Fran O'Sullivan: Red Sheds over governed and under led

The Warehouse can't put off a sweeping review any longer as other retailers eat into its profit. Photo / Natalie Slade

Wanted: Chief executive with vision, vigour and verve to put the mojo back into The Warehouse.

As chief executive jobs go this one ought to be a right doozy.

Not because it comes with a $2.8 million pay packet - frankly a stellar candidate will want a bit more than that given the challenges he/she will face reversing the company's decline.

But because the major issue the new chief executive will face is getting some clear water between her/himself and an over-controlling board which reserves iconic status for The Warehouse founder Sir Stephen Tindall. He remains a director, is the major shareholder and his personality continues to percolate the company through his focus on PC qualities like sustainability which are not uppermost for customers in today's tough climate.

Right now The Warehouse has all the appearances of a company which is over-governed and under-led.

Cue the absurd situation where incumbent chief executive Ian Morrice reacted like a stunned mullet when the skids were rather nastily slipped under his tenure at the company.

Morrice's initial reaction to speculation that he was facing the axe after a drop in sales over the Christmas period seemed bizarre. He had absolutely no comment to make.

Even Telecom chief executive Paul Reynolds, who faced real credibility issues over the botched launch of the XT network, did not wait around for his chairman to take the lead before fronting questions on his tenure.

But Morrice's "confirmation" that he was planning to resign in 2011, had to wait until chairman Keith Smith issued the obligatory comfort statement saying the board "was comfortable with Ian's performance".

The speculation was hardly surprising given the company's directors had reported a 2.7 per cent drop in sales for the two months ended January 2 compared with the same period last year. Same-store sales were down 3.8 per cent. Warehouse Stationery sales were flat.

Morrice's explanation: "As widely reported retail sales in general have been very soft over this key seasonal trading period. We expected the sector to remain difficult and highly promotionally driven over the course of our 2011 financial year but NZ consumers remain even more focused than we predicted in strengthening household balance sheets."

A fair interpretation of Morrice's words would say The Warehouse's customers were still spending on essentials - apparel, footwear, and seasonal categories - which traded in line with the previous year.

But while spending on non-essentials - electronics, gaming, CDs and DVDs - were well down, it would be incorrect to state this was simply because of customer belt-tightening.

Hungry, specialist retailers such as JB Hi-Fi are starting to eat The Warehouse's lunch in much the same way that companies such as Farmers, Briscoes and Mitre 10 have been taking market-share off the Red Boxes.

The upshot is the company expects its adjusted group net profit after tax for the six months ending January 30, 2011 to be $51 million-$54 million - well down on the $57 million reported at the 2010 interim result.

But the more brutal metrics are the major drop in The Warehouse's market share of the total retail sector from 10.2 per cent in 2004 (the year of Morrice's appointment) to 7.6 per cent. The company has in effect lost 26 per cent of its previous market share during Morrice's reign.

When he was appointed chief executive the calm-mannered Scotsman was stepping into the shoes of Greg Muir whose tenure was a mere two years. Muir had privately chaffed at Tindall's strong presence.

But when the board appointed Morrice they were after a chief executive who would be able to take the company through the difficult transition from its founder to professional management. A chief who would be confident enough in himself not to feel compelled to compete with Tindall, who was still seen as face of the company even though he had branched out. But Morrice has been a bit too faceless.

The problem is that The Warehouse board does not give its chief executive much room to move. It makes a big deal of governance, to the point of having a specific board committee focused on this, when frankly directors would be better directed on the value the board could bring to the business in the way New Zealand's largest listed company Fletcher Building works.

The chief executive's delegated authority is too tightly circumscribed. For instance, the board reserves the right to decide/signoff/decline all material contracts over $1 million in the ordinary course of business, the acquisition or disposal of fixed assets above $1 million and contracts of the company or any subsidiary not previously budgeted which exceed $250,000.

It doesn't take rocket scientist IQ to work out the enormous amount of paperwork this practice would generate given the company's huge numbers of suppliers. But it also suggests a lack of trust in a CEO's judgment.

The fundamental issue is branding. The company's mission statement talks about "making the desirable affordable".

But the perception is that too many of The Warehouse's cheap products will not last the distance. Other retailers successfully promote their own bargains. In the US, Walmart has come strongly through the recession. It widened aisles, reduced the oppressive height of shelves and improved the customer experience with better tailored product choices.

The Warehouse can't continue to put off a sweeping strategic review.

Time for Tindall to re-enter the frame.

It's his money on the line after all.