High-quality products key for Warehouse

The Warehouse Group has opportunities to increase its ``wallet share'' across all categories by focusing on consumers with high disposable incomes.

Morningstar analyst Johannes Faul said the group was achieving the goal through a programme that focused on stocking more international brands, speeding up own-label product development and improving customer satisfaction through better product presentation.

``There is a notion among shoppers The Warehouse Group, although cheap, does not offer high-quality products. Management would do well to dispel that notion.''

Writing in a research report, Mr Faul said the integration of Noel Leeming would probably result in some reputable premium brands moving across the the group's Red Shed stores over time. More people could be enticed into those stores, improving their brand perception.

The Warehouse Group did not have an economic or market advantage, he said.

The company stood apart in the New Zealand retail sector because of its sheer size and it had unprecedented scale from which it would leverage its brand.

It had a total retail trading area of about 650,000sqm, four times the size of rival Briscoe Group.

However, its brands were easily replicated, had low barriers to entry and had failed to resonate with consumers in the past three years, Mr Faul said.

Discount department store and electronic retailing were highly competitive and price competition was a major factor in determining sales.

Unfortunately, price pressure had led to margin pressure. Operating margins for the group had fallen by more than half, from 7.4% in 2010 to 3.6% in 2017.

The group's offering was not differentiated enough to justify selling products at a premium retail price, he said.

The group competed on a global stage and had the ``distinct disadvantage'' of servicing a small domestic population of below five million, compared with those from the US servicing more than 320 million.

Online retailers operated within an environment of very low operating costs. Technology provided a 12-hour shop front and no need for expensive shop leases or selling staff.

Lower operating cost enabled those new market entrants to deliver products at a compelling price, Mr Faul said.

Morningstar placed a fair value estimate on the group at $2.30 a share. The Warehouse Group was forecast to achieve compound annual growth of 1.7% per year during the next five years and have operating margins averaging about 3.6%.

The group's focus on e-commerce would result in strong online sales growth, he said.

The Warehouse shares were up 7c to $2.10 at the close yesterday.

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