Monday, January 4, 2010

The Warehouse: Big Brands, Big Opportunities

While doing some largely unwanted retail therapy over the Christmas/New Year period my thoughts were naturally drawn to the New Zealand retail sector and specifically The Warehouse Group Ltd [WHS.NZX] and its stated intention at the end of 2009 to sell more "branded products" in its nearly 90 big red sheds.

This indication to the market and Warehouse investors that the company is to go beyond its current retail realm and or perception by consumers that it sells "cheap junk" poses a number of questions rather than answering any.

The Warehouse itself as a brand is currently stuck with the image of a company that sells cheap and nasty stuff that breaks and it does well in this sector.

That image was more ingrained many years ago when the company first started but the perception by consumers is that that image is tardy and that the fact that they sell "junk" still remains.

Incidentally this is also true of a host of other retailers that compete with the Warehouse but the big red sheds seem to be permanently stuck with the moniker of a seller of crap.

This is where the problem of moving the company more upmarket and selling bigger and better brands begins.

The company already sells a number of branded products like Apple's Ipod, Sony Playstation, Microsoft Xbox, but also sells a number of other "brands" that are unique to the company and are in fact inferior rubbish.

However it lacks a full range of branded product across the diverse number of retail sectors it operates in and that presents a problem for the company. Few people are going to go into a Warehouse store to buy a branded product if they know there isn't a full range to choose from or a consistent supply of that product on a day to day basis. Of course this dilemna can be got around by simply supplying a full range of branded product to its customers but so far this has proven difficult for the company to achieve for a number of reasons.

Big name brand suppliers in the main have been reluctant to supply their sought after consumer products to the Warehouse simply because of that image of cheap and nasty and damage that may occur due to an association with their brand and the Warehouse's poor image in some consumers minds. In addition, the discounts that The Warehouse would want to negotiate with brand owners for the large volumes that they would sell often make suppliers baulk because of the lower margins made. This of course would be ameliorated by the volume of their goods that The Warehouse could sell.

This can hurt brands as a whole because the owner of that brand would have spent considerable time and money on an image that fits their target market and to place that product in the shelves alongside a perceived or actual inferior brand can have deleterious consequences for the long-term viability of that brand and the product or products that are sold under that branding.

As I said above though The Warehouse has managed very slowly to garner a few well known and loved brands to stock their shelves. This has taken many years to achieve on the part of CEO Ian Morrice and his management team and it will probably take many more years to get a good range of branded product throughout the Warehouse's range of goods.

An indication of how successful branded selling at the company could go in the future can be seen in the Warehouse' toy department. The company has long been the seller of a large range of toys from all of the big brands and as a result has become New Zealand's biggest seller by far of toys.

This is because that long ingrained image that the company sells cheap and nasty stuff has been replaced by the image that indeed the their toys are cheap but because they are selling branded toys consumers know that The Warehouse is the place to go to buy the best toys at the best price.

The company also has a large range of quality goods in the CD/DVD ("software" rather than "hardware") and book departments and the company has also become the largest book and CD/ DVD retailer.

My point is, even though it is going to take a long time for The Warehouse to shake the tag of cheap and nasty, judging from their track record in specific areas of the retail sector there is no reason why the company would not eventually be thought of as the retailer that sells the best branded goods at the best possible price overall.

This will be good news for consumers but especially good for shareholders as it will provide a boost to revenue and with good management, a boost to profit as well.

Happy shopping.


Disc: I own WHS shares in the Share Investor Portfolio


Warehouse Group Ltd: 2010 Full Year Profit Analysis
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