Monday, March 20, 2006

Christopher Niesche: Love affair with Warehouse off the boil

If there was ever a time when retailers should have made a killing it was over the past few years.

Kiwis have been spending like never before and the high dollar has made the goods that retailers import much cheaper.

Yet somehow, the country's largest retailer The Warehouse hasn't prospered. Put aside the troubles it's had with its Australian stores and look just at the performance of the New Zealand "Red Sheds" and the story is unchanged: The Warehouse has failed to take advantage of New Zealanders' spending binge.

In the three years to the middle of 2005 core retail sales in New Zealand - including inflation - rose 18 per cent. Over the same period, annual Red Shed sales rose about the same amount, to $1.48 billion in the year to the end of July last year.

On its own, that doesn't look so bad, but The Warehouse had to open seven new shops to take its total to 85 over the three years just to keep up with the nations's retail sales growth. During those three years the company's operating earnings actually declined, from $147 million in the year to July 2002 to $139 million in 2005.

The Warehouse - led by chief Scotsman Ian Morrice - argues that while the cost of goods they bought was lower, the price they sold them for also fell because of competition. This meant that it was making less money for each item it sold. Wages, power, property and other costs have been all been rising strongly as well.

And the company let huge and expensive problems develop in its supply chain - the way it gets goods from its warehouses to its shops - while it tried to turn around its loss-making Australian stores.

But those reasons are only a partial explanation. Perhaps Kiwis have fallen out of love with The Warehouse.

After many years of expensive imported goods and lack of choice due to the country's closed economy, Stephen Tindall's company in the 1990s gave Kiwis access to cheap, mass-produced factory goods.

But New Zealanders have got richer - or to be totally accurate, they feel richer. Near full employment, strong wage rises and rocketing house prices have given Kiwis more money in their back pocket, albeit most of it borrowed. It's possible that New Zealanders are looking to spend their extra money on better quality and branded goods, and The Warehouse is no longer so attractive.

Rod Duke's Briscoe Group is benefiting, with its change in strategy to sell more branded goods and hold fewer sales at its Briscoes Homeware and Rebel Sports stores. It delivered a 35 per cent rise in full-year net profit to $25 million on Friday.

The Warehouse is following a similar strategy, but it hasn't yet yielded results. The company said on Monday that operating earnings at the Red Sheds were $92.1 million, up just 2.2 per cent on the year before.

Just as shoppers seem to have fallen in and out of love with The Warehouse, so have investors. Warehouse shares listed at the end of 1994 at $2.50 by mid-2002 had more than trebled to $7.90.

But as the company began to struggle with its Australian operations and hit trouble in New Zealand, the stock dropped as low as $3.06 in mid-2005. They closed at $3.85 on Friday.

Now that it's got rid of its troubled Australian stores, The Warehouse can focus on moving into food, liquor and pharmacy goods. It won't be easy, as the three are very competitive sectors, but it is treading cautiously. The company will also continue its strategy of offering better quality goods and relying less on discounting. But the problem is that it's doing this when the economy is slowing and New Zealanders' spending binge is finally coming to an end.

With higher mortgage rates biting, the housing market coming off the boil and consumer confidence softening, the retail environment looks tough for the next couple of years.

Kiwis might once again want to shop at a place where everyone gets a bargain.


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