Why Kmart’s expansion is more bad news for The Warehouse

Kmart’s expansion in Auckland is likely to eat into earnings for The Warehouse and nearby US wholesale store Costco, an analyst says.

Yesterday the low-price Australasian retail chain announced it will open its largest New Zealand store.

An outlet spanning more than half a hectare is to be built in Auckland’s northwest at Westgate.

That will be almost nearly opposite the American-owned Costco Wholesale, in a street yet to be created: Maki Place, off the Maki St thoroughfare.

At 6700sq m, the new big-box Westgate store will be larger than the almost half-hectare shop of just under 5000sq m, Kmart Manukau, which opened last year.

It will rise opposite the Westgate Lifestyle Centre anchored by Harvey Norman, Briscoes, and Rebel Sport.

Forsyth Barr equity analyst Paul Koraua expects Wesfarmers-owned Kmart to do roughly $50 million in sales when the new store opens based on the size of the store.

“That $50m of sales is going to have to come out of its competitors in the area. So The Warehouse, and potentially Costco in Westgate are going to have to give up a little bit of share to make room,” Koraua said.

An impression of the vast new Kmart store, due to open in 2026. It will be on Maki Pl, off Maki St, across from Costco Wholesale. Photo / Kmart

He said that while headline consumer spending numbers were down, Kmart’s sales have continued to hold up well thanks to its diverse product offering.

“It’s obviously a positive for Wesfarmers. I think they’ve been winning a lot of share recently, just by strength, product offering, price point, etc. It’s very positive for them. But if you’re a competitor who has a store in the area, I think I’d be a little bit cautious of what share this will take out of that Westgate market.”

Tim Morris, director of food, FMCG, and retail at Coriolis said that Kmart has needed to increase its physical presence in New Zealand for some time.

“My hot take is Kmart makes a great store offer and has always been under-stored in New Zealand, and it could easily have quite as many stores. One of the things that has benefited The Warehouse is the failure of Kmart to expand over the last 20 years,” Morris said.

He thinks Kmart and Wesfarmers have continued to perform because fundamentally “People still need things.”

Morris also believes that Kmart’s competitors now include the likes of online-based retailer Temu.

Kmart v The Warehouse financials

Financial accounts for Kmart NZ Holdings show it had total revenue of $924m in the year to June 2023, up from $719m in 2022. Its net profit after tax was $69.7m up from $48.8m.

The NZ arm paid a dividend of $66m, up from $50m. Its 2024 New Zealand accounts have yet to be filed with the Companies Office. It currently has 27 stores in New Zealand.

The Warehouse Group which includes The Warehouse, Warehouse Stationary and Noel Leeming, reported revenue of $3.4 billion in the year to July 2023 with a net profit of $29.9m. The red sheds alone reported sales of $1.9b, an increase of 9.6% on the prior financial year. It is due to report its full-year 2024 profit on September 26.

In June the retailer said it expected FY24 sales from continuing operations to be between 6-7% lower than the prior year, and FY24 earnings before interest and tax, excluding the loss from discontinued operations and any potential restructuring costs, to be in the range of $22m to $30m, compared to $83.4m in the prior year.

Interim CEO John Journee said at the time: “Retail across New Zealand is under pressure, and we are no exception. Market conditions and cost of living pressures have continued to be challenging into our fourth quarter and we expect these conditions to continue through to our year-end.

“We are taking decisive action internally to address areas we can improve. We are exercising tighter cost control and we have a laser focus on trading our core brands, The Warehouse, Warehouse Stationery and Noel Leeming.”

Former chief executive Nick Grayston told the Herald earlier this year that it was already facing intense competition from online retailers such as Temu and in-store adversaries including Costco, Kmart and the big supermarkets.

Encouraging signs

Westpac senior economist Satish Ranchhod said that Kmart’s financial resources allowed it to avoid business pressures across the economy.

“They think New Zealand is probably still an attractive market, and I think it’s also a bit different for big players like Kmart,” Ranchhod said.

Satish Ranchhod, senior economist at Westpac Bank. Photo / NZME

“Kmart can take that longer-term perspective, and despite these temporary slowdowns, they think still that there’s a growth opportunity. I think the really big thing here is that this highlights that retailers who’ve been able to pivot in response to changing economic circumstances have been doing better.

“Kmart prides itself on offering value, high-value options for consumers when they are getting cost of living pressures, and that’s what we’re seeing right now, and New Zealanders that responded to that.”

He thinks that this kind of investment is an encouraging sign that businesses still see growth opportunities here in NZ.

Expansion plan rolls on

Back in September, Kmart opened its massive new North Island distribution centre at Hamilton’s Ruakura Superhub.

The 40,000sq m facility would serve as a strategic hub for Kmart’s North Island operations and was the hub’s largest occupier to date.

It included warehousing, distribution, storage, a container yard and offices, and would supply 26 Kmart stores across New Zealand, alongside the Christchurch distribution centre.

Kmart opens its huge new 40,000sq m distribution centre at Hamilton's Ruakura Superhub. Photo / Danielle Zollickhofer

Kmart chief executive John Gualtieri said the larger, purpose-built facility would allow the company to work more efficiently and has “lots of opportunity” for years to come.

“We’re passionate about setting up for the future in New Zealand ... Our new distribution centre will enable us to improve our productivity, meaning we are creating a more reliable flow of stock into stores and into our customer’s hands.”

The Superhub was developed by Tainui Group Holdings (TGH) whose chair Hinerangi Raumati-Tu’ua described the opening of the Kmart facility as a “real boost” to the Hamilton and Waikato economies.