The Warehouse needs to show it's different to competitors like Kmart, and it isn't - analyst

Friday, 22 September 2017

The Warehouse withdrawn the Kids Caboodle Glacier Toy Boxes from sale while they investigate complaints about loose hinges.

The Warehouse Group's failure to respond to new competition like Kmart contributed to the retailer posting a $58 million profit plunge, an industry analyst says.

The group, which owns The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo chains, has reported a $20.4 million profit for the year to July 30, down from $78.3m last year.

First Retail Group managing director Chris Wilkinson says The Warehouse have failed to offer the customer anything different as competitors swoop in.

First Retail managing director Chris Wilkinson said core The Warehouse stores had not differentiated themselves as competition ramped up.

'Everyone is nipping at The Warehouse's heels,' he said.

The Warehouse chief executive Nick Grayston said in July that 'offering credit is something that requires fairly deep pockets'.

Wilkinson says The Warehouse's home wares range looks slight out of place in the discount retailer's stores.

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'To be successful in retail you need to be different and unfortunately The Warehouse isn't.

The Warehouse had begun to reduce the number of product categories it sold in its red stores, 'but all of those sectors are under siege'.

The Warehouse is implementing its 'everyday low prices' strategy and is changing its mix of products to better compete in an intensely competitive market.

But Wilkinson said everyday low prices was a generic term that many businesses were using.

'It's like saying you have quality product. Everyone is expecting that now,' he said.

The Warehouse Group chief executive Nick Grayston was not concerned by the reduced profit.

'The Warehouse has realised it has to change and have taken swift action to do so,' he said.

The Warehouse recently launched its own home wares range to compete directly with Kmart.

Wilkinson said Kmart's success had been its control over its own branded goods and The Warehouse needed to do the same.

'There is very little outside Kmart's own range. The secret to success for retail … is being able to control that cost structure,' he said.

'The secret for The Warehouse may be to make their own product or source product that is not able to be purchased elsewhere.'

Grayston said a core plan for the future was to consolidate product brands sold from 150 to 30.

'We've invested quite a lot in terms of sourcing those direct, we've built our own design team, we've enhanced our sourcing capability,' he said.

The Warehouse's digital strategy was also ramping up with a former Alibaba executive recently hired to lead the online business.

'We have invested in world class global talent. We're going to be building a payments platform that will enable us to deliver personalised pricing.

'It's not a direct reaction to Amazon. It's more a reaction to the changing face of commerce and it's all about reducing friction for customers.'

Another looming threat was Australian pharmacy chain Chemist Warehouse opening in Auckland.

'The Warehouse have done an exceptional job around body care and cosmetics in the past, but Chemist Warehouse coming from Australia is going to be absolutely massive,' Wilkinson said.

Changes to the group's business model led to a net loss of 143 non-store based jobs.

Similar big box retailers in the United Kingdom were cracking down on staff costs, with one retailer cutting thousands of jobs.

'Wilco have just gone out to consultation on 3000 staff in the UK. A lot of layers of management will be stripped out,' Wilkinson said.

Grayston said further job losses were unlikely.

'I would never say it's completely off the table. Modern business is continually restructuring but I don't foresee at this stage major people restructuring.'

The main reason for The Warehouse Group profit dive due to impairment of goodwill and fixed assets totalling $40m linked to the sale of its financial services arm Warehouse Money, to Invercargill-based SBS bank in July.

When the losses associated with the sale of Warehouse Money were taken into account, profit after tax was $59.2m, in line with expectations.

The Warehouse launched Warehouse Money in 2015 after spending $7.3m buying Westpac out of a joint venture which had offered credit cards.

Operating profit for Noel Leeming was up 60 per cent and 10 per cent for Warehouse Stationery. But operating profit was down for the core The Warehouse stores by 5.4 per cent and down 21 per cent for Torpedo7 stores.

Apparel sales were strong for the the core The Warehouse stores but this was offset by weaker sales in some general merchandise categories.

Shareholders will be paid a final dividend of 6 cents a share, taking the total dividend for the year to 16c a share, fully imputed.