Storm clouds gathering above Bunnings

Steve Collinge – Executive Editor Insight DIY

I have just returned from my first trip to Australia with the intention of totally immersing myself in the home improvement and garden market. It was a fabulous trip, totally fascinating, full of huge opportunity for businesses prepared to adapt and embrace the digital revolution and yet deeply troubling for others, all at the same time.

As you may be aware, following the Wesfarmers car-crash with Bunnings in the UK, I have taken a much closer interest in the market and retailer developments in Australia. I wanted to see for my own eyes the sheer dominance of Bunnings, how it lives and breathes in the culture and hearts of so many Australians and how its competitors are reacting to this.

Bunnings currently has a store estate of 372 branches (317 in Australia and 55 in New Zealand). At this stage it is worth bearing in mind the size of the Australian population, which currently stands at 24.6 million people. Of the 317 Australian Bunnings stores, 265 of these are big-box and are quite frankly some of the largest retail stores of any type that I have seen.

Two weeks ago, Wesfarmers published its first half results for the period ending 31st December 2018. There is much talk in Australia of a slowing economy and after eight years of economic boom, construction, particularly of apartments within the larger cities, is slowing. At the same time, due to a clamp-down on the banks it is harder than it was a year ago to get the much needed mortgages and home loans, stifling the life-blood of our industry.

The top line results for the Wesfarmers group were good, with EBIT growth of 37.5 per cent to $1.645 billion for the six months compared to the same period last year. It is worth mentioning at this stage that these numbers are for their ‘Continuing Operations’ following the divestment of Coles and the recent sell off of some of their smaller businesses including Kmart Tyre & Auto and of course Bunnings UK. The Wesfarmers business now consists of just Bunnings, Kmart Group including Target brand, Office Works and some legacy industrials businesses.

Most notably these changes have led to a dramatic increase in the importance of Bunnings to Wesfarmers, which during this last six month period, now accounts for 57 per cent of its profit. Unless Wesfarmers has some secret planned acquisitions on the horizon, then however you look at it, Bunnings is critically important to Wesfarmers and likely to get more important.

The confidence with which Wesfarmers is currently choosing to stake its future and the income and livelihoods of its investors and shareholders on Bunnings, reminds me far too much of the misplaced confidence with which they turned up in the UK, all bold and brash and threatening to transform the market, a little over three years ago.

But the performance of Bunnings, that has been so impressive for so long, is slipping. In the July to December six month trading period in 2017, Bunnings’ total revenue climbed 10 per cent and 9.0 per cent on a like for like store basis. By the end of their financial year (30 June 2018), total sales were up 8.9 per cent and like for like 7.8 per cent. However, in the results published last week, total sales increased only 5.2 per cent, with like for like store growth 4 per cent against a back-drop of store space increasing 5.5 per cent.

Let us not forget that the 5.5 per cent growth in sales has been achieved during a period when eight new Bunnings Warehouse stores were completed and came online including four relocations, as well as eighteen store upgrades and store extensions.

Store cannibalisation will become an increasing issue for the Bunnings business as time passes and is already impacting on its performance, as the majority of new stores cannibalise at least some sales from existing locations and therefore deliver less true incremental gains. Despite this, in a desperate drive for growth, the business appears to be blindly continuing with a relentless new big-box opening programme, with 14 new warehouses currently under construction, plus six upgrades and expansions.

The customers, shoppers and consumers of home improvement and garden products are changing, at a dramatic rate and at a pace that I am not actually sure any of us have really got our heads around. For the majority of home improvement projects including many aspects of decorating, gardening, tiling, flooring etc. inspiration is critically important.

For a company that currently attracts so many consumers, Bunnings is the least inspirational home improvement store I have ever seen. It is a warehouse, with concrete floors, wide and long aisles and a choice of product that goes so far beyond ‘widest range’.

I do think they have recognised this and the publication last week of their new monthly Bunnings magazine bears this out. The magazine is great, is inspirational, features lots of images of lovely kitchens and beautiful gardens, but it does not solve their problem. Having read the magazine and been inspired by what Bunnings can offer, the experience in store then falls dramatically short. It is not at all easy to find the products featured in the magazine and if you eventually do, the inspiration is lacking, just aisle after aisle of products in boxes. The magazine is nothing more than a sticking plaster solution to a far greater issue and may as well have been produced by a completely different business.

The options available for consumers to find inspiration and ideas are already gathering momentum in Australia. With the growth and engagement potential of Instagram, Pinterest and many other similar websites, consumers are finding their inspiration online. If you do not believe me, ask any female member of your family over the age of 30. 

In the last 12 months both Pinterest and Instagram in the US and UK are trialling ‘Buy Now’ options, enabling home improvement and home enhancement consumers to not only find what they are looking for on these websites, but also link through to buying the products, in many cases from online retailers. Mark my words, these businesses that already engage with millions of consumers in Australia will become some of the most influential retailers of the future. And the greatest risk to the Big-Box retailers is that they gradually become totally irrelevant to the female shopper.

Now let us consider the online shopper. Recent research of the Australian Online retail market by eshopworld concluded that there are currently 12.2 million eCommerce users in Australia, with an additional 2.15 million users expected to be shopping online by 2021. Four years from now, these 14.35 million eCommerce users will represent 59.79 per cent of the total population and will spend an average of €1,076 US online. 

The research goes on to say that Total Australian eCommerce revenue across all product categories currently stands at $10.5 billion USD and is expected to grow dramatically to $15.4 billion USD within two years. Fashion is currently the leading product category in Australia, accounting for $3.2 billion USD market share, followed by electronics and home improvement will not be too far behind.A separate source, Statistica forecasts that online retail penetration (total value of online retail sales as a share of total retail sales) in Australia will continue its increase from just over 5.5 per cent in 2014 to 7.25 per cent this year. In the UK, this figure is likely to be above 19 per cent by the end of 2019 and there is no reason why Australia will not see a similar growth trajectory.

However you look at it, the growth of online retailing is Australia is unstoppable and I am sorry but I do not accept the argument that geographical distances will ultimately be the undoing of Amazon or any other pure-play retailer than dares to enter the shores of Australia. The fact is that over 15 million of the 24 million Australians live in the seven largest cities, which presents no barrier to the logistics powerhouse that is Amazon.

And yet, despite the growing evidence of online disruption to come, Bunnings operates with a barely transactional website and has only recently dipped its toes into the world of click and collect with a one store trial. This is so obviously a strategy designed to placate the city investors and journalists as opposed to a business that truly understands the impact that online retail with inflict on the Australian market. It is ‘a ‘foot on the brake’ strategy, designed to protect and support their store estate, whilst the high streets and shopping malls of the US and the UK are littered with the closed shops and sad remains of retailers who thought they would follow a similar plan.

Ultimately, the fixed costs required to run and maintain big-box home improvement stores, which had previously delivered a key point of difference with high stock holding, huge range and great service, soon become a noose around the retailers neck, which month by month gets tighter and tighter as store footfall declines. 

We are already aware that Bunnings are taking steps to reduce store costs, by cutting back on store hours and the number of staff available on the shop-floor. With a core element of their three prong strategy being Best Service, it is indicative of the gathering clouds and worrying that Bunnings are already being forced to take action like this, under the guise of ‘Cost Control.’

As footfall declines further due to store cannibalisation and customers simply choosing to buy elsewhere, they have got nowhere to go. Once a big-box store starts losing money, it is incredibly difficult to justify further investment in that location, particularly if there is a better performing store relatively close by. And what happens next is they have to start closing. This process becomes accelerated if the established retailer also has to match online retail prices and as a result, the bottom line takes an even more painful hit.

The clouds are beginning to gather above Bunnings, the days of rampant growth are over and every percentage of sales growth from now on is going to get harder and harder to achieve.

A Bunnings Garden Centre in the UK during a blizzard did not prove popular for plant sales.

I believe that declining footfall and store cannibalisation will within two years lead to a dramatic reduction in Wesfarmers new store opening plan and the business will focus investment instead on improving the profitable Bunnings stores or even investment in an entirely different business. 

Market disruption is already happening in Australia, it is just difficult to quantify at the moment as there is no reliable market share figures available. Home Improvement consumers all over the world are changing, they want inspiration and they want to be able to buy simply and easily online.

Storm clouds are beginning to gather above Bunnings and unless they wake up soon and realise that the market is changing, they have a tough time ahead of them.