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HomeNEWSThe Warehouse Group gears up for experimentation

The Warehouse Group gears up for experimentation

The Warehouse Group chief executive Nick Grayston’s transformative plans for the group include better use of data; a greater focus on omnichannel retail; and strategic use of the group’s financial services division. However, the group has delivered a “mixed” first-half result.rn

The Warehouse Group chief executive Nick Grayston’s transformative plans for the group include better use of data; a greater focus on omnichannel retail; and strategic use of the group’s financial services division. However, the group has delivered a “mixed” first-half result.

While The Warehouse Group’s retail sales were up 3.3 percent compared to HY16, profits were down, with the group today announcing an adjusted net profit after tax result of $39.7 million for the first half of HY17. Compared to $45.6 million in HY16, it’s down 12.9 percent. The reported net profit after tax is down an alarming 76 percent from $57.2 million in HY16 to $13.6 million.

The group attributes $4 million worth of costs (excluded from the adjusted net profit) to operating model changes. Last month, a restructure was announced which would see the leadership structure of the Red Sheds and Warehouse Stationery combined, resulting in the loss of around 130 jobs. This is expected to generate annual savings of $15-20 million following a one-off restructuring cost of up to $13 million.

Another $22.7 million worth of one-off costs were attributed to the full non-cash impairment of goodwill relating to prior financial services ($22.7M) acquisitions. TWG bought out its financial services partner Westpac in 2015, but the project has since struggled to meet expectations, reporting an operating loss of $5.2 million for HY17.

Chief financial officer Mark Yeoman told the NZ Herald that changes connected to the buy-out meant customers using TWG’s financial services were required to reapply for their cancelled cards, with fewer than expected making the switch.

Nevertheless, Grayston sees the financial services divison as “a very important enabler” for the rest of the business, citing significant credit opportunities from Noel Leeming and Torpedo7, and the potential for such from business customers from the Red Sheds and Warehouse Stationery.

“They’re part of our portfolio of goods and services.”

TWG’s core brand, The Warehouse or ‘Red Sheds’ showed weak performance with its operating profit for the half-year of $59.5 million down by 9.1 percent from HY16. Grayston says the disappointing result was “part of the businesses’ strategy” as it executes changes across the Red Sheds, also citing factors including a slow start to summer.

“It was always going to cost us more not to take these actions,” he says of the changes.

By contrast, Grayston emphasised Noel Leeming’s “very strong” performance, with its operating profit of $9.2 million showing an increase of 44.1 percent on HY16. In its report, TWG attributed this success to market share gains supported by successful promotional events and offers, together with a focus on margin management. It expects year-on-year growth to soften in the second half as the effect of competitor Dick Smith’s exit from the market wears off.

Grayston described Torpedo7 as repaying the group’s faith, with its still-small operating profit of $2.4 million representing an increase of 41.5 percent over the same period last year. Warehouse Stationery is also holding steady, reporting a 7.4 percent increase over HY16 with an operating profit of $6.5 million.

Part of Grayston’s vision for TWG includes boosting omnichannel investment across the group. He spoke today of two core steps:

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  1. Create a robust ecommerce experience. He says the group is currently experimenting how best to satisfy its customers online.
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  3. Reduce the assortment in stores. “It’s no longer necessary to carry every item,” Grayston says, explaining that many items can be fulfilled via delivery instead. He intends to have the group capable of executing same-day and three-day delivery.

Grayston also plans to grow the group’s data capability. He says at the time he was appointed in 2015, the company had lots of information but wasn’t consolidating it to a single view of the customer. It’s now starting to get “very rich data” spanning the group as a whole.

Loyalty programmes in the traditional sense are unlikely to be part of the data collecting picture, however. Grayston says that while Fly Buys works for Noel Leeming, the group looked at adopting a traditional loyalty programme more widely, but decided not to, leaning towards a more independent solution instead.

“We don’t believe that we need to partner necessarily with traditional loyalty programmes.”

The group also plans to further implement an Every Day Low Price (EDLP) strategy across the Red Sheds. Grayston says that in order to win over New Zealand’s notoriously discount-driven shoppers, there will be a “re-education” process, but in many categories, particularly essentials, there’s evidence they’d rather have EDLP prices than wait for a sale.

More than 25 percent of The Warehouse’s assortment is already EDLP, he says, explaining that these categories are performing better than the discounted ones.

“It’s vindication from our customers.”

Speaking more broadly, Grayston says it’s obvious to him after his 15 years in US retail that retailers who pursue a high-low strategy struggle more than those with an EDLP. Discount-driven retailers are especially vulnerable to the aggressive growth of pureplays like Amazon, he says.

Grayston says observers can expect to see a lot more experimentation across the TWG group in the future.

“It’s no longer necessary to have long lead times, big bets,” he says. 

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