The Warehouse Group has been transforming New Zealand retailing ever since its launch on the North Shore by Stephen Tindall in 1982. Nearly every New Zealander will have passed through its stores at one point — the average weekly foot traffic is over 2 million people per week.
The group comprises much more than the "Red Sheds" that most of us associate with The Warehouse. Since 2014, the company has acquired other retail chains, evolving into a "family of brands" rather than previous attempts to extend "The Warehouse" brand across other retail and consumer categories.
So when you buy that TV at Noel Leeming, your ski helmet at Torpedo 7, arrange for your children's school stationery at Warehouse Stationery or purchase from different retailers at themarket.com, you're contributing in some way to supporting The Warehouse Group (TWG).
In fact, these days The Warehouse itself contributes only 56 per cent of the company's $3.1 billion revenue, with Noel Leeming chipping in another 30 per cent. That revenue makes TWG New Zealand's largest retail group (although the privately-held James Pascoe Group must be running it close).
Evolution and change
The story of the group's evolution is bound up with the huge social and technology-based change that has disrupted global retail. The company is an object lesson in how businesses need to constantly evolve to adapt to environmental and competitive factors.
In TWG's case, its broad product range means it competes against nearly everyone else, large and small. Just as The Warehouse was the "disruptor" to legacy retail in the 1980s and 1990s, it is now in turn being disrupted by the growth of other "big box" retailers over the past decade, such as Kmart, Briscoes and Bunnings.
And that's before we get into the much-hyped impact of the digital revolution. There has been much commentary on Amazon's impact on TWG, as the US giant continues its expansion through its own fulfilment centres in Australia.
Over the past year, TWG invested in an online portal with offerings from multiple retailers — www.themarket.com. The site is a clear nod to the "Amazon" model, but tailored nicely for New Zealand consumers — including using the TWG store network as collection centres. The company points out that The Market is "independently operated but backed by The Warehouse Group".
The company has also invested heavily in its own digital capability, including the Warehouse app. Online sales are growing fast (at around 20 per cent) — but still represent only 8 per cent of the company's total revenue. Nonetheless, this is a significant change from a few years ago; at least TWG is now playing the game, not watching from the sidelines.
Massive foot traffic. Strong, well-known brands. All of that contributes to a big share of New Zealanders' spending flowing through TWG's checkouts — around 3.2 per cent of all retail sales.
The graph above shows the group's "share of wallet" over the past decade. That share was given a leg up by the purchase of Noel Leeming in late 2012. A more recent decline can be attributed to the likes of Kmart expanding their presence in New Zealand.
It's not just about revenue, however. Both product (gross) margins and operating costs are critical.
The graph below shows the impact of the Noel Leeming purchase on overall gross margins; nonetheless, the company has managed to maintain its margins since then. No mean feat in an uncompromising retail environment.
For that $3.1b in revenue, TWG's net profit in the last full-year report (July 2019) was $65.5m after tax. That was significantly above the previous year, which was only $23.1m, on similar revenue.
That means for every $1 a customer spends in store, 2.1c goes to the company and its shareholders. Another 17c goes to staff as wages and salaries.
On July 21, TWG announced redundancies and store closures in various locations (including the head office), with cuts in hours for other staff. The move has been widely criticised in some circles, with a TV3 Newshub reporter positing on July 20 that the company should "accept lower profit".
If TWG was making a large dollop more than 2.1c in every $1 of revenue for its shareholders, I might be inclined to agree. Even if the company and its shareholders accept lower profitability, it should probably focus on making any form of profit first.
An update to trading issued on May 8 revealed a 17.9 per cent quarterly fall in sales versus the comparable quarter of 2019, as a result of Covid-19. My own calculations show this sudden drop in revenue has likely resulted in a net loss for the quarter of $30m-$35m. Even if trading resumes as expected for the rest of the year, this is a difficult hole for TWG to climb out of — and does not remove the need for change.
The announced staffing changes, store closures and a recent move to "agile working" are about TWG's ongoing evolution to stay relevant to customers and survive in what is an ever-changing retail environment. Covid-19 has simply made that more urgent.
The move to a full "agile" model is interesting, and certainly not common among "legacy" retailers. An agile approach is characterised by fast-paced, customer-centric development of "good enough" solutions followed by multiple upgrades of functionality. It's a common model for delivering technology-related functions, usually in sectors where the technology element of delivering a service to customers is increasing rapidly (banking, for example).
As the digital components of TWG's business continue to grow, it becomes easy to understand why the agile model could be attractive.
A notable downside is that it is inherently difficult for a team to be agile when the remainder of the organisation remains in its previous (non-agile) way of working. Whatever your view on the methodology itself, at least TWG has mitigated this risk by applying the agile approach to the entire company.
It will be important for TWG and its leadership "squad" (yes, that's an agile term) to maintain commitment, manage the process as an ongoing transformation and ensure staff get the right support, coaching and training to adopt this new style of working.
Customers' perceptions of quality have been a perceived weakness in the past, although actions taken over the past few years have focused heavily on improving inventory management and the customer experience within stores.
An agile approach, with its focus on the customer, is likely to result in a better experience over time, linking TWG's digital channels with its immense physical store footprint.
Financially, Covid-19 will have a significant impact on TWG's full-year results. The company announced a $46m net profit after tax for the first half of its financial year, followed by its "Covid period" announcement of an 18 per cent fall in sales.
The company hasn't been known for delivering high returns to investors; the $2.05 share price is a lot less than the $3.88 it was at when the company listed in 2000 (allowing for the impact of a share split). Dividends have been paid regularly but for investors, the Warehouse story is very different to a Mainfreight or Fisher & Paykel.
Without Covid-19, The Warehouse Group would have been on track to delivering its best result in many years in the year to July 2020. That doesn't mean an outstanding performance — just a result that shows all the reforms it has undertaken are driving good outcomes. Even with Covid-19, it should still deliver a profit of $20m-$30m.
Further investment will also be required in underlying core systems, and its ongoing business transformation.
More concerning in the short term is the damage to the company's reputation and brand through its recent announcements, and the somewhat tone-deaf proclamation that it could open its stores during the level 3 lockdown phase, a statement retracted by the company shortly afterwards.
Other than that, TWG's Covid response has been solid, with the support of the government wage subsidy and other measures to protect cash.
The only certainty in all of this is that the retail sector will keep evolving rapidly. The Warehouse Group simply has to keep up.