Management

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

Australia's unique environment doesn't always translate successfully to less pristine corners of the globe.

The country is home to the world's largest population of feral camels, and the feral hog herd is more than four times the size of its U.S. equivalent. Species introduced in the other direction don't do as well: Despite decades in the wild, Europe's wallabies are confined to pockets in France and the British Isles.

There's a similar pattern in the country's corporate ecosystem. With notable exceptions -- Rupert Murdoch's News Corp. and Twenty-First Century Fox Inc., mall-owner Westfield Corp., shipping pallet distributor Brambles Ltd., and the mining and energy companies that raise global revenue from their domestic assets -- the country's biggest businesses seem to thrive at home. They often stumble the moment they head overseas.

Take Qantas Airways Ltd. Rather than enjoying its dominant share of one of the world's most profitable domestic aviation markets, the carrier feels perennially compelled to venture abroad and burn money trying to capture a bigger slice of long-haul routes.

Losing Altitude
Qantas shares have fallen 26 percent since its record first-half result in February
Source: Bloomberg

Coming off a record first-half profit in February, Qantas announced plans to sharply increase capacity into Asia, a market already oversupplied with seats. The unsurprising result of this hubris was announced Monday: First-half earnings will be as much as 13 percent lower this year because of falling fares on those routes.

Australia & New Zealand Banking Group Ltd. is another example. Former Chief Executive Officer Mike Smith made a compelling case when he joined in 2007 that the bank's future lay in Asia, as a sort of antipodean version of his previous employer, HSBC Holdings Plc. As rich countries' housing markets were starting to crack, his drive to stop pushing dumb mortgages to Australians and start getting filthy rich in rising Asia seemed prescient.

Chasing the Rising Sun
In former CEO Mike Smith's time in the job, ANZ underperformed more mortgage-heavy local banks
Source: Bloomberg

That didn't work out much better. His successor Shayne Elliott on Monday announced the sale or review of a swath of the Asian assets. Overseas operations consume almost one-third of the bank’s capital while accounting for less than one-fifth of profit. ANZ reported its lowest full-year earnings since 2011 on Thursday, with unaudited cash profit missing analyst estimates and falling about 18 percent to A$5.9 billion ($4.5 billion.)

It turns out that just sitting back and pushing dumb mortgages would have been a pretty good strategy. Commonwealth Bank of Australia Ltd. and Westpac Banking Corp., the two players with the biggest exposure to domestic home loans, were the best performers during Smith's term at the helm.

Is there something in the water that makes these businesses struggle?

The pattern is weirdly widespread. Electrical-goods retailer Harvey Norman Holdings Ltd., Coke bottler Coca-Cola Amatil Ltd. and fast-food franchisee Domino's Pizza Enterprises Ltd. have all made bridgeheads into Asia that were conspicuously less successful than their local operations. If food and supplements makers Treasury Wine Estates Ltd., Blackmores Ltd., and Bellamy's Australia Ltd. have done better, it's thanks largely to Chinese demand for Australia-branded products.

You Better Run, You Better Take Cover
Australian companies regularly make forays into overseas markets that are less profitable than the land downunder
Source: Bloomberg
Note: "Asia" refers to differently-labeled regions for different companies. For Coca-Cola Amatil, Indonesia & Papua New Guinea; for Domino's Pizza Enterprises, Japan; for Blackmore's and Bellamy's, China or China & Hong Kong; for Harvey Norman and Treasury Wine Estates, Asia. All margin figures are operating margins except for Harvey Norman, which is Ebitda margin.

It's probably a mistake to look at this as a case of Australian companies doing uniquely badly overseas. The performance of these international divisions isn't poor -- it's normal. The anomaly is their exceptionally profitable local units.

Look at Australia's benchmark S&P/ASX 200 index as a whole and you get closer to the heart of the matter. It has one of the best aggregate operating margins among major peers, comfortably outstripping Japan's Topix and the U.K.'s FTSE 100 and usually running ahead of the S&P 500 as well.

Profit Motive
The operating margin for companies on Australia's benchmark index is one of the best globally
Source: Bloomberg

That profit performance embodies a complaint many Australians have about the local business environment: The preponderance of duopolies.

If you want to buy food or liquor, most of the market is sewn up by Woolworths Ltd. or Wesfarmers Ltd. Go to a department store, and it's probably Myer Holdings Ltd. or David Jones . Take a domestic flight, and you're probably on Qantas or Virgin Australia Holdings Ltd. The big casinos are owned by Crown Resorts Ltd. or Star Entertainment Group Ltd.

Concentrated markets are congenial for locally dominant businesses, which can go about the business of extracting profit from their customers in the time-honored fashion outlined by Adam Smith:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Profitable companies in small, mature markets will almost inevitably want to venture further afield with their expertise. Australia's experience suggests they may be better off focusing on the home front.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds ANZ earnings in seventh paragraph.)

An earlier version of this article corrected the spelling of Blackmores.

  1. Owned now by South Africa's Woolworths Holdings Ltd., which is unrelated to the Australian retailer Woolworths Ltd.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net