabilities.

4.6.2 Overseas sourcing and local manufacturing Pacific Brands is one of Australia’s largest importers of consumer goods from Asia, while at the same time retaining a strategic local manufacturing base in product categories where it believes Australian manufacturing will provide a long-term competitive advantage. The flexibility provided by a combination of import sourcing and local manufacturing is a strength of Pacific Brands.

Overseas sourcing Third party sourcing encompasses a diverse product range and provides Pacific Brands with: • greater flexibility in changing designs and products; • a variable cost base and low cost of production; and • greater efficiency. Pacific Brands’ long history of product sourcing provides it with on-going benefits including: • expertise and skills acquired through experience; • long-term relationships with quality suppliers who are accustomed and committed to Pacific Brands’ requirements; • exclusive relationships with various overseas suppliers enhancing product quality, design protection, flexibility, timeliness and responsiveness; • commitment to use of suppliers who comply with International Labour Organization standards; • development of experienced sourcing personnel; and • established credit track record which helps improve payment terms. Pacific Brands is continually consolidating its sourcing arrangements through its dedicated offices situated in Hong Kong and China.

Local manufacturing Pacific Brands has a substantial investment in Australian-based manufacturing, serving a strategic purpose of balancing the needs of customers with Pacific Brands’ cost objectives. In particular, the Australian manufacturing presence is maintained because: • it is more capital intensive (such as the production of socks and hosiery) allowing it to be cost competitive; • it offers a flexible, quick-response capability; • it allows the local manufacture of new products on a trial basis while design, demand and other requirements are assessed (if required, overseas sourcing can then be utilised); • the flexible modular garment assembly processes and systems contribute to low cost and responsive production; and • bulkier products (mainly those within The Home Comfort Group) need to be positioned within proximity of sources of demand to minimise freight costs and lead times.

4.6.3 Distribution activities In Australia, Pacific Brands has 12 stand-alone distribution centres, with the major facilities utilising radio frequency (RF) technology for the management of inventory and the paperless picking of customer order requirements resulting in high inventory accuracy and labour efficiency levels. The integrated IT and RF technologies enable the picking of multiple orders simultaneously. Due to the extensive reach of Pacific Brands’ products, the distribution centres handle a multitude of customer requirements, with technology enabling customer service and support.

4.7 Future Growth Opportunities Pacific Brands’ growth strategy is founded on three core planks, being: • brand and category growth; • operational effectiveness; and • strategic acquisitions. Transforming Businesses: Changing the Business Model – Reading 19 17 60 Pacific Brands Prospectus Section 4

4.7.1 Brand and category growth Brand development There is little doubt that consumers respond positively to strong brands. Pacific Brands manages a wide-ranging stable of brands that are distributed primarily through retail customers. The brand development strategy is focused on ensuring that consumer demand for its products remains high. Concepts and initiatives continue to be developed by Pacific Brands to provide enhanced profitability, mainly through increased margins. These concepts and initiatives include the on-going marketing and development of existing brands in order to improve product category positions, together with the rationalisation of unprofitable product categories. Increased advertising and marketing focus on key brands across various product categories is expected to enhance their “everyday essentials” status in the retail marketplace.

New categories Pacific Brands’ scale, brand awareness, infrastructure and customer relationships provide the opportunity to enter new product categories within the consumer goods industries in which it operates (eg KingGee into workboots). Pacific Brands diligently assesses the viability of entering new product categories and will only enter such categories if their brand attributes are consistent with its business model, and Pacific Brands’ flexible sourcing and distribution capabilities can be sufficiently utilised to ensure a profitable return.

Overseas sales Pacific Brands’ primary business focus remains on the Australian and New Zealand markets; however, it believes that it is well positioned outside these core markets to exploit overseas opportunities. Pacific Brands currently distributes intimate apparel and footwear in the UK and US. Its brand management and product sourcing capability provide it with the capacity to expand its global reach. In FY2003, overseas sales included: • intimate apparel in the US and UK ($19 million); • bedding in Malaysia ($17 million); and • footwear in the UK ($34 million).

4.7.2 Operational effectiveness Pacific Brands’ supply chain strategy provides significant opportunities for it to leverage its scale and enhance profitability by rationalising, consolidating and extending its operations. Some of the initiatives underway include: • consolidation of: – offshore sourcing arrangements, providing improved pricing, quality of product and increased flexibility with regard to “make or buy” decisions; – customer orders, resulting in reduced freight costs; and – warehouses, leading to reduced transport costs and more effective use of existing space; • moving to electronic ordering and despatch through the use of bar-coding; and • collaborative forecasting with customers, in order to improve Pacific Brands’ forecasting of demand patterns, resulting in more effective inventory management. Pacific Brands has recently established a dedicated internal team focused on operational efficiencies (Project Brave New Way). The Brave New Way team analyses, evaluates, recommends and actions operational efficiency programs across Pacific Brands, with a view to eliminating business complexity and improving margins.

4.7.3 Strategic acquisitions Pacific Brands’ substantial scale has enabled it to extract benefits by utilising its existing infrastructure to maximise returns from acquisitions. This has been evidenced by the recent business acquisitions of Clarks (childrens), Hush Puppies, Sara Lee Apparel Australasia (including brands such as KingGee, Razzamatazz and Stubbies), Sachi and Kolotex. Significant cost savings have been, and continue to be, extracted in areas including manufacturing, distribution, sales and marketing, and administration.

18 Strategic Management 4 61 Pacific Brands Prospectus

The Pacific Brands business

Through focused brand marketing and product innovation, Pacific Brands has achieved, and continues to achieve, sales growth through these acquisitions. The extraction of such benefits facilitates Pacific Brands exceeding its internal required rate of return on acquisitions and also provides it with a competitive advantage in pursuing complementary acquisitions. Pacific Brands is continually reviewing the potential for acquisitions that can be absorbed into its existing infrastructure to provide either new product category opportunities or improve existing product category positions.

4.8 Business Systems Pacific Brands has a stable and reliable IT infrastructure. The majority of Pacific Brands’ businesses operate under one of two enterprise resource planning (ERP) systems complemented by in-depth business intelligence software and a centralised data warehouse and supply chain system. Within Australia and New Zealand, call centre, hardware and communications infrastructure has been outsourced to third party providers. Pacific Brands has a disaster recovery plan in place for its key IT systems, including off-site back-up facilities. Pacific Brands has focused its e-business activities on business-to-business initiatives. Approximately 80% of orders with customers are electronic. A leading edge web-based system has been developed to efficiently service small to medium-sized customers.

4.9 Corporate Social Responsibility Pacific Brands has a strong commitment to supporting the communities in which it conducts business, providing funding, products, and the time of its employees to various community-based charities. To date, Pacific Brands’ key initiative has been supporting the Caring For You program. Caring For You is a “grass roots” program in Australia that operates workshops for women treated for breast cancer. It is staffed by both full-time employees and volunteers (all breast cancer survivors) who donate their time to run these workshops across Australia. Pacific Brands believes that this program will help make a difference to women afflicted with breast cancer. Looking forward, Pacific Brands will continue its involvement with various community-based charities.

4.10 Code of Conduct for Manufacturers and Suppliers Pacific Brands is committed to ethical and responsible conduct in all of its operations and respect for the rights of all individuals and the environment. Pacific Brands expects these same commitments to be shared by all manufacturers and suppliers of its products and seeks to enforce this policy through a formal code of conduct, which includes: • not using child labour; • not using any forced or involuntary labour; and • providing employees with a safe and healthy workplace in compliance with all applicable laws and regulations. Pacific Brands regularly conducts audits of its suppliers and in the event that a supplier is unable or unwilling to achieve compliance, Pacific Brands reserves the right to terminate or suspend the relevant supply contract.

4.11 Environment Pacific Brands’ operations are subject to environmental laws and regulations, the details of which vary depending upon the jurisdiction in which the operation is located. These environmental laws and regulations control the use of land, erection of buildings and structures on land, the emissions of substances to water, land and atmosphere, the emission of noise and odours, the treatment and disposal of waste, and the investigation and remediation of soil and groundwater contamination. Pacific Brands has procedures in place designed to ensure compliance with all environmental regulatory requirements.

Transforming Businesses: Changing the Business Model – Reading 19 19 62

2a. Exercise Question: What is the business model of the Pacific Brands? Analyse it in terms of the framework presented in Johnson, Christensen & Kagermann (2008), SM4 Reading 1, which articulates a business model in terms of four elements: 1. The Customer Value Proposition, 2. The Profit Formula, 3. Key Resources and 4. Key Processes.

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20 Strategic Management 4

2b. Exercise Question: What is your assessment of the business model? Would you buy stock at the IPO?

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Part 3: Company Performance and Decisions in 2008-9 Let’s now move forward five years and see how the original business model performed and how management responded. In SM3 we encountered Wesfamers and its fundamental objective of achieving a high total shareholder return (TSR). The 2008 Annual report of Pacific Brands publishes for the last time TSR figures since IPO.

Source: Annual Report 2008: http://bit.ly/rcQBsZ

A year later management addresses the performance problems of the firm by introducing new strategic initiatives.

Pacific Brands Case– Reading 19 21 Annual Report 2009: CHAIRMAN & CEO’S REVIEW

Dear Shareholders, The last twelve months have seen significant change in your business – changes that position the Company for a sustainable, positive future. As we mentioned in our last annual report, Pacific Brands completed a comprehensive strategic review of your business, driven by the imperative to keep Pacific Brands relevant, competitive and strong. The outcome of our review is a strategy we believe will deliver the most sustainable future for our Company – ‘Pacific Brands 2010’. The strategic review confirmed that while our business model is inherently sound, there were areas of the business we could improve. We had too many brands, too much complexity, high cost structures in local manufacturing and limited uniformity of processes and procedures. However, the review also revealed pockets of excellence which could be leveraged throughout our entire Company. Throughout the year, we commenced the implementation of Pacific Brands 2010 – encompassing restructuring, refinancing, retraining, reskilling and regenerating our Company. We are pleased to present the 6th Annual Report of Pacific Brands for the year ended 30 Jun 2009.

Financial Results Pacific Brands achieved solid operating earnings and cashflow in challenging market conditions. Our sales were $2.0 billion and our earnings before interest tax and amortisation (EBITA) and significant items were $205.3 million. Reported earnings in F09 were impacted by a number of significant items not related to ongoing operations. The group booked non-cash asset impairment and write-down charges and incurred restructuring expenses of $334.6 million (post tax) associated with the implementation of Pacific Brands 2010. We’ve maintained solid net operating cashflow of $81.2 million after significant items and capital expenditure through tight control of expenses and prudent inventory management. Significant costs have been taken out in all businesses as we accelerated the implementation of the Pacific Brands 2010 transformation program in response to the volatile and softer market conditions.

New Capital Structure The Company now has a much stronger balance sheet following the equity raising and debt refinancing completed during the year. As we announced in April, Pacific Brands has extended the maturity date of its debt, with no significant refinancing now required until March 2012. This is an excellent result that demonstrates continued support from our banking syndicate. We were also pleased with the results of our $256.0 million equity raising, successfully completed in June this year. The strong support from investors has resulted in a strengthening of Pacific Brands’ balance sheet and has provided the Company with additional financial flexibility. As a result of the equity raising and our solid cash flow generation, we have reduced our net debt levels to $452.8 million at 30 June 2009, from $742.7 million at 30 June 2008. Our gearing levels have dropped during the year to 2.0 times from 2.9 times, we have fully repaid tranche 1 of our debt and have reduced tranche 2 by $117.5 million. continue

22 Strategic Management 4 We would like to welcome our new shareholders who joined the register throughout the year and thank our existing shareholders who supported us during the equity raising.

Pacific Brands 2010 Our strategic review left us in no doubt that we needed to make significant structural changes to the Company. While Pacific Brands had performed well in the environment that existed in previous years, the new environment, with production and performance benchmarked by global standards, meant that we had to update the way we did business in order to ensure the future strength and performance of the Company. The strategic review highlighted that we had an extremely cluttered portfolio – our top twenty brands provided us with almost two-thirds of our sales – and our long tail of almost two hundred other brands accounted for just 2% of sales. The strategic review confirmed we could get better returns by concentrating on our key brands and devoting more resources to growing them. Under Pacific Bands 2010, we are progressively discontinuing, merging or divesting our smaller brands to create a stronger and more focused portfolio of brands. We are putting more of the right skills and resources into the teams that support our key brands. We have made good progress implementing Pacific Brands 2010 – transforming our business and strengthening our business model. All the initiatives contained in the plan are underway. Our cost savings are ahead of plan and are tracking towards an annualised target of $150 million by the end of F11 with full impact in F12 (based on current market conditions and currency rates, and before any reinvestment). The Pacific Brands 2010 transformation program has six core themes set out below. 1. Rationalise and focus the portfolio 2. Optimise the revenue base 3. Rebase overhead cost structures 4. Transform supply chain and operations 5. Reduce capital employed 6. Build organisational capability Implementation achievements during F09 included: • Discontinued, merged and divested more than 150 brands and reduced stock keeping units by 10% • Increased prices for the first time in many years for some businesses • Prioritised marketing expenditure to increase effectiveness • Decreased the workforce by more than 800 • Re-negotiated more than 50% of the volume of our supplies from China • Closed four factories and part of another • Reduced inventory holdings • Rolled out a ‘brand excellence’ improvement program • Introduced new product development processes to the majority of the group • Implemented new product lifecycle management and financial reporting systems

Manufacturing Closures While the Pacific Brands 2010 strategy has involved many decisions, the most significant of these in terms of the impact on our employees has been the cessation of the majority of clothing manufacturing in Australia and New Zealand and the resulting outsourcing of these to offshore suppliers. continue

Pacific Brands Case– Reading 19 23 Pacific Brands was the last major Australian company still manufacturing clothing in any significant capacity onshore. Until now, we have maintained as much manufacturing here as possible. Yet we have sourced approximately 70% of our products from overseas for many years. This decision will result in more than 1,200 manufacturing employees being made redundant. While the rationale of making so many people redundant was compelling, it didn’t make the decision any easier or more palatable. Many of these people have been with us for decades and have made an important contribution to the development of Pacific Brands. In the course of deciding to restructure the business, our considerations included ensuring that we would do everything possible to give our employees being made redundant the best chance of getting a new job in sustainable industries. We have been working in consultation with the Textile Clothing and Footwear Union of Australia to develop, fund and implement an extensive retraining program for all manufacturing employees being made redundant. It is a program that is unique in Australia and has been extended to our New Zealand employees in consultation with the National Distribution Union in New Zealand. This sets a new benchmark for managing redundancies. Most significantly, impacted employees have already, and will continue to, receive retraining and re-skilling while still in their current jobs. All affected manufacturing workers have been offered retraining and have access to $3,000 worth of courses and up to three weeks paid leave while they are still in their jobs, which is over and above any government retraining they may be eligible for. We are determined to support our employees and assist them with their transition to new work and new opportunities. Pacific Brands, like most other major wholesalers, has been importing from Asia for more than 50 years. We will continue to work closely with our supply partners to ensure all our products and fabrics manufactured offshore maintain our high quality standards.

Changes to the Board and Management Team There were a number of changes to the structure and composition of the Board and Management team of Pacific Brands during the past year: • In November 2008, Pat Handley resigned as Chairman of Pacific Brands after seven years in the position. We thank Pat for his contribution to the Company • James MacKenzie was elected to the role of Chairman by the Board following Pat’s resignation Dr Nora Scheinkestel joined the Board in June. Nora brings invaluable experience to Pacific Brands, having served as a non-executive Chairman and director of companies in a wide range of sectors in the public, government and private spheres In April this year, CFO Stephen Tierney resigned after nineteen years at Pacific Brands. We thank Stephen for his contribution to the Company • David Bortolussi joined the Company as Chief Financial and Operating Officer in June this year. David joined the Company from Foster’s and prior to that was with McKinsey & Company and PricewaterhouseCoopers • Simon Smith joined Pacific Brands to lead our Home Comfort division from eBay Australia where he spent eight years as Managing Director continue

24 Strategic Management 4 • Melanie Allibon joined the Company to manage Human Resources across the group following roles at Amcor, Foster’s and BHP Pacific Brands has a skilled management team with the experience and enthusiasm to continue the successful implementation of Pacific Brands 2010 and ongoing operations of the Company. Dividend The Pacific Brands Board has decided to preserve the Company’s capital and no dividends have been declared in the year ending 30 June 2009. The Board will make a decision in respect of future dividends after assessing the Company’s operating performance at each half and the outlook at that time. Outlook Since the start of the financial year, trading has been mixed with some businesses performing well and others marginally down on the prior corresponding period. Although the economic environment and outlook remain uncertain, the Company notes cautious optimism in the market and recent signs of improving consumer confidence. Consistent with the Pacific Brands 2010 strategy to rationalise and focus the portfolio, reported sales revenue is expected to reduce over the course of the transformation period. However, implementation of Pacific Brands 2010 is expected to result in a more robust and profitable business in the longer term. Feedback Your feedback is extremely important to us and we want to ensure that you, our shareholders, have an avenue to ask any questions about Pacific Brands 2010 or other Company matters. We have created a designated email address for you to submit questions and we will endeavour to address these at our Annual General Meeting on 20 October 2009 at The Sebel, Albert Park in Melbourne. Please email any questions you may have to [email protected] Thank you for your support over the past 12 months. James MacKenzie, Chairman Sue Morphet, Chief Executive Officer 26 August 2009

Source: Annual Report 2009, http://bit.ly/o2jeR3

Pacific Brands Case– Reading 19 25

3a. Exercise Question: How has the business model changed for Pacific Brands? Is it an incremental or large change from the previous model?

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3b. Exercise Question: What were the main drivers of, and assumptions behind, these decisions?

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26 Strategic Management 4 3c. Exercise Question: What are the pros and cons of shifting all manufacturing out of Australia? On balance, would you have made the same decision as CEO?

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Part 4: Reactions to decision to stop manufacturing in Australia Now let us look at a video and two newspaper articles describing the public reaction.

WORK HEADS OFFSHORE AS PACIFIC BRANDS AXES JOBS, The Age February 26, 2009

To see video, hold CTRL key and click on picture above or go to: http://bit.ly/qS2psp

Pacific Brands Case– Reading 19 27

BY BEN SCHNEIDERS, ARI SHARP and KATHARINE MURPHY with MARC MONCRIEF ANOTHER wave of mass lay-offs is looming in Victorian manufacturing after Pacific Brands, the company behind some of Australia’s most famous clothing labels, said it would axe more than 1800 jobs. In a decision with potentially drastic implications for local industry, Pacific Brands said it saw no future in manufacturing here, with most of its remaining local production to be transferred to Asia. The company, whose household name labels include Bonds and Holeproof, will close seven factories over the next 18 months and axe 1200 manufacturing jobs, including 553 in Victoria. About 650 administrative staff will also be shed. Chief executive Sue Morphet, announcing the cuts, said that with few exceptions it was no longer competitive to keep making clothes in Australia. Bicycle helmets and carpet underlay will be among the few products still made here. The company went ahead with its decision despite offers of financial aid from the Federal Government, and despite claims that it was needlessly closing profitable plants. Federal Industry Minister Kim Carr blasted the company for rebuffing the offer of help. "I spoke to the chairman of the board and I specifically asked was there anything further we could do to get the company to change its mind, and the answer they have given me is ‘no’." There were also claims that some of the cuts were not commercially justified. "It just doesn’t make sense to close those parts of the business that are profitable," said Textile, Clothing and Footwear Union national secretary Michele O’Neil, "especially when you’ve got iconic brands that have built their reputation on being an Australian company that continues to make things in Australia." The Pacific Brands closures are expected to have big knock on effects, with thousands of jobs in suppliers and related service industries under threat. Ms O’Neil said closing the hosiery plant at Coolaroo, in Melbourne’s northern suburbs, would impact heavily on local communities that were dependent on manufacturing. The region has already lost more than its share of jobs in the economic slowdown, with companies including Caterpillar, ABC Learning Centres, Ford and OneSteel having shed staff. The Australian Workers Union’s Cesar Melhem said: "Manufacturing is like a ticking time bomb. Many companies are on a knife edge." Most concern is centred on the car industry, where flagging sales have forced production cuts and thousands of job losses. Yesterday it was confirmed that another 225 jobs would go at Albury gearbox factory Drivetrain Systems International. Travel publisher Lonely Planet will also cut up to 40 staff from its Melbourne office, while up to 90 more jobs could be lost at the stalled Southern Star observation wheel. Senator Carr warned that more bad news could be expected in the present economic climate. continue

28 Strategic Management 4 "We are in a position now to say that there are many, many companies that are facing an acute liquidity crisis," he said, declining to name any of the companies. "This will not be the last day in which we have to deal with very disappointing news like this." Ms Morphet said all worker entitlements at Pacific Brands would be met. She also defended the company’s move against claims that it had abused Government assistance — estimated by the clothing workers’ union at more than $15 million in recent years. She said the assistance had helped keep the industry working.The move to slash jobs came as the company announced a net loss of $150 million for the December half-year. Almost 300 people will lose jobs at Coolaroo, with another 255 at the Holeproof plant in Nunawading — many of them migrant women with poor prospects of finding other work. With other non-manufacturing cuts, including at the Hawthorn head office, up to 1000 people could lose jobs in Melbourne. Arife Koksal, 36, a machine operator at Coolaroo for five years, said she was shocked and upset. "We’ve got families to feed, mortgages," she said. Ms Koksal said her chances of getting another job, especially in manufacturing, were slim. Australian Industry Group Victorian director Tim Piper said the Pacific Brands decision was a "big blow" to manufacturing. "They’ve been a survivor in a pretty difficult business," he said. But amid the difficulties in manufacturing, he said companies and unions were working more closely to avoid job losses. The latest round of job losses comes just weeks after BHP Billiton said it would lay off more than 3000 Australian workers and after David Jones, Foster’s and CSR all said hundreds of jobs would be axed. Responding to the Pacific Brands news, Premier John Brumby blamed the world recession and the disappearance of export markets. "Japan is in depression, the UK economy is shrinking by 5%, the US economy is shrinking by 3%," Mr Brumby said. "I have been saying for some time we will see announcements of this type." In Canberra, Opposition Leader Malcolm Turnbull used question time to taunt the Government over the Pacific Brands decision, saying billions of dollars in fiscal stimulus had failed to deliver jobs. "Prime Minister, how does your socks and jocksled recovery look now, and how many more workers will lose their jobs because of your economic incompetence?" Prime Minister Kevin Rudd said that while the Government had an economic strategy to see Australia through the crisis, the Coalition was using the crisis to score cheap political points. "It is almost as if each time job losses are announced in this country you can hear the champagne corks pop in the Liberal and National parties’ party room," he said.

Source: The Age, http://bit.ly/olrUPK

Pacific Brands Case– Reading 19 29 PACIFIC BRANDS BOSS SUE MORPHET HIRES GUARD BY STEPHEN DRILL news.com.au, March 01, 2009 Morphet hires 24-hour security guard protection for mansion follows fallout over sacked workers EMBATTLED Pacific Brands chief executive Sue Morphet has hired a 24-hour security patrol to protect her mansion in Melbourne. The Hawthorne home, which includes a tennis court, was being defended by a security guard yesterday as the fallout from her decision to sack 1850 workers continued. The home was listed for sale on website realestate.com.au for more than $2 million. It is believed Ms Morphet hired security because she was worried angry workers would ransack her home after widespread sackings were announced on Wednesday. Ms Morphet, who accepted a $1.1 million pay rise last year, was unavailable for comment. But even her well-heeled Hawthorn neighbours had turned on the head of the company, which controls household names such as Bonds, Hard Yakka, Playtex and Dunlop. A neighbour, who refused to be named, said Ms Morphet deserved all the grief she was receiving. "Go for it. She's accepted the big pay rises while giving all her workers the sack," the neighbour said. Pacific Brands' directors were consulting each other yesterday as they considered a request from Industry Minister, Kim Carr, to keep some or all of their factories open. Mr Carr met executives and unions on Friday in a last-ditch bid to help save Australian jobs. But when the Sunday Herald Sun rang chief financial officer Stephen Tierney and director Dominique Fisher, yesterday they passed on inquiries to their high-profile spin doctor to the stars, Sue Cato. The public relations mogul, who has defended controversial photographer Bill Henson, said there was no comment. Business experts estimated Ms Cato would reap tens of thousands of dollars in fees. Meanwhile, transport unions continued to put pressure on the company yesterday. "We call on the company to do the right thing by Australian taxpayers, the Government and the workers and work together to keep the jobs in Australia," national secretary of the Maritime Union of Australia, Paddy Crumlin, said.

Source: news.com.au, http://bit.ly/rkoLCb

30 Strategic Management 4

4a. Exercise Question: Do you think the reactions of workers and the public at large are justified?

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4b. Exercise Question: What impact will this decision – and the way it was communicated – have on the company’s ability to project the attributes and values that we saw at the beginning of the case to its customers and employees?

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Pacific Brands Case– Reading 19 31 4c. Exercise Question: Has your view changed about the correctness of the decision to stop manufacturing in Australia?

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4d. Exercise Question: Could the CEO have handled the situation better?

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32 Strategic Management 4 Part 5: Pacific Brands in 2011 and beyond Now let us look at an article as well as financial information describing the company in 2011.

PACIFIC BRANDS CLIMBS ON BUYBACK

BLAIR SPEEDY reports in the The Australian August 24, 2011 1:29PM

PACIFIC Brands, the company behind clothing labels including Bonds, Holeproof and King Gee, has reported a $132 million net loss for the past financial year, driven by write downs on the value of its shoe and sportswear divisions.

The company booked one-off costs of $235m for the 12 months to June 30, including $212m in writedowns on the value of its footwear, outerwear and sport division as well as its Sleepmaker mattress and Dunlop foam divisions. Excluding one-off items, net profit rose by 14.5 per cent to $103.4m while sales were down 7.3 per cent to $1.615 billion. Shares in Pacific Brands were up 6 cents, or 8.8 per cent, to 68c by early afternoon, after the company also unveiled an on-market share buyback of up to 10 per cent of its issued stock. The benchmark S&P/ASX 200 index was down 0.2 per cent. Chief executive Sue Morphet said the underwear and hosiery division produced an 11.4 per cent increase in earnings before interest, tax and amortisation to $111.3m. The earnings lift for the division came despite an 8 per cent decline in sales due to brand deletions and the loss of sales to discount department store Kmart, which had demanded price reductions Ms Morphet said the company could not provide without compromising quality. The workwear division, which includes the King Gee and Yakka brands, reported a 19.3 per cent gain in EBITA to $49.9m, boosted by demand from the mining sector. Homewares, which includes bedding brands Tontine and Sheridan, booked a 20 per cent gain in EBITA to $40.4m, while the footwear-outerwear and sport division EBITA collapsed 95 per cent to just $800,000, as sales fell 23.6 per cent as a result of cool summer weather and the loss of sales to Kmart. Earnings for the current financial year would be affected by ``weak retail conditions marked by extremely cautious and value-conscious consumers, and intense industry competition,'' as well as the loss of sales to Kmart. Higher input costs including cotton prices, Chinese labour costs and energy would also weigh on margins this year, Ms Morphet said, although the company had already raised the price of some affected products in order to pass on the impact to consumers. "It has been a very challenging couple of years, and the next 12 months don't look any easier," Ms Morphet said. The company also announced up to 100 further job cuts as it integrates its Sydney and Melbourne underwear divisions. continue

Pacific Brands Case– Reading 19 33 Ms Morphet said the company expects some of the affected staff to retain their positions by relocating, but would not specify how many redundancies the company expects to incur. The job cuts follow the shedding of around 1800 manufacturing jobs and 850 other staff at Pacbrands since 2009, when the company announced a restructuring plan to outsource the bulk of its production to cheaper Asian manufacturers and sell off underperforming businesses.

Source: The Australian http://bit.ly/pGZf06

5a. Exercise Question: Why do you think the stock price went up although the company still seems to face a difficult environment?

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34 Strategic Management 4 Here are the financials of 2010 in comparison to 2009.

Source: Annual Report 2010, http://bit.ly/pYNntR

Pacific Brands Case– Reading 19 35 And here is the performance of the Pacific Brand stock compared to the ASX since 2009.

Source: ASX. http://bit.ly/wC7m02

5b. Exercise Question: Do you think that Pacific Brands has become a better-managed company in the past couple of years under Sue Morphet?

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36 Strategic Management 4 5c. Exercise Question: To what extent did the decisions that were made reflect ‘conventional wisdom’ and commercial orthodoxy? What strategies counter to this orthodoxy could have been adopted?

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Pacific Brands Case– Reading 19 37 Here is an article about the state of the company in 2012.

PACIFIC BRANDS WARNS OF POOR SALES PERSISTING

Eli Greenblat reports in the The Sydney Morning Herald October 24, 2012

PACIFIC Brands has avoided the embarrassment of a ''second strike'' against its remuneration report and a full spill of the board, as it warned there had been no change to the poor trading environment that saw it crash to a $450 million loss last financial year. New chief executive John Pollaers, who is only 50 days in the role at the embattled clothing manufacturer, told investors at the company's annual meeting yesterday that year-to-date underlying sales were down and that the trading environment remained challenging. Mr Pollaers said there had been no change to the company's outlook for 2012-13 since the release of its full-year results, when deteriorating conditions across its key markets triggered more than $500 million in write-offs and restructuring charges.

''There has been no noticeable improvement in the operating environment so far this year,'' Mr Pollaers said. ''Time will tell whether the latest interest rate cut has much impact, but prudently our plans assume more of the same. Trading remains volatile, with September down but October month-to-date in line with last year.'' Mr Pollaers said performance among retailers was mixed, and performance within Pacific Brands' portfolio was also a mix of up and down. ''We've got some brands in our portfolio performing and some that are a bit more of a challenge,'' he said. The underwear division was up, with Bonds performing well but Rio and Holeproof offsetting much of that growth. Workwear was down after a drop in economic activity since March, and was showing no immediate signs of turning. ''As always, timing of the rollout of key contracts may impact the phasing of sales between the halves.'' Mr Pollaers said it was still too early to say if Pacific Brands would make more writedowns or further restructuring. ''My sense is the company is in much better shape as a consequence of the decisions that it's taken over the last five years,'' he said. Investors have swallowed write-downs and charges of more than $1 billion since 2009, when Pacific Brands had a near-death experience after the global financial crisis. Shareholders overwhelmingly supported the remuneration report after last year voting more than 50 per cent against the item and setting up a ''first strike'' for the company. Almost 98 per cent of proxies were voted in favour of adopting the remuneration report this year.

Source: SMH http://bit.ly/UoCc7b

38 Strategic Management 4

5d. Exercise Question: If you were the new CEO John Pollaers, what would you do to prepare for the world in 2020, what major trends and discontinuities would you get it to focus on? What are the implications for their current business model?

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Bring your answers to the class discussion in residential 4.

Pacific Brands Case– Reading 19 39