Warehouse rummages in Australia's bargain bin

By Anna Day in Canberra

Friday 28th June 2002

AUSTRALIA: Where everyone gets a bargain

The Warehouse has entered the Australian retail market at one of the worst possible times. While Australians continue to support the country's 4% economic growth with their credit cards and interest-free loans, retail competition is cut throat.

But that has not stopped sharebrokers' enthusiasm for the company, which is soon to be upgraded from a foreign exempt listing to become fully-listed shares on the ASX. Is there a high reward in such a high-risk market?

The problem facing The Warehouse is that it is bargain time for consumers, with huge discounts at the middle-market retail chains.

One week it is Kmart advertising 25% off its clothing or housewares, the next it's Target matching the discount.

It is only in the food sector that prices have risen over the past year - up 4.7% in a sector dominated by Woolworths and Coles. Prices in the other sectors have risen only 0.9%. Retail trade is up more than 7% but profits are tight.

So why are the retail analysts so enthusiastic? The calibre of the management, the marketing strategy and the stock is winning customers in a nation of shoppers with few loyalties.

The Warehouse target market is far better served than its equivalent in New Zealand. Kmart, Target and Big W compete in the middle market. The more upmarket Myers and David Jones both promise to match any competitors' prices, as do the hardware giants. Bunnings has swallowed most of the big hardware chains in its way, leaving only Magnet Mart and Mitre 10 as competitors.

Then there are the chains and single operators that compete in specific sectors: Officeworks, Super Cheap Auto, Harvey Norman and Spotlight. None of the big garden centres has yet formed into a major chain.

Coles Myer has tried several strategies as profits dropped, including moving Grace Bros/Myer department stores downmarket. All that did was to lose the upper market to the David Jones department store and take market share from its Target and Kmart stores. One new boss later and both Target and Coles Myer have moved further up market again.

At the bottom of the market, where price leads to impulse if not compulsive buying, The Warehouse took over a couple of the big players: Clints and Solly's, but that still leaves Best and Less, Go-Lo and King Kong, plus a myriad of others.

The analysts see The Warehouse slipping in between Go-Lo and Kmart. Chief executive Greg Muir says it is growing at 30% a year and is now one-sixth the size of Coles Myers' Target chain. It is opening or rejuvenating 20-25 stores a year, and claims to be breaking even.

Mr Muir has other ideas. He aims for customer loyalty for specific store ranges, for example cheap gardening tools, home office furniture, shoes and so on. Twenty months on, he says the start-up strategy is on target.

While media reports say the chain is working on low margins, Mr Muir says gross profit is high but net profit is low. It is part of the plan, with start costs for the 20-25 new stores still cutting into profit. It now has 120 stores.

A large portion of the costs relates to the expansion of the already established Solly's or Clints stores, which were much smaller than the typical Warehouse set up.

As leases expire the company is seeking new sites nearby, although it has been the anchor store in new shopping centres in some areas.

It took nine months for the company to buy the Solly's and Clints discount chains and in that time the company got up to scratch on the Australian corporate and retail environment, planning and employment legislation and set up an Australian-dominated buying team. However, it had worked with the two chains before the acquisition.

Because of the huge distances in Australia, the company is looking for one or two sites to set up its logistics centre - it costs the company dearly when stock is mistakenly shipped into Melbourne when it should have been in Queensland.

Now it is relying on a similar formula to the one it has used in New Zealand - the right product and position plus the quality of its staff.

Its staff stands out in the Australian market. The Harvard Bulletin wrote some 20 years ago that the chief executive's characteristics permeated through a company. Certainly in 25 years of journalism I have found you can enter a company at any level and work out the characteristics of the boss.

While Mr Muir denies any claim to have the charisma of founder Stephen Tindall, the analysts have great confidence in him as a chief executive. In the next couple of years they expect profit to roll in.

Disclaimer: Kiwi-born Anna Day works from a Warehouse desk and wears Warehouse boots

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