By Tim O’Shannassy

Acknowledgement

Introduction

Mr Mark Coulter, chief executive officer (CEO) of Temple & Webster Group Limited (Temple & Webster) was briefing journalists on the latest set of results: ‘We’ve done all the modelling that suggests that if we actually go hard now, grow faster and outperform our peers, while the market is coming online…and become a dominant force in furniture and homewares retailing, then that is an optimising strategy” (Greenblat, 2022: 17). The big issue right now is – has Coulter got it right?

Temple & Webster in its 2021 first half financial year results informed the market of a 40 per cent decline in first half profit and no dividend; the positive in the results is another substantial increase in sales. Temple & Webster could be interested in the right merger and acquisition (M & A) target at the right price. However Coulter and his team have more to think about after operational pressures due to growth impacted net promoter score statistics in 2021. Temple & Webster need to stay on top of brand development and operations management as they develop shareholder value in the business.

An Uncertain Business Environment in the 2020-2022 Pandemic

The wider community and the corporate scene are increasingly aware of the importance of protecting the natural environment, this includes the use of sustainable business practices. At the Glasgow Summit in 2021 the Morrison Government committed Australia to net zero carbon emissions by 2050 (Chambers & Brown, 2022).

An Australian Federal election is due in May with economic issues likely to be front and centre of the debate – cost of living, interest rates, employment growth and rising wages (Dusevic, 2022), while the Western Australian border remains closed and international travel to the east coast is  starting to grow.

Global inflationary pressures are starting to strengthen, especially in the United States, due to international supply chain disruptions related to the Covid-19 pandemic (Dusevic, 2022). The Reserve Bank of Australia (RBA) expects the rate of inflation to settle in the two to three per cent target band later in 2022. Commonwealth Bank of Australia foresee a cash rate peak of 1.25 per cent compared with Westpac’s 1.75 per cent around March 2024 (Dusevic, 2022).

During the most difficult moments of the Covid-19 pandemic in Australia State Governments held lockdowns of varying length to limit citizen movement, reducing the rate of Covid-19 infection and saving lives. The Federal Government stepped up with Jobkeeper payments to help businesses and individuals through these difficult days (Frydenberg & Corrman, 2020). Hotel quarantine was used to facilitate international and interstate travel. Australia now has a strong national vaccination rate and all states except Western Australia have opened their borders. The omicron variant has resulted in high rates of community infection but it is less likely to lead to hospitalisation or death compared with earlier variants; however the emergence of omicron has led to a ‘shadow lockdown’ with many in the community quite conservative in their day to day movement and activity as they seek to avoid infection. This is impacting small businesses in sectors such as bricks and mortar retail.

There is a strong push in the international and Australian corporate scene for businesses to not only be working for shareholders but also to be having a social impact in areas such as indigenous reconciliation, helping the homeless, protecting woman and children from domestic violence, and more.

There is a structural shift at play in the retail market as consumers shift from bricks and mortar retail to online retail – and this is particularly suited to furniture and homewares (Greenblat, 2022). The availability of the Android and Apple operating systems, plus the use of artificial intelligence are all useful technological tools digital entrepreneurs can put to use (Temple & Webster, 2021).

A range of legal issues impact stock exchange listed retail industry operators in Australian. There are serious consequences for Australian corporates for breaches of any of the relevant Acts that apply to a business setting. In Australia the Competition and Consumer Act 2010 sets out competition and fair trading law, and provides protection to consumers.  The Corporations Act 2001 articulates laws applicable to corporations including director’s duties. The Australian Securities and Investment Commission, and the Australian Prudential Authority oversee the Australian Stock Exchange, merger and acquisition activity between corporates, and the financial services scene. Foreign investment in Australia is overseen by the Australian Foreign Investment Review Board while trade practices are overseen by the Australian Competition and Consumer Commission. The current Australian company tax rate is 30% compared with the United States at 21%.

Retail Industry Trends

Government enforced Covid-19 lockdowns in 2020 and 2021 meant that consumer discretionary spending moved from the travel category to furniture and homewares. There has been a stronger move in retail away from traditional bricks and mortar to online by shoppers in recent years, this has been accelerated by the Covid-19 pandemic. The furniture and homewares market in Australia is worth A$16 billion annually and only 10 per cent of this spend is online (Temple & Webster, 2021). This is well behind the United States market with up to 25 per cent online market penetration and this looks to be increasing; this will be driven by millennials entering their core furniture and homewares buying phase of their lifecycle (Temple & Webster, 2021).

There is strong and intense rivalry on the Australian retail scene, both online and in traditional bricks and mortar. Great rivals include Bunnings, Harvey Norman, Premier Investments Limited, Nick Scali Limited, Adairs Limited, King Living, Space Furniture and more. To get an idea of comparative financial strength Harvey Norman stock market capitalisation is A$6.63 billion, Nick Scali Limited A$1.06 billion, Adairs Limited A$531.5 million, compared with Temple & Webster A$988.92 million (Australian Stock Exchange, 2022).

Suppliers in the retail industry tend to be located in clusters in emerging economies. A low level of differentiation between factories leads them to seek endorsement from prominent brand retailers (e.g., Gap) to build new business. As emerging economies become more developed costs increase, resulting in this low cost manufacturing activity shifting to even less developed economic locations such as Bangladesh and Pakistan (Obe, 2019).

A further issue for supplier power is the use of transparency indices exposing ethical sourcing standards in developed and developing countries. What this does is impose western ideals on developing country locations where bribery, graft and child labour practices can occur. This can be of great concern to businesses seeking to implement an ethical sourcing program (Kim, Colicchia & Menchof, 2016)

In retail small entrants regularly emerge, however larger footprint brands rarely enter the market unless they have substantial capital backing them. Distribution and rental costs for retailers in Australia is expensive and during the pandemic consumers were spending frugally on traditional retail.  The ongoing threat of well informed, physically mobile and digitally savvy consumers also makes it tough for small retailers to establish themselves. In many shopping strips around Melbourne and Sydney smaller retailers have been closing their doors, evidenced by the numbers of empty shop fronts in Chapel Street Prahran.

There are few true substitutes for retail shopping; online retailing is not a substitute as it is the digital transition of the retail experience; new entries might find ways to make their brand and/or products popular. Different payment modes and other finance options may make the retail experience and the act of purchasing more appealing to consumers.

Temple & Webster Group Limited Strategic Situation

Strategy

CEO Mark Coulter articulates the Temple & Webster (2021: 9) clear and simple strategy:

We want to have the biggest and best range – having everything you need for the home. Importantly, the “best” bit of this means we won’t list everything. We want to be seen as a place for quality, at an affordable price; we want to be a source of inspiration and the place customers go to when they want to make their home more beautiful; and we want to create a seamless customer experience when shopping, including our customer’s experience of the delivery to their home.

Currently the focus for Temple & Webster is sales growth, building brand understanding and recognition, and developing the customer base (Greenblat, 2022). Temple & Webster are expecting synergies to come from building close relationships with suppliers, developing exclusive product ranges, investing in technology and data, and growing logistics capability. The Temple & Webster customer proposition will improve with the achievement of economies of scale (Temple & Webster, 2021).

Key Stakeholders

Corporate headquarters is located in Sydney and has hundreds of suppliers. The directors of Temple & Webster are Chairperson Stephen Heath, Susan Thomas, Conrad Yiu, CEO Mark Coulter and Belinda Rowe. Mr Coulter and Mr Yiu are co-founders of the business and the largest shareholders on the board. It is the view of the board that employees are the most important stakeholders.

Functional Level

Temple & Webster are keen to develop a sustainable business outperforming the furniture and homewares online category (Temple & Webster, 2021). The brand marketing team has been grown and early forays into television advertising have been successful. Brand awareness is 61 per cent (Greenblat, 2021)

The customer is the focus of all Temple & Webster do: “Our vision is to make the world more beautiful, one room at a time” (Temple & Webster, 2021: 11). There is a strong focus on sales growth and improving the net promoter score which is currently 62 per cent but did recently fluctuate to below 55% due to pressures in third party logistics and the internal customer service capability (refer Figure 1 below). Business to business revenue is up 110 per cent in 2021, and ‘Private Label’ is a strategic focus. Active customers – unique customer who completed a transaction in the past 12 months is 62 per cent. Successful investment in technology will enhance the probability of future success.

In 2021 there was a 12 per cent increase in annual revenue per active customer which is now valued at A$425 and this metric has improved steadily since 2018 (Temple & Webster, 2021).

Operations pressures in the autumn, winter and spring months of 2021 resulted in a worrying drop in this net promoter score in the second and third quarter of 2021. The executive team and management reacted well increasing capacity to now five warehouse locations, improving internal customer service and logistics partner processes and systems to allow more effective scaling of the business (Greenblat, 2022). Temple & Webster do not wish to have their own warehouses and trucks but are looking for ways to gain greater control of these activities to ensure a favourable customer experience (Temple & Webster, 2021).

Temple & Webster gather a tremendous quantity of retail data and use this insight to inform purchasing, inventory management and pricing (Greenblat, 2022). The business maintains a very low level of aged stock. Manufacturing has now been geographically diversified away from China (Temple & Webster, 2021).

Given the core business is online retail customer data and privacy is a critical success factor on platforms that are scalable and secure. The ISO 27001 standard has been adopted as the cyber security framework. A Cyber Security Officer has been appointed at Temple & Webster and industry experts are regularly called in to provide independent audits on policies, processes and platforms (Temple & Webster, 2021).

Temple & Webster are proud of their relatively small but engaged workforce being in the top quartile of technology businesses in Australia with an 84 per cent employee engagement score. All up 51 per cent of managers are female and 44 per cent of the executive are female; 95 per cent of the workforce is proud to work for Temple & Webster (Temple & Webster, 2021).

Temple & Webster have the priority of achieving market leading shareholder returns; total shareholder returns are up 7,607 per cent over a five year period, 1,320 per cent over the medium (three year) term, and 71 per cent in the past financial year (Temple & Webster, 2021). The balance sheet has no debt with cash and cash equivalents held totalling A$97.5 million (2020 A$38.08 million). Table 1 and Table 2 below set out summary financial data.

Table 1: Temple & Webster Limited Financial Summary Financial Years 2020-2021  (Temple & Webster Limited Annual Report, 2021)

Table 2 Temple & Webster Group Limited Cash Flows Summary Financial Years 2020-2021

(Temple & Webster Group Limited Annual Report, 2021)

The Future Strategy Challenge

CEO Coulter and the board of directors have a range of considerations. Has Temple & Webster optimised its strategy raising capital while cash flow positive, going debt free and not paying a divided to shareholders in 2021? What should be the brand development plan? Is Temple & Webster on top of operations management? Should they go deeper into logistics and customer delivery? Should Temple & Webster be leveraging its strong balance sheet growth and pushing harder for growth by gearing up? Is there a suitable merger and acquisition prospect out there for Temple & Webster? What would be the characteristics of a suitable merger and acquisition prospect?

References

Australian Stock Exchange, 2022, ASX Retail Companies, https://www.listcorp.com/asx/sectors/consumer-discretionary/retailing, viewed 17 February 2022.

Chambers, G. & Brown, G. 2022, No taxes to hit net zero, The Australian, 2 February, p. 1.

Commonwealth of Australia, 2001, Corporations Act, Canberra ACT.

Commonwealth of Australia, 2010, Competition and Consumer Act, Canberra, ACT Commonwealth of Australia, 2011, Work, Health and Safety Act, Canberra, ACT.

Dusevic, T. 2022, Early rate hike ‘risks jobless rate’, The Weekend Australian, 12 February, p. 2.

Frydenberg, J. and Corrman, M. 2020, Economic and fiscal update, 23 July, Australian Treasury, Canberra, ACT, https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/mediareleases/economic-and-fiscalupdate#:~:text=Net%20debt%20is%20expected%20to,GDP)%20at%2030%20June%202021. &text=Despite%20the%20support%20to%20the,quarter%20by%207%20per%20cent, downloaded 31 July 2020.

Greenblat, E. 2022, Temple & Webster goes for growth, The Australian, 10 February, p. 17.

Kim, S., Colicchia, C. & Menachof, D. (2016) ‘Ethical Sourcing: An Analysis of the Literature and Implications for Future Research’, Journal of Business Ethics, 152(5), pp.1033-52.

Lowe, P. 2020. Covid-19, the labour market and public sector balance sheets, Address to the Anika Foundation Online, 21 July, https://www.rba.gov.au/speeches/2020/sp-gov-2020-0721.html, downloaded 28 July 2020.

Obe, M. (2019) ‘Pakistan garment makers chase rivals in India and Bangladesh’, Nikkei Asian Review 25 August 2019 [online] https://asia.nikkei.com/Business/Business-trends/Pakistangarment-makers-chase-rivals-in-India-and-Bangladesh, accessed 15 February 2020.

Temple & Webster Group Limited, 2021, Annual Report, viewed 17 February 2022.