Monday, January 10, 2011

Has the Warehouse lost its Mojo?

Once upon a time, not so long ago, the Warehouse Group Ltd [WHS.NZX] was a "category killer" that managed to pounce on all of its competition in terms of its offerings and what price it put on those goods. It was usually the cheapest place in town and was the first and only destination for many a kiwi family who had some discretionary dollars to spend.

For investors and shoppers alike this is now clearly not the case.

The latest dip in sales for the group over the Christmas trading period was a mammoth 3.8% drop in same store sales across the Red Sheds and a flat result for their Stationery business.

This comes on top of flat sales for the Full Year 2010 Result & 2009 Full Year so the medium term pattern looks alarming to say the least.

What isn't at first clear is just why their sales figures are heading south. To be fair, competition like Briscoes Homeware, part of Briscoe Group Ltd [BGR.NZX] and Kmart are kicking their backside and they never used to. Offerings from The Warehouse' competitors are better and sometimes cheaper, indicating buyers for those competitors are doing a much better job at picking what consumers want.

Ian Morrice, Warehouse CEO has indicated that sales were down because of weak "consumer electronics, gaming, CDs and DVD" sales but this sort of excuse has been used by Mr Morrice before for sales dips and even in the centre of one of our worst ever economic periods the sheer size of the company should mean that its buying power trumps that of its smaller competition.

What I think might be happening though is that former Warehouse shoppers no longer know what the company stands for as it has transitioned over the last few years from a company with a focus of the cheapest possible prices for unbranded goods to a company that is now selling increased offerings of branded goods for close to what its competitors are.

Increasingly though, as traditional Warehouse shoppers get older and have less disposable income, the younger consumer is finding that there are hipper, cheaper places to go like specialty retailers like JB Hifi for electronics, DVDs and CDs and fashionable mall stores for lingerie and women's clothes. They simply wouldn't be seen dead at a a Warehouse store and that is clearly a problem for the company and its shareholders.

To be fair to the company other retailers are finding the going even tougher, with some vanishing over 2010 and more set to do so over 2011 as discounts get bigger just to keep market share. Some of its competitors are losing big money and will not be able to outlast the red sheds.

Having said that, The Warehouse have to decide whether they are going to offer more choice and brands at the best prices or languish like the competition they helped kill in the 1990s least they end up in the same boat themselves in years to come.

Disclosure: I own WHS shares in the Share Investor Portfolio

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  1. Hi Darren,
    They'll bounce back and they will still make 50m + profit this year and the dividend will still be good.
    They are like K-Mart in America and K-Mart does well when economic times are tough. I think the Warehouse will be ok.

  2. The thing is RJ, The Warehouse used to do well during average economic times and better when there was a recession.

    I think they will be OK too but they seem to be a little complacent when it comes to their competition and that is what killed the Warehouse' competition in the 1980s/1990s.

    They have to have a plan to turn the sinking sales around. They don't seem to have one.


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