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Lower prices are just the beginning in Bunnings’ UK plans

23 January 2016

9:00 AM

23 January 2016

9:00 AM

For every success story of Australian companies taking on the world, there are plenty of burned fingers. In bidding three quarters of a billion dollars for Britain’s under-performing 265 Homebase stores (the UK’s second biggest home improvement chain) will the Westfarmers-owned Bunnings replicate the great overseas successes of Westfield, James Hardie and CSL? Or will it be another costly failure like BHP’s (repeatedly) in North America and National Australia Bank’s in Britain? Local knowledge can be vital. How significant is it for Bunnings that the British live in terraces or semi-detacheds while Australians prefer bungalows on a quarter acre or McMansions (apart from the growing numbers, largely from overseas, who prefer high rise apartments)? Does this really make the multi-billion dollar British Do-It-Yourself/hardware market different from the Australian one that Bunnings dominates? And how accurate are the British investment analysts who explain the fall in UK DIY sales but booming business in stores aimed at tradesmen as a ‘trend to “do it for me” as time-poor homeowners prefer to employ a tradesman to make improvements for them’?

The clear differences between the two markets are evidenced by the profits of companies in them. Helped considerably by being my wife’s favourite store, Bunnings is the world’s most profitable DIY/hardware chain with pre-tax earnings of about $1 billion on sales of $10 billion and returning 33 per cent on capital. With its 338 stores in Australia and New Zealand, Bunnings is now listed as the seventh biggest of its kind in the world after the US’ Home Depot, Lowe’s and Menard, France’s Adeo, UK’s Kingfisher and Germany’s OBI. In the decade since coming under the wing of Westfarmers (it also owns Coles), Bunnings has mastered its rivals and humiliated Woolworths which has acknowledged defeat by ending its multi-million dollar cash-leaking Masters joint venture with US giant Lowe’s.

Bunnings is betting that its successful Australian warehouse formula will work overseas and that imposing the Bunnings name on Homebase stores will not backfire. In any event, the scope for improvement is immense; Homebase, which has about one eighth of the UK market, has been in decline for years. Profits have slumped over the past decade by 80 per cent to only 20 million pounds on stagnant revenue of 1.5 billion pounds (Bunnings’ turnover is three times larger). Closures have cut store numbers from a peak of 349 to 265 – with 60 more scheduled to go. The same problem of under-performing stores is affecting the industry’s leader, Kingfisher-owned B&Q with 40 per cent of the market, which is in the process of closing 60 of its 360 sites – while at the same time Kingfisher is hoping to improve on its lagging profits by proposing a big increase in its ‘Screwfix’ chain aimed at servicing tradesmen. And to give an even more mixed message about the state of the British market that Bunnings is entering, the third largest participant, Travis Perkins, with 10 per cent, is doing reasonably well, having emerged from what it described as a ‘modest reduction in “renovate, modernise and improvement” in 2015 due to the slowdown in secondary housing transactions’. Its shares have just been upgraded by UBS and Deutsche in view of ‘the broadly favourable trading outlook’.

While Bunnings’ potential rivals in Britain have profit margins well below what Bunnings is used to, it sees ‘an attractive and growing market’ for the British home improvement business, with Homebase providing established stores of the right size to support warehouse marketing at a low operating cost. Bunnings’ bid needs the approval of shareholders in Homebase’s listed parent company, Home Retail Group, whose board recently rejected a one billion pound takeover bid by supermarket giant Sainsburys, the original founder of Homebase 36 years ago. Although the bid remains alive until early February, Sainsburys’ objective was the Argos retail chain subsidiary and may even welcome the Bunnings purchase of a ‘surplus’ asset.

In any event, ‘Bunnings takes on Britain’ was the inch-tall heading in last week’s the Australian newspaper as Bunnings’ lower prices may be just the beginning of revolutionary changes in Britain’s home improvement business.

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