Nov. 28 (Bloomberg) -- Warehouse Group Ltd., New Zealand’s biggest discount retailer, will expand its general merchandise business for the first time in three years, adding smaller stores as a recession forces consumers to cut costs.

At least 15 of the stores, less than half the size of the current format, will be built in the next five years, with the first opening next year, Chief Executive Officer Ian Morrice told the company’s annual meeting in Auckland today. The company has identified as many as 30 regional centers that could support a Warehouse store, he said.

Warehouse, subject of competing takeover bids from Sydney- based Woolworths Ltd. and Foodstuffs NZ Ltd., is opening smaller stores after a strategy to build hypermarkets offering groceries failed to add sufficient sales to justify the investment. New Zealand retail sales fell the past three quarters and spending is likely to remain subdued, the company said today.

“In the current economic climate, the Warehouse is just the place that people will turn to,” Morrice said. “This a time when a brand like Warehouse should prosper.”

Warehouse rose 11 cents, or 3.1 percent, to NZ$3.63 at the 5 p.m. close of trading in Wellington. The benchmark NZX 50 Index rose 1.6 percent.

Warehouse operates 85 general merchandise stores, with an average of 5,400 square meters of retail space, and 44 stationery outlets. Group sales fell 2.1 percent in the three months ended Oct. 26, led by declines in higher-priced items including home appliances and outdoor furniture.

As well as the new stores, which will be about 2,000 square meters in size, the company will increase its use of the Internet to lure customers to its outlets and access the country’s NZ$5 billion ($3 billion) online shopping market, Morrice said.

Warehouse is owned 10 percent each by Woolworths and Auckland-based grocer Foodstuffs, which bought their stakes in 2006 after founder Stephen Tindall proposed buying out minority holders and expanding into groceries. Each had sought regulatory clearance to bid for the remainder.

The company hasn’t had recent contact with either party, Chairman Keith Smith said today.

To contact the reporter on this story: Gavin Evans in Wellington on gavinevans@bloomberg.net

Last Updated: November 27, 2008 23:25 EST