Red alert

Ian Morrice, newly installed chief executive of New Zealand's largest retailer, The Warehouse, is short of time.

Only after much negotiation did the Weekend Herald secure an interview, and then it is to be conducted in two parts. The first will be a 10-minute chat during a photo session at the group's Northcote headquarters.

Two days later the Scottish-born executive would call us from a taxi as he travelled across Sydney. (As it turns out, Morrice, who took the reins at the start of last month, got into work early and called from the Sydney office.)

It is no wonder.

The day of our first encounter, Tuesday, Morrice disclosed that first-quarter, same-store sales at the New Zealand "red sheds" - the engine of profitability - had dipped 2.6 per cent against the same period last year.

The news shocked investors, who instead had been bracing themselves for more bad news from The Warehouse's struggling Australian "yellow sheds". The share price tumbled over the next couple of days to as low as $3.73, a five-year trough. It recovered yesterday to $3.79.

Meanwhile, retail sales figures out yesterday showed that the fall occurred when total New Zealand retail sales rose 2.4 per cent - the highest quarterly rise since the June quarter of 1997.

If anyone should have been growing in such a benign environment, it should be our biggest retailer.

On the day of the figures, The Warehouse blamed the late onset of spring, which hit clothing sales. Meanwhile, customers spent more on fridges, freezers, televisions and furniture, the so-called consumer durables that do not typically figure prominently on the shelves of the 85 red sheds.

Sitting in his second-floor Northcote office overlooking the Waitemata Harbour, Morrice, the former boss of the successful British DIY chain B&Q, looks relaxed despite the pressure. His orange B&Q apron has been exchanged for the obligatory red Warehouse shirt.

He says later from Sydney that he is making the most of his temporary separation from his wife and three children, who are to join him in New Zealand in the new year. "I'm travelling a lot and focusing on understanding the business. I'm enjoying myself."

Morrice is candid about the group's problems. He seemingly pays little heed to the sensibilities of his predecessors, founder Stephen Tindall, who was in control for most of the past year, and Greg Muir, now heading childswear retailer Pumpkin Patch.

Problems linked to The Warehouse's years of rapid growth have come home to roost. The stores have grown haphazardly, making it hard for customers to find what they are looking for.

"I've been in some stores that have been extended four times in five years ... When you get into these big spaces, and our stores are among the biggest in the country, it can be difficult for people to find their way around."

Even the relatively new Albany store, the only one The Warehouse would allow us to photograph inside, suffers from these problems.

Meanwhile, the red sheds are often located away from other shops. This means customers have to make a special trip rather than stopping off when they do their weekly shopping.

"A customer would typically visit their grocery shop three or four times as often as they'd visit The Warehouse."

Morrice is an old hand at developing store format - his first job was as a trainee at British appliance retailer Dixons.

"The format will need to be looked at, not in a piecemeal way but in a new and radical way," he promises.

He plans to cherry-pick aspects of retailers such as Tesco, WalMart and his old employer B&Q to breathe new life into the red sheds.

Stores will become less cluttered with pallets of stock and piles of merchandise. They will also become more focused on customer needs.

"Up until now we've had a push model. We push the stock out to stores and the stores find a way of compelling customers to buy it. There's no reason we can't be in a pull system, which means we can have significantly less stock in the stores."

The Warehouse will sell more high-value goods such as consumer electronics. Morrice plans to have plasma and LCD TVs in Warehouse stores next year and may offer big-name brands alongside the cut-price Transonic TVs now sold.

He insists this move will be different from the last attempt to sell higher-value items such as AEG whiteware. That trial lasted only a short time and led to debates over whether The Warehouse was watering down its bargain-basement brand.

Morrice says there was a time in the not-too-distant past when it was hard to get some high-value brands to do business. Recent success with selling the high-profile Dell Computer brand shows the attitude is changing.

There is, however, no over-arching plan to take The Warehouse upmarket. Morrice will choose areas where it makes sense to sell higher-value goods, but the low-cost value proposition that has underpinned The Warehouse's success will not be discarded.

There will be more central sites.

"We're relatively under-spaced in the metropolitan areas. That's a simple fact of the competition for sites and the availability of land."

And despite customer concerns about store size, he is committed to the "megastore" concept. Having acres of floor space underpins The Warehouse's formula of buying in bulk and selling cheap.

Morrice is also focused on pinning down costs to combat booming property values, rising fuel prices, wages and packaging costs.

He points to last year's result.

"We grew sales in the red sheds over $130 million last year but didn't grow the profit. The question is, are we developing the top line profitably?"

The answer is plainly no.

"In order to grow share profitably, we've got to be much more efficient as a business," says Morrice, who wants to squeeze cost out of the supply chain, one of the biggest in the country, and buy cheaper.

Staff training and even marketing are under review.

The bottom line is a refocus on customers.

As Morrice says, The Warehouse has a couple of major things in its favour - a brand "as strong as [British retailer] Marks & Spencer's in its heyday" and the fact that the chain takes only 9 per cent of total consumer spending in its part of the market.

It is a statistic Morrice is fond of quoting. "There's a lot more mileage in what The Warehouse can bring to that if you subscribe to that argument," he says.

All of this will be done largely without extra investment.

"For the last five to eight years we've always had a substantial capital investment programme. I'm talking about refocusing some of that investment."

Then there is Australia.

The "yellow sheds", which have grown out of the $114 million acquisition of the Silly Solly's and Clint's Crazy Bargains chain stores, have seen their losses deepen - to $36.5 million last year from $13.4 million.

The Australian chains' collection of small stores was out of step with the New Zealand megastore satisfy-all approach.

"The foothold we bought in Australia was not really compatible with the business we had in New Zealand," says Morrice.

Despite the problems, Morrice is adamant there is value in The Warehouse being in Australia, a market five times the size of New Zealand.

He says the yellow sheds are well on the road to recovery.

Money had been poured into building 2800sq m stores. Although smaller than the typical red shed, they are more closely aligned with The Warehouse culture.

"Our sales performance has not been sparkling," admits Morrice, who credits "yellow sheds" chief executive Ian Tsicalas with getting costs under control and sourcing better stock.

Even the often-overlooked Warehouse Stationery "blue sheds" will feel the sweep of the new broom, despite lifting same-store sales a spectacular 17 per cent in the last quarter.

The $200-million-a-year business, which sells everything from printer cartridges to calculators, may need more investment.

"A lot of the infrastructure has been creaking."

Despite the implicit criticism, Morrice is not perturbed about Tindall looming large over the business. The Warehouse founder is still a non-executive director, and through his personal holding and that of his charitable trust, the Tindall Foundation, he controls just under 50 per cent of Warehouse shares - worth around $500 million.

Morrice said Tindall had given him space to pursue his vision for the company.

"He's taken the decision to move his office out of the Warehouse building and essentially put some separation between himself and The Warehouse." Morrice said there was no sign of Tindall selling any of his holding.

"For the time being he's keen to keep that shareholding because he believes, like I do, that in the longer term there's going to be upside in the share price."

Some 18,000 Warehouse shareholders will hope he's right.


Selling the change

The Warehouse chief executive Ian Morrice has big plans:

A STORE REVAMP

"The format will need to be looked at, not in a piecemeal way but in a new and radical way. This comes through from customer feedback. The stores can be extremely difficult to shop."

MOVING UP-MARKET

"There was a time in the not too distant past where it was hard to get some high-value brands to want to do business with us."

FINDING BETTER LOCATIONS

"A customer would typically visit their grocery shop three or four times as often as they'd visit The Warehouse."