Abstract
Private equity has been controversial because of its apparent impact on labour and employment. Analysis of the effects has generated mixed results in the literature, and the reasons for this divergence remain unclear. The article considers whether labour regulation, business strategy and the role of labour in the process of value creation moderate the impact of private equity ownership on labour. It does so by examining the case of Myer, one of the largest private equity buyouts in Australia to date. The article examines the range of initiatives taken by management after the buyout. It is found that the business strategy, the state of the business and the nature of labour’s contribution are all key influences on what happens to labour after private equity buyouts. By contrast, the potential to take advantage of the weakening of labour regulation in Work Choices to make major changes was not exploited by management.
Introduction
Private equity (PE) has been controversial in many countries in the last 10 years, with extensive debates in academic and policy circles over its costs and benefits. Critics argue that PE extracts and transfers value from labour and taxpayers, often taking advantage of weak disclosure and regulatory regimes (PSE, 2007). There have been some dramatic examples of the adverse effects of PE on labour, drawn especially from the US and UK, which are consistent with these criticisms (see Appelbaum et al., 2012; Clark, 2009a). The central argument in these studies is that the closer alignment of executives with owners in PE, coupled with owners’ attempts to extract greater value, leads to pressures for work intensification, employment reductions and harsher industrial relations. By contrast, supporters of PE argue that it plays a valuable role in restructuring businesses, and that adverse effects on labour tend to be restricted to cases where acquired firms are already in financial difficulties. In others, employment reductions post-takeover can be counterbalanced by new job creation in the longer run (‘creative destruction’) (Davis et al., 2011).
This article provides an evaluation of the labour management approach taken in a large PE buyout in Australia, that of the retail chain Myer in the second half of the 2000s. Until now, there has not been any detailed research into the labour and employment effects in Australian companies, and nearly all of the evidence has been generated in the US and Europe. The article examines the main changes introduced by the new management team installed by the PE owners. These initiatives are in the areas of incentives, work organisation and industrial relations. The company extended pay for performance schemes across the managerial workforce and introduced various incentives and benefits for the entire workforce. Changes were made to staff deployment, including a merging of some clerical and sales duties. The employment conditions of new employees were amended, though Myer maintained its collective relationships with unions rather than moving to Work Choices-style individual bargaining. Myer increased its profits during the period of PE ownership, but this does not seem to have been primarily at the expense of its workforce. Overall, the Myer case involves value creation rather than value redistribution from labour to capital. Nevertheless, within the labour force, there was some redistribution of value shares, with distinctions being drawn between waged and salaried staff, and between existing and new waged staff, in the implementation of new labour policies.
The article identifies the nature and success of the business strategy implemented post-buyout as a key moderating influence on the labour effects of PE. Where business strategies aim at market and revenue growth, and the firm is able to realise these, pressures from new owners for the enhancement of ‘shareholder value’ may be met without substantial transfers of value away from labour or other stakeholders. Unlocking ‘free cash flows’ by reducing costs created by duplication or increasing scale economies may also dilute pressures to extract further value from labour. This is not to say that labour will be immune from changes to working practices, employment or remuneration. But it does mean that the impacts of these on labour are likely to be more mixed, with perhaps both gains and losses. There is also the possibility that impacts will be varied within the workforce, with some groups benefiting or losing more than others.
The case further indicates that the extent to which the business strategy is dependent on employee discretionary performance and commitment has an important influence on labour outcomes. While the philosophy and pressures of PE ownership may lead to various operational innovations consistent with ‘hard’ high-performance work practices, such as performance targets and incentives, these may be balanced by other human resources (HR) innovations that are more sympathetic to employee interests, such as measures to enhance commitment. These considerations can outweigh the apparent potential for reductions in employment regulation (as was promoted by Work Choices), which would facilitate breaches of implicit contracts with firm stakeholders.
The article commences by outlining the main features of the PE model, and by summarising the extant findings from the literature on its effects on labour. It then provides details of the Myer buyout prior to outlining the main changes in pay, employment, work organisation and industrial relations. The final sections provide an evaluation of the changes overall, and a consideration of the implications of the case.
PE and labour management
PE can refer to all investments in unquoted companies, but is usually seen to refer to acquisitions of companies that are beyond the start-up stage by funds with a particular set of characteristics (see Wright et al., 2009). PE funds invite subscriptions by wealthy individuals and other institutional investors, but not usually retail investors. These investors are known as ‘limited partners’ of the fund. The funds are managed by ‘general partners’ who receive an annual management fee (typically 2%) from investor subscriptions and are entitled to 20% of the annual returns of the fund above a ‘hurdle’ rate of return (‘carried interest’). The capital accumulated within PE funds is used to acquire existing companies, such as divested subsidiaries, companies in distress and publicly listed firms (so-called ‘public-to-private transactions’). Typically, much of the acquisition price is met by loans (increasingly supplied by hedge funds and sovereign wealth funds), with this debt loaded onto the balance sheet of the acquired company and equity from the PE fund (or group of funds) making up the remainder.
The PE business model typically involves extensive restructuring of the finances and operations of the acquired company to prepare it for a resale or flotation in several years’ time. Advocates of PE argue that it achieves higher returns for owners by resolving the ‘agency problem’ between owners and managers (see Jensen and Meckling, 1976). It does so by enhancing the incentives of owners to direct the management of the firm, and typically by linking managerial pay to owners’ desired outcomes. It is widely argued that this unlocks ‘value’ for owners that hitherto has been expropriated by incumbent management for themselves and other stakeholders, such as labour (Jensen, 1989: 64–65). Concentrated PE ownership facilitates activist management, with the PE fund typically installing their own management team (referred to as ‘operating partners’ if they have some ownership stake) or nominees on the company board (see Appelbaum et al., 2012; Clark, 2009b; Folkman et al., 2009; Gospel et al., 2010).
The buyout literature suggests that buyout firms normally generate significantly higher financial returns than before they became private (see Cumming et al., 2007). However, the basis for these has been the subject of some debate. Some commentators suggest that financial engineering and arbitrage generate a substantial proportion of the gains, with value transfers coming from debt-holders, previous shareholders and taxpayers (Folkman et al., 2009). Others, however, suggest that much of the gains from PE arise from shifts of value from labour to owners (PSE, 2007). As such, PE reverses any flows of ‘free cash’ that managers have been directing to the labour force in the form of above-market wage rates or employment numbers (Jensen, 1989). Thus, PE is likely to be detrimental to labour. For instance, the Socialist Group in the European Parliament has argued that ‘as a rule, LBO investors very quickly begin to trim working conditions after entry in order to achieve greater efficiencies and productivity’ (PSE, 2007: 111). Appelbaum et al. (2012) argue that the PE business model encourages owners to renege on implicit contracts with stakeholders in order to maximise financial returns to the fund partners. More broadly, Clark (2009a) suggests that the PE business model usually requires a ‘downsize and distribute’ approach by management. These claims run in direct contrast to those of the PE industry itself, which portrays itself as a generator of employment (see Australian Private Equity and Venture Capital Association (AVCAL), 2007).
A growing body of empirical studies assesses the impact of PE ownership on various aspects of employment and work in buyout companies. Most evidence is from the US and the UK, but some information has also come from mainland Europe (see Gospel et al., 2010). Far from painting a uniform picture in terms of the impact of PE, these reviews indicate a diversity of outcomes in terms of employment, wages, work organisation and industrial relations in buyout firms (see Bacon et al., 2008; Davis et al., 2008; Folkman et al., 2009; Wood and Wright, 2009; Wright et al., 2009). Less clear are the factors that influence this diversity of outcomes, an issue we turn to shortly.
The issue that has attracted most attention is the impact on employment, with ‘sharply diverging assessments of the impact of PE on employment in the academic literature’ (Gospel et al., 2010: 24; see also Wright et al., 2009). The most comprehensive survey evidence from the US indicates that PE-owned firms restructure aggressively and consequently eliminate jobs (Davis et al., 2008), but also that employment grows in the years following this initial restructuring. A recent study by the same team shows that firm-level employment data mask significant shifts in workplace-level employment under PE ownership. While employment declines at existing workplaces once acquired, it grows faster than in non-PE comparators at newly opened workplaces (Davis et al., 2011).
Evidence from European countries also provides a mixed picture of employment effects. Amess and Wright (2007) find that employment in UK buyouts falls initially but then grows subsequently so that the net average effect is growth in employment. Cressy et al. (2007) find a similar pattern, suggesting that initial restructuring provides the basis for job creation. By contrast, Goergen et al. (2011) find a significant decrease in employment in PE-backed buyouts, but no subsequent improvement in company performance. So far, there is little systematic Australian evidence on this issue. Suggestions from AVCAL (2007) that PE ownership is associated with employment growth are often supported by evidence from studies conducted outside Australia.
There is also a diversity of evidence about the effects of PE on work organisation and HR practices. Some case studies find evidence of work intensification and ‘harsher’ HR policies (PSE, 2007), but other survey-based evidence finds a greater use of ‘high-commitment’ work practices. Amess and Wright (2007) find greater employee discretion in buyout firms than non-buyout firms, with important variations based on worker skill. It is also suggested that buyout firms do not reduce their spending on high-performance HR practices (Bacon et al., 2008: 1425). Bruining et al. (2005) find that buyout firms increase their use of high-commitment work practices, as indicated by more employee involvement, training and work flexibility.
In terms of union recognition and collective bargaining, some studies from the UK suggest a greater level of animosity towards unions among managers of PE firms, but there is no systematic evidence of de-unionisation post-buyout (Bruining et al., 2005; Thornton, 2007). When union recognition has been removed upon buyout, membership has often reverted to pre-buyout levels over time (Bacon et al., 2004). There are cases in the UK where union activism has forced re-recognition of unions by PE owners (Clark, 2009b). European survey evidence collected from managers of buyout firms suggests little change in the recognition of and attitude towards trade unions pre- and post-buyout (Bacon et al., 2010).
The diversity in evidence has often been attributed to selection effects and biases. Supporters of PE have argued that case studies of extensive change to employment and work practices tend to focus on companies already facing serious financial and market challenges prior to the buyout (Milne, 2008). They also fail to take account of comparable companies not in PE ownership that are also undertaking significant restructuring of work and employment. On the other side, those surveys that show favourable or neutral effects have been criticised for survivorship bias: those companies that go out of business or shut down plants after acquisition by PE do not show up in these surveys (Siegel et al., 2011).
The evidence suggests considerable variation between PE buyouts in changes to employment, work organisation and HR management (HRM). Some firms display dramatic changes to employment and labour management, and some do not. Given this, the key issue concerns the conditions that moderate the impact of PE. Why does PE have certain effects in some instances but not in others?
One possibility is that the extent and character of employment regulation constrains the capacity of PE to restructure acquired businesses. On the whole, more extensive change may be observed in countries where employment protection and legislation on employee voice is weaker, such as the US and UK (Bacon et al., 2010; Gospel et al., 2010). This may be because PE firms have more latitude to make changes and because the ex ante potential to make changes attracts PE to firms that may benefit from restructuring. Bacon et al. (2010) argue that the impact of PE is shaped by particular national institutional and social models and it does not necessarily threaten practices of worker participation where such practices are entrenched. Where employment and industrial relations regulation is weakened, as in the case of Work Choices in Australia, there would appear to be the potential to make substantial changes to employment, HRM and industrial relations.
The second possibility is that the effects of PE on labour are likely to differ between cases where firms are in distress and those where firms have significant growth opportunities. In the case of the former, the financial pressures to transfer value to PE funds and their partners may indeed lead to breaches of implicit contracts, as highlighted by Appelbaum et al. (2012). By contrast, where businesses are acquired with strong positive growth prospects, greater value may be transferred to investors without substantial change to employment and HRM. Alternatively, there may be extensive changes to labour management, but these may have positive as well negative effects on labour.
A third potential moderating factor is the nature of work and the character of its contribution to value generation. As has been emphasised in the sociology of work and high-performance work systems literature over many years, there are limits to the extent to which work can be intensified or deskilled when value creation requires employee commitment and discretionary effort (Appelbaum et al., 2000). Some types of production, such as those requiring high levels of employee knowledge or extensive interface with consumers, benefit from high levels of employee commitment. In these contexts, PE takeovers might lead to greater use of high-commitment work practices, given that they often lead to the installation of new, professional managers. Although the literature suggests, on average, a greater use of high-commitment work practices after PE buyouts (Bloom et al., 2009; Bruining et al., 2005), the circumstances in which these are found is not yet clear. It is also not clear to what extent these practices are distributed uniformly among the workforce.
Case study of the Myer buyout by PE
The volume of venture capital and PE funds increased dramatically in Australia during the mid-2000s (see Thomson Reuters and Australian Private Equity and Venture Capital Association Limited, 2008: 2). Similar to the US, the UK and Europe (see House of Commons Treasury Committee, 2007; Watt, 2008; World Economic Forum, 2008: 17), buyouts of public companies represented an increasing proportion of PE transactions in this period (Reserve Bank of Australia (RBA), 2007).
In the remainder of the article, we focus on a large PE buyout in Australia – the acquisition of Myer Pty Ltd by a PE consortium headed by the Asian branch of Texas Pacific Group (TPG) in 2006. Several factors explain the choice of this case. First, the liberalisation of industrial relations arrangements in the mid-2000s under the Work Choices initiative gave the new PE owners considerable scope to force extensive changes to employment and industrial relations policies and practices. Second, from the outset, the PE fund and its new managers emphasised their intention to grow the business. However, they also embraced initiatives that have been widespread in retail buyouts, such as property sales and leasebacks. These have proved challenging for the finances of many retail buyouts, and have led in some cases to powerful pressures on prevailing patterns of employment and industrial relations (as in the case of Mervyn’s stores; see Appelbaum et al., 2012). Third, since retail work involves face-to-face interactions with customers, employee attitudes and behaviour can have a substantial impact on revenue streams, especially if the company sells ‘high-end’ goods and wants to position itself in upper segments of retail markets. In these circumstances, a need to engender employee commitment and encourage discretionary work effort may require different labour and HR practices from those that might be associated with tightening financial and operational pressures.
This is an exploratory case investigated using an iterative process of data-gathering and analysis. Access was gained through the Chief Executive Officer (CEO), Bernie Brookes. He was the key informant throughout the study. While this reliance obviously creates verification issues, the CEO provided a high level of cooperation and openness. To verify this information, documents in the public domain were interrogated, including primary company documents, multiple years of financial results of both Myer and its parent company, and current and previous certified agreements. This data was bolstered and checked against data gathered by interviews with a small number of other key informants. An interview was conducted with the Federal Secretary of the Shop, Distributive and Allied Employees Association (SDA), which represents retail workers in Myer, and further information was sourced from the Australian Services Union (ASU), which represents clerical workers at Myer. 1 Interviews were also conducted with the Human Resource Director of David Jones, Myer’s closest retail competitor. Interviews were also conducted with financial analysts responsible for monitoring the Australian retail sector. 2 These multiple data sources allowed for triangulation and verification of data, and enabled a comprehensive picture to be built of the labour management and financial position of the company post-buyout.
The Myer buyout and management strategy
Myer has been operating retail stores in Australia since the beginning of the 20th century. The company was initially registered on the Australian Stock Exchange (ASX) in 1925 (Barber, 2008). It expanded its retail operations over the first half of the 20th century and began to diversify operations from the later part of the 1960s. Myer consolidated its position as Australia’s largest full-line department store retailer with the acquisition of Grace Brothers in 1983. However, the early 1980s’ recession had a significant effect on Myer’s profitability and contributed to the decision to merge with Coles Pty Ltd (a grocery retail company) in 1985. In 2001, following a decade of some turbulence for the Coles-Myer group, a new CEO was appointed who set about implementing a five-year turnaround plan for the company. The Myer segment of the company reported mixed success following these changes. While the contribution of Myer to the overall group is difficult to isolate, the annual reports between 2003 and 2006 show an overall decline in revenue from sales during this period, and following a significant increase in earnings before interest and tax (EBIT) and profit in 2003 and 2004, both declined in 2005 (Coles-Myer Ltd, 2003, 2004, 2005, 2006a).
The Myer segment was formally offered for sale in December 2005. In March 2006, Coles-Myer announced the sale of Myer to a PE consortium dominated by Newbridge Capital (with the Myer family retaining a small stake) for AU$1409 million. 3 The consortium acquired 61 stores located in all six Australian states. The workforce at the time of acquisition was around 22,000 (Coles-Myer Ltd, 2006b). The acquisition was funded by approximately AU$1000 million of debt and AU$400 million of equity, a gearing ratio of around 70:30. After taking control in June 2006, the new Myer owners raised AU$242.96 million through a corporate note issue in September 2006, which was used to pay down subordinated debt (Myer Group Pty Ltd, 2008a).
The new owners set about implementing a ‘turnaround’ strategy for the company. Their strategic objective was to improve operational effectiveness and then expand the business. Upon taking ownership, the Executive Chairman of Myer made a public undertaking not to sell any of the 61 stores, stating that the new management team would focus on improving customer service and building the business (McMahon, 2006). At the same time, the company embarked on ‘101 business improvement projects’ to increase operational effectiveness (Myer Group Pty Ltd, 2007b). Subsequently, several new stores were opened, but with two stores being closed.
While more cost-effective labour utilisation was a crucial element in the management’s plans, it was just one of several initiatives to increase the financial value and operating profit of the company. One of the first initiatives was to reduce accumulated stock by mounting a clearance sale to increase revenue. In order to build repeat business, it also extended the company’s customer loyalty scheme, ‘Myer One’. This scheme enabled the company to collect information about customers’ spending habits and to develop initiatives based on this data. Management subsequently refined the products stocked in each store. By using more systematically collected data about customer purchases, the management was able to differentiate between different segments of the market and thus to offer different products in different stores.
A major part of the business improvement programme was a reduction in the costs of running the business. This was achieved by integrating sales and supply data obtained by the introduction of new information technology (IT) systems, and reducing supply time to stores. The most significant operational change was to the supply chain. Supply was streamlined across Australia, with the replacement of 34 small distribution centres with four new regional distribution centres in Brisbane, Sydney, Melbourne and Perth. This initiative maximised ‘cross dock’ movement and minimised ‘put away’ storage (Myer Group Pty Ltd, 2007c: 9; Retailtimes, 2008). The company also increasingly used roll cages to bring merchandise to stores, allowing goods to be pre-packaged and with pricing information already attached. These changes, combined with the engagement of new contractors to transport goods from China, dramatically reduced supply times and costs (Myer Group Pty Ltd, 2008b: Retailtimes, 2008). The amount of storage space in stores was also reduced to provide more room for product display (Pyne and Mitchell, 2009: 41). New company-specific IT systems (necessitated by the separation from Coles) allowed for greater integration of information between stores, suppliers and distributors.
Myer management also initiated closer relationships with suppliers, seen by some as imposing greater discipline on suppliers, and this had a substantial impact on costs and inventory control (Myer Group Pty Ltd, 2008b; Washington and Carson, 2007). The company reduced the number of its suppliers and developed an IT platform that better controlled supply arrangements. However, it complemented these ‘hard’ initiatives with ‘supplier of the year’ awards for various categories of suppliers, presented each year at a gala ball. This contrasts with the approach adopted by the PE owners of Mervyn’s department stores in the US, where the relationship with suppliers deteriorated (Appelbaum et al., 2012). The changes to operations, along with the staffing initiative discussed later, resulted in an average 25% to 30% increase in the value of revenue from sales per employee (Myer CEO, personal communication, 2010).
The supply and IT changes were accompanied by a modified approach to the management of the labour force within the company. The following sections analyse the changes to labour management, focusing on incentives, workforce management flexibility and industrial relations.
Changes in labour management
Incentives
PE is notable for enhancing incentives in its acquired companies (Bloom et al., 2009), and Myer is no exception. The company instituted new performance and reward systems for both senior executive management 4 and lower-grade management. These programmes – a stock option and a profit-sharing reward scheme – remained in place following the company’s refloat. Both were organised around organisational and individual targets, though with a greater emphasis on individual performance. While the performance of all staff in the organisation is subject to an annual performance appraisal, only management have some part of their remuneration contingent upon performance. Senior executive staff were eligible for the stock option plan (the Myer Equity Incentive Plan) established ‘to help ensure retention of senior management and to provide incentives for Directors and Senior Executives to deliver both short and long term shareholder returns’ (Myer Group Pty Ltd, 2007a: 51). Rewards were triggered by achievement of earnings per share targets, with options granted to senior staff once the target was reached (Interview, 9 July 2010). The number of options, value of these options and number of managers participating in the scheme all increased between 2006 and 2009 (see Myer Group Pty Ltd, 2007a: 52; 2008a: 47; 2009: 46). In 2009, the plan was expanded to include over 350 managers outside the senior executive group, with, on average, around two managers per store eligible. Prior to TPG’s buyout, there was no share-based remuneration for these managers.
The new owners also rewarded individual managerial performance with a short-term incentive programme (which also continued after the company’s refloat). All salaried staff (around 1600 employees) had an at-risk component included in their remuneration. Each financial year, targets were set for these staff in four or five areas. Two related directly to sales and profits, while the others related to activities within the particular manager’s portfolio. This scheme gave these staff the opportunity to earn bonuses significantly in excess of their base salary. Access to the short-term incentive bonus pool was in addition to the annual performance appraisal system used to adjust base salary. There were a small number of managers who achieved over 100% of their bonus pool (around 40% of their base salary) between 2006 and 2009. In addition, there were ‘one or two that have earned more in at risk remuneration than they have in base remuneration’ (Myer CEO, personal communication, 2010).
Myer’s top management sought to link performance to specific tangible measures and make managerial staff accountable for their performance. In the event that management personnel consistently failed to meet their specified targets, they were paid out and removed (Myer CEO, personal communication, 2009). The CEO publicly recognised the emphasis on performance, particularly at senior levels, stating: if deep down in your tummy you know someone is not right for the job, it’s a lot cheaper to take them out than it is for them to hang around and make a mess of your business. That mentality, as ogreish as it sounds, is what private equity is all about. (Washington and Carson, 2007: 43)
Although the incentives for managers were highly focused on aligning managerial interests with those of owners, the company also provided a package of benefits for employees aimed at enhancing commitment and identification with the company. Notably, Myer was the first major retailer to introduce a paid parental leave scheme for permanent employees in March 2008. 5 Other employee benefits were packaged under the umbrella of the ‘Myer for Me’ programme. This bundled a range of services, often provided by Myer to their customers, at a staff discount. It included a staff discount card, a reduced interest rate Myer credit card, access to wholesale price travel through the Myer travel office and discounts on health, home and car insurance. The company also offered prizes and rewards for performance considered by management to be outstanding. The general approach of the company was that ‘[any new business initiative] that we introduce must have a better than average benefit to our staff’ (Myer CEO, personal communication, 2010).
The company also introduced incentive rewards for retail staff. They created an ‘inspirational people award’ and a ‘high-performance club’ award, which rewarded employees with gift cards and prizes, such as overseas holidays. There were also one-off rewards for employees deemed by management to have made an exceptional contribution to corporate performance. These achievements and rewards were recognised at presentation ceremonies and were communicated to the workforce through the in-store TV channel. The company also re-established a graduate and store management development programme, which aimed to identify and develop employees for future store management responsibilities. In a retail environment where committed and knowledgeable staff contribute to customer satisfaction, these practices were designed to elicit and reward high performance.
Workforce management and flexibility
The spread of performance-based rewards at Myer is consistent with the observations made in the PE and buyout literature. Yet, as shown earlier, Myer management also implemented policies designed to encourage commitment and performance from their waged staff. At the same time, achieving improvements in efficiency and labour utilisation was an important objective for the operating partners. This section outlines the main changes in these areas.
Using the workforce more efficiently and effectively was an important component of the turnaround phase of the business plan. During the due diligence period, TPG’s operating partners developed a model for restructuring labour usage in order to improve cost-effectiveness. Part of this process involved an analysis of employment numbers and job roles in each store. With the aid of consultants, the optimum number of employees per store was calculated for different times of the day and different days of the week. This model was referred to as the ‘soup bowl’ (Myer CEO, personal communication, 2009). The model required a redeployment of some staff from non-service to service areas, as well as a bundling together of some clerical and retail tasks and alteration to staffing rosters. The new owners were able to introduce these changes under the terms of the collective agreement in place when they acquired the company. They took further steps to consolidate this flexibility in rostering and staffing when renegotiating the collective agreement with the union representing retail staff.
One result of these initiatives was a significant decrease in employee numbers. Upon acquiring the company in 2006, the workforce totalled approximately 22,000 (Coles-Myer Ltd, 2006b). In 2007, Myer reported that it had around 20,000 employees (Myer Group Pty Ltd, 2007c: 16). Staffing levels in 2009 were estimated at around 17,200, with seasonal fluctuations (Interview, 9 July 2010). This reduction in overall staffing levels – around 5000 – is confirmed by the reduction in employee benefit expense reported in the accounts (Myer Group Pty Ltd, 2007a, 2009). Between 2006 and 2009, the number of Myer stores grew from 61 to 65 (including two store closures), meaning that stores were now operating with a lower number of staff, particularly casual workers. This outcome is consistent with the observations of Davis et al. (2011: 33) that PE owners are ‘agents of restructuring’, whereby they ‘accelerate the reallocation of jobs across establishments within target firms’.
This reduction in staff numbers was managed largely without forced redundancies. Staff turnover increased in the first two years after acquisition, with the management’s increased emphasis on employee performance having a strong selection effect. The company began rehiring after July 2007 (Myer Group Pty Ltd, 2007c). In 2008, the company announced 115 forced redundancies (less than 1% of the workforce), which were explained as a response to the changed retail trading conditions resulting from the global financial crisis (Myer, 2009: 4). 6
Industrial relations
The expiry of the collective agreements covering waged workers in 2007 occurred in circumstances whereby the new management could have attempted to force through significant changes to employment conditions and effectively de-recognised the unions covering their employees. The Work Choices legislation, which came into effect in 2006, created an opportunity for management to restrict union bargaining, or indeed introduce individual contracts (Westcott, 2009). While the company considered individual contracting for employment conditions, this was not their preferred option (Washington and Carson, 2007: 43). A non-union collective agreement for Myer store employees was also considered, but judged not to be cost-effective. Instead, management chose to negotiate a new collective agreement with the SDA (which represented the retail staff). Even though the bargaining climate was framed by the restrictions on union activity introduced by Work Choices, the SDA entered a relatively collaborative relationship with Myer management (SDA Federal Secretary, personal communication, 2006).
Myer finalised an agreement with the SDA in September 2007. 7 This agreement was notable for both ensuring the conditions of current employees and providing management with increased flexibility in the employment of their workforce. It did this by establishing a separate set of arrangements, contained in Part Two of the agreement, for new employees. The agreement contained a series of annual pay increases consistent with the average national wage growth for 2007 (Australian Bureau of Statistics (ABS), 2007: 1). There were no changes to rostering arrangements, spans of hours, overtime entitlements or the definition of job roles for existing employees. However, Part Two of the new agreement provided a single occupational classification, which combined into one position many of the tasks that were assigned to two higher-level positions in Part One of the agreement. The base payment rate for this classification was the same as the Level 1 classification in Part One. Part Two of the 2007 agreement also allowed for slightly longer maximum working hours and for employees to be rostered for up to seven consecutive days, as opposed to five. These provisions, along with the increase in the number of days worked in a four-week cycle, allowed the company to roster permanent employees over weekends, reducing their reliance on casual employees. Penalty rates and overtime provisions remained almost identical in both parts of the agreement, suggesting that reducing unit labour cost was not a priority. Nonetheless, a reduced reliance on casual employees would decrease the overall wages bill. Part Two of the 2007 agreement applied only to new employees and employees (new or old) who took up work in newly opened stores. Although average tenure among the labour force at Myer was reasonably long (estimated at eight years), the company had a relatively high staff turnover rate of over 20% per year. Consequently, a growing proportion of employees came to be covered by Part Two of the 2007 agreement.
Discussion
Notes: FY – Financial year.
2005 financial year figures from Coles-Myer Ltd (2005).
2006 net profit and revenue from sale of goods figures are a combination of those reported in Myer Group Pty Ltd (2007a) and Coles-Myer Ltd (2006a).
2006 Retained profits and capital commitment figures are not full financial year figures.
Sources: Coles-Myer Ltd (2005, 2006a); Myer Group (2007a, 2007c, 2008a, 2008b, 2009).
As Table 1 illustrates, Myer sales revenue initially increased, but then declined slightly for most of the period of PE ownership. Revenue growth was lower than the rate of inflation. However, profits and profitability increased substantially and at a greater rate than revenues. The increase in profits can be attributed largely to cost reductions, as shown by the declining proportion of the cash costs of business. The debt position of the Myer Group did not deteriorate and the net debt of the parent company (NB Flinders) fell over the period. Profits do not appear to have been taken out of the company, with retained earnings increasing each year by about the same amount as profit reported. During 2007, the company sold its central Melbourne retail site, with the proceeds of this sale largely distributed to owners – AU$235 million returned to Myer owners and AU$364 million to NB Flinders in August 2007. At the same time, a dividend of AU$196 was paid to NB Flinders’ owners. In all, AU$795 million was paid out to owners of Myer and NB Flinders during PE ownership.
Part of the reduction in costs during the period came from reductions in the wages bill. Although average wages changed little, the company reduced the workforce, mainly through labour turnover, and effected a restructuring in employment profiles across each store such that fewer employees were required. There was some substitution of more expensive staff by slightly cheaper workers. Waged workers employed before 2007 experienced no reduction of employment conditions; however, waged workers employed after this time were engaged on a more flexible, and marginally nominally lower, occupational position (as there was only one occupational grade). This flexibility, as well as a reworking of rostering arrangements, resulted in Myer achieving a leaner staffing profile across its retail stores. At the same time, Myer management extended a number of benefits to its waged workforce. These initiatives came at an operational cost to the company, offsetting cost gains made in other areas of labour management. Nevertheless, the ratio of employee benefit (expense) to revenue declined over the period of PE ownership from 17.6% in 2007 to 15.9% in 2009 (Myer Group Pty Ltd, 2007a, 2008a, 2009).
Although labour management featured as an important element in the Myer ‘turnaround’ plan, it was not the most significant factor in releasing value. Cost reductions attained through the operational changes described earlier contributed significantly to profit generation. In explaining the large growth in sales turnover per employee, the company CEO set out that this has ‘been because we’ve got better IT systems, better supply chain systems, some [is also] … because they’re [employees are] working harder and smarter’ (Myer CEO, personal communication, 2010).
This case contrasts with other case studies of PE ownership, such as that of department store Mervyn’s in the US. This company experienced severe financial pressures as a result of PE ownership, which led to important breaches of implicit contracts with a range of stakeholders (Appelbaum et al., 2012). Myer has some similarities, however, with another retail case reported by Gospel et al. (2010) – that of DinoSol supermarket in Spain. Several similarities are notable: the greater use of incentives; a reduction in employment achieved largely through natural wastage; a shifting from casual to permanent employment conditions; and the reliance on existing forms of labour representation.
A key question is why labour management changes and continuities at Myer took the form they did, given the widespread prediction that PE can lead to adverse effects on labour. The Myer case suggests that the business strategy of the company, as influenced by the objectives of the PE fund, has a significant moderating effect on outcomes. In this case, the owners and management identified significant opportunities to improve operations and to grow revenues. During the ‘turnaround’ phase of the business plan, the company’s balance sheet remained sound, with strong profit growth, which was largely retained in the business. Financial pressures from PE ownership, such as those arising from leverage, were not as strong as experienced in some other PE buyouts. This, in turn, muted the pressures on labour.
An important factor was the mid-market positioning of Myer’s department stores. Increases in revenue were to some extent dependent on standards of customer service: major attacks on employment conditions, and breaches of implicit contracts, would have potentially had powerful adverse effects on customer service, and hence on sales revenue. Indeed, polling by a market research firm showed that Myer customer satisfaction increased from the beginning of 2009 after being relatively stagnant for the two years previous (Roy Morgan Research, 2009). Employee consent and commitment was viewed as desirable in this service industry setting, hence the introduction of various new rewards for staff, the shift from casual to permanent employment conditions and the reliance on collective forms of labour representation and voice.
Also significant in this case is that managers and owners did not take the opportunity to use the new industrial relations possibilities allowed for by the Work Choices legislation. Instead, they decided to seek reforms to employment conditions through existing collective bargaining arrangements. Recent literature has suggested that the nature of labour regulation has potentially important effects on the capacity of PE to breach implicit contracts (Bacon et al., 2010; Gospel et al., 2010). The evidence suggests that PE adapts to the systems of labour regulation in place where it operates. It might be anticipated that the conjunction of the PE buyout of Myer with the introduction of Work Choices would have resulted in major changes to industrial relations procedures, and the terms and conditions of employees. But Myer management retained existing forms of employee representation. This case suggests, therefore, that the willingness of PE to take advantage of weak labour regulation will be influenced by company business strategy and profitability.
Conclusions
This article has analysed the management initiatives introduced by TPG following its buyout of Myer. This discussion has been framed in the buyout and PE literature, which has developed primarily in the UK, US and Europe, and focuses on the employment and industrial relations changes arising from PE ownership. This literature reveals that there is not a consistent set of employment relations consequences that follow a PE buyout. Such a result is unsurprising as the assumption that management installed by PE owners would install similar sets of labour management policies is highly deterministic and overlooks the role of agency and contingency. However, what is characteristic of PE is a focus on releasing ‘value’ to fund owners and this priority acts as the basis for operational and financial decisions. In this sense, PE is ‘unideological’ and unsentimental (Watt, 2008: 562).
The evidence from the Myer case suggests that increases in operating profits and the payment of dividends to fund owners resulted without a significant transfer of rents away from labour. Employees have benefited from some improvements to rewards, though increases in remuneration for some employees have been strongly linked to achievement of performance targets. Industrial relations processes and relationships with collective labour remain relatively unchanged, though there have been changes to employment conditions for those new to the company. However, the case also suggests that treating labour as a homogeneous category may be problematic. The evidence from Myer indicates that some trade-off has occurred between the interests of current employees and those of future employees, and that there has been some shifting between casual and permanent employment categories. Overall, the evidence from this case is consistent with the view that PE firms are neither ‘angels nor demons’ in their impact on labour (Lutz and Achleitner, 2009).
The Myer case also has some more general implications. While there is a generalised requirement to transfer value to fund partners within the PE business model, and some of this transfer may come from labour, the manner in which this is achieved, as well as the targeting of labour as a source of value, are moderated by the nature and success of the business strategy adopted by the operating partners, and the nature of workforce contribution to value generation. If operating partners adopt a business strategy of growth (often accompanied by increases in operational effectiveness), and if employee commitment and consent is instrumental to the achievement of such a strategy, then the labour force may not be ‘leveraged’ in order to release value. The Myer case suggests that these moderating factors may be more important than the regulatory environment. In this case, there was the opportunity to take advantage of a significant weakening in protections for collective labour representation to change industrial relations procedures and employment conditions. But, on the whole, this opportunity was not taken, and the approach remained mainly conciliatory and incremental. Overall, this suggests that while the regulatory environment may shape management actions in PE buyouts, the perceived ‘needs of the business’ are more important. The business strategy, the state of the business and the nature of labour’s contribution are all key influences on what happens to labour after PE buyouts.
Footnotes
Notes
Funding
This research received no specific grant from any funding agency in the public, commercial or not-for-profit sectors.