Power tool specialists set to outgrow demand
There is no question the Australian power tool industry is highly competitive – not only due to the huge number of brands that service this market, but also the increasing competition between specialist tool retailers. Industry groups now question what this fierce competition will mean for tool specialists in the future. Will the market become so flooded that it may no longer serve as a viable business for tool specialist groups?
Central Purchasing Services (CPS) Business Development Manager, Greg Downie recently expressed his concerns to AHJ on the continual expansion of tool specialists, pointing out that the increasing competition between retailers could see the industry heading for problems.
“I have spent my life working in construction and procurement and I am an active participant and observer of our industry. I am also a Western Australian representative on Hardware Australia and have developed an instinct as to how some changes will play out. I have seen a lot of changes within the industry including the development of some very dominant players. This increasing competition will have two affects. Firstly, the industrial and trade tools market will end up over serviced. Secondly, this will see independent traders pushed out,” Mr Downie said.
“Once upon a time, power tools were sold by hardware stores. Those stores with a large depth and width of stock were seen as specialists, while other stores only maintained a smaller range as a convenience buy for customers. Over time this category has grown and evolved, with retailers setting up power tool stores with an ancillary offer of hand tools and other equipment. Selling power tools is generally high value and low margin though it is perceived as a ‘sexy’ place to be in retail.”
“Today there are many players in this market, all with different business structures. We now see stores within ASX companies, private company stores, privately owned franchised stores, hardware stores and other independent stores. While some groups are laying out big expansion plans, I believe there are storm clouds building for some operators. The battery tool market has grown along with its capability and range, but it is a finite market to sell to. The number of stores is growing much faster than the number of users to sell to,” he said.
While Mr Downie admits it is difficult to see how this evolving situation will play out, he does believe the larger players could adopt a predatory approach by using their resources and existing relationships to create a competitive advantage. Their goal and strategy may be to achieve closure of competing stores.
“When you look back over the last 20 years, Bunnings kicked off in a big way in the late 90s. Over time, the large format style of retailing has tended to push out smaller independent stores. I see this happening in the power tool market, particularly now with Metcash purchasing Total Tools and Bunnings buying Adelaide Tools. Bunnings has also been very vocal about opening 24 new stores in this space this year. Sydney Tools are doing the same.”
“I just really wonder about some of their business plans because it seems these three big players are just going to fight for this industrial and trade tools space. I also think Bunnings want control of this space as well and will try to push people out of it in years to come. When you overlay the three of them, you can see there will be twice as many outlets amongst these three major players in a few years’ time.”
Mr Downie has also been active in communicating his concerns to the ACCC, particularly now the retail industry is favouring large format stores.
“I have written to Federal, State and local Government representatives in regards to the whole retail space favouring large format retail right across this area. Whether this is in hardware, furniture or electrical goods, large formats are destroying a lot of small business. I just feel this is not good for the consumer and our economy in the long term.”
“The government parties I have written to suggested I get in touch with the ACCC. However, the ACCC has stated that they would only act if they feel the consumer is being disadvantaged by large format retail. I understand their position but as the large format retailers continue to grow and the smaller retailers disappear, large format stores tend to exert unreasonable market power and push prices up. At the start of the process the customers are not disadvantaged but in the long run they are and then it is just too late,” he said.
Demand in the industrial and power tool space may also start to decline particularly as tradies opt for quality tool products so they have reliability on-site. This then leads to a low turnaround of tool purchases throughout the year, according to Mr Downie.
“Tradies invest in quality products from the top brands so they have peace of mind that their tools will not let them down. It is more about the performance of the tool for them rather than the price point. As for the DIY market, I am also a power tool user and a keen renovator, but I have upgraded all of my tools. It will be a year or two before I blow anything up and need to replace it,” he said.
“Most power tool suppliers also reward retailers if they place a volume order which means a small player often does not have access to the pricing of a large player. The other thing is retailers often buy a tool for $100, then sell it for $100, but then receive a rebate sometime after for selling this product. There is no other part of the hardware or industrial market that does this. Power tools are unique in that people make the money off the rebate, which is their margin of it and this is the case throughout most brands.”
“It seems that everyone wants to sell power tools but then they get a bit a closer to the market they realise there is not a lot of money to be made and they make more money selling a hammer than we do on a battery drill. But if you are in that space you have to have an offer, you have to stock it,” Mr Downie said.
In saying this, there are still smaller format hardware stores who continue to grow and evolve despite the fear that the market will be flooded with big boxes and tool specialists.
“The market is always dynamic and it is still evolving. What I have found personally is that while Bunnings has some dominance in places in the market, there are also now some big gaps in the industry. I live in an area where if I need to go to a larger format hardware, I have to travel quite some distance because all the little ones in-between this space have closed,” he said.
“In years to come I actually think we might see some smaller independents opening with a very specific range. I do not think they will go to head-to-head with Bunnings, but they will sell the basic range and pick up those customers that do not want to travel as far and do not want to be caught in a mega carpark. The Sunlite Mitre 10 group in metro Sydney is a good example of a smaller format store that continues to grow in sales.’
While every hardware retailer has its place in the market, as specialist tool retailers continue to expand into the market, this can only mean tumultuous times ahead.
ITT stands out with specialist offer
National Business Manager for the ITT (Industrial and Tool Traders) group – which is a specialist arm of HBT – Kevin Marshall said while he understands that increasing competition in the industrial and trade tools space may be of concern to some independent groups, he believes HBT will not be affected because the group is so diverse.
“Our offer is quite different because we have not taken the design of a Bunnings tool shop and then expanded this into our stores. Our ITT stores are more focused on being specialists to a certain category. For example, one ITT member may be a fasteners specialist, which means they have all the tools their customers need to complete a large project using fasteners and all of the ancillary products that go with this. Another ITT member is a plaster specialist who not only provides plaster but all of the tools, fixing and adhesives that go with being a plaster specialist,” Mr Marshall said.
“If we do have ITT stores that are similar to the top three tools specialists, they are often located in remote locations, so they are often based outside of that main stream, price competitiveness. While we have 860 stores, they are all very different. We do not have just one store that is replicated 300 times if you like,” he said.
This is not to say the market is extremely competitive, according to Mr Marshall, who said it is understandable that those who sell primarily power tools, adhesives or abrasives – the mainstream type products – are concerned about increasing competition.
“Any of our HBT (ITT) stores that are located in suburban metro areas are very diverse so they could be timber, decking or fastener specialists, which means they are not direct competitors to any tool specialist group or Bunnings. This is great for us but also a hindrance because our suppliers cannot be a part of every store,” Mr Marshall said.
“Suppliers often struggle with the diversity of HBT at times, because they believe they might be able to service all 800 plus stores and then realise this is not the case because the group is so diverse, so often they only have the ability to service 50 stores,” he said.
When discussing the last 12 months, like most hardware groups, 2020 was a year of unprecedented growth for HBT, which initially began in the garden and paint sectors before expanding out to every single category, according to Mr Marshall.
“Sales exploded in power tools, abrasives, fasteners, even hand tools – every category experienced significant growth. Suppliers said one of the reasons for this growth in sales was COVID shame. Once people began having Zoom meetings at home, they soon realized the wall in the background was not as nice as they thought, so they decided to fix it up. The DIY and trade sectors boomed because people had nothing else to do but fix up their homes during lockdown.”
“Some stores now tell us that if some of their trade customers get all of the quotes they currently have submitted to the industry, they have got in excess of two to three years’ work. Suppliers now believe they will at least do the same numbers as they did last year, with some predicting up to five per cent growth on last year,” he said.
Although 2021 sales look positive for the hardware industry, the supply and cost of importing goods remains a concern, particularly in the industrial and trade tools market, with shipping costs significantly higher. International markets have also begun to panic buy and stock pile power tools which are now in high demand, according to Mr Marshall.
“The decreased supply in power tools is very noticeable at the moment. If you walk into any store you can see power tool stock levels are low. These levels are starting to come back due to tradies having a Christmas break as there was a chance for retailers to recoup some stock. Products made in China remain very difficult to source currently including power tool accessories, circular saw blades, things that usually have good healthy stock levels. This is especially the case for independents because corporates often have supply agreements, so our members pretty much have to wait until their nominated supplier has supply,” he said.
“Independents can also be more flexible when sourcing products as well. In times of product shortages, they can flex and source stock from new suppliers or move to different ranges rather than having to go through planogram changes or new product presentations.”
“Chinese New Year is also upon us which will again slow things down for a little while. This usually slows production for around two weeks, which is similar to our Christmas and New Year. I can see holes in inventory pretty much right up until post Easter,” Mr Marshall said.
Despite the current supply concerns playing havoc for suppliers and members currently, one major positive that has come out of the pandemic is the fact that customers are being redirected back to their local store and are enjoying personalised service now more than ever.
“Members have noticed a lot of former customers returning to the store, who are enjoying the personalised service they often do not experience in a corporate environment. Independents always provide quality service because the store owner has got skin in the game. So, he will be making sure their staff are knowledgeable, friendly and look after their customers,” he said.
While sales remain healthy in stores, the online industrial and trade tool space has also become highly competitive. While some HBT stores are set up for online shopping, Mr Marshall said stock also remains an issue within the online space.
“Shopping carts and things like that is something our group has to invest in and help our members transfer to an online platform or an omni channel presence. Currently members direct customers to supplier websites where they can source product information or FAQ’s. This is always helpful when customers are researching a product,” he said.
For now, the two main drivers of the industrial and trade tools space are innovation and quality, according to Mr Marshall who said the challenge moving forward is ensuring HBT members are getting this message across to its customers.
“We have great conversations with our suppliers at a buying level, and then we pass that information internally to our stores. But they also need to get this information to their customers, so the tradies or the guys that come into purchase these products know which products are new. We are working on trying to assist members to be able to deliver this message succinctly and directly so customers are educated on products that ensure efficiency. We see innovation as an area that will definitely drive growth.”
“Tradies are also time-poor so members need to tell them about new products that will save time on the work site over the product they have been buying for the last five years out of habit. But it is a difficult exercise for our members, especially when tradies are ordering from a worksite and having to stop them in mid-sentence to educate them on new products that may be available. Getting that information to them in a clear and concise way will be a game changer for us moving forward,” he said.
Tool business booms in Tassy
Alan Watt has run the successful specialist Tasweld Group for over 30 years, which now operates three Tasmanian stores in Burnie, Derwent Park and Invermay.
Today the group supplies a diverse range of welding gear, power tools, abrasives, work clothing and safety equipment to a wide range of customers and boasts a huge customer base, supplying businesses in steel fabrication, manufacturing, construction, aquaculture and agriculture.
As General Manager of the diverse business, Mr Watt said he has witnessed many changes within the industrial and trade tools segment of late.
“There are a few things happening in the industry currently. Some of our larger customers are slowing down, particularly larger manufacturing and fabrication customers who rely on overseas and interstate orders. They have had a lot of those orders put on hold due to the uncertainty and they have got some shortage of work which has made them slow down slightly. However, this has been made up for by all of the medium sized businesses and tradies who now have more work than they can cope with at the moment,” Mr Watt said.
“We saw significant growth early in 2020 and this has continued to a lesser extent over the last six months. There was a slight slowdown over the Christmas period but we expect this to pick up as soon as things kick off for 2021. Based on feedback from our customers we expect this growth to continue substantially, with a lot of our customers having order books that are full out until the end of the year or longer.”
“The word from our customers is that they expect to be flat out all year. There is a bit of a housing boom going on in Tasmania currently with home owners wanting to take advantage of both the State and Federal home builder grants, so there is a lot of new housing going up and there is a big rush to meet the grant time lines. Most tradies are turning away work because they have so much on,” he said.
The industrial and trade tools space is currently driven by strong growth in construction, housing and manufacturing, according to Mr Watt, who said consumers are also choosing to spend money on their homes because they can no longer travel.
“I guess with people not travelling now because of COVID, there is a lot of people putting money into other projects such as renovations. It seems the money that is coming out of the tourism sector is going into the building industry.”
“There is also some population growth in Tasmania at the moment with interstate buyers snapping up properties before they have even viewed these homes. There is a feeling people want to move out of the big cities and move to areas like Tasmania,” he said.
In regards to supply, problems are becoming resolved, according to Mr Watt who said in general the suppliers have come back in-line, though there are still some shipping delays which is a combination of internal Australian factors and COVID related factors.
“Big companies like Makita have had a lot of trouble and this has not one hundred per cent fixed itself but it certainly will be back on track soon. They have had little stock for a long time although they are having record sales,” he said.
In the meantime, specialist tool competition remains very strong in Tasmania, particularly around the Derwant Park store, where Mr Watt said there are seven tool specialist and hardware stores within a 500 metre radius of the business.
“In terms of specialty tools, we still do a lot of power tools and hand tools in-store but it is not a major strength for us. We mainly do this for the customers who just want a one stop shop.”
“The business does attract a retail and DIY customer base, but although our pricing is very competitive, most of the tools we sell are to larger industrial customers who already buying from us and it is just easy for them to also purchase their tools from us,” he said.
For now, Mr Watt said he will continue to enjoy the building boom in Tasmania and looks forward to another busy year ahead.