Bunnings won’t repeat Woolworths’ Masters mistakes

A pedestrian walks past a Homebase store in London. Bunnings is unlikely to make the dumb errors Masters made in its initial years. Chris Ratcliffe/Bloomberg News

When Bunnings’ John Gillam appears at next week’s Wesfarmers’ strategy briefing of investors and analysts he will inevitably have to confront the elephant in the room. Does Bunnings $705 million purchase of the UK home improvements chain Homebase have the makings of another Masters disaster?

In fact that question has been put on the table, again, by Bank of America Merrill Lynch analyst David Errington, who received some significant airtime yesterday after saying the Homebase acquisition could be as damaging to Wesfarmers’ investors as Woolworths’ disastrous foray, with Lowe’s of the US, into the home improvement market here.

While Errington is highly-regarded for his bold and often ultimately correct calls in the past — including his scepticism over, not just Woolworths’ Masters play but its broader strategies — the one certainty is that, whatever the eventual outcome of Bunnings’ offshore expansion, it won’t look anything like the disastrous end to Woolworths’ attempt to take on Bunnings in home improvement.

Between them Woolworths and Lowe’s invested about $3 billion — and shredded more than $1bn — in their ill-fated and abysmally-executed attempt to build a Bunnings rival from scratch.

It is worth noting what Bunnings isn’t doing in its first venture offshore.

It isn’t planning to go from a blank sheet of paper to a 150 store network within five years, which forced the Masters joint venture to embark on a frenetic scramble to acquire sites and construct new stores.

It isn’t planning to invent an entirely new supply chain for a business category that Woolworths had no experience in and in a region that Lowe’s was unfamiliar with.

It isn’t going to have to create a completely new brand and attract a completely new customer base, nor is it going to have to recruit a raft of new store managers and hire and train a completely new workforce.

It isn’t confronting the massive cash haemorrhaging that Woolworths and Lowe’s experienced as they raced to try to gain the critical mass of mature stores that would generate the network benefits and cash flows that they needed to reduce the weight of funding the entire Masters business from their balance sheets and the cash flows from their other businesses.

What Bunnings bought for its $705m was an existing, established network of 265 stores focused within the Greater London region, the most prosperous part of the UK and one in which Homebase’s home improvement rivals are under-represented.

It bought an existing customer base, about $3bn of existing sales and about $40m of earnings before interest and tax. Homebase might be only modestly profitable but it is, unlike Masters, profitable and is an established and cash-generating business.

It also bought a renovation opportunity. Homebase’s former owner, Home Retail Group (which itself has been acquired by Sainsbury’s) struggled to generate any sales or earnings growth from the chain and so started stuffing its stores with concessions, including its Argos general merchandise brand and Habitat homewares brand.

Bunnings has asked for those concessions to be removed. While it will lose around 20 per cent of the existing Homebase sales base, which was Bunnings’ plan from before it bought the business. Shedding the low-margin concessions will open up significant space in its stores for traditional home improvement products.

Unlike the Masters joint venture, Homebase has an existing supply chain. There is an opportunity for Bunnings, which has its own relationships with global suppliers that don’t currently service the UK, to use the space it will free up from the removal of the concessions to expand and differentiate the Homebase offer.

One obvious extension to a Homebase offer, given where the core of its network is located and the under-representation of its rivals in that region, is to address the current absence of any Homebase presence in the trade sector and its relatively limited range of core hardware products generally.

Bunnings is unlikely to make the dumb errors Masters made in its initial years, when Lowe’s failed to appreciate the difference between northern hemisphere and southern hemisphere seasons and Masters ended up with summer stock in winter.

Most significantly, because it is buying an existing business and store network, Bunnings doesn’t have the same urgency to scramble for scale and market share that Masters faced. Masters didn’t trial its format in a pilot store before it started its dash for growth.

Bunnings apparently plans to trial formats in one or two pilot stores over the next year or two — it isn’t rushing into a risky complete makeover of Homebase — while focusing on improving the detail of what it has bought. Gillam’s long-time lieutenant, the vastly experienced Peter (PJ) Davis, who has relocated to the UK, has already overhauled Homebase’s under-performing management.

While Wesfarmers has said it plans to invest about $1bn over the next five years in recreating Homebase as a Bunnings-branded business, the approach appears to be a very cautious one and one predicated on the base case of simply improving the existing business and the returns from its existing sales base (less the lost turnover from the concessions).

The other obvious difference between Bunnings’ move into the UK and the Masters’ joint venture is that, while there are strong competitors in the UK, with Kingfisher’s B&Q chain and Travis Perkins’ Wickes the key players alongside Homebase, the market is highly fragmented and, unlike the market Masters attempted to enter, there isn’t a dominant incumbent like Bunnings.

There are, obviously, no guarantees that Bunnings will be successful in the UK but the nature and consequence of a failure would be very different, and nowhere as disastrous, for Wesfarmers as the fallout from the overly-ambitious and rushed greenfields Masters experiment was for Woolworths.

The challenge for Gillam and his team will be to convince the sceptics, like Errington, that they can transfer their experience and intimate knowledge of home improvement — and their demonstrated success as one of the world’s most profitable home improvement retailers — into a new and distant geography where customers may, indeed probably will, respond differently to its traditional offer than Australian consumers.

Ultimately, as it has been for Masters, the perceived success or failure of the expansion into the UK will be determined, with hindsight, by the results but the foundations for Bunnings UK business are very different, and far more robust, than those that gave way under Masters.