The Great New Zealand Carpet Bag Company

THE GREAT NEW ZEALAND CARPET BAG COMPANY

A KIWI SUCCESS STORY?

Patrick was standing in Bart’s office on the 12th floor on the prestigious Plaza Tower

Centre. He had his back to Bart and was looking out of the large ‘picture’ windows at

a flotilla of yachts with rainbow coloured sails passing under the Auckland harbour

bridge. It was another beautiful clear day – totally out of keeping with the way he was

feeling. He turned to Bart and said ‘We have come a long way in five years, don’t lets

fall out now. Bring in this consultant of yours and let’s see what we can salvage out of

this mess’.

THE BEGINNING

Five years ago Patrick Chong, a newcomer to New Zealand, had joined in partnership

with his next door neighbour Bart Simpson. Bart had been the manager of a small

branch of the Bank of New Zealand but had recently taken voluntary redundancy.

Bart had $200,000 which he wanted to invest and was looking for a business

opportunity. Patrick had been a manager of a factory making hand bags in Beijing

and, although he had little capital, he also was looking for a business opportunity.

Bart had no manufacturing experience, but believed that he would be a good sales

person. Bart had for a long time had an interesting idea of using off cuts of carpet to

make hand luggage. He had explained this idea to Patrick when chatting together

over the back fence. They decided to pool their strengths and to manufacture and

sell hand luggage made out of carpet. Thus the Great New Zealand Carpet Bag

Company was born.

After some investigation and preliminary planning they had leased a large disused

warehouse at a very cheap rental in Huntly. Huntly is 100 kilometres south of

Auckland and is on the bank of the Waikato River. Huntly was originally a coal mining

town but mining ceased some years ago and today it is a very pleasant clean rural

town. It is also the home town of the Maori Queen. The local borough council were

keen to attract new industry to Huntly so as to offset high unemployment and to

arrest the tendency for young people to move north to the metropolis of Auckland.

The advantages of locating in Huntly for Bart and Patrick were cheap rent and energy

costs, location on the main trunk rail way line, and plenty of labour. For Patrick the

extra advantage would be cheap housing and a good small town life style for Ting

Ting his wife and their children. Bart decided to stay in Auckland where his children

were already established in schools and of course Peggy his wife was not keen to

move from her golf and bridge clubs.

Case Study #4: Carpet Bag

From the start it was agreed that the partnership would be equal in all ways but for

each man to have clearly defined responsibilities. Patrick was to arrange all the

resources required for the factory including purchase of plant and equipment and

recruitment and training of labour. He was also responsible for liaison with the local

authorities. Bart was to be responsible for marketing and selling and for the

negotiation with suppliers of materials from contacts he had made in his banking

days. He was also responsible for accounting and tax returns etc. To begin with they

started with a staff of six people besides themselves; four machinists and one cutter

in the factory with Patrick, and one administration assistant working with Bart from

an ‘office’ in his home.

THE FIRST TWELVE MONTHS

In the first twelve months the Great New Zealand Carpet Bag Company grew at a rate

that completely bemused both men. They were both working twelve hour days and

both were thoroughly enjoying the challenges and excitement.

Once the first dozen or so bags had been made Bart took samples to several large

department stores in Auckland and across the Tasman Sea in Melbourne and Sydney.

The store ‘buyers’ were most enthusiastic at the novelty value of carpet as a

material, and impressed with the obvious high quality of the bags and the price. (Bart

had purposely set the price at 10% below the wholesale price of other comparable

bags). Large orders were received in the first month of operations and Patrick had to

gear the factory up accordingly. The partnership had to go into debt to finance from

the buyers. On the strength of the forward orders Bart had no trouble in convincing

his old bank to provide the funds required.

Some of the early problems were:

Suppliers were not always reliable

Some machinery proved to be light weight and had to be replaced

The factory could not keep up with demand

Bart in his enthusiasm promised early deliveries without consulting Patrick

Bart committed the partnership to large expensive offices in down town Auckland

without consulting Patrick.

Patrick leased new machinery through a finance company without advising Bart.

(Bart could have arranged a far better lease deal with the bank).

Despite all these problems, most of them brought on by the need to react quickly to

get things done, at the end of the first twelve months the partnership was working

remarkably well and both men and their families were still good friends.

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Due to the unreliability of suppliers the factory developed a practice of stock piling

raw materials. Patrick also aimed to build up a stock pile of finished goods (in fact it

was three years before he achieved this). Patrick and Bart both agreed that quality

could not be compromised and Patrick trained workers to accept responsibility for the

quality of their work. Patrick was however continually frustrated with the erratic

delivery of materials from local suppliers. He kept suggesting that they import

materials even though this would mean longer lead times and even bigger stockpiles.

Bart however refused to do this, he steadfastly retained the responsibility of

negotiating suppliers and prices. Bart believed in loyalty to his supplier friends.

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The suppliers claimed to Bart that they did their best but;

Orders received from the factory were frequently by word of mouth.

Orders were always ‘panic’ orders.

Often the factory did not clearly state what they wanted (specifically colour,

quantity and delivery dates).

When they tried to ring the factory to clarify what was required Patrick would

become excitable and was often hard to understand and further misunderstanding

would occur.

Bart maintained his original policy of keeping the price below the competition,

however he was a little concerned to note that The Great New Zealand Carpet Bags

were actually being retailed at a price higher than the competition, this was

especially so in the Australian stores.

THE RISE AND FALL OF THE CARPET BAG

The initial demand and success of the carpet bags exceeded all the expectations of

the partners. By the end of the first three years the operation had expanded to the

extent that the factory employed 120 people. New equipment had been leased

including state of the art laser cutters. The factory was still housed in the original

warehouse, but extra space had been leased for storage. Patrick was still working

long hours and was still battling with the suppliers. The ‘good’ news was at last the

factory had caught up with demand and he was now able to supply orders from stock.

Patrick was so busy that he hadn’t visited ‘head’ office for over twelve months, but

once a month Bart dropped in to see him. The accounting and administration was still

done in Auckland where the office staff now totalled 80 people, Patrick wondered if all

these people were really necessary, but Bart assured him that they were and hinted

at exciting new developments for year four.

The 80 office staff includes the Marketing Manager Jude Nye, the Sales Manager

Tracey Simpson (Bart’s daughter), The Accountant Charlie Chong (Patrick’s oldest

son), the Human Resource Manager Hinemoa Henare, the Information Technology

Manager Zinzan Fitzpatrick, and the Purchasing Manager Freddie Starr. The office

staff are young, friendly and enthusiastic, and like to entertain clients and the major

suppliers. Towards the end of year three Bart was only dropping into the office for a

few minutes each day. On Fridays Bart and Peggy would join the ‘Head’ Office

managers for drinks and dinner at one of the more fashionable cafes. The Great New

Zealand Carpet Bag Company always paid for the bill.

Despite the Head Office extravagances the business showed a healthy profit for year

three. During the year the bank had been happy to increase the loan to partnership.

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Although the interest rate was higher than Bart would have liked he had no real

option but to accept the banks terms.

In year four the demand for the carpet bags levelled off and towards the end of the

year there was a noticeable drop in orders. During this year The Great New Zealand

Carpet Bag Company opened six of its own retail ships in the main cities of New

Zealand and Australia. It transpired that this was the ‘big thing’ which had been

hinted at by Bart to Patrick. The retail stores were not as successful as hoped but

they did manage to breakeven for the last month of the year. Also during year four

the factory, at Patrick’s initiative and to use up spare capacity, began manufacturing

‘conventional’ luggage (not using carpet). Again the emphasis was on high quality

and in keeping the price below the competitors. This new line was reasonably

successful. By the end of year four there were still 120 people working at the factory,

buy unlike previous years no overtime was being worked. The finished goods store

had an estimated six weeks of stock on hand. The office (due to the need to manage

and market the retail stores) had grown to 95 people, and the number employed in

the retail stores totalled 25. The profit for year four was less than in year three.

For the first six months of year five the retail stores continued to stutter along; some

months a small profit others a small loss. Also during this period the demand for

carpet bags almost dried up, but this was to some extent offset by the steadily

growing demand for the ‘conventional’ luggage. Patrick was beginning to get worried.

Had now had a large stock of carpet bags, and had ceased making them, he also had

at least one months supply of ‘conventional’ luggage. The factory obviously now had

an over capacity in people but he was reluctant to lay anyone off. Instead he had

reassigned some workers to painting the factory, and had begun a process of closing

parts of the line for overhaul and maintenance, although in his heart he knew that the

work being done was not strictly necessary.

Then in the seventh month Patrick was amazed to find a container outside the factory

full of carpet bags returned from a department store chain in Australia. On contacting

Bart he was shocked to learn that all ‘sales’ to the Australian stores were on a return

basis. Bart explained that the deal he had made (when the business was just

beginning) was that stores only paid when they had sold the goods and they had the

option to return the goods if they hadn’t sold after three months. He believed he had

done a good deal because the Stores had agreed to pay the return freight. Over the

years he had seen no need to change the arrangement.

In the first year of sales obviously there had been no problem with this arrangement

as demand was outstripping supply and cheques were being received at regular

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intervals from the stores. No one had foreseen that the Carpet Bag was a novelty

item and that the meteoric growth would be followed by an equally meteoric decline.

In months eight, nine and ten of year five, further smaller consignments of carpet

bags were returned. However the demand for the ‘conventional’ luggage was still

slowly but steadily increasing and Patrick was still building to stock. Apart from the

large number of carpet bags on hand and a small supply of raw materials for carpet

bags, he now had two months stock of finished ‘conventional’ luggage with about one

month of raw materials. Spare staff were being employed to landscape the grounds in

which the factory and store were set. Factory numbers due to natural attrition were

down to 108.

THE CRUNCH

It is now the last month of year five. Bart has just told Patrick that the Bank is

pressing for the repayment of the loan. Patrick is shocked to find that the amount

owed is $2,000,000. Bart says the bank is prepared to agree to an arrangement of

repayment over two years providing $500,000 is paid within seven days. He suggests

that they both mortgage their homes to do this. He is confident that they can trade

out of the situation and he has hired a consultant to look at the company and to

advise them on what they can do to turn the organisation around.

Patrick turns away from the view of the bridge, the yachts, and the sparkling

Auckland harbour and says ‘We have come a long way in five years, don’t lets fall out

now. Bring in this consultant of yours and let’s see what we can salvage out of this

mess’.

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The Great New Zealand Carpet Bag Company

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