Are we about to see an ‘Aldi’ of the hardware sector take on Bunnings?

LOOK out Bunnings. You’re about to face off with a new player. This is the little guy out to challenge the hardware giant’s dominance.

BUNNINGS is about to face a new challenger and it will probably slay it easily. But we should keep barracking for any little guys brave enough to take on the big green giant.

Mitre 10 and Home Hardware could be going to merge to take on Bunnings, according to some recent news reports.

This is good. We need this. Masters tried to take on Bunnings and it has been, what the kids might call, an epic fail.

Bunnings profits alone are actually bigger than Masters revenue. Bunnings makes $9.5 billion a year, ten times more than Masters $930 million in revenue.

And Masters seems to be going backwards. It has four times as many stores in 2012, but revenue has risen just two-and-a-half-fold in that time. The business made a loss of around $250 million last year, before interest and tax.

Masters might not last much longer. Woolworths Limited (which owns Masters in a joint venture with US hardware chain Lowe’s) has been considering shutting it down.

If the Masters challenge fades away, we need a new challenger for Bunnings. The alternative is giving them domination over DIY. And that won’t necessarily be good for us.

Bunnings’ fat profits are dependent on some very clever marketing that has us all believing they are incredibly cheap.

Not quite: Masters tried to take on Bunnings and it was an epic fail.

Take the price beat guarantee. It’s quite tricky to use because items in stock are often exclusive, or simply subtly different to Masters products. Also, Bunnings cleverly plays with our expectations with that dusty warehouse vibe and using real staff in their ads. (I thought they might be paid actors, but not. Bunnings employs thousands of staff so it must be easy to find some that perform well on camera.)

All this contributes to a sense they are very cheap, and permits them to keep margins high. (The EBIT (earnings before interest and tax) margin was 11.5 per cent at Bunnings last year, compared to 4.7 per cent at Coles, 6.9 per cent at Officeworks, 2.6 per cent at Target)

So, could Mitre 10 (owned by Metcash — the company behind IGA supermarkets) and Home Hardware (owned by Woolworths Limited) together make a stand against Bunnings?

Could it become the Aldi of hardware — the much-loved third horse in the race?

It doesn’t seem especially likely. Mitre 10 and Home Hardware have smaller store footprints. Even with combined buying power their total sales are unlikely to reach the scale of Bunnings. If they can’t damage Bunnings when they operate with separate brands it seems unlikely a combined brand is going to make a big difference.

Home Hardware could to merge with Mitre 10 to take on Bunnings.

Mitre 10 could merge with Home Hardware to take on Bunnings.

Even if they try and fail, high hardware profits should keep the challengers coming.

It could be American brand Home Depot setting up shop. Or Germany’s Obi. Or a small local brand that has a brilliant idea. Whoever it is, they might be well-advised to roll out a pure hardware store, because Masters experiment with selling hardware and whitegoods has not gone well.

Challengers can keep trying, because retail is not a business where first-mover advantage matters a lot.

In some sectors, the first business to set up has a big advantage. They can lock people in to their business model. Think about Microsoft — you need to be able to work with other people’s software, so you have to use Microsoft products. The same with Facebook. You might like to use another social network, but if none of your friends move you’re stuck.

Retail is different. First mover advantage is much smaller. A challenger can see what the existing business has done and try to do it better. There is often upheaval in retail and some huge names in retailing have gone broke over the years. Myer and David Jones are under threat. So are McDonalds and Subway.

Consumer preferences change all the time, and so does best practice in retail. Bunnings better keep looking over its shoulder. Because if this challenger doesn’t give them a fright, there will eventually be one that does.

Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.