Analysts describe The Warehouse as a "sunset" brand, set to slowly decline out of business. So what are the challenges it needs to address to turnaround? Photo / Jason Oxenham
Shares in The Warehouse are trading around their lowest levels since listing on the stock exchange.
The company doesn’t have a permanent chief executive nearly a year after its last chief executive resigned and its revenue and profit margin is under pressure.
Interim chief executive John Journee is undertaking a turnaround but what will it take to get New Zealand’s largest retailer back in the game?
In its 2025 first-half result in late March, it posted a return to profit of $11.8 million. However, revenue continued to decline, falling to $1.6 billion, down 1.6% compared to the first half of 2024.
The retailer’s earnings before interest and tax also took a significant hit, down 54.5% to $19.5m, while gross profit margins decreased a further 180 basis points to 32.5%.
Following the result, Journee said the transition was still in its early days, but the result was an encouraging early sign.
“These are our first results under our new strategy and they reflect a business in transition. We’re resetting the focus, addressing legacy issues and embedding our brand-led structure and approach,” Journee said.
“We’re very focused on what we can do and there’s heaps that we can do and are doing. I suppose an advantage of basically leaving opportunities on the table is you can pick them up and run with them.”
But as The Warehouse continues to face margin pressures, weak consumer demand and confidence, and more competition entering the market, what do analysts believe are the biggest challenges facing The Warehouse?
Clare Capital senior analyst Laura Matthews thinks a key difference between The Warehouse and its biggest competitor, Kmart, and a potential reason why it is falling behind, is its supply chain and procurement process.
Kmart, which revealed a bumper $106 million profit for its 2024 financial year, has a unique model in which 85% of products it sells are from its internal brand, Anko.
These products are designed by a Kmart-owned product development company, Anko Global, and utilising a network of 900 manufacturers, it can bring a new product to market in just 180 days.
“They [Kmart] can have more control over the production and the end products, whereas The Warehouse is more of the traditional retailer model where they have to go out and find existing products that they can buy and stock for the end customers,” Matthews said.
“There’s a big difference between those two business models, and that reflects in the operating profit margins.”
For the 2024 financial year, The Warehouse had an operating profit margin of roughly 2%, compared to Kmart’s 2024 result where it was roughly 16%, eight times higher.
Not helping that situation is the growth of grocery for the red sheds, a particularly low-margin segment.
It now represents 25.8% of total sales for The Warehouse, with category sales up 12.5% on the 2023 financial year.
“At the same time while it’s growing, their home and apparel segments are shrinking, and they’re the higher margin segments that ideally you want to be making up more of your sales.
“If you don’t have a good gross margin to start, you’re never going to get a good operating margin at the end,” Matthews said.
Perhaps the biggest challenge ahead for the red sheds is not necessarily its internal struggles, but the external competitors that are on the rise or set to open, with no bigger disruptor than Swedish giant Ikea set to open this year.
Forsyth Barr analysis has forecast Ikea to earn $191 million in sales over its first year in business, and to take roughly 6% of the NZ furniture, floor coverings, housewares, and textiles market.
According to their analysis, The Warehouse currently holds roughly 11% of that market share, with Kmart sitting on 7%.
A retailer entering the market and taking market share roughly the size of their biggest competitor is a serious concern.
Chris Wilkinson, managing director of First Retail, believes there is a lot of big box retailers creeping into The Warehouse’s categories.
“The challenge for them is that they’re in this really difficult middle ground. All those areas where they potentially have been able to win in the past, there’s this cannibalisation.
“The Warehouse is across so many of these different categories that [it] makes it particularly challenging for them to find something that they can own decisively and be successful.”
He thinks the brand needs to refine and possibly grow product categories that separate it from the likes of Kmart and Ikea to find its edge, including areas like gardening and, perhaps controversially, grocery.
Wilkinson said that consumers are realising the value on offer for the staple products it introduced, but getting them to recognise The Warehouse as a serious grocery player is a much harder task.
“The biggest challenge is they’ve got to be able to deliver grocery with convenience. If you’ve only got one aisle, the key thing is you don’t need lots of products. The real aspect is to have volume, more of less is the key and to be able to deliver convenience.
“If they can leverage that and actually turn it around a decent margin on it, there’s opportunity there.”
A recent report by Forsyth Barr analysts Paul Koraua and Rohan Koreman-Smit titled Retail Rundown Retailer Life Cycles, described the four phases of a retailer.
The pair looked at 53 listed retailers, with more than 1000 financial years of data, to understand the shareholder returns retailers have historically delivered depending on where they are in the life cycle.
The four phases include growth, optimisation, maturity, and finally sunset. In sunset, both store count and earnings per store are in decline typically because of long-term market share loss, broader industry or consumer preference shifts, and/or management mis-execution.
Competitors of The Warehouse including Briscoe Group, KMD Brands and Hallenstein Glassons all range from optimisation to maturity.
Unfortunately for The Warehouse, Koraua and Koreman-Smit believe the business “is displaying all the characteristics of a company in sunset”.
Koraua explained that the categorisation doesn’t mean the business is going to go under in the near future, but more about how the business has been trending over the last 10 to 15 years.
“If you take a wide lens and have a look over the last 20 years, you’ve seen earnings before interest and tax (ebit) margins decline pretty materially,” Koraua said.
“Gross margins have still always been pretty solid for the company, but it’s been mixed market share losses and an inability to control costs which has really hurt the most in the long run.”
Koraua agreed that competition is a key challenge for the retailer, referencing the impact from Kmart and Ikea once it opens will continue to have, with the now added pressure of e-commerce retailers such as Temu and Shein.
Latest figures from Stats NZ show imports of low-value goods, purchased directly by households, increased by almost a third last year, and have more than doubled since before the pandemic.
He also acknowledged Wilkinson’s point about category creep, believing the only category The Warehouse may be performing better than Kmart is in toys.
But, overall, Koraua thinks that identifying areas of opportunity for The Warehouse is a “super hard question”.
“They tried to do online and to be the New Zealand Amazon, that came crashing down. They’ve tried to become everything to everyone with Warehouse Extra, that came crashing down. They tried moving to Australia, that didn’t work.”
He highlighted the business’s store network and legacy in New Zealand as key differentiators, but said they need to leverage it to benefit from it.
“If you’re sitting in Timaru and there’s a Warehouse down the road that’s been there for 30 years, you’re still probably going to walk in there. If the product’s been changed around and it’s more attractive to consumers, maybe that’s how they can start winning that market share back, winning back in the regions.”
Tom Raynel is a multimedia business journalist for the Herald, covering small business, retail and tourism.
It follows Australian Competition and Consumer Commission’s similar decision on April 9.