Posting a 73.9 percent drop in annual net profit has clearly focussed the minds of The Warehouse Group’s board and CEO. The result has mainly been attributed to the sale of its financial services and restructuring costs, but the company has recognised it has to transform its operation if it is to regain the profits of yesteryear.
While businesses such as Noel Leeming performed well, the company’s Annual Results presentation posted on the NZX today notes that at 60% of sales and almost 80% of operating profit, its core business remains The Warehouse stores. That is where it needs to focus its efforts, because the revenue from acquiring new businesses has not offset the decline in The Warehouse’s profitability.
In other words – the company has to get really good at being a general retailer. And it has to do it during a time of changing customer expectations, digital transformation, and global competition, as the slide entitled “External forces of change” shows.
The inclusion of the Amazon logo in this slide echoes the Forsyth Barr report in July examining the possible impact on New Zealand listed companies when Amazon arrives in Australia, noting that “with commoditised and brand name products, big box retailers The Warehouse Group and Briscoe Group are the most exposed to the Amazon effect.”
The Warehouse Group’s transformation strategy, as outlined in the NZX presentation, is an interesting read. It seems to me that it can be boiled down to three key areas.
- Boost investment in IT specifically in cloud infrastructure and SaaS applications
- Focus on use and application of data
- Deploy machine learning and AI
- Develop culture of innovation
2. Eliminate complexity, drive down price
- Every Day Low Prices – sell stuff at the cheapest price you can, focus on passing every saving onto customers
- Rationalise product lines – find out what people want, sell them that and get rid of everything else.
- Integrate Warehouse and Warehouse Stationary stores where it makes sense
3. Operational efficiency
- Develop capability to enable metric-based decision making, data-driven marketing to drive personalisation, test dynamic pricing
- Review and consolidate scale and crossover of customers (there are currently a range of loyalty and payment programmes across brands)
- Trial a subscription-based delivery model with NZ Post to provide two-hour delivery trials with The Warehouse, Warehouse Stationery and Noel Leeming, in selected areas
This last point is a big one. When I checked out The Warehouse’s online store, I randomly selected four items – a paddling pool, a bar stool, a dress, and a book. For all of the items it would take 2-4 days for delivery – even if I went to the store to pick it up.
Customer’s expectations have indeed changed – they want to buy stuff at the cheapest price, and they want it now. The Warehouse Group’s transformation strategy – as outlined in its Annual Results presentation – makes sense. But there was nothing in it that I could see which hasn’t already been implemented around the world – most notably by Amazon.
The Warehouse Group is playing catch up. It had better hurry up and execute.