Warehouse moves into 'cut-throat' market

16:00, Dec 10 2012

The Warehouse Group will boost its shaky brand power with the purchase of Noel Leeming Group, but it is joining a cut-throat, margin-choking market, analysts warn.

New Zealand's biggest listed retailer announced yesterday it had bought the group, which has about 1500 staff and comprises the Noel Leeming and Bond & Bond electronics and appliance chains, for $65 million.

That is less than half the $138.5m paid in 2004 by its previous owner, Australian private equity firm Gresham Private Equity.

Mark Powell, chief executive of The Warehouse Group, which includes Warehouse Stationery, said consumers could see some Noel Leeming electronic and whiteware brands appear in its red and blue stores.

"But it won't be wholesale changes. It would be more tweaking the ranges of each retail brand. At the end of the day they're very distinct retail brands."

The Warehouse had had mixed success in getting reputable brands in stores, he said. It stocked many brands including Telecom and Vodafone in mobiles, but had found others reluctant to get on board.


Tim Morris, analyst and director at Coriolis Research, said brands, particularly electronics brands, were the weakest link in The Warehouse's offering.

"You buy [Noel Leeming] and suddenly Sony has to sell to you, and so does Fisher & Paykel . . . and you can sell all that stuff in your stores as well."

The purchase opened up a new market for The Warehouse, and expanded its property portfolio.

But the fiercely competitive electronics sector was "an ugly space right now", with no game-changing Apple products to boost sales and massive price deflation, particularly in flat-screen TVs.

"The Warehouse can't fix that because it's external, and there's just a lot of competition in that space, there's probably one or two chains too many."

Morningstar analyst Nachi Moghe said $65m seemed like a good price but the sector was besieged by price deflation, competition and challenges from online content downloads.

Based on its most recent results filed with the Companies Office and assuming similar trading, Noel Leeming Group would deliver about $7m to The Warehouse's bottom line, he said. "It'll be nothing significant."

The group narrowed its loss to $615,000 for the year ended March 31 on a 7.6 per cent lift in revenues to $607.8m, but the loss was due to interest costs on debt of $113.6m that wiped out its $10.6m operating profit.

The Warehouse could expect some margin dilution, as Noel Leeming's margin on earnings before interest and tax was just 1.7 per cent, well below The Warehouse's normalised 7 per cent or so.

It claimed margins in the sector had stabilised, "but I'm sceptical . . . I think they'll continue to be under pressure".

The Warehouse was the only real mass-market retailer, and faced competition from a range of specialist "category killers", including Bunnings and JB Hi-Fi.

Market commentator Arthur Lim said on the face of it Gresham had lost out on the deal, although it could have recovered some of its $38.2m shareholder loan since the end of last financial year.

"Nobody is going to know . . . but from the numbers it looks like they've just paid out Bank of Scotland, and Gresham would have had to write off everything." The bank was owed $73.5m by the group.

He expected the purchase would increase The Warehouse's earnings per share. "But not massively so . . . until such time they can realise the strategic competitive advantages [of the deal].

"That's probably one to two years down the track."

The company could encounter some resistance to introducing "premium brands" into a discount retailer, he said.

Powell said the electronics and whiteware sector had seen sales increase by 3.8 per cent over the past five years or so.

Noel Leeming was not just in electronics - which has seen the most price deflation - but also in appliances, he said.

"Like any sector in retail it's competitive. It's our job now to figure out how to beat the competition."

Gresham, which is half-owned by Bunnings and Kmart owner Wesfarmers, did not return calls for comment.

The deal follows the sale of Noel Leeming rival Dick Smith by Woolworths to private equity group Anchorage Capital Partners for just A$20m in September.

The Warehouse shares closed up 0.32 per cent to $3.10. yesterday.


The Warehouse Group: Consumer electronics: Veon Akai Apple Hewlett-Packard Whiteware: Private label, no brands

Noel Leeming Group: Consumer electronics, includes: Sony Samsung Panasonic Apple Hewlett-Packard LG Toshiba Whiteware, includes: Fisher & Paykel Mitsubishi Westinghouse Samsung Simpson Haier