14/01/2016 - 14:30

Wesfarmers builds UK hardware base

14/01/2016 - 14:30

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For as long as I can remember, I’ve asked the Wesfarmers leadership when they would look at an international expansion.

Wesfarmers builds UK hardware base
Wesfarmers hopes to make its first overseas foray after offering $A700 million to acquire the Homebase home improvement store chain in Britain from Home Retail Group.

For as long as I can remember, I’ve asked the Wesfarmers leadership when they would look at an international expansion.

The response was usually something like, ‘we believe there are plenty of opportunities in Australia’; and, to be fair, they have consistently delivered on that theme – operating successfully in a sandbox they knew well and understood.

Beyond New Zealand, which represents 2 per cent of Wesfarmers’ turnover, the group has virtually no significant presence elsewhere overseas. In 2014-15, revenue from other foreign countries amounted to $32 million, or 0.05 per cent. Its asset base outside Australia/New Zealand was $7 million; probably not much different than the value of managing director Richard Goyder’s house. 

But as it has become increasingly successful, it seems logical that the opportunities in the immediate vicinity must shrink; especially if management prefers to stick to businesses it is most confident in. To be frank, big licks of growth in the areas of its greatest success – supermarkets, liquor and hardware – would be a challenge, even without regulators breathing down its neck.

So it ought to come as no surprise that Wesfarmers has finally sought to bust out of Australasia with its announced offer to purchase the UK and Ireland’s second largest home improvement and garden retailer, Homebase, for almost $700 million.

It makes some sense to take its most successful Australian business and try to project that management discipline onto a related operation, perhaps one that needs a bit of renovation itself.

But Australian companies have an awful track record in the UK and other foreign markets, one of the latest being National Australia Bank, chaired by Michael Chaney, Mr Goyder’s predecessor at Wesfarmers, who has just rejoined the former WA farmers’ cooperative as chair.

No doubt they’ll have lots to talk about.

No-one has really made a good case for why Australian companies have failed so badly in the UK and the US; markets which, for all intents and purposes, look and feel a lot like our own. Presumably that is the attraction.

I think too many companies have overestimated the similarities between Australia and the UK, based on our strong historic links and shared cultural aspects.

One big factor working in Wesfarmers’ favour might be the economic cycle. The UK is emerging from a long period of austerity and is seen as the strongest performer in Europe. That contrasts with question marks over Australia’s economy. The great pity is that, due to the different cycles, Wesfarmers’ acquisition comes about two and half years after the Australian dollar peaked against the pound (when the Perth-based business was still bedding down the Coles acquisition).

But scale and distance, to my mind, are also very important factors in our poor national record at world domination. A big Australian company is just a bit player in the UK which, in population terms alone is three times our size, a factor multiplied considerably by the close proximity of Europe and its role as a key player in the European Union.

It is worth noting, however, that within Australia Wesfarmers has overcome the tyranny of distance that has often stymied Western Australian companies' attempts to cross the Nullarbor to access the bigger markets of the east. From its Perth home, it is now Australia’s biggest private employer – an incredible achievement no-one could have forecast even as recently as 10 years ago.

Perhaps Bunnings chief John Gillam, entering his 10th year at the helm of the Bunnings chain, will be relocating from Melbourne to London to roll up his sleeves and make this major acquisition work. After all, what’s left to do in Australia, having taken a sledgehammer to Woolworths’ hardware plans under the poorly executed Masters brand? Success in the UK with a major Australian owned business would make Mr Gillam almost unique in Australian business. Although at $700 million maybe that business is just not big enough to warrant his full-time exposure.

Of course, in looking at opening operations in the Northern Hemisphere, Wesfarmers has access to retail talent with considerable experience in the UK. Former Coles boss Ian McLeod has a broad retail past and was recruited from a UK car parts retailer to successfully turn around Coles. Perhaps he, or others that he helped him, might like a challenge back in their home country.

Despite the success of bringing the UK supermarket managers to turnaround Coles, there’s no proof that exporting the Bunnings strategy to Homebase will be a winner.

Certainly, the initial Bunnings plan was copied from the US Home Depot business, but that doesn’t mean what worked in North America and was transplanted to Australia can necessarily leapfrog to the UK. Hardware retailing success doesn’t necessarily cross borders – Woolies has proved that.

One of Bunnings’ great strengths, the warehouse big box retail concept, is much harder to replicate in the UK where big wide-open spaces and urban sprawl don’t quite exist like they do in Australia.

However I am not suggesting that Wesfarmers intends to cut and paste a one-size-fits-all strategy. That is far too simplistic. Even with the Coles purchase it has struggled to make some bits generate adequate returns on capital employed, like Target for instance.

But its management discipline as an unfashionable conglomerate has provided evidence that its approach is transmissible across Australia in a host of industries, so why shouldn’t it work with a global leap?

Let’s hope it does. Australia needs to create more business champions that can operate internationally, rather than sit back in our small and cosy safe haven hoping the sea provides a strong enough barrier to competition.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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