Every New Zealander knows the “Red Shed,” the name locals have for The Warehouse, a retail store that sells essentials across the country. Its parent company, The Warehouse Group (TWG) is one of New Zealand’s largest retailers, with half of all New Zealanders shopping at one of TWG’s stores every week, while 90 percent shop at a TWG store at least twice annually. Many Kiwis in remote areas rely on The Warehouse for everyday goods such as food for their pantries, cleaning supplies, health and beauty products, and items for pets.
“TWG is more than just a staple in Kiwis’ lives,” says McKinsey partner Guilherme Riederer. “It’s also a story about how putting customers at the center of an enterprise, embracing innovation, and rethinking priorities can improve business performance, strengthen employees’ capabilities, and catalyze sustainability.”
By 2019, The Warehouse Group became the third major global retailer and first large company in New Zealand to become carbon neutral, embracing the vision to build New Zealand’s most sustainable, convenient, and customer-first company. Transforming the company and bringing this vision to life required long-term strategic rethinking and restructuring nearly every aspect of the company, which is where McKinsey stepped in to help make the dream a reality.
When Sir Stephen Tindall founded The Warehouse in 1982, he was entering a market of exorbitant import tariffs and high prices that left most New Zealanders without access to reasonably priced essential goods. The new retailer addressed that need and the business steadily grew to become an everyday fixture in New Zealanders’ lives by providing easy access to affordable goods. TWG was first listed on the New Zealand stock exchange in 1994 and expanded to include five other specialized retail stores.
We wanted to empower our employees with a sense of purpose to bring them closer to the customer.
Meanwhile, competition was mounting. Fundamental changes in the global retail environment forced companies to adapt, innovate, and serve customers in new ways or risk going out of business. By 2018, TWG realized it needed to make changes and decided to shift its focus from selling products to helping solve its customers’ problems. The company would need to transform to become more efficient at the basics while learning how to be better equipped to tackle the many opportunities ahead.
“We knew we needed to fix our retail fundamentals and invest in the digital future” says TWG CEO Nick Grayston. “We also wanted to empower our employees with a sense of purpose to bring them closer to the customer. This shift would allow us to move from just supplying products to really solving for the customer.”
Seeing new potential
TWG wanted to improve performance by transforming how it operates and simplifying its business. McKinsey’s research shows the companies that have achieved the most successful transformations were those that made substantial changes to business–planning processes and review cycles. For TWG, this involved first identifying an opportunity for profound change across the organization, which required engaging frontline workers—including store and area managers—across the country.
In mid-2018, TWG leaders partnered with McKinsey to launch 250 new initiatives, aiming to simplify everything from pricing and store operations to supplier negotiations, with the goal of raising earnings from 3.6 percent to 7 percent. A central transformation office met every month to monitor progress and results.
This initial transformation helped TWG achieve its highest annual profit in a decade, doubled its stock price, lifted its Organizational Health Index score to the second quartile, and helped build new capabilities for approximately 1,500 employees—all over the course of a few months. It also paved the way for TWG leaders to reimagine the group’s organizational structure. TWG decided to explore how it could move away from operating as distinct business units within each brand, which was a time-consuming approach, and instead run the company more like a start-up with small teams that delivered end-to-end results without an endless series of handoffs.
TWG piloted this new agile approach with a few specific teams in early in 2019, which included its women’s wear and click-and-collect teams. The timeline from concept to reaching customers with a new product was cut in half, from ten to five months. To scale that successful approach across the entire company, TWG partnered with McKinsey to overhaul its operating model.
Partnering for change
Becoming truly customer-centric and nimble meant TWG needed to break down existing siloes within and across brands while radically speeding up decision making and overall time to market. TWG reduced its 12 organizational layers down to three and redesigned itself around 18 fit-for-purpose cells that brought people together from across functions like merchandising, planning, customer insight, marketing, and supply chain.
These fit-for-purpose cells were built around specific customer experiences like work and study; relax, celebrate, and get outdoors; help me raise good kids; and help me look my best, among others—giving TWG a clear customer-centric approach to problem solving. By bringing together people from across functions, these cells were equipped with end-to-end resources to complete their shared mission.
Building on capabilities
Making sure these teams functioned smoothly under this new structure would require a shift in mindsets and behaviors across the entire company. “TWG’s employees were used to decisions going up and down a siloed chain of command, with leadership focused on managing and directing, rather than collaborating,” says McKinsey engagement manager Alexandra Hall. “We worked with leaders to eliminate those structures and unleash the potential of their people.”
Leaders worked to break this hierarchical design, focusing on cultivating three key traits among employees: expertise, mindsets, and performance. They also collapsed 70 job families down to 40 and defined six core role types, making it easy for talent to move across teams and priorities for a project when necessary. The new setup recognized people’s technical skills and allowed them to grow their expertise. As a result, employee engagement scores rose, setting TWG up as a destination for top talent and helping it outperform its peers.
Leading with technology
This new model also involved building new employee capabilities. Leading up to the launch of this new approach in September 2020, an agile coaching team designed and led learning modules for 1,200 full-time employees on topics including methodology, business acumen, prioritization, customer insights, and design thinking. Today, agile coaches at TWG continue to design and deliver sessions on innovation, ways of working, and customer centricity in line with the company’s new culture of learning and growth.
The agile-design approach removed siloes between brands and business units, restructuring them around customer and business outcomes, but legacy processes still stood in the way of true collaborative work. TWG established a new quarterly business review to define the organization’s goals and the cross-brand workplans needed to achieve them. The result was faster decision-making and collaboration.
Legacy siloes among digital, business, and technology also needed to be busted. As part of the transition, teams became product owners, which meant TWG’s mobile app, website, and loyalty technology—previously managed by the technology business unit—would now be overseen by relevant customer journey teams to help align decision making with customer outcomes.
Unlocking growth, accelerating sustainability
In 2021, TWG worked to improve the way it reached customers online and in-stores using improved data-based promotions, pricing, and better supply chain experiences. As a result, the overall weighted average net promoter scores increased by more than 7.5 percentage points to over 76 in 2021, building on a six percent growth in 2020. This year-after-year growth came on the heels of the company’s highest profit performance in the past decade.
Transforming into an agile customer-focused organization ... created a pathway to make TWG one of New Zealand’s most sustainable businesses.
In the first half of 2022, TWG’s market share grew, despite a general decline in total retail spending across New Zealand, and TWG’s online growth rate was three times that of the total retail market: nearly 68 percent. What’s more, the organization saw ten years’ worth of e-commerce growth in two months, bumping online revenue up to 16 percent from just five percent of total sales at the start of the COVID-19 pandemic.
TWG’s new strategy brought all group properties together to form a frictionless, integrated ecosystem. As part of this forward-looking effort, TWG made a cornerstone investment in a digital health company, began defining its payments strategy, scaled its marketplace business, TheMarket, and has plans to expand its membership program, the “MarketClub,” to all brands and customers, which represent around 80 percent of New Zealand’s population.
Innovating to net zero
The transformation has optimized resources and increased productivity, allowing TWG to plan new growth and sustainability initiatives. To do this, the group embedded sustainability objectives into its quarterly business review, ensuring each cell across the group was on track to meet sustainability goals. For example, cells were asked to double the percentage of all products and services with sustainable attributes within a nine-month period in the product area.
While TWG has been carbon neutral in its carbon emissions and energy use since 2019, it also recognizes 87 percent of its total emissions are generated by product manufacturing. TWG now has a plan to work with suppliers to eliminate 80 percent of Scope 3 emissions by 2040, including more than 100 new initiatives that would directly impact the communities TWG serves. This is part of TWG’s ambitious plan to halve carbon emissions by 2030 and reach zero emissions by 2040.
“Transforming into an agile customer-focused organization has not only opened opportunities for growth, [it] boosted employee engagement and improved the overall consumer experience,” says Nick. “It also created a pathway to make TWG one of New Zealand’s most sustainable businesses—a goal we’re proud to work toward and stand behind every day.”
Learn more: Guilherme Riederer is a partner in McKinsey’s Auckland, New Zealand office; Laurent Kinet is a senior partner in the Auckland office; David Pralong is a senior partner in the Carolinas office; and Andrew Grant is a senior partner in the Auckland office.