The Warehouse Group: The rise and fall of a retail icon

Saturday, 27 July 2024

Retail and shopping were far simpler when The Warehouse opened its doors in 1982.

There was less choice and competition, no internet shopping, and its owners didn’t have social media influencers to turbo-charge sales.

When Sir Stephen Tindall started The Warehouse its main products were rattan and rice paper blinds, sold for $10.

Its range expanded when import licensing laws changed a couple of years later, and it became known for its big bins filled with cheap products, everything from curtains to Body Glove surfing gear.

One Auckland store grew to a handful, and after 12 years, a fully-fledged retail company listed on the New Zealand Stock Exchange.

Business boomed for the group through Covid, but since the lockdowns ended, The Warehouse has struggled to dominate any of the product categories it sells, its profits have slumped and its share-price has tanked.

Most New Zealanders have a memory of visiting The Warehouse in their childhood, and the “red sheds”, became something of a national icon.

But investment analysts say the groups’ recent history has been that of mis-allocated capital, failed ventures and a loss of focus.

Tindall wants to be involved in the business again, and together with private equity firm Adamantem Capital, has bold ideas for a turnaround.

Going public

The Warehouse grew fast. It opened its second store in Papatoetoe, Auckland, two-and-a-half months after the first, and a third just a few months later.

In 1994, the company floated on the sharemarket, raising $32 million to open another 22 new stores in the following 18 months.

Tindall had ambitions to have stores across New Zealand and Australia early on.

Today, there are 88 The Warehouse stores, all in New Zealand.

In 1991, it started Warehouse Stationery, bought household technology and appliances retailer Noel Leeming in 2013, and then spent $52m to buy the outdoor equipment chain Torpedo7.

In 2019, it started online shopping platform TheMarket.com as a New Zealand answer to Amazon.com and to cash in on the rise in online shopping.

Many of its investments did not pay off.

In February, Torpedo7 was sold to Auckland-based retail group Tahua Partners for $1, after making losses of $50m over six years.

In June, it shut TheMarket.com after failing to find a buyer for the struggling operation.

Management said the rationalisation of the group would allow it to focus on its core businesess, The Warehouse, Warehouse Stationery and Noel Leeming.

Forsyth Barr investment analyst Rohan Koreman-Smit has said The Warehouse needed to go back to basics after a history of failed expansions into non-core areas.

“It’s all been a history of miss-allocation of capital,” Koreman-Smit said.

The focus now had to be on fixing the three core operations, he said.

“It used to be a place where everyone got a bargain, and I think through the years it lost a number of customers, whether it be through not being competitively priced enough, whether it be through not having the right stock, or simple things like getting rid of basics they would sell week-in, week-out.

“You go there these days, and sometimes those things aren’t there.”

Acquisitions, supermarket ambitions

TheMarket.com and Torpedo7 fails were not the group’s first.

In the early 2000s The Warehouse tried to expand into Australia, buying discount chains Clint’s Crazy Bins and Silly Solly’s.

It paid A$118m (NZ$131m) for the network of 115 stores, which it renamed to The Warehouse.

By 2005, after burning through $250m, it sold its Australian operation for just under $100m to Australian private equity firms Catalyst Investment Managers and Castle Harlan Australian Mezzanine Partners.

Tindall acknowledged the company had lacked experience in the Australian retail market and underestimated the level of competition,and took responsibility for the flop.

The company then, tried its hand at becoming a supermarket, of sorts.

From 2006 to 2009, the group opened three ‘Warehouse Extra’ stores, one each in Auckland, Hamilton and Whangarei. The large format stores heavily focused on fresh produce, meat and frozen foods.

Again, it failed, and the stores were closed, costing the group $12m.

At the time, the group said the stores had been an important trial.

Just over 10 years later, The Warehouse again turned its attention to groceries.

Financial strife

The Warehouse Group’s share price peaked in the post-pandemic consumer spend-up, at $4.10 a share in 2021, but then households, struggling with high inflation, and high mortgage rates, tightened their purse strings, and stopped spending.

The shares have fallen 75% in two-and-a-half years, and hit an all-time low of 95 cents earlier this month.

The company’s value has plunged from about $3 billionto less than $500m.

Long time chief executive Nick Grayston departed in May, and a cost-saving restructure was initiated.

But then fresh hope for investors emerged as the beaten down group was subject to a takeover bid by Adamantem Capital.

Private equity proposal

On Tuesday, The Warehouse Group announced it had received a proposal from Australian private equity firm Adamantem Capital to acquire all of its shares, at a price between $1.50 and $1.70 per share, valuing the group at up to $590 million.

If approved, the takeover the company will de-list from the NZX and return to private ownership.

Tindall supports the proposal and he, and his associated Tindall Foundation, would retain a 50% shareholding in the company, if shareholders vote in favour of the takeover.

The Warehouse Group board is considering the proposal, and will make a recommendation to shareholders on whether it fairly values the group, and has appointed Jarden to advise it.

Milford Asset Management equities analyst Jeremy Hutton says: “Shareholders have had a really tough run in The Warehouse over the past few years. while the range in the offer was a significant premium to where the stock was sitting last week … [it] is still lower than what the share price was at the start of this year.”

For the shoppers, a private owner might be well-placed to breathe life back into the red sheds, and grow its grocery offering.

“Quite often with companies, if they need to do a pretty significant transition and reinvent themselves, they find it easier in a private setting so they don't have to report to the market,” Hutton says.

“Some of the actions they can take are somewhat more behind closed doors than in the public domain.”

What’s next?

The Australian newspaper reported that Tindall is keen to take The Warehouse in the direction of a supermarket.

The Warehouse got back into groceries in 2020, and in 2021 launched its private label pantry brand The Market Kitchen.

It now stocks more than 9000 grocery items, and it sells fresh produce and chilled goods in a growing number of its stores, and grocery now makes up about a fifth of its sales.

Grayston had struggled to gain access to wholesale supply at fair prices.

A high profile businessman with extensive experience in retail, who spoke to The Post on the condition of anonymity, says going private would allow the business to restructure without investor scrutiny.

“If you go private, then no one knows your sales and no one knows the profit. No one knows how bad it is, because you don't have to report anything to the market, and you can literally do it behind closed doors,” he says.

The red shed had been “a problem child for a decade or more,” he says.

“It's just been a sad story of a whole lot of missteps, and management just incapable of getting them out of it, and planning and executing a strategy that's going to work, and all the time you've got Kmart and Temu eating their lunch.”

Shareholders Association chief executive Oliver Mander agrees that the indication of interest by Adamantem has been “well timed” as shareholders continue to be unimpressed by the company’s performance.

Seven months ago, its share price was trading at the upper end of the Adamantem offer range.

“It does seem a really short term view that's being taken right now, so whether it's a good deal for shareholders depends on the shareholders’ view.

“There's a lot of different views around its future. The company’s got one view that says we can refocus business and succeed by focusing back on our core operations of The Warehouse, Warehouse Stationary and Noel Leeming. Obviously, Sir Stephen Tindall has a different view. He says actually there is a change in business model needed.”