Enterprise Success: No going back: Retailing in the age of difference

Stories of NZ enterprise success
This is the sixth article in major eight-part NZ Management series: Stories of NZ enterprise success. Senior business journalists Nick Grant and Vicki Jayne draw on insights from the Deloitte/Management magazine Top 200 Awards and associated lists of the country’s leading companies to conduct sector-by-sector review of the underlying drivers of success in key parts of New Zealand’s economy.
Next month: The food & beverage sector.

The importance of the retail sector to the New Zealand economy is beyond dispute. That it serves twofold purpose as both channel for significant proportion of household consumption and leading indicator of confidence in the local economy only boosts its value.
As such, it comes as no surprise that the sector’s previously steadily-rising sales revenue has been stunted by the impact of the global recession. (See box story “Ouch!”)
At the same time, New Zealand retailers remain beset by other challenges. Not least of these are the opportunities and threats presented by technological innovations that constantly fine-tune consumer behaviour. The rise and rise of online retail channels continues apace.
Yet many argue retail’s chief challenge is that recessionary pressures have already caused consumers to evolve. They now exhibit lack of appetite for debt alongside much more prudent attitude to saving. What’s more, this new, risk-averse, increasingly assertive consumer looks likely to be here to stay.
“We all have to realise there’s no going back,” says John Albertson, CEO of the New Zealand Retailers Association (NZRA). “Any retailer hoping we’re going to return to the market of 2003-2004 is in for shock, because it’s whole new ball game.”
So while, as The Warehouse CEO Mark Powell notes, “retail remains pretty simple”, it’s certainly not getting any easier.
The value of sticking to one’s knitting is demonstrated by Kathmandu, the adventure apparel and equipment retailer, which earned the Marsh Most Improved Performance Award at last year’s Deloitte/Management magazine Top 200 Awards.
In its first full year listed on the New Zealand and Australian stock exchanges, the company gave what one awards judge described as “a stellar performance”. It grew sales by 23.5 percent to $306 million, with net profit before extraordinaries improving 47 percent and gross profit margin up by 65.5 percent.
This success is underpinned by Kathmandu’s focus on creating quality branded products for which it reaps both wholesale and retail margins, as result of eschewing selling them via wholesale channels.
The company’s growth, meanwhile, is fuelled by the rollout of new stores. With 46 stores in 2006, its store footprint had increased to 110 by mid-2011. further 15 stores will have been opened by the end of 2012.
Little wonder that, although cautious about the ongoing challenges of the economic environment, Kathmandu CEO Peter Halkett has told shareholders “our performance through the past year gives us confidence that our focused growth strategies should continue”.
Such confidence was underscored by the June opening of new distribution centre in Christchurch that doubled distribution capacity.
A key success factor for Kathmandu is clearly the position it occupies in the quality end of its market and the point of difference the exclusivity of its brand affords.
This is in stark contrast to much of the retail market, which has been engaged in downward spiral of price slashing for short-term cashflow.
“Over the past six years or so, it’s been fiercely competitive market and margins have been halved,” says NZRA’s Albertson. “So if you’re looking at $1 million business, the owner’s taking out $30,000 year on average. That’s huge risk for very little return.”
Noting “there’s point where no one can go any lower on price and still have businesses that are viable”, Albertson suggests that sooner or later (and his personal preference is sooner) retailers need to adopt longer term, more sustainable strategy. Retailers run the risk of huge discounts being bedded into consumers’ expectations.
“Some years ago if you offered 10 percent discount, it sounded like good deal,” he says. “These days you’re probably looking at 30-40 percent. It’s long road back from there especially when you up the ante with the prices offered by some of the online operators… particularly around daily deals.”
Other than those operating their business as discount structures, then, Albertson reckons retailers could do well to shift their focus from price to the total purchase experience. “If price really was the be-all and end-all, by this stage the stores operating at the bottom end of the market would have it all,” he says.
It’s point not lost on Mark Powell, who took over as CEO of The Warehouse just over year ago. The iconic New Zealand retailer – which in May celebrated the 30th anniversary of its first store opening – boasts scale and reach that’s legitimate cause for envy. Around 20 percent of Kiwis visit one of its stores each week.
Nonetheless, the Deloitte/Management magazine Top 200 figures clearly show The Warehouse has been in decline for some years. Since peaking at $2.26 billion in 2004, its revenue has fallen each successive year, recording total of just under $1.68 billion in 2011, the company’s lowest since 2001’s $1.66 billion.
Given the opportunity to blame this underperformance on fallout from the global financial crisis, Powell demurs.
“You could argue The Warehouse is price-led retailer and so should benefit in recession,” he says. “While it’s certainly very competitive environment out there, lots of our issues go back over the past decade.”
Although he appreciates there were valid distractions for senior management during this time – including an ill-fated attempt to expand into the Australian market and being the target of potential corporate takeover – Powell says these issues fundamentally stemmed from long-term, systemic lack of reinvestment in the business.
“As retailer you need to be refitting stores every seven years. So if you have 89 as we do, you should be doing about 15 to 20 stores year on regular basis. The Warehouse only refitted about 15 of them in 10 years. That’s substantial underinvestment.”
Now faced with playing catch-up, the company has committed $130 million to store investment programme.
“We have just done the first 10 refits, and we’ll roll into another 20-odd next year and about 24 the year after, to really bring our stores up to standard, so they’re clean, contemporary, operate well and give good customer experience.”
That customer experience is being further enhanced by increasing the number of shop-floor employees.
“We got into loop of trying to hold our profit by reducing costs rather than driving sales, which isn’t sustainable long term. In any retail business you’ve got to control costs tightly but it’s fine line. And when you start removing costs that actually hurt the customer experience to the degree that you start losing sales, it becomes self-defeating,” says Powell.
“So we’ve put 300-odd people back into our stores in the past year to improve service to our customers and there’ve been lot of good results from that. During the 2000s we had many years of seeing same-store sales decline, for instance, and now we’re starting to see consistency in the sales group, which is what you really want.”
Another leg of The Warehouse’s turnaround strategy (it has six legs in total) is what Powell refers to as “multi-channel and direct customer engagement” – leveraging the opportunities offered by technology.
In other words, direct customer engagement includes the recent rollout of BizRewards account card aimed at small businesses and the soon-to-be launched ‘Your Warehouse’ that, for now, remains commercially sensitive secret.
It also includes the installation of new customer relationship management system (Oracle CRM) in order to fully understand and benef

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