ANALYSIS: No-one knows how long it might take for Wesfarmers’ foreign foray to bear fruit, and at what cost.
ANALYSIS: No-one knows how long it might take for Wesfarmers’ foreign foray to bear fruit, and at what cost.
It has never been wise to bet against Wesfarmers, Western Australia’s most successful non-mining business, but it is equally clear that the challenge of ‘exporting’ the Bunnings hardware business to Britain could not have come at a worse time.
In military terms, Wesfarmers is embarking on a foreign campaign as it tries to fight a series of local battles – a challenge that has proved too much for many great historical empires, such as the Roman and Napoleonic.
Close to home the list of Wesfarmers’ problems includes a poor-performing coal division, the Target discount retail business (which is struggling to survive), and the flagship Coles food business, which is being hurt by the invasion of cut-price specialists such as Germany’s Aldi.
Even Bunnings, the best of the divisions in Wesfarmers’ diversified portfolio, has signaled that the next 12 months could be tough as the hardware market is flooded with the leftovers of the failed Woolworths experiment in hardware, Masters.
What happened to Masters, which tried to introduce American-style hardware retailing to Australia, is one sobering way of analysing the challenge ahead for Wesfarmers as it tries to introduce Australian-style hardware retailing to Britain.
Another, equally sobering, test is to visit Britain to judge how that country’s hardware business is structured, and how successfully the Bunnings brand can be layered over the existing Homebase chain, which Wesfarmers bought in January for £340 million ($705 million).
Astute readers will quickly understand why it is important to quote the purchase price in both currencies, because that’s the first problem – given the collapse in the value of British currency in the wake of the decision to quit the European Union.
In little more than six months, the value of the Homebase chain and its 265 stores scattered across Britain has fallen by $110 million on currency alone, because an Australian dollar today buys 57 pence versus 48 pence when Wesfarmers sent its $705 million to Britain.
A currency setback could, however, be the least of Wesfarmers’ problems; because while Homebase is described as a ‘poorly maintained house in a good street’ and will benefit from a radical makeover, the cost and the time to turn Homebase into Bunnings could be prohibitive.
There is also the risk that the Homebase adventure, and that’s what it is, is highly unlikely to succeed during the career spans of the current senior management team at Wesfarmers, given that managing director Richard Goyder has been in the top job for 10 years, which is a long time for a chief executive.
Whether the next person in charge will be prepared to persevere with the Homebase makeover is a question for another time. The more immediate issue is that Homebase is more than a run-down business – it’s a disaster zone, as my visit by last Friday afternoon to the Battersea store demonstrated.
Other people have noted how badly the Homebase business has been run for the past decade, but to see it immediately after visiting a Bunnings store in Perth is remarkable in that it provides a perfect before-and-after comparison.
And if you gave Bunnings a score of 100 out of 100, then Homebase would get a five, or perhaps a 10.
Put another way, Bunnings as we know it is at least 10 times better than Homebase as it currently operates with its eclectic offering of traditional hardware (nuts, bolts, tools and paint) mixed with mobile phones, beds and duvet covers.
The official explanation from Wesfarmers is that it has bought Homebase at a knockdown price and will now set about turning it into a winner under the Bunnings name.
In time, it might work, but that claim about buying cheap and adding value can also be described as public relations spin, because no-one knows how long it will take to turn the failing Homebase business into a successful Bunnings.
And no-one knows how much it will cost.
Clues that not all is well at the Battersea Homebase are obvious from outside the store. Its big car park is capable of holding 150 cars, but only 25 spaces were taken at 2pm on a Friday afternoon before a long weekend. At a similar juncture in Australia, the Bunnings car park would be full and the store would be jumping as do-it-yourself home owners stocked up for a weekend’s work.
The first items on display as you enter the Battersea store are a display of outdoor furniture alongside a stack of bagged gypsum and Karcher high-pressure cleaning tools. Walk to the left and you can buy a new mobile phone, or walk up to a mezzanine floor and there’s a bed for sale, just one.
The garden centre at the back of the store is probably the best part of the Battersea Homebase, with the potential to rival Bunnings; but that’s when you spot another problem, which was obvious in the car park – there are hardly any customers.
During my walkabout I counted 30, but that probably included a bit of double counting, while at the checkouts I saw two transactions.
Wesfarmers has been at this point in its past retail adventures and has made good a number of times. Bunnings is a fabulous success and Coles has been a terrific turnaround story. But Target is a flop and no-one, least of all Mr Goyder, wants to talk about the original Wesfarmers retailing business, the Charlie Carters grocery chain, which was an abject failure.
On balance, and looking back at past retail investments, it could be argued that Wesfarmers gets it right about half the time, which is probably the industry average in retailing.
Homebase, however, is different for the following reasons.
• Britain already has a number of highly successful hardware chains, such as B&Q and Wickes, which will offer far greater competition than that ever faced by Bunnings in Australia.
• Very few Australian businesses, of any sort, have succeeded when exported. Some do, but most do not.
• Time (and money) will become an issue with investors, because while Wesfarmers is proposing a slow start by converting six Homebase to the Bunnings name over the next 12 months as a ‘proof of concept’ trial, it will take years, and perhaps a decade, to complete the job.
• While the British hardware adventure proceeds there are problems closer to home, which will require the attention of senior management. These include the Aldi assault on Coles and the prospect of a revitalised Woolworths after its near-death experience.
Ditching the mobile phones and bedroom furniture is an easy step in Bunnings’ makeover of Home Base, as is improving store layout and making greater use of space, such as installing higher shelving.
It will also be easy to focus on home owner do-it-yourself market and garden products. However snatching a bigger slice of the British retail market will not be as easy as some Wesfarmers staff imagine, given that even the world’s biggest retailing, America’s Walmart, has never tried to do business in Britain under its own name, sticking with the name of its local arm, Asda.
Wesfarmers might have bought a renovator’s delight but it could also be said to have bitten off more than it can chew, given the challenges it has closer to home.
On the stock market, most investment analysts have turned wary of Wesfarmers after its poor profit result for the 2016 financial year, which included an 83 per cent fall in net profit to $407 million after a series if hefty asset-value write-downs.
Only one leading investment bank, Macquarie, currently rates Wesfarmers as a ‘buy’. Most banks have the stock as a ‘hold’, and Citi says ‘sell’, mainly because of the challenging retail outlook and despite an expected recovery in coal.
As for the British hardware experiment, the jury of investment banks is yet to deliver its verdict, prepared to give Wesfarmers time to prove the concept – or not.
