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Andrew Patterson meets an MBO that is winning in international markets by focussing on what it knows best and doing it to global standards

Posted in Business
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By Andrew Patterson

Very few New Zealand companies still in business today are able to lay claim to having been founded in the 19th century. Auckland based bathroom fittings manufacturer Methven is one who can and it remains a source of immense pride for its 230 staff.

Established in Dunedin by one George Methven in 1886 as an iron and brass foundry, the business has been operating continuously for more than 125 years supplying a variety of tap wares and fittings to the plumbing trade as well as undertaking a range of contract manufacturing.

Originally listed on the NZ Stock Exchange in 1930 and then delisted in 1936, it returned to life as a public company in 2004 following a management buyout three years earlier when Methven was acquired from MCK Group.

Today the company bears little resemblance to those early days having switched its focus exclusively to manufacturing innovative shower and tap fittings reflecting a growing focus on luxury bathroom fit outs by DIYers and home renovators.

Finding a unique advantage

Long-time CEO Rick Fala, who was part of the team that led the management buyout in 2001, says Methven has been forced to adapt to a market place that has changed significantly in recent decades.

“Previously we used to undertake a lot of contract manufacturing in the 70s and 80s including yacht winches, plumbing supplies and even golf heads," Fala told interest.co.nz. "Following the management buyout, we moved out of all those areas and decided to focus solely on our core business which was tapware and bathroom fittings."

“We actually discovered at that time that we had some technologies that couldn’t be found anywhere else in the world so we decided to use that to our advantage."

“One thing we’ve learned to do very efficiently as a company is to move water within households, so in many ways we’re also a fluid dynamic company that can work in low flow environments.”

These days Methven refers to bathrooms on its website as sanctuaries; a trend that has become increasingly reflected in the design and fit out of bathrooms over the last decade. It’s a far cry from the days when bathrooms were all about functionality and much less about design.

“Our research and consumer testing has found women in particular now regard the bathroom as a form of sanctuary. It’s a place where they can get away from screaming kids and the multitude of other pressures they face on a daily basis."

“When they step into the shower, that’s often the one place where they’ll get some time out for themselves.”

Competing with global giants

Globally, the competitive space in the bathroom fittings sector is huge.

“Our competitors worldwide would literally number in the thousands. Originally for us the main competitors came from Italy and Germany but increasingly that competition has now moved to China."

“Of course, we also source many of our components from China ourselves, while retaining our key product development and R&D capability in Auckland. We also supplement our range with some contract manufacturing out of China which enables us to remain competitive."

“So what we do is mix and match the premium aspects of our products here in NZ while having our economy range that we can offer the DIY sector produced in China.”

As an exporter, the high dollar has taken its toll on Methven, though not as badly as might be the case with other businesses selling offshore.

“Dealing with the high dollar has had its challenges and we’re no different to other exporters in that regard, but on the other side of the coin we do buy components from China in US dollars so there is actually a natural hedge there as well."

“The other aspect of our business is that bathrooms are very experiential and people are prepared to pay for quality so, as a result, our margins are actually higher than a lot of other industry sectors.”

Managing in the GFC

If dealing with the high NZ dollar wasn’t enough, the company has also had to battle a significant down turn in the building and construction sector post the global financial crisis (GFC). Rick Fala says that’s resulted in a distinct switching in consumer preferences.

“Since the onset of the GFC we’ve seen a definite switch to the more value end of the market and you’ve seen that reflected in the rise of the DIY offering. In fact, in the UK we’ve seen the emergence of the plumbing e-tailer so that’s a trend we think will ultimately sweep through the rest of the world as part of this changing face in retail that is currently taking place."

“In both NZ and Australia the size of the DIY sector also continues to expand and to an extent it’s been offsetting the decline in the merchant side of the business that has resulted from the fall off in construction activity."

“However, the customer we are really trying to appeal to the most is the renovation sector. The sort of person who wants to really look into all the options available and isn’t afraid to spend a bit extra for quality – that’s our customer.”

Australian lifeline

Weathering the downtown has come at a cost for Methven with the company reporting flat revenues in the second half of last year and a rapid decline in the profitability of its UK operation.

“Our proprietary brands have stood up quite well because we have a point of difference but our UK business, which we brought in 2007, just prior to the start of the GFC, was still dominated at the time by a low price high volume product range and so our margins just got hammered because there was no real point of difference. So we had a business that went from being very profitable to break even in the space of just two years. As a result, we’ve had to try and reposition that business at the more premium end of the market."

“Here in New Zealand we are the market leader in bathroom fittings with a 50% plus market share so there was no way we could avoid the downturn particularly after a 50% decline in housing starts."

“Our shining light though, until recently, has been Australia. While the other parts of the business suffered we still had Australia growing strongly and adding to the bottom line. However, in the last year we’ve seen our revenues there drop by 7% and yet profits were up by 20% and that’s because we could the sense the downturn coming so we improved the quality of our earnings. Interestingly, what Methven learned was that it’s during tough times that you actually expand your product range."

“Over the last few years we would have added at least 50 new products to our range which has been essential for maintaining our brand profile.”

Conserving water

Innovating new products has always been one of Methven’s key strengths which has seen it significantly expand its design capability in recent years. A growing trend globally has seen a real focus on water conservation; a trend the company has been well placed to use to its advantage as a result of the environment it has grown up in.

“In NZ we have very challenging water conditions as a result of the low flow problem I spoke about earlier.”

“So by the time the whole water conservation issue hit, we already had products that worked very efficiently under these conditions."

“An example of that has been our Satin Jet technology which we developed that gives a very good shower despite the low flow conditions that frequently it has to operate in.”

“So what a lot of our competitors found, to their cost, is that their products didn’t work nearly as well when the rate of flow was reduced as people began installing systems that reduced their water consumption."

Design IP

“We’ve also significantly boosted our design capability in the last few years from three to 16 to reflect this need to keep pace with the market. It’s also been a deliberate strategy to ensure that our IP is retained in NZ even though the vast majority of our contract manufacturing is now undertaken in China."

“Our design hub is based in Auckland, where all our R&D and new product team are located, and we send them overseas fairly regularly to trade shows and other international events where they’re able to monitor trends and innovation in bathroom fittings and design."

Future growth

So where will growth occur for Methven in the future? It’s a question Rick Fala is quick to answer.

“Growth will mainly come from our shower products. We’re actually working on a new shower technology which we hope to release in the next 12-18 months. We want to make these products famous, not just here in NZ; we want them to become world famous."

“We’ve also adopted a tactical approach to our marketing strategy in China where we have a distribution agreement in place for our products in the three major cities of Beijing, Shanghai and Guangzhou."

“Our approach has been to focus on installing our products in five star hotels in each of these cities. What we’ve wanted to provide is a great shower experience for guests that hopefully will result in future sales down the line but we have also been able to offer the hotels significant cost savings both in terms of water and energy."

“As we don’t actually have the big marketing budgets that many of our competitors are able to utilize, our marketing efforts have to be much more carefully thought through.”

With 125 years of manufacturing already under its belt, the future has plenty of emerging trends moving in its favour to ensure that Methven’s second century is just as productive as its first.

“The growth of online purchasing or e-tailing really works to our benefit. Our products are generally the ones that people will spend some time researching online from anywhere in the world."

“So we can see sales growth coming through the traditional channels but also increasingly through the non-traditional channels, such as online, as well."

“Another example of non-traditional growth for us was recently winning a social housing contract in South Africa where we secured an order for 67,000 of our satin jet products which is the type of business we increasingly hope to attract more of in the future.”

With a 20 year warranty on all its products, one of the longest on offer in both this country and Australia, Methven obviously has plenty of faith in its products to keep operating for some time yet.

 

KEY FACTS

Sector: Bathroom fittings
Founded: 1886
Staff: 230 (NZ based: 100)
Turnover: NZ$105 million
Growth: -13% yoy (2011/12)
Biggest market: Australia
Fastest growing market: Australia
International offices: Australia, UK, China, UAE
Export / Domestic sales split: 70% : 30%
Profitable: Yes
Gross dividend yield:  11.3% (2012)
Recent highlights: Sustainability and Good Design Award in Chicago and recipient of NZ Best Award three times 
Ownership: Publicly listed on NZX

 

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1 Comments

Good to see a NZ business

Good to see a NZ business still manufacturing in NZ. Also to see they make products that quote 'last a lifetime'. But does make me wonder why they only have a 20 year warranty if they are expected to last a lifetime, and some other manufacturers do have lifetime warranties.
Got Methven stuff myself, and it is very good quality, so you do pay for what you get