Warehouse prepares for Amazon juggernaut by upping customer engagement, adding services

Thursday 9th March 2017

Warehouse Group says it is a question of when not if Amazon arrives in New Zealand and estimates the online shopping giant will strip $4 billion to $5 billion out of Australia's retail market while becoming a more convenient option for Kiwi shoppers.

Chief executive Nick Grayston said e-commerce only makes up about 10 percent of the New Zealand market, much lower than in other developed countries. But Warehouse has to prepare for increased disruption and part of the response is to move away from a "transactional relationship" with customers where price is the only determinant, to "an engagement model" which could include walk-in health clinics, a return to pharmacies, financial advice and mobile services.

"Amazon's already a threat but one we're embracing to make ourselves better," Grayston said. "We know we will not compete only on price."

Based in Australia, Amazon would be able to service New Zealand "a lot quicker" than when local shoppers were placing orders to the UK or the US.

“Our strategy is to get our retail fundamentals right in today’s changing retail environment and invest to remain relevant for our customers," Grayston said. "We must compete effectively and ensure the sustainability of our business in the long term. The company must evolve and not doing so is the riskiest decision this company could make."

Warehouse's online sales rose 25 percent to $106 million in its first half. Net profit dropped 76 percent to $13.6 million after the retailer took an impairment charge against its financial services unit, recognised restructuring costs and earned less from its Red Shed department stores. Total sales rose 3.3 percent to $1.6 billion.

The result included a $22.7 million goodwill impairment against the company's Financial Service Group, which in 2015 bought out its joint venture partner Westpac Banking Corp, taking control of a $57 million loan book and leaving the retailer to relaunch its store cards.

Financial Services recorded a first-half operating loss of $5.2 million, up from a loss of $2.7 million a year earlier. The unit's sales in the first half rose to $10.3 million from $8.1 million.

"The trading performance from the Financial Services Group during the current half year continued to be below expectations, caused largely by a fewer than expected number of the cardholders acquired as part of the Westpac acquisitions taking up new card offers," the company said today. "This resulted in the board reviewing the outlook for the Financial Services Group and looking at various alternative strategies to gain the scale necessary for the business to achieve profitability."

Chief financial officer Mark Yeoman said the transition proved harder than expected. The venture with Westpac was part of the Mastercard credit card scheme while the new one is Visa. The change required the old card to be cancelled and a new one issued and then cardholders couldn't continue to make payments through Westpac branches as they had become used to, he said. "Some customers thought it was too much hassle" and there was a smaller take-up than expected.

The cardholders' in-store experience was also "sub-optimal," Grayston added. Customers preferred a discreet situation when they had issues relating to their card rather than at a counter near the check-out and the company was looking at various options to improve it.

Noel Leeming was a bright spot in the first-half results, with sales climbing to $422 million from about $380 million and operating profit rose to $9.2 million from $6.4 million.

Grayston said the electronics retailer had gained "a small benefit" from the demise of the Dick Smith chain, as had rivals such as JB HiFi, but that had since abated and the sector remained competitive.

The retailer's Red Shed stores reported a gain in first-half sales to $975 million from $973 million while operating profit dropped to $59.5 million from $65 million. Same-store sales rose 1.3 percent. Warehouse Stationery sales rose to $139 million from $137.8 million while operating profit rose to $6.5 million from $6 million. Torpedo7 sales rose to $86.4 million from $76 million for an operating profit of $2.4 million, up from $1.7 million.

The company said weak trading has continued into the second half of the year and as a result, full-year adjusted profit was forecast to be $54 million to $58 million, a drop of as much as 15 percent from a year earlier. CFO Yeoman said the guidance "reflects a reasonably conservative outlook.

While Warehouse isn't facing the same headwinds from a strong New Zealand dollar as it had in 2016, it would be bedding in changes to its operating model which have included streamlining back-office and support functions. The company recognised restructuring costs of about $4 million in the first half out of projected costs of $10 million to $13 million for the full year, Yeoman said.

The shares last traded at $2.57 and have fallen 7.2 percent in the past 12 months while the NZX 50 Index has gained 11 percent.

BusinessDesk.co.nz

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