Nailing Bunnings’ next decade is Wesfarmers’ big growth challenge
January marks Schneider’s 10th year as boss of the retail behemoth and as impressive as the record is, the heat is on to lift the pace of growth.
Wesfarmers is trading at around 31 times forecast earnings down from 36 times earlier this year and as the asset accounting for 60 per cent-plus of company earnings it’s up to Bunnings to maintain that rating.
Consensus has Bunnings increasing earnings by 4 per cent over the next three years, but for bulls like Bank of America’s David Errington that growth needs to be closer to double that rate to hit his price objective for the stock of $100 a share (against $81 this week).
Schneider is aware of the pressure and in his own seemingly relaxed way is pulling every lever he can, but there is a big hill to climb.
First the track record. From the 2015 financial year to last financial year, sales have more than doubled from $9.5bn to $19.6bn with earnings up 115 per cent from $1.1bn to $2.3bn. Digital sales have grown from close to zero to 7 per cent of revenue.
Schneider talks about creating value from the front gate to the backyard and as Australia’s most trusted brand, it is both a responsibility and a base for more leverage.
Staff numbers are up 46 per cent to 57,600 but importantly permanent roles account for 71 per cent of this number to ensure continuity for customer service. Better to deal with someone who knows what they are talking about.
The headcount is a little under half the Wesfarmers total of 118,000 so productivity is okay given Bunnings accounts for 60 per cent of earnings.
Around 70 per cent of Bunnings sales come from its traditional hardware base even though its product range now includes solar panels and batteries, farm supplies, cleaning products, home security and pet food.
Next year, it will roll out its Zelora solar business interstate from its Newcastle-based trial which means a bigger market. The hire purchase model means after 10 years the panels and batteries become yours and more people can afford renewable power.
Since 1994 when Bunnings was simply a hardware store its addressable market has grown from hardware to home improvement to home improvement and outdoor living to the $110bn home living and building environments.
This growing market also helps keep the ACCC off its back and new product lines bring more people into the store for different reasons. Bunnings has been growing digital sales and rapidly changed its product mix but at the end of the day, its base leverages off home sales.
When you sell your property, you dress it up, and when you buy, you make it your own with Bunnings’ help.
ACCC notification regime
As previously noted the folk at Igneo Infrastructure Partners are battling to gain ACCC approval to buy Newcastle-based building and demolition waste company Benedict Recycling.
The matter was due to be settled in November but now is due for a final decision on December 4.
As the new year marks the formal start of the compulsory notification regime it is worth noting deal auctions will no longer be considered by the regulator, just concluded deals.
The ACCC will be on holidays for merger matters from December 23 until January 10.
OFX wants a platform
OFX boss Skander Malcolm and his chair Patricia Cross are at a cross roads expanding their base from foreign exchange payments to full service accounts management for small business.
It’s a tough space for two reasons, small business has kept its head down amid the economic uncertainty and it’s a crowded space with others also trying to work from their base to broaden their reach.
But one-in-four have international links and all look for simplicity which makes an integrated payments platform a winner.
Airwallex ($6.2bn value), Wise (GBP8.8bn) and Xero ($20bn) are just some of the bigger rivals against OFX at just $142m.
Malcolm has increased investment from $16m to $24m to fund the expansion into full service payments but it comes at a time of little in the way of growth. The former GE Capital executive faced shareholder protests over his short term incentives at a time when profits are going nowhere. It’s just a matter of the OFX team executing.
RBA inflation problem
This week’s blowout inflation figures should jolt the federal government into action. Stay tuned for the news grabs but let’s see whether anything actually happens.
Full credit to the government and Greens for passing the environmental regulation laws which provide more business certainty.
This week’s Climate Change Authority safeguards report highlighted more work is needed to hit climate targets with industry and hard to abate sectors the focus.
Stage two looks like a revamped National Competition Policy, first agreed to with the states last November, but given some legs in Friday’s state treasurers meeting.
The $900m 10-year program agreed to will get more heft but the money will only go to the states that actually do the work.
The $16bn funding in the 2005 Hilmer competition review was put in state forward estimates and withdrawn when they failed to complete the tasks.
The focus will include the long awaited national apprenticeship accreditation and blocking gate keepers like the medical colleges which set the rules on college membership. This so called gatekeeper reform was advocated in the Policy Institute paper first revealed here in August.
There will be more data sharing by governments, noting the feds through to the Australian Taxation Office, Medicare and Centrelink control most personal data with the states limited to licences and payroll.
Competition policy requires negotiation with the states with 80 per cent of regulations delivered at state level in key bureaucracies such as health, education and infrastructure, but competition policy is led by the feds.
Planning law changes are another key initiative also covered by the environmental law. The key task now is to right the rules and regulations to back the laws along the lines recommended by report author Graeme Samuel.
The states will be the primary environmental regulators by adopting federal rules simplifying the process so business knows where it stands. It includes an independent EPA from July next year and tighter controls on native forest logging after 12 months in a deal with the Greens.
Jim Chalmers needs to do more than update last year’s press release. What is needed is someone to take ownership and be held accountable for progress.
Same goes for AI policy which is badly in need of a national champion or the danger is Canberra will be left consulting and floating ideas while the rest of the world moves on.
The latest example were reforms urged by the Australian Academy of Technological Sciences and Engineering/Kearney report on artificial intelligence screaming for a whole of government response.
Australia has spent $30m on AI in the last five years while global investment approaches $3 trillion. A $5bn investment now would boost the economy by $200bn but needs across-government support.
Initial steps like affirming Australia’s copyright laws and enforcement and using the tax laws to enforce negotiations with the global tech platforms are but a start. Training the workforce and market and environmentally sustainable network of AI factories are needed.
Mike Schneider recently summoned his predecessors to Melbourne’s Tea House restaurant for a dinner to celebrate the last decade at Bunnings. The record is extraordinary.