The giant hardware retailer achieves a mammoth 69pc return on invested capital

Submissions to the inquiry ask it to examine Bunnings’ dominance over its competitors. Picture: Andrew Henshaw/NewsWire

Bunnings has a unique Australian icon status. It was named the most trusted brand in the country this year. Yet the unrivalled success of Bunnings allegedly has a darker side which is set to be debated in a Senate inquiry.

A 72-page submission from those seeking to alert the nation to the wider impacts of Bunnings’ dominance estimates that the giant hardware retailer achieves a mammoth 69 per cent return on invested capital – twice the level achieved by similar US businesses like Lowes and Home Depot.

While not directly comparable to supermarkets, Bunnings’ returns on invested capital are around eight times the average of Woolworths’ and Coles’ returns, which are the subject of intense community debate.

Until now, there has been no such debate about the profits of Wesfarmers-owned subsidiary Bunnings.

The submission to the Senate inquiry was made jointly by University of Sydney retail researcher Lisa Asher and a small competitor of Bunnings, John Dahlsen, who is also a former chairman of Woolworths.

Dahlsen claims he was forced to sell small regional stores to Bunnings when it opened up against him and sent the stores into loss.

The Dahlsen family company also submits it is being attacked by Bunnings in the roof trusses sector. Bunnings in its submissions to the Senate will put forward a different view to Asher and Dahlsen.

There can be no doubt that Bunnings has achieved levels of profit greater than any other major global or local retailer operating in a similar space as a result of its market dominance, flexibility and supply chain efficiency.

The Asher-Dahlsen submission says Bunnings’ market share in 2023-24 reached a staggering 66 per cent of the $26bn Australian hardware and building supplies market. The next competitor, Mitre 10, had just 13.4 per cent.

The top two retailers account for over 79.4 per cent of this vital Australian economic segment.

But the Bunnings dominance over its next largest competitor, delivers significant market and pricing power, which has sent Mitre 10 into decline.

Mitre10 has dropped from having 900 stores in the 1990s to just 300. By contrast, a combination of market power and acquisition has enabled the Bunnings group to rapidly expand its number of stores from 378 some four years ago to 513 in 2023-24, including 286 warehouses, 65 smaller format stores, 31 trade centres, 15 Tool Kit Depot stores, and 116 Beaumont Tiles stores.

Bunnings’ key advertising message is that they have the lowest prices and offer to beat competitors by 10 per cent if they are found to be lower. In areas where major non-building retailers have similar products to Bunnings there will be price differences, but the market concentration in hardware makes it very difficult for small rivals to beat Bunnings on price.

Asher and Dahlsen ask the Senate to request Bunnings to disclose how many times it activates the 10 per cent discount.

Bunnings’ market share and the flexible design of its stores gives it the ability to change its product mix and enter new fields.

That ability gives it great power over its suppliers. Some suppliers have only one buyer, which is Bunnings, so they are heavily reliant on this relationship for viability.

There is a higher chance of abuse of power in such situations, especially as Bunnings has a significant amount of data which can profoundly impact product selection and range.

Asher and Dahlsen say that in retail, those who hold the greatest control over the supply chain hold the most power. Bunnings has much greater supply chain power than Woolworths and Coles as an ever expanding part of the Australian building industry is being supplied by Bunnings.

They say that Australia is now entering a new age of mega retail, where “we are seeing dominance of category killers”. But Bunnings is now transitioning from this stage into an “industry crusher” as it extends from being a consumer retailer to be the major supplier to the building trade and from there to other sectors.

They say greater regulation is required to protect consumer welfare and allow for adequate competition and functioning markets. This includes the need for a specific big box retailer code of conduct, and an ombudsman to assist in overseeing the sector.

Independents who trade in a limited number of categories have great difficulty coping with Bunnings’ disruption because it invariably applies to the whole, or a significant part, of their business, putting them at a significant competitive disadvantage.

Meanwhile, Bunnings is reinvigorating its trade offer by expanding its presence in roof truss manufacturing. It has built huge, capital-intensive, robotic plants in Melbourne and Sydney and is proposing the same in Brisbane, Adelaide, and Perth. This is vertical integration into its supply chain, and delivers greater control over that supply chain.

Bunnings, unlike all the other players, can absorb the losses and continue running at a loss without materially affecting its profit statement. Later it can lift prices, as there will be no competition.

Recently, Bunnings entered the home care pet market and is revitalising its auto category. Many potential categories are open to Bunnings to disrupt.

Footnote: The 72 page Asher Dahlsen Senate submission opens a real debate on the issue of Bunnings market position and returns. In due course Bunnings will have a detailed reply and I look forward to running a similar summary. The debate will then move to the next stage.