Analysis: Papua New Guinea companies using rationalisation to adapt to weaker economic conditions

The sluggish Papua New Guinea economy is triggering a bout of rationalisation, two of the recent examples being in the banking and manufacturing sectors. Two distinct management strategies are behind these moves, notes David James.

Paradise’s Anthony Smare (left) and Steamships’ Peter Langslow finalise the sale of Laga Industries to Paradise.

Larger Papua New Guinea companies typically pursue one of two strategies in their search for profitability:

  1. Economies of scale. The aim here is to get a strong market share to generate large revenues. Then management looks for operational efficiencies to turn the revenue into consistent profits.
  2. Economies of scope. The aim here is to establish operations in different industries to generate diverse revenues. Then back office efficiencies are pursued to create profitability.

A prominent example of the ‘economies of scale’ approach is Bank South Pacific. Because it has such a dominant market share, achieving big jumps in revenue growth is difficult. Instead, achieving internal cost efficiencies is key to its profitability.

There are many examples in PNG of the economies of scope approach, including: Brian Bell, KK Kingston, CPL Group and TE (PNG). These companies have multiple divisions, sometimes in different industry sectors.

The strength of this strategy is that it can reduce the risks of being exposed to a single market, potentially making it easier to manage volatility.

The potential downside, however, is that when the overall economy weakens, all the divisions can come under pressure, forcing the divestment of less important businesses.

Such a requirement to divest can be seen in CPL Group’s recent sale of Paradise Cinemas to R H Group’s Vision City.

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‘Loans will increase by half, deposits will double and earnings per share will rise by almost a third.’

Acquisition

Kina Securities is looking to create economies of scale, as evidenced by its acquisition last month of ANZ’s PNG retail, commercial and SME businesses.

The aim is to increase the company’s size and penetration. (As was its 2015 acquisition of the PNG assets of Malaysia’s Maybank—the move that triggered Kina’s transition into a bank.)

The acquisition will increase the company’s retail banking footprint to 21 branches, 82 ATMs and more than 1800 EFTPOS terminals.

‘Another rationalisation move is the sale by conglomerate Steamships Trading Company of Laga Industries.’

Loans will increase by half, deposits will double and earnings per share will rise by almost a third, according to Kina’s estimates.

For the ANZ, by contrast, it represents the withdrawal from an underperforming niche. It is a move that has become commonplace for Australian banks in recent years—the sale of non-core overseas operations.

Westpac made a similar move when it sold some of its smaller Pacific assets to Bank South Pacific in 2015.

Conglomerate

Another rationalisation move, by conglomerate Steamships Trading Company, is the sale of Laga Industries to manufacturer Paradise Company, which produces Paradise Foods, Paradise Beverages and Queen Emma Chocolates.

Laga Industries manufactures Gala Ice cream, Oasis Water and Highlands Meadow Cooking Oil and other products.

For Steamships, the sale represents a partial withdrawal from pursuing economies of scope. The company will instead concentrate on its core operations of logistics, property and hotels.

For Paradise, it is an opportunity to expand its operations in the same industry sector.

‘It really is business as usual for all staff as ownership changes to Paradise.’

‘We are bringing together two strong growing food businesses to create a very large food business with a strong sales and distribution network around the country, strong brand loyalty and backed up by two talented and dedicated groups of employees at the two companies,’ claims Anthony Smare, Chairman of the Board of Paradise Company.

Business as usual

Smare believes the manufacturing sites and staff will be unaffected, contending that both companies (Paradise and Laga) have ‘first class systems and procedures with strong management frameworks’ in place.

‘It really is business as usual for all staff as ownership changes to Paradise.’

To create economies of scale, Paradise will have to concentrate on creating improved internal efficiencies.

‘We expect that the new combined Paradise Company—with its diverse products leading the PNG market in biscuits, snack foods, water, ice cream, cooking oil, chocolates and beverages—to now start leveraging the synergies of the combined businesses to accelerate its growth,’ says Smare.

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