Industry Insights 2019

Industry Insights 2019

In this 2019 edition of ‘Industry Insights’ the Australian Hardware Journal conducted  exclusive interviews with industry leaders, revealing their thoughts on the year that was and positive predictions for the year ahead.

HBT (Hardware & Building Traders) Chief Executive Officer, Greg Benstead 

HBT Chief Executive Officer, Greg Benstead.

When the Australian Hardware Journal caught up with HBT Chief Executive Officer, Greg Benstead this month, he had only just returned from several HBT state member meetings, most recently in Western Australia.

Coming off the back of these meetings Mr Benstead said member discussions indicated that although there had been an economic downturn over the past 12 months, this had not necessarily affected HBT due to the diversity of its stores.

“Conceptually the industry has had a softening. However, due to the diversity of our membership, now with over 800 stores, our results are not necessarily reflecting a downturn based on how HBT is tracking. In saying this, we are always looking at how the individual members are going. I believe the members are generally doing well, particularly due to some great member/supplier relationships, while HBT continually pushes for deals that deliver better rebates for members. The combination of this, as well as more stores coming on board with us, has delivered strong growth which is great,” Mr Benstead said.

“I believe that although business is better, I would not say it is booming on an individual store level. This is possibly because many of our stores did not really decline in sales this year, they stagnated. Everyone said they were working very hard to achieve last year’s numbers. So, while a lot of people in the industry did say they were in decline, HBT stores worked harder and avoided much of this,” he said.

Despite this, optimism is growing in the market, mostly due to forward orders which are looking better, according to Mr Benstead, who said Western Australian members are also looking forward to a positive 2020 after being the hardest hit on a national level. 

“Western Australian members have also indicated that the mining industry has become quite responsible in the way it delivers contracts, so this should mean improvement over there from mid-next year without the boom and bust of prior years. South Australia has also struggled of late, while the east coast is broadly holding up. In saying this, everyone is certainly optimistic about the future.”

“Due to the nature of our business we deal with a lot of tradies who work in the home building sector, but it seems to be the larger builders constructing high-rise apartments who are the ones struggling – we are not in that game,” he said.

In saying this, Mr Benstead said the drought and current bushfire devastation has also had an effect on some members. 

“The drought is certainly having an impact everywhere. Orange is one such town that is pretty much out of water and when talking to some of the stores in that area, they have just said they need to look at all opportunities to strengthen their business. It is very tough for all members impacted by drought at the moment,” he said.

Continued membership growth

Once confidence in the marketplace gains momentum and the economy fundamentals start to improve, HBT expects to achieve even further growth in membership numbers.

“While we still have a lot of memberships in the pipeline we are currently reviewing, the work we have implemented with supplier relationships also continues to reap a lot of benefits. I believe in May our numbers were around the 750 mark; however, this has grown to over 800 stores just six months on,” he said.

Mr Benstead said that member numbers have particularly bumped up after several store groups joined HBT, with Victoria being the biggest growth area.

“Now that we have a team member in every single state, we are getting out to stores far more than we have in the past because now we have the resources and it is making a difference. There is certainly momentum in this area, particularly because we have someone in all of these locations who can visit potential members. A lot of these stores are also independents that have never been a part of any buying group before. Word of mouth seems to be another reason new members come on board, with current members spruiking HBT’s benefits to other independents,” he said.

Growth opportunities & combatting change

Mr Benstead went on to point out that there are always potential growth areas in the market, particularly now that a number of HBT’s product categories have been rectified and deals continue to improve. This also means the members are now pushing volume back through HBT because the deals are better, he said.

“I think one segment that has been soft of late is the timber/building area, so to me that is the one area that is also now set to make a comeback. Timber/building softened due to a combination of factors; one being the high volume of stock that suppliers had on the water earlier this year. On arrival to our shores this stock was not being bought at the same rate it usually is, which then led to discounting and deflation in the market as well. Sales look a bit softer than what the volume would indicate because of that deflation. However, with the industry appearing to be on the improve, this is sure to be a stronger area,” he said.

Mr Benstead also pointed out that timber and building suppliers become particularly innovative when things get tough, which is why there is an abundance of interesting products on the market currently.

“There are a lot more innovative composite wood type products on the market, which is a value add and great for the industry. Although these products are a little more expensive, ultimately people are prepared to pay for a quality product and I think this is what suppliers are bringing to the market currently,” he said.

When looking at combating changes in the market, including keeping up with the growth of online shopping, Mr Benstead said HBT continues to encourage members to expand their online presence by instigating deals with website developers. 

“As a group we are also looking at developing platforms that will allow a landing page to redirect customers to their nearest HBT, ITT or H Hardware store,” he said.

This is particularly important when considering Bunnings’ development of its online offer and the need to combat the threat of the Big Box as a whole.

“Members need to take a really strong role in lobbying together to stop this model from devouring much of the Australian economy. Local councils do not seem to realise that when they put a Big Box in town, they are putting 20 other local businesses out of business over the next few years.”

“Bunnings has done a great job in ensuring they are seen as the guys who go out of their way to help the local community with events such as the popular charity sausage sizzle. The reality is they are literally eating away at independent businesses, but I believe independents will start to work more closely together on this over the next 12 to18 months,” he said.

However, it seems HBT members are not only combatting competition by developing an online presence, but also through a ‘do it for me’ service in-store, according to Mr Benstead.

“We have several HBT stores that are great examples of this. Builders can walk into these stores with their customers and select products from the various showrooms. They then give a product order to their staff and it is all done for the customer on the spot. This is a great concept and also develops relationships with local tradies, who then also refer the customer to the store. This is the sort of thing that needs to be done at a localised store level around the country. The benefit of being an independent is when we do become involved in concepts such as this, it also means you are helping the tradies in those little towns and keeping business local,” Mr Benstead said.

Plans for 2020

Upon his arrival to HBT a couple of years ago, Mr Benstead immediately embarked on a strategy of change for the business, including improving member rebates, growing membership, ensuring better supplier deals for members and developing sales data for suppliers. Mr Benstead said HBT has also had a really good year finalising a lot of set goals, including completing around 80 per cent of the IT work it had in the pipeline.

“Our job is to ensure we source better reports and information for members, which is why HBT is working on a process of getting sales data from our suppliers, so we can collect data and give our members good information about what segments are growing and not growing. This is now being done far quicker than it has in the past. This is so beneficial because information is power, however we also need to ensure this process remains simple for both members and suppliers,” he said.

“For now, it really is about remaining on the same trajectory for HBT. Ultimately, we act as a buying group for our members so whatever they want, that is what we deliver. Everyone seems to be happy, particularly when we are delivering on things such as record rebates for members that we achieved last quarter,” Mr Benstead said.

Plans are also well underway for the 2020 HBT National Conference to be held on the Gold Coast from May 4 to 6, with the popular event expected to be bigger and better than ever considering the growth of member numbers in recent months, he said.

IHG (Independent Hardware Group) General Manager of Marketing, Karen Fahey 

IHG (Independent Hardware Group) General Manager of Marketing, Karen Fahey.

IHG General Manager of Marketing, Karen Fahey recently spoke with AHJ, not only touching on the downturn in the building industry, but also how IHG managed to grow despite the current market conditions.

Ms Fahey said that while there are stores in the network that have felt pressure because they have exposure to volume builders, the majority of members service the smaller builder and renovation market and are less exposed to increased economic pressure. 

“In saying this, the industry could still be in for another tough 12 months. Certainly, our intelligence from the HIA on housing approvals suggests that whilst it appears we are near the bottom of the hockey stick, consumer spending and wage growth is quite low. Overall it is best to assume that we will have more of the same in 2020,” she said.

“Even if the drought were to break in NSW and Queensland, it will take some time for those regional areas to get back on their feet. That being said, independents have been riding these cyclical waves for generations and they are very resilient in the face of economic headwinds and natural disasters,” Ms Fahey said.

Despite the tough market conditions, IHG has continued to perform well, with a general level of optimism now manifesting across the member network. This is particularly evident with over 90 Sapphire store transformations to be completed by the end of April, according to Ms Fahey, indicating that IHG independents, and Metcash, see the value of continual reinvestment via the Sapphire Program.

“The most recent Sapphire launches have been in Moe, Margaret River and Warrnambool – all independent stores that were previously branded Home Timber & Hardware. These are all fantastic families who are embracing the future of a strong challenger brand in Mitre 10. The Sapphire Program continues to deliver growth, and thus we have a two-year pipeline of stores ready to undergo their own transformation, which is very exciting.”  

“You cannot underestimate the value that Metcash brings to our model, particularly in this area of capital reinvestment into stores. Additionally, IHG has also just opened a new, state-of-the-art distribution centre in Queensland this year, which all stems from the backing of Metcash,” Ms Fahey said.

It seems IHG’s consistent positive results also grow from the group’s unwavering focus on its strategy and consistency in its approach to both members and suppliers, she said.

“As IHG General Manager of Merchandise, Annette Welsh announced during our February Expo, IHG has a strong a focus on growing its share of the house build segment. We call this our ‘Whole of House’ strategy and this is showing some real returns. Additionally, IHG continues to invest in its digital transformation strategy, which continues to evolve and generate new markets and customers for members. Additionally, IHG has also invested into its trade technology, in a bid to future proof our stores and respond to the needs of customers. From a training perspective, IHG has also invested in its e-learning training portal, and we now have some exciting trade training modules that we have been trialling.”  

“Most importantly, we continue to work respectfully with our members – particularly our advisory groups, and this ensures that we remain accountable and transparent. Those independent owners who volunteer their time to work with us are crucial to our success.  They tell us when to run, when to slow down and most importantly, when to be bold,” Ms Fahey said.

Responding to market needs also remains a priority for IHG, which is why development in the ‘Connected Home’ will continue even though, “it is very early days”, according to Ms Fahey.

“It is for this reason that we have been setting up benchmark stores to test and trial different merchandising methods, and upskill our teams in the right fashion.”

“Our shopper led range has also performed particularly well in 2019, reflecting that the SKUs that are selling are in direct response to the market’s needs. The transformation of our business from supplier-led ranges to shopper-led or consumer-led, has certainly contributed to our success this year,” she said.

Online shopping is another evolving trend in the industry, particularly now the Big Box has made big moves into the online market over the last 24 months. IHG members have also enjoyed good growth in the online channel, which Ms Fahey said is expected to continue despite the threat of Bunnings’ online presence.

“In saying this, whilst most hardware consumers are eager to conduct their research online, over 60 per cent will still opt to complete the sale instore. This again reiterates the need for high standard stores that are well ranged with great product knowledge to close the sale,” she said.

“It should also be noted that the DIFM market will continue to grow due to generational change, loss of skills and a consumer’s ongoing desire for convenience. Independents have unofficially catered for this in many ways within their own local area, however there still may be the need to approach this from a national standpoint going forward.”

“The female shopper will also continue to increase her visibility in the hardware channel, which is why we need to cater for a woman’s growing need for confidence and technical information within hardware. In addition, the changing face of the typical Australian household size and composition will mean that the rental market is another good opportunity for our stores to capitalise on,” Ms Fahey said.

Geographically, growth areas within the hardware sector are expected in Tasmania after strong evidence of growth for over two years, both in the domestic and infrastructure markets. Ms Fahey said that despite the over representation of Bunnings in Tasmania, IHG stores have continued to flourish.  

“However, for the remainder of the country growth is generally hard to achieve. Given the market, we should not consider zero growth as a negative. We celebrate the stores that have been able to outpace market trends with flat growth, even if they are slightly down on last year,” she said.

IHG’s plans for the year ahead remain as per its strategy document, which will ensure more of the same in 2020, according to Ms Fahey. IHG’s Sapphire Program, shopper led range, Whole of House program, along with the continual development of IHG’s digital and trade technology will be the mainstays of its growth program.

“IHG will also continually bring Home Timber & Hardware stores across to the Mitre 10 brand – either via a Sapphire transformation or by painting them up. We expect that by the end of April, more than 70 per cent of IHG’s volume will be attributable to the Mitre 10 brand,” she said.

“In 2020, the industry will also see celebration of our family-owned stores – a content series that captures the essence of why consumers should support independent businesses in their local communities.”

“We also expect Bunnings to remain aggressive, particularly in the trade sector, and we will continue to work with our stores to prepare for this. Inappropriate big-box development will be felt by all independents, not just those within the IHG channel, and the quicker we find ways to work together the better,” she said.

In closing, Ms Fahey said IHG’s purpose is unwavering.

“We exist to build and maintain successful independents. We strive to give consumers a choice, and our Mitre 10 brand strategy exists to build a viable challenger brand within the Australian market,” she said.

TradeTools Chairman, Greg Ford 

TradeTools Chairman, Greg Ford.

Now with 19 stores throughout Queensland and one international store, TradeTools Chairman, Greg Ford, said while he believes the construction sector has definitely bottomed out in the sunshine state, small signs of recovery are starting to become apparent. Unfortunately though, it will take a full two years before things return to ‘normal’, he said.

“Although our turnover is edging up, so are our prices due to the weakness of our dollar. But overall our profitability is nicely intact and we are showing healthy returns,” Mr Ford said.

When discussing industry circumstance that may have affected TradeTools’ performance over the last 12 months, Mr Ford believes that the industry needs to see the “prices of existing dwellings increase which will have the effect of making the price of new buildings more competitive.”

“At present, existing house prices are noticeably below the cost of building new, so this margin has to narrow in order to make new construction more worthwhile.”

Looking at store performance throughout 2020, Mr Ford said he expects a marginal increase in turnover for TradeTools’ 18 existing stores nationally, however the group does plan to open two new, large stores during 2020 which is expected to significantly increase the group’s turnover.

“TradeTools has just opened a new store in Cairns and we are genuinely surprised by just how quickly that store has hit its target figure. In fact, the figure that we had set for the store to aim at within 12 months was actually hit in just the sixth week of trading! Even our highly successful Toowoomba store did not manage this when we opened there some years ago,’ Mr Ford said.

In saying this, the market is changing rapidly and competition is fierce, with a further increase in a number of TradeTools competitor stores.

“We always hark back to the story of the three little pigs, who respectively built houses out of straw, mud and bricks. Of course, when the winds blew the first two houses of straw and bricks soon fell over, but the brick house survived quite comfortably. Our competitors mainly lease their buildings and pay, what to us is, enormous amounts in rent – the easy road to expansion, but by using straw and mud. However, we always buy our buildings outright, so we are the ones building our business with bricks,” he said.

When discussing areas of growth in the hardware industry over the next 12 months, Mr Ford said while he does see a further small take up in online shopping, in-store sales are steadily growing.

“Quite simply, many hardware items are quite difficult to freight in both weight and size, so online buyers are charged for that, either directly or indirectly. And anyone who thinks that ‘free freight’ is genuinely free, needs an urgent business reality check,” Mr Ford said.

“We do not see any real areas of growth within the industrial tool industry that we are mainly involved in, apart from a further take up of more cordless product and maybe a new budget line of light industrial cordless tools that we are about to launch,” he said.

Mr Ford believes future areas of growth will be particularly noticeable in areas such as the Sunshine Coast and Northern NSW, which will continue to see strong construction growth.

“They are both lovely places to live, are relatively affordable and are also ideal areas for the army of baby boomers currently retiring. We are currently looking to open a TradeTools store in Lismore, as soon as we find a suitable site to buy in order to service the growth area of North Eastern NSW,” Mr Ford said.

Looking ahead to 2020, TradeTools already has much planned for the new year, including the launch of a budget priced range of cordless products aimed squarely at the occasional trade or weekend user.

“This is an area traditionally occupied by the big hardware companies, but we believe that many people would much prefer to buy these semi-speciality tool products from a genuine tool store, particularly as we are much more knowledgeable and have generally lower prices,” Mr Ford said.

CPS (Central Purchasing Services) General Manager, Stephen Wren

Central Purchasing Services (CPS) General Manager, Stephen Wren.

Central Purchasing Services (CPS) has achieved one of the most successful financial years for over 10 years, according to General Manager Stephen Wren, with member rebate distributions increasing 55 per cent, costs reduced by eight per cent and profit increasing by an incredible 56 per cent.  

CPS is not only in a strong financial position with healthy cash reserves, but also has a low cost of operation with very low ongoing financial obligations, according to Mr Wren.

“The group has experienced healthy growth primarily via greenfield opportunities. The MAKIT banner continues to prosper with a number of new stores coming on board in regional Western Australia recently. The TradeSmart business has also continued to perform well, with an eight per cent increase in member numbers bringing the total growth since acquisition a few years ago to 44 per cent,” Mr Wren said.  

Although the CPS business has continued to prosper on the east coast over the past four years (like-for-like), there have been signs of a tapering over FY2019, with a fall from double digit to single digit growth, according to Mr Wren.  

“As a business that is orientated to rural areas, the lower level of consumer confidence is primarily a consequence of drought conditions and this was most likely more influential than any drag created by the housing market. For Western Australia, economic conditions are vastly different to those in the east, so 2019 was positive in that it was a static year, with the market giving some signals that the bottom has been reached,” Mr Wren said.

“Sales in the first and more so the second quarter (F ’20) are also showing consistent improvement. In November, Western Australian house prices increased for the first time in five years which will finally drive some confidence and demand back into the market,” he said.

Over the last four years, CPS’ primary focus was to concentrate on the basics, including increasing the level of rebates through business synergies and strategic partnerships. CPS has also reduced the cost of doing business and accelerated the speed of rebate payments to members and improve transparency, Mr Wren said.

“As a business that was struggling to confirm its position in the market five years ago, the level of transparency that we provide and the speed at which we return rebates to members has been most influential in driving our business. Overall, the business has reported its strongest performance in over 10 years, including increases in member rebate distribution values and percentages, and final company profit which is at the highest it has been for 10 years. Much of our financial and member success is driven by focusing on the basics of the business,” he said.

When looking at the industry as a whole, suppliers are displaying a greater willingness to engage with independents, according to Mr Wren, which is a response to increasing concerns of over-exposure to some of the nation’s distribution channels. 

“The flip-side of this is the rapid expansion of those outlets over the past year. While our business is not overly exposed to the general tool market, the erosion of the fringes of member businesses cannot be played down,” he said.

When discussing growth areas in the Australian hardware industry, opportunity lies in providing bespoke solutions to markets, according to Mr Wren, who said continual centralisation and alignment of national players leaves voids in markets, both in terms of products on offer and in the customers that require more detailed or tailored solutions.  

“Tier three and tier four builders in particular represent an excellent example of bespoke service opportunities. For many of our members, increasing focus on those product categories that are not well catered for by nationals has done and will continue to be rewarding in terms of both volume and margin opportunities,” he said.

“Online buying also continues to be an area of significant influence and great challenge for the industry. A number of tool suppliers have introduced pricing mechanisms that prevent rouge operators from destroying certain markets. Independent stores are however challenged with the cost of building and maintaining sophisticated solutions to remain competitive in that space.”

“Independent stores also continue to capitalise on lower staff turnover resulting in greater knowledge retention, and it is that knowledge that represents a real opportunity for a strategic competitive advantage. For stores to fully capitalise on this opportunity they need to dovetail selling skills into the product knowledge,” Mr Wren said.

Looking at the year ahead, Mr Wren said he expects improvements in the building industry will drive underlying demand and offer some positive news to consumer sentiment throughout 2020.  

“We have recently increased staff numbers in the Melbourne office with the appointment of Aaron Penney (ex Kincrome Key Account Manager), to the role of Sales and Marketing Manager. The next phase of our plan is to increase the focus on providing support for sell-through solutions to stores as opposed to simply selling to stores. The objective of the initiative is to be more proactive in combatting the growth of corporates.”

“We also expect to see that the number of independent stores who operate as traditional hardware stores will decline, however at the same time, a portion of those outlets will move into more specialised markets and prosper. We are continually trying to refine our offer and build into those markets, such as industrials, to provide solutions to those operations. Specialisation and being the source for something, as opposed to trying to be the solution for everything, is the opportunity for independents,” he said

From a buying group perspective Mr Wren said the only question that keeps him awake at night is how can the group  increase its relevance to the Australian market.

“The largest operation takes $13 billion of the market, while the collective volume of all hardware, industrial and plumbing buying groups represents only a portion of that. In the coming years we believe that our operations will need to be more competitive to support independents. The only logical solution to that is for groups to strike strategic alliances with each other and for mergers and acquisitions to occur,” Mr Wren concluded.

CSS (Construction Supply Specialists) Co-founder, Jeff Wellard 

CSS Group Managing Director, Jeff Wellard.

When reflecting on the past 12 months, CSS Co-founder, Jeff Wellard said he believed 2019 ended up being a reasonably good year for the CSS Group as a whole, after what was quite a shaky start. 

“There is no doubt that the first half of the year produced results below expectations, and while it was far from being disastrous, there was reason to be a little more attentive to detail moving forward. Although we finished the first half down on projection, there was a feeling of ‘quiet’ expectation that the second half of 2019 would be more upbeat right across the county,” Mr Wellard said.

“Obviously, rural areas were still being affected dramatically by the ongoing drought, but the mining uplift along with an increase in both domestic and commercial construction (in built-up areas), resulted in the group finishing the year off strongly. It was also pleasing to see growth in a number of the newer members that contributed heavily to the overall position of the group at year’s end,” he said.

An increasing market awareness of the CSS house brand (Impact-A), along with bracket creep – where smaller members develop to be medium stores and the medium develop to big – as well as supplier partners becoming more innovative with products and being even more involved with the members, have all played a big part in keeping CSS on the move, according to Mr Wellard. 

“Increases in localised trade show activity with individual store members was also upbeat during this period and provided extra exposure, which additionally aided the sales effort.”

Looking to the year ahead it would appear that there is more of the same on the way, particularly with the drought still having a huge, adverse effect on rural Australia, while the mining, construction and industrial areas slowly develop in line with ‘expert’ market expectations. 

“Sydney, Melbourne and Brisbane are also likely to continue infrastructure spending which will also keep stimulating the private sector for a while. However, independently owned small business operators will need to be even better organised and supported to maintain their positions. It seems there is also a strong push by some wholesale-based suppliers to develop ‘click and collect’ systems linked back to ‘supporting’ independent retailers, many of whom will need assistance in getting themselves e-commerce ready to play in the game, and this will be a challenge for some,” he said.

Most in the industry also remain very aware that market consolidation will be a big part of life moving forward, particularly with corporate buy-outs regularly occurring. This may also affect the way buying groups with independently owned and operated members operate, Mr Wellard said. 

“While there is still a significant space for the independent, there is also a growing need for a more structured, interactive and consolidated approach to how we go to market and how we work with key suppliers who are ‘strong’ with major national chains and big box stores.” 

Suppliers will need to be more creative with their approach to individual stores as owners, managers and buyers will be even more critical when it comes to ranging products – especially new lines or change-over of brands. Distributors will also be looking carefully at what each supplier is ‘offering up’ to support the generation of pull through sales at store level and then assisting with stock management systems to increase stock turn overall,” Mr Wellard said.

The development of required operational skills at all levels within small, medium and large independently owned and operated industrial supply house operations, will be another key factor for growth and development going forward, according to Mr Wellard. 

“This is particularly the case with professional training in sales and service, profit and loss systems, accounting and e-commerce systems, and their implementation into the business, which will be the drivers that will take each company from the bracket they are in now, up to the next bracket
during 2020.”

Looking into the future, Mr Wellard said the main focus for CSS will be on providing the necessary sales, marketing, administration and operational platforms and interaction between all suppliers that will help members be better equipped and ready to meet the challenges of the continually changing market place.