Talking Point

Talking Point

The views expressed in this article are not necessarily representative of those of the publisher or of employees of Glenvale Publications. Some passages have been shortened for the purpose of grammatical clarity.

This is the full version of an interview with Mitre 10 CEO Bernie Bicknell, held not long after the Mitre 10 Gold Coast Expo.

TP: Thank you for coming down Bernie for your annual pilgrimage to the Hardware Journal. Can you begin by telling us how the Mitre 10 Expo was received.

BB: The Expo was great. It was our most successful one in terms of attendance and we had to turn suppliers away because we were limited by space. I was really impressed with the trade show and the suppliers and I think it was a very strong showing by suppliers. I thought it was a good representation of the industry.

TP: There were some very good stands, like the Rockwell stand and the ITW Stand.

BB: Absolutely… The thing about the trade show is that it costs the suppliers a lot of money to set the thing up and to put their stands together. I think ultimately that’s why we’re very keen to get a lot of our members at the show to make sure that that effort is rewarded.

TP: For those who weren’t at the Expo, could you elaborate on your address.

BB: In brief summary, we talked about financial performance. It’s been a good financial performance, we set ourselves a budget of nine million dollars earnings before interest and tax and we achieved just under that number. It was 8.8 or 8.9 million. Of that, we spent all bar one million of it on interest so we ended up with a profit after tax. We’re in the black by one million dollars and we thought it was a great result.

I think we fulfilled all the promises and plans that we laid out in the previous year. We talked about the work we’ve done in supply chain. It’s been a huge year in supply chain because we moved out of three warehouses and into two new ones. We talked about the fact that that’s nearly complete and we’re just in the final stages of bedding down our Derrimut site. So really, that had a financial impact that probably cost us the best part of a million and a half dollars of non recurring costs.

So all in all we thought it was a great year operationally and a great year financially. That was quite important to summarise where we’re at because we’ve put our share holders and members through two years of restructuring and it was great to be able to stand up and say that we’ve come through it and that we’re stable again, particularly when some of our competitors have been out there saying that Mitre 10 is not going to be around.

Once we talked about the current performance – the business – I then talked about our strategic direction and the future that we face in the industry. There were a couple of issues that I think were very important to talk about because they were outside of the control of Mitre 10. The major one was actually the Ryobi issue and the fact that a bread and butter market leader in a vital segment of our business is no longer available to us, and it is no longer available to us for the simple reason that the dominant market leader has been able to negotiate them away from us. And I mean, good job by Bunnings to do that, but what it’s done is make it a less even playing field than it was. So I posed the strategic question: where do we go in independent hardware if in fact that playing field becomes less and less even? Now in the past, Bunnings and other businesses have been picking off some of the independent businesses that don’t have succession plans and are available for sale, but whether it’s the threat of lack of supply of critical products or whether it’s inability to hold network, fundamentally the independent sector – led by Mitre 10 because we are by far the largest part of it – needs to address that issue. We can’t become a poor cousin to Bunnings. That is long term failure and we won’t succeed if that happens. We’re forty nine years old and we won’t make it to another 49 unless we actually change our approach.

So that, if you like, was the strategic imperative. I then moved on to the work that we’re currently doing. We are currently looking for an equity partner to participate in the industry, so we’re looking for a long term player who has the vision to participate in the hardware home improvement industry, who has an appetite to inject cash, and who has an appetite for longer term returns largely through owning corporate stores. The big benefit that this brings to our business is that we’ve got an option when a member with no succession plan wants to retire because their kids have gone to uni.

Under our current balance sheet we simply just haven’t got that option. I think that’s absolutely vital, otherwise we’ll see further fragmentation of this industry and that gap between first and second will be just enormous.

So I talked at length about the process and talked about some of our findings on that. The major one was that we need to be open. It’s not the only option, but we need to be open to the option that we will be bought outright. As result we then spent a lot of time asking what that means to members, what does that mean to their day to day business, how does that affect them, what would a new owner bring, what would they want and how would we protect those interests. So as you can see it was a far reaching presentation. We had a room full of suppliers and a room full of members and we were prepared to be fully transparent and open about our intentions and to talk about it. And I think that’s pretty powerful that we did that. It puts that whole thing on the agenda. It takes it out in the open and I think when we bring something to the table it won’t be a surprise.

TP: The situation does not appear to have been made any easier by certain media outlets perhaps being a little liberal in their interpretation. Could you definitively tell us what is really going on with Mitre 10 and particularly Woolworths.

BB: Well let me tell you exactly what I’m at liberty to say. We are talking and we are in negotiations with more than one party. We are not limited to one party and even now we don’t have any binding agreements with any single party. I can’t deny neither can I confirm the names of any party because we’re bound by confidentiality agreements. I can’t confirm or deny who we’re talking to. However, there are a number of them and they are both within the country and international. The press reports have really overstepped the mark and quite frankly I’ve been personally misrepresented, which is disappointing because I’m sure a lot of people read that and probably took it to be accurate reporting, which it wasn’t.

TP: Well the same thing happened last year didn’t it.

BB: Yes. And look, I guess it’s all fair in love and war when it comes to a story in a sense but ultimately the truth always comes out and I think that will be the case. It’s a big move so our shareholders should rest assured because it’s a slow process, it’s completely democratic, and it’s quite formal. We’re not rushing into anything, even though the press might have us married off. That’s just not the case.

TP: Well it would be a boring story.

BB: Well exactly. Saying that Mitre 10 are still working on something is hardly a big story.

TP: More than one scenario has been mentioned by the media and also by yourself, including a full or a partial sale or an equity injection. Can you elaborate on what the various models might look like?

BB: There are numerous, starting with the option that would involve the least change. One of the options is someone who has an appetite to put stores on the ground who simply uses the Mitre 10 brand. We would license them as we license any other franchisee to use the brand. That’s an option, where we actually go out and grant wholesale rights over areas where we don’t currently have stores. That’s one way. The other way is that we have a partner who comes in and creates a joint venture in the purchasing of stores. So a joint venture with current members, a joint venture with store managers, a joint venture with Mitre 10. They inject the cash and the capital, we inject the expertise. That’s another one.

Those are ways that equity could be injected into the business without changing the structure of it or even the ownership of the company itself. An equity injection into the company is quite a difficult one in terms of minority because we’re quite a complex organisation with quite a complex structure. So it’s very unlikely that a company would put in a minority equity injection. For example, a thirty percent equity. There’s always a chance that a company, for example a listed company, could actually fold Mitre 10 into the company and issue shares to existing Mitre 10 shareholders. That’s another possibility.

Or, at the top end, a company could simply make an offer for Mitre 10 businesses and buy the company outright. This would be an offer for the share capital of the company, which would be similar to any other takeover. There are probably a few more combinations on that but these are the most likely ones.

TP: Would Mitre 10 consider a partial sale?

BB: If it made sense. A partial sale would be fine. The main issue is this: I would have said two or three months ago before the economic collapse that there’s a lot of money out there but now there’s a lot less money. But still, most of the money that’s out there is aggressive, short term. For example, private equity money is just too short a term for us. What we want is to engage with a partner who really is about the long term future because that’s where it will come from. It won’t come over a two or three year period which is up on the time frames that private equity players use.

TP: In the event of a partial sale – and I say this because anecdotally this appears to be a source of anxiety for small members – what would happen to smaller members who don’t own two or three or four stores?

BB: Well, the good news is that this is where we pretty much started our work. That is to say, what do we have to put in place for all of our stores? And the reality is that the vast majority of our stores are medium to small size, and the majority of them are in rural areas. So, we’ve got to address both those issues. And for no other reason, we’ve got to get this thing accepted if we’ve got people who are concerned about their own businesses. We understand we won’t go past first base if we haven’t addressed, in an absolutely formally agreed way, what the rights of our stores are. We have talked about commercial pricing out of warehouses; continuity of our supply of broken pack product; continuation of free interstore deliveries out of warehouses; development of ranges and extension of our capabilities out of our DCs; flexibility in promotional offerings; continued and increased investment in our direct to air marketing; continuation of our trade division, which is basically a cost plus mode which works very well; continuation of our state offices which provide the day to day support for a lot of our regional and smaller stores.

What we’ve done in lots of detail is put that down into writing. One of the very early things we do when talking to one of these prospects is actually say ‘here it is’, if you actually can’t get past this we don’t go forward because we’d be wasting each other’s time. I understand the concerns and it’s pretty much the first place we start. If we can’t get past that we know that this thing will falter. Our members generate their wealth out of their stores, they don’t generate their wealth out of Mitre 10.

Having said that, Mitre 10 has got to be strong and growing for them to be able to continue to get returns out of their stores. It’s quite a fine balance. I’ve got to look after the company and I’ve got to make sure that company stays strong so that they’ve got the ability to continue to work their businesses. We walk hand in hand on this one.

TP: And what was the sentiment of members?

BB: It was really good. This will sound like rose coloured glasses but I am always really encouraged how well our membership embraces challenging things put to them. Not everyone understands every issue but by and large there’s a huge capacity to take on those challenges. I was very encouraged. Sometimes I don’t get my negative feedback directly, it comes through other parties, through our state offices or whatever, but by and large, although people might have their own view on whether we’re on the right track exactly, they know we’ve got to be working on the issues. I think that’s a fundamental difference between some of our competitors who haven’t got the dialogue going. My view is that if you talk, if you keep working on it, ultimately you’ll come up with a solution.

TP: Some of the members I spoke to at the Expo were quite optimistic.

BB: Well it’s a big challenge, isn’t it. We’re talking about one of the biggest things that will happen in this company so I’m sure they’re feeling a little nervous about it as well.

TP: Without a doubt. But like I said, there seemed to be more optimism than despair.

BB: Well yes. And I think some of that comes from being transparent about it.

TP: Why are you not seeking reappointment next year?

BB: Well. I’ve been there eight years and I genuinely believe that it’s time for someone with a fresh approach to come in and take a shot. It’s a tough gig and we’ve been through some pretty tough times in creating the initial national structure way back in 2000 and 2001; installing a huge computer system through 2001 and 2002; and the various things that we’ve had to do. I feel a bit like Kevin Sheedy in a way – I know I haven’t been there 25 years – but I think sometimes, both for your own staff and for your members, that if the coach has been there for too long you keep repeating the same things. I genuinely think that someone else with a new message will come in, take a look at it, find a lot of stuff wrong that they don’t like that I’ve done and hopefully find a good foundation to build on. It’s genuinely time for someone to come up and take their shot.

TP: What would you like to see achieved between now and June 2009?

BB: I would love to see the whole strategic equity work come to fruition. That would be brilliant, to be able to have something on the table. I want to see the final stages of our supply chain work bed down and have very reliable and cost effective warehouses. Again, that’s the culmination of three years of work. I’d like to see us really weather this current financial storm. For example, the impact of foreign currency devaluation on this industry, which is largely imported product, is going to be monumental. So how we address that and stay competitive is also critical. Over the next six months I would also like to leave a stable organisation that is competing aggressively, getting out there, picking up stores and generally representing the brand well. I don’t think it’ll be my busiest nine months but it’ll certainly hold all the challenges of making sure things are left in good shape.

TP: Do you know who will take over?

BB: The honest answer is no, we don’t. I can tell you that there are a couple of internal candidates who have already telegraphed their interest. They were recruited because they wanted a career with Mitre 10 so that’s good. I know the board had just commenced the process of evaluating the sort of person they need to go forward and the skill sets and the experience they need. It will be a process that will combine external and internal. I believe it stood me in good stead to come from the CFO’s position where I had a good understanding of the business when I got to sit in the CEO’s chair. That was really quite useful. I think any internal candidates should be seen to have the ability to compete with any of the externals.

TP: How exactly has the Ryobi deal affected Mitre 10?

BB: The first thing is that, no matter how you want to cut it, it actually reduces the competition in the market. The fact is that Ryobi was a major brand and continues to be a major brand in the power tools sector. There’s no debate about that. And they’re very strong in the price point segment. To have it in one store alone has to reduce competition just by definition. We will get around it, we’ve done a lot of work with other suppliers, and we’ll continue to do that, but it’s us working our way back to a position that we already had with that Ryobi business. I’m not going to make it any glossier than that. Will we get past it? Yes, we will get past it and that will happen and in the end we will try to make sure that we’re relevant so that it doesn’t happen with other suppliers. Fundamentally, though, it just gives us one less weapon in our arsenal to compete with. In the longer term, yes we will get past it, it places us at a disadvantage. Bunnings would not have done this if it wasn’t a competitive advantage. Why would they have bothered?

I’ve got to say we’re getting really good support from other suppliers. Bosch we’ve done a lot of work with and that’s been good work. It will take hold over the next twelve months. But I just think the principle is bad. I think ultimately products should be available unless you’ve developed your own brand. But, to actually develop it and market across different channels and different businesses and retailers and then to withdraw, I think that’s actually bad for the market and bad for business.

TP: Well the ACCC thought otherwise.

BB: Well the ACCC and I don’t always agree. Unfortunately my opinion doesn’t count. I’ve always been quite critical and I always thought – and I’ve said this a number of times – that Bunnings being allowed to buy the Hardware House chain through the Wesfarmers acquisition of Howard Smith – I can’t think of another country in the world where the number one player would be allowed to buy the number two player, so obviously the ACCC has better ideas than I have because I can’t see how that went through. That fundamentally changed our industry forever… We’ve got to defend our position on these things. We’re more than happy to compete on a level playing field but attempts to tip the balance just make life very tough.

TP: One of happier areas for Mitre 10 has been the Trade Division, with double digit growth and new leadership with Adrian Woodcock. Why has the Trade Division performed so well?

BB: I think for a number of reasons. The first one is the fact that we stand or fall on the performance of our stores, there’s no doubt about that. Mitre 10 stores really know how to do trade. They’ve got the structure, they’ve got the staff, they’ve got the experience – they really know how to do it. That’s the sort of history that Bunnings and others find difficult to replicate. So the first thing is we actually know how to do it at store level. I think the second thing is we’ve got a history and tradition of it and I think that’s important. And we’ve got a national footprint. We’ve worked out that we’ve got the largest trade sales force in the country. We’ve got roughly 20,000 trade reps over all stores – just Trade Division. It’s an enormous footprint, although there are some very strong regional players and we all know who they are.