Analysis: Bunnings' market strategy
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Price fixing is illegal. What about product pegging? If you haven't heard that expression before get used to it because it is about to revolutionise Australian retailing.
According to people in the hardware industry, the first shots in a looming "product war" have been fired by Bunnings, the home improvement division of Wesfarmers.
The target is Masters Home Improvement, the new hardware business created by Woolworths and its American partner, Lowe's - but the victims will be small hardware stores that are at risk of being crushed by the warring retail giants.
What's happening is a variation of the "milk war" being fought by Woolworths and Coles, the food division of Wesfarmers, with cut-price milk being used as a loss leader to attract customers into supermarkets.
Corner stores have already been hurt by the milk war. Hardware stores are about to be hurt by the product war which involves Bunnings, and potentially Masters when it starts trading later this year, in signing exclusive distribution agreements with major product makers.
Ryobi power tools are an early example of what's happening. Regarded by home handymen as having the best range of drills and saws, Ryobi products are becoming a Bunnings-only name, and not available for sale at small hardware stores.
Pollyfilla, another product used by every home handyman, appears to be going the same way with local hardware stores being told that supplies of the gap-plugging goo will be cut off, allegedly because it is to become an exclusive Bunnings line.
Both of those products fall into the same "essentials" category as milk. They get customers into a store, triggering the sale of other products which in the hardware business can be at a ratio of three-to-one -- $3 on "other" products for every $1 on the essential.
Woolworths and Wesfarmers, through multiple trading names, already control 40 per cent of the total retail spend in Australia. The milk war and the product deals, are a warning for everyone in retail that they want more.
The problem for small hardware operators, and the media, is discovering exactly what's happening, how far it might go, and what government regulators think about exclusive product deals.
Wesfarmers, when contacted yesterday, was silent on the matter. Head of its public relations office, and former WA Premier, Alan Carpenter, offered to make inquiries and report back, but is yet to do so.
The Australian Competition and Consumer Commission (ACCC) was also silent on the matter with its media spokesman, Brent Rebecca, declining to comment on speculation that an investigation is underway into the hardware industry.
From a business strategy perspective it makes perfect sense for a retailer to offer either exclusive (and popular) products as a mechanism for attracting customers, just as heavy discounting is a perfectly acceptable sales tool.
But, the bigger question is whether Australia really wants more of its retail sector to be controlled by just two companies.
Hardware is the next battleground for retail spending with Bunnings shoring up its market dominance ahead of the opening of the first Masters store scheduled for Braybrook in Melbourne's western suburbs by October, and for 150 outlets within five years.
For government the question is tricky. On one hand the current high level of competition between Wesfarmers and Woolworths means cheap prices, which please customers (voters).
It's what comes later that is causing angst because if/when two companies control more than 50% of the Australian retail industry they will be perfectly placed to maximise profits.
If anyone doubts that this is the way the world works look at how China first manipulated the rare earth industry with excess, low-cost production that drove competitors out of business, and once in control of 95% of global output, can enjoy sky-high prices.
Wesfarmers and Woolworths will never reach such a high level of market dominance, but a point will be reached where price cutting gives way to profit extraction.