Rough year bites deep into TWG digital spend

Published on the 30/11/2023 | Written by Heather Wright

Rough year bites deep into TWG digital spend

$30m shaved off FY24 spend…

A tough financial year has bitten deep into New Zealand retailer The Warehouse Group’s digital infrastructure spend, with the company deferring $30 million in planned spend.

While the logged a 3.2 percent increase in sales – hitting $3.4 billion for FY23 – net profit after tax plummeted 66.6 percent to $29.8 million.

The Warehouse Group chair, Joan Withers, says the difficult trading environment comes as the company is at ‘the point of peak spending’ in replacing legacy information systems and digital infrastructure, needed to support its in-store and online strategies.

“The post-Covid-19 environment and change in shopping habits has caused us to refocus the balance on retail fundamentals.”

The company, whose brands include Noel Leeming, Torpedo 7 and digital marketplace The Market, alongside The Warehouse and Warehouse Stationery, has been involved in a multi-year migration from Oracle E-business Suite to Oracle SaaS, including ERP and ERM, since 2020, in what it has said is ‘probably’ the biggest technology transformation it has undertaken.

Work around Salesforce and Relex, a unified supply chain and retail planning offering, is also part of the work.

Around $100 million was earmarked for the project in 2020, with plans to standardise on Oracle for the backend, with Salesforce’s commerce cloud at the front. Core systems investment has include the ERP finance and inventory, group order management system, warehouse management system, master data management and the delivery of a new people and HR system, Human Capital Management. Most significant of the core system projects underway is the ERP finance and inventory system deployment – one of the company’s major investments last year. The finance module was deployed in FY22, with testing continuing through to the first half of FY24, and go live scheduled for H2 FY24.

“In 2021, coming out of Covid, we recommitted to a strategy that focused on fixing the retail fundamentals and investing in the digital future,” Nick Grayston, The Warehouse Group CEO, says.

“While it is hard to strike the right balance in the best of times, the post-Covid-19 environment and subsequent change in customer shopping habits has caused us to refocus the balance on retail fundamentals. As a result, we have deferred approximately $30 million of digital initiative expenditure.”

Grayston admitted the company is ’30 years underinvested’ and going through a ‘painful time of catchup’.

“It would be inefficient to stop these much-needed key infrastructure projects part way through, versus continuing and finishing these much needed investments.”

The company has previously noted that the new ERP finance inventory system will provide more timely reporting, project accounting, real-time inventory management and enable improved stock availability.

Torpedo7’s migration to the new ERP system, which was completed in October, wasn’t smooth sailing, with Grayston noting that it had caused ‘some disruption’ with fulfilment in Q1 and resulted in a period when some customers were unable to have transactions fulfilled both in-store and online.

“Most of these teething issues are resolved now,” he adds. Torpedo7 experienced ‘significant challenges’ for the year, with decreased consumer demand leading to the company recording a 25.4 percent drop in sales and a loss of $22.2 million, and ‘exposing other flaws in the Torpedo7 business model’.

Less than two months ago the company was hailing its  its ERP rollout, saying it was ‘progressing well’ with the business making significant progress in developing its operational systems to enable access to realtime data across procurement, distribution and fulfilment.

At the Annual General Meeting last week, the company took heat over its MarketClub smartphone-based loyalty scheme – aimed at the Warehouse’s ‘big spenders’, with some questioning its viability – and the access to discounts it provides – for older customers who don’t own smartphones.

Grayston noted the impact of a change in accounting standards, which mean a significant amount of project expenditure is now classified as software-as-a-service and is taken straight to profit and loss, hitting the bottom line immediately, rather than being capitalised over five or 10 years.

“In FY23, capital expenditure was $113.2 million compared to $107.5 million in FY22, while total project expenditure was $154.4 million on these projects in FY23,” he says.

Much of that $154.4 million related to key SaaS projects.

Project expenditure for FY24 is now expected to be $80 million, a significant drop on previous years.

“We made a conscious choice to continue the investment to complete our transformation programme which drove increased cost of doing business, particularly IS operational expenditure and depreciation.

“The change in accounting principles also meant much of this expenditure hit the bottom line immediately, resulting in this being expensed through the profit and loss, rather than capitalised over five or 10 years,” he says.

“We remain committed to our strategy and investment in our transformation, however the shift in market conditions and customer spending has put pressure on our business and led to a disappointing overall result for FY23,” Grayston says. “This has pivoted our focus from transformation to improving our performance.”

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