The Warehouse's $54m loss: When strategy misfires and competition nails it

For the first time in its 42-year history, The Warehouse, one of New Zealand’s largest discount retailers, has reported a significant annual loss—a $54.2 million net loss. This marks a pivotal moment, not only for The Warehouse but for the entire retail landscape in New Zealand. The reasons behind this loss highlight key lessons in strategy, execution, and market adaptation that other retailers can learn from. Before we get into what went wrong it is worth noting that The Warehouse has meandered with focus, misalignment and discipline for years. This is not a dig at the people within the organisation - there are some exceptional retail practitioners within this business. Yet the Board and ELT seem to have been charmed by the diversification potential and other shiny opportunities without maintaining three critical factors (1) the role and position of The Warehouse in the NZ retail landscape (2) internal strategic alignment and (3) a laser-focus on the customer.

A Perfect Storm: What Went Wrong?

The Warehouse's struggles cannot be attributed solely to external factors like inflation and the global economic downturn. Several internal missteps and increased competition played significant roles in their underperformance.

1. Overambitious diversification strategy The Warehouse’s push towards an "ecosystem" strategy, which included ventures like TheMarket.com and Torpedo7, which overstretched its resources. These ventures failed to achieve profitability, with TheMarket.com eventually being slated for closure after posting significant losses.
2. Execution issues and misaligned product strategy The Warehouse’s execution in its core categories, particularly in apparel and homewares, has fallen short. There are many factors impacting this but the competition (including Kmart) have nailed them to the wall by being more on-trend, engaging and positioned.
3. Digital and E-commerce lag Despite efforts to grow its online presence, The Warehouse have lagged behind competitors which offer a more seamless and appealing e-commerce experience. This might be harsh as some competitors are digital pure-plays in this market, however, if you have an eco-strategy vision, this is key. TheMarket.com provided a distraction while a move into The Warehouse becoming a marketplace might have come far too late in the strategy.
4. Rising operational costs Along with supply chain disruptions, The Warehouse faced rising labour and overhead costs, which squeezed its margins further. However, so has the rest of the world. The business however has not been able to "cut the cloth" as effectively as its competitors and I think this is largely cultural (which I'll cover later).

Competitive Pressures: Who’s impacting The Warehouse?

The retail landscape in New Zealand has evolved dramatically, with several competitors eroding The Warehouse's market share:

1. Kmart: Kmart has aggressively captured the budget-conscious consumer with its broad product range and competitive pricing. Its private-label brands and focus on style at low prices have outperformed The Warehouse in many areas. Just sit on TikTok or Instagram and watch the endless reels of finds and recommendations. These guys understand their audience and trends to the "nth" degree (or they are just exceptionally talented).
2. Foodstuffs: (Pak’nSave, New World, Four Square) Foodstuffs has been a significant player, especially Pak’nSave, which targets the same value-driven customers as The Warehouse. The grocery category has been crucial for The Warehouse to get frequency and recency of visitation, but Foodstuffs has effectively captured the bulk of this market through its low-cost model and compelling positioning.
3. Costco: Costco’s entry into New Zealand added another layer of competition, especially in bulk buying, groceries, electronics, and apparel—categories The Warehouse traditionally relied on. Costco will have more impact as they open a DC in NZ and lay more footprint. It's not if, but when they will have a more compelling reach throughout all of NZ.
4. Briscoes and Farmers In the homeware and apparel categories, Briscoes and Farmers remain strong competitors, offering targeted promotions and mid-range to premium products. Their consistent promotional activity and strong brand positioning have attracted customers who might have otherwise shopped at The Warehouse. No one can dispute Briscoe's results and if like me, you have shopped at Farmer's anytime recently, they are having a renaissance in categories like Kid's, Homewares, Furniture and Kitchenware. Women's fashion is still continuing to grow and beauty continues to look strong.
5. Online Retailers (Trade Me, Amazon, Shein, Temu) Trade Me remains New Zealand’s dominant online marketplace, while Amazon continues to grow its footprint. And don't underestimate the impact of Shein and Temu in certain audience that are the Warehouse's target market. While there is no country-level specific data for these two, in Australia, Temu had an estimated $1.7 billion in sales, while Shein reached $1.1 billion in the 12 months leading up to June 2024. Both platforms have seen a rapid rise in popularity due to their ultra-low prices, particularly during the ongoing cost-of-living crisis. This has led to millions of monthly active users across both platforms, with Shein serving mostly younger, female shoppers, and Temu attracting an older demographic.
6. The Chemist Warehouse Chemist Warehouse has rapidly expanded its physical stores in New Zealand while also building a strong e-commerce platform. This omnichannel strategy has likely attracted customers who appreciate the convenience of shopping both online and in-store, giving it an edge over The Warehouse, which has struggled with e-commerce. Chemist Warehouse is known for its aggressive discounting, which aligns well with price-sensitive consumers—a demographic that The Warehouse also targets. By offering products at lower prices, especially in health and beauty, Chemist Warehouse has drawn customers away from The Warehouse in these categories.

Key Insights for Retailers

The Warehouse’s struggles offer several important lessons for other retailers:

1. Diversification can work, but it needs to be strategic Retailers must ensure that diversification is aligned with their core strengths. It should not come at the expense of operational efficiency or dilute the brand's focus. Before entering new categories or launching new platforms, thorough market research and clear execution plans are essential
2. Agility is crucial for success Retailers need to be flexible in responding to changes in consumer behaviour. The Warehouse’s slow adaptation to shifting preferences, particularly in key categories like apparel, led to costly discounting and margin erosion. Leveraging real-time data and adjusting quickly to trends is critical in maintaining competitiveness.
3. Keep a Laser Focus on Your Customer The key to thriving in today’s competitive retail landscape is having a deep, ongoing understanding of who your customers are and how you're meeting their needs. It’s about consistently aligning your product offerings, pricing, promotions, and customer experience with evolving consumer expectations. The Warehouse failed to keep its finger on the pulse of its customer base, particularly as competitors like Kmart and Pak’nSave sharpened their focus on affordability and value.

Big corporate retailers display certain behaviours and have are impacted by industry cultural hang-overs from our ecosystem and small market. At the end of this article is an additional read relating to what I think The Warehouse specifically displayed of these behaviours.

The Warehouse’s first-ever annual loss is a stark reminder that even well-established brands need to evolve continuously to stay competitive. For retailers, focusing on core strengths, remaining adaptable, and executing considered strategies effectively will be key to navigating the challenges of a dynamic retail environment.

Successful retailers are continuously refining their approach based on real-time customer data, ensuring that every element of their offering—from product selection to price points and promotional strategies—meets the precise needs of their target market. Without this focus, retailers risk falling out of sync with their customers, leading to missed opportunities and declining loyalty.

Don't under-estimate The Warehouse by any means. And this isn't a trashing of the business but a cautionary tale. By learning from The Warehouse’s missteps, other retailers can position themselves for long-term success in an increasingly competitive market. And with their own self-reflection they hopefully will return stronger.

PS. Can someone explain to me the current Warehouse marketing campaign? Other than the dreadful lip-synching I want to understand what and why? Many things fly around my head about legacy taglines, jingles, customer positioning and your competitors. If ever The Warehouse needed a reset now is the time, but it this the right direction? It just feels "meh" and a missed opportunity.

ADDITIONAL READ - Big retailer behaviour watch-outs

I have seen the good, bad and ugly of retail and by and large it's good. Even in big retailers. But there is an ugly cycle that occurs that is a result of bad behaviour that I think is a result of the size and expectations of bigger retailers to "deliver." Deliver growth consistently, cost reduction consistently, head count reduction, etc, etc. The sector talks a lot to "innovation and investment" but the behaviours and expectations differ. Call it cultural perhaps but it is a result of some legacy and institutionalised behaviours and it isn't unique to NZ. But let's relate it to The Warehouse use case.

• Acquisition: The Warehouse is great at identifying great adjacent businesses for diversification. Torpedo7 was a retail mover and shaker prior to its acquisition by The Warehouse in 2013. Founded in 2004 as an outdoor and adventure gear retailer in New Zealand. The company started as an e-commerce platform specialising in selling bikes, camping equipment, and other outdoor adventure gear at competitive prices. Torpedo7 quickly gained a reputation for offering high-quality products at lower prices than traditional brick-and-mortar stores, making it a favourite among outdoor enthusiasts. Over time it expanded its product range to include snow sports, water sports, and fitness equipment, operating primarily online but also venturing into physical retail stores through partnerships. This was a rapidly growing retail sector. But often acquisition doesn't achieve the economies of scale promised but more significantly often these young hungry businesses lose the culture and "heart" that makes it so compelling. The bigger entity swallows all the goodness and spits out another version of what it already does. Everything that made Torpedo7 unique got lost along the way. A different version may have seen the smaller entity teaching the bigger entity new tricks to thinking and responding to their customer opportunity.
• Efficiencies: The Warehouse (and this isn't unique to TWL but is endemic in large retailers), identify efficiencies and wow the leadership and Board with the opportunities. These are real but what they fail to right size or account for is it takes time to imbed the efficiencies to optimise the impact. What this means in reality is that costs are cut to achieve the "synergy savings" that were promised far too early. Simplistically, "if we implement this new system/business/etc we will achieve xyz in cost savings. This will be as a result of headcount reduction, improved productivity from the new widget or improvements in go to market activity (eg. margin savings)". But to get to the "synergy savings" the business will need to make and implement change/system/process. This can take 12-24 months depending on how extensive the change is. But often the leadership team have made promises to get this across the line which realistically can't be delivered. So then the headcount is cut before the process is implemented and then you have a stressed out team doing BAU, change and trying to achieve this ideal synergy saving. That might be too simplistic but I've sat through many cycles like this..... "we will just get it across the line with the board and then we can right-size/change it." Bollocks! It rarely happens and then you are asked to deliver the results earlier to make up for something else that didn't work.
• Agile: The Warehouse operated under an Agile structure which is popular for companies looking to adapt to changing market conditions and improve responsiveness to customer needs. There are pros and cons but I am not a big fan of adoption of this structure and approach in retail for several reasons, which requires a jug of G&Ts to discuss. But there are benefits no doubt. The cons are what also have surfaced in The Warehouse. There is a focus on the short-term which overshadows long-term. Without getting into the precise machinations, everyone is absorbed in being involved and delivering stuff. Often talent within The Warehouse are "in another bloody meeting", rather than out there understanding the customer. Coordinating Agile teams across different departments and locations does add to misalignment and actually can contribute to slowing down real and necessary change. Speed and the iterative nature of Agile means many initiatives never actually get completed and this also makes it hard to measure impact and performance of initiatives making it hard to know the difference between success and failure. I don't know first-hand but I have heard on good authority from many sources that there was also a rub. A rub between the sentiment of Agile to provide a more flexible, autonomous and collaborative environment but still having hierarchical decision-making. Whether this is true or not, doesn't matter, as it was a widely held perspective by employees. And we know what people think is more important than the facts in these cases.
• Retail fundamentals: The basics, "sticking to your knitting", whatever you want to call it, there are things that need to be done first before all else to stay in the game and be relevant, compelling and desirable to customers. There are trade-offs customers will make. Kmart constantly looks like someone has ransacked the place, but we overlook that because the price, range and new products are mind-blowing. We might only shop at Briscoes when they are on-sale but we pop in anyway. The Warehouse for many years didn't have the basics in order. The product was underwhelming, the pricing was not competitive and the store experience was below average. Again, this isn't a dig at the hardworking teams - you are only as good as the leadership and strategic direction you are given. If you have to keep you labour hours at a certain ratio, you reap what you sow.

Interim acting Chief Executive John Journee said to the BusinessDesk following the annual results announcement, “Yes, we operate in a highly competitive market and that’s obvious. But, good competition makes us better as well.” This is true and now it's time to see The Warehouse respond. And they have started. Check out Barbie's Dream House at The Warehouse Albany.