The Warehouse bets big on transformation as net profit falls

The Warehouse bets big on transformation as net profit falls

New tech and new agile ways of working feature in The Warehouse Group's future

Nick Grayston (The Warehouse Group)

Nick Grayston (The Warehouse Group)

Credit: The Warehouse Group

The Warehouse Group will "say goodbye to old ways of doing things" and push forward with transforming the way it works, chair Joan Withers told investors this morning.

"We continue to apply a laser focus to fixing our retail fundamentals and are embracing opportunities to build a digital future – and we are intensifying these efforts," Withers said in the group's annual report.

"We are now on the cusp of the next stage in our evolution: becoming a business that is Agile, with the discipline, insights and confidence to adapt, focus and deliver even in times of global upheaval and economic contraction."

Last week, the group sales of $3.2 billion, up 3.3 per cent on 2019 or 1.5 per cent when adjusting for 2020 being a 53-week year, compared to 52 weeks in 2019. 

Group sales in the second half of 2020 were $1.5 billion, up 4.1 per cent on FY19 but flat when adjusting for 2020 being a 53-week year.

The group reported full year net profit after tax of $44.5 million, down 32 per cent on 2019, however, this included $67.8 million received in government pandemic response wage subsidies. 

Excluding the wage subsidy, the group made a loss of $4.3 million.

The Warehouse Group is poised to deploy Oracle's E-Business suite cloud software at the back end with with Salesforce’s commerce cloud powering activity at the front as part of a  $100 million investment in transformation over the next two and a half years.

“It’s probably the biggest technology transformation we’ve undertaken, certainly since the last enterprise resource planning investment, which is by now probably 12 or 13 years old,” the group’s chief information officer, Edwin Gear, told The National Business Review last week.

The group faced headwinds during the Christmas period of 2019, brought on in part by New Zealand’s adoption of heavy discounting as early as Black Friday in November and a lost week of trading that recurs every six years, CEO Nick Grayston said in the report.

However, the business also suffered a "self-inflicted wound" from an initiative to centralise fulfilment functions for The Warehouse and Warehouse Stationery and deploy a new Warehouse Management System (WMS).

"With the benefit of hindsight, we now know that insufficient user input and early-stage support in the planning and development phase, underpinned by poor quality of data, data architecture and governance, contributed to the issues relating to the WMS project," Grayston said.

"We regret that this happened and the inconvenience that it caused to our customers."

Grayston said the group had have learnt a great deal from the experience, which underscored that the old-fashioned siloed methods of execution and hierarchical structures were no longer fit for purpose. 

"It also highlighted that 25 years of under-investment in information systems and physical infrastructure is a problem we must address in order to become a nimble, customer-centric company."

An experienced senior executives, Pejman Okhovat, was now in charge of the integrated supply chain.

"We had already planned to shift to an Agile operating model and the WMS experience further validated its introduction," Grayston said. 

"These learnings are all the more important given the huge slate of systems modernisation we have ahead of us."

The response to the WMS challenge meant the group was much better placed when COVID-19 hit.

"The closure of our physical stores and the subsequent permission from the government to sell essentials online proved to be a quantum leap for our online sales, with 48 per cent of our online purchasers during this period being new e-commerce customers.

"We saw exponential growth in eCommerce in just two months from April through to June. While not all this growth has survived lockdown, much of it has and this behaviour shift will have profound effects on legacy retailers, which necessitates the acceleration of our transformation."

The benefit of becoming much more agile was that the group quickly opened 30 The Warehouse and Warehouse Stationery stores as online fulfilment centres, which took a lot of the pressure off, Grayston said.

"We also quickly moved to open all 75 Noel Leeming stores as fulfilment centres due to demand.

It was by no means perfect, but by and large, the business coped and that would not have been the case in the last months of calendar year 2019. 

"It’s a real learning from adversity, and also points into the health of the future.

"We still have in front of us a major task in terms of information system and physical infrastructure upgrades. We have an integrated systems strategy and are well placed to begin rolling out improvements. 

"For example, introducing a new finance and inventory system in The Warehouse will enable real-time visibility of inventory that will have a customer-facing benefit.

Among key risks to the transformation noted were change management associated with migration from legacy to integrated back-office functions; integration between new and legacy systems through multiple middleware tools and architectures, and; the availability of suitably qualified and experienced technical and functional resources. 

Mitigations included ensuring transformation to new group and Torpedo7 ERP systems was business-led and "not led by solution vendors and systems integrator"; the design of a multi-channel middleware integration architecture to ensure agreed standards were applied and upheld, and; contracting suitably experienced service partners to leverage experience and augment scarce resources.

January marked the completion of the group’s earlier "Rise" transformation programme, which resulted in 275 initiatives being implemented. 

The programme was designed to improve financial performance and focused on simplification to reduce complexities and costs, reduce working capital, drive efficiencies and generate greater customer relevance.

The group partnered with an unnamed consultancy firm to assist with the implementation of the programme and incurred costs of $22 million which largely represented the consultancy firm’s success fees.

However, in a 2017 news report, chair Joan Withers said the retailer had engaged global management consultancy McKinsey & Company to assist with implementing its change strategy.

McKinsey & Company registered one of its international companies as operating in New Zealand last May.

McKinsey Pacific Rim Inc's New Zealand business reported total revenue of $24.1 million for the year ended 31 December 2019, down from $30.6 million in 2018.

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