Turning around The Warehouse fortunes vital for the nation

Tuesday, 1 October 2024

Ex-pat Lisa Asher is a retail academic researcher at The University of Sydney and Drew Franklin is a Senior Lecturer in marketing at the University of Auckland.

OPINION: It is painful to watch from the sidelines as the big red sheds continue to report worsening results to shareholders and the stock market. As a New Zealand icon, its success is perhaps much more important than Kiwis realise. We would not want to lose any more local brands, even as events in 2023 and 2024 have seen so many go in an apparently unstoppable trend.

There’s a big reason it’s more important now than ever before that The Warehouse rights itself. As the ComCom reviews the merger of Foodstuffs North Island and Foodstuffs South Island (with a decision out today), our knight in shining armour is The Warehouse, rather than a foreign company. The competition it brings to our grocery trade – at present, about the only competition at scale – helps bring down prices.

But the challenge it faces is its core business is suffering, and how can it revive its core and add a new offer, potentially an even more full grocery offering, when a dramatic turnaround is needed?

How did we get here?

The short answer is K-mart. Wesfarmers-owned Kmart is a formidable force, with a laser focus on low prices every day. It has been so successful it has cannibalised its own premium mass merchant brand, Target.

And it has also helped diminish the success of Woolworths-owned Big W, which is in a similar position to The Warehouse in losing market share to K-mart: its sales declined by -2.1% and EBIT profit down -90.4% in the last year reported.

What is K-mart doing so well? The answers are buried in their financial reports but, put simply, they have a very low cost to procure products and very little clarity on ethical sourcing and environmental impact.

They source from emerging nations, with buying offices in those locations or nearby.

Sourcing from Cambodia, Vietnam, Bangladesh, India, amongst others, the salaries of the people K-mart employs are much lower than those in Australia and New Zealand. The cost base is managed where the products are sourced. K-mart has also created a wholesale business through private label brand Anko into other markets, which puts more volume through its existing suppliers.

Additional volume brings the end price lower again. Wholesaling gives K-mart more buying power with its suppliers, and more power to demand lower prices.

Ethical sourcing versus sustainable value

Sourcing from nations with looser labour and environmental laws allows for extremely competitive prices, which obviously helps K-mart’s value proposition. H&M also does it this way, although perhaps makes more of an effort to persuade customers it has some green practises (a recent study shows it needs to do better ).

Annual report and ethical sourcing data from K-mart parent company Wesfarmers shows the company monitors 64.7% of their suppliers for ethical sourcing, and have trained some 1706 people on modern slavery in 2024. This number seems a bit light for 4000 suppliers but, on the other hand, is of a big enough number that suggests best practice is not yet embedded in its supply chain.

Then there is the question of how far down the supply chain the company reports. Its environmental disclosures don’t really cover the suppliers so much as their own direct reports. What is the true human and environmental cost of that garment or toy?

Greater transparency on sourcing is required by K-mart, so that shoppers can decide if they wish to support this type of business model, including detailed information on suppliers, worker conditions and environmental impact. Otherwise unethical sourcing practices which exploit poor labour and environmental laws will be the benchmark the Warehouse will have to follow to be cost competitive.

Do New Zealand shoppers wish to support a new paradigm around sourcing? Or, is a better balance between cost, quality and ethics a value proposition they can get behind? We recommend the latter, but only Kiwis can decide.

Painful financials

The Warehouse aims for more ethical trade and more openness around suppliers. However, that is not all that accounts for its eye-watering cost of doing business at group level.

When we compare earnings before interest and tax to revenue across these three, The Warehouse sits at around 1%, Big W is less, at 0.3% and K-mart is a whopping 8.63%, based on the numbers in the 2024 financial year.

Moreover, the cost of doing business at The Warehouse is 32.6%, Big W is 30% and while Wesfarmers does not disclose K-mart’s cost of doing business, we can assume it would be near Walmart’s at less than 20%. These are vastly different numbers.

In short, The Warehouse needs major attention to bring its cost of doing business down, and fast. A flatter structure is necessary, with more doers. People who understand turnaround culture as well as this type of retailing knowledge, are required. The business must look fundamentally different within the next 6, 12 and 18 months if it is to remain viable.

It should also relocate its office from the hill in Northcote and harbour views, closer to its shoppers south of the bridge.

Just like P&G learnt when it was building successful consumer brands, close proximity is key to knowing your customers and winning them back.

Being a public company may well also be part of the problem, as ongoing public disclosures signals to the entire market, including competitors, what is going on. This is why the failed takeover bid of the business he founded by Sir Stephen Tindall and his associates needs another look and consideration.

Future outlook

For The Warehouse to turn around, it must look in the mirror with honesty.

The reflection the company makes might include a look at the hire of its previous CEO Nick Grayston. Grayston had previously worked at Sears in the US, and in senior leadership during the period of its downwards spiral, but leaving before Sears Holdings filed for bankruptcy.

The yet-to-be-hired next Warehouse CEO should be skilled in turnarounds, not a keeper of the status quo.

A second lesson is that the new CEO must understand what makes this business, the quintessentially Kiwi ‘Te Ware-whare’, what it is. Modernisation can not come without an understanding of its unique place in the cultural landscape, and international talent is all well and good, but an understanding of New Zealand and its unique retailing environment is critical. To juggle both with a lot of humility will be a tough job to take on. Those willing to rewrite the playbook are necessary. Risks will need to be taken.

Key among the challenges are how to juggle ethical sourcing with managing cost while dealing with the complexity of being publicly listed.

The Warehouse is the sleeping competitor to help with grocery affordability, and a special part of our cultural fabric. For now, it continues battling for survival within its core business.

Voting with our wallet

The cost-of-living crisis is hurting many families. However, we would really like to see some local support for The Warehouse’s offerings as it embarks on its turnaround. Before shopping a foreign owned competitor, we’d like to encourage buying local. And the place of feedback has never been more important – call, ring, text, email and let them know what they are doing right or wrong.

If we don’t fraternise and engage with The Warehouse we will have to reckon with the fact we saw what was happening and allowed it to happen, which would be a tragedy for The Warehouse specifically and New Zealand in general.

• The writers have no affiliation with, nor shares in, The Warehouse.