05/02/2018 - 11:59

Wesfarmers strikes out on Homebase

05/02/2018 - 11:59

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ANALYSIS: Investors are taking note of Wesfarmers’ fraught foray into the UK hardware market.

THE trouble reported this morning in its British hardware adventure will no doubt dent Wesfarmers’ reputation, but even as shareholders in the conglomerate digest that very predictable news, the real problem is closer to home.

That will come as no surprise to observers of Western Australia’s biggest company, however.

Coles, the food retailer that has been the engine-room of the broadly diversified Wesfarmers for the past decade, also appears to be losing its way; and that could be much more serious than the failed experiment to buy the British Homebase chain of hardware stores and then rebrand them as Bunnings.

Critical reports of Coles started to surface last week, first in a survey by investment bank UBS, followed by a separate analysis by another bank, Citi, which praised Woolworths as a competitor staging a powerful fightback against Coles – and winning.

Regular readers of Business News will not find any of this a surprise because it is exactly what was published nearly 18 months ago in a story I filed from London under the headline: ‘Wesfarmers fighting on two fronts with Homebase in far-flung Britain’.

Based on a visit to the scene of the investment, while also calling on the knowledge of what happens to companies that launch international expeditions without really understanding the local rules, the key comment in that article bears repeating.

“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 in the past for other great empires from the Romans to Napoleon.”

Perhaps the greatest irony behind today’s admission from Wesfarmers that it has been forced to write-off $1 billion from its British investment is that its misguided attempt to export Bunnings started in the same week Woolworths announced the closure of its ill-fated investment in Australian hardware retailing, via the Masters joint venture with US-based Lowe’s.

What happened to Woolworths – largely because it accepted Lowe’s advice on how to sell hardware in Australia using a US model – has now happened to Wesfarmers in its efforts to sell hardware in Britain using an Australian model.

In today’s announcement Wesfarmers’ relatively new chief executive, Rob Scott, confirmed what every unbiased observer could see – that the Homebase acquisition has been a disaster and new Bunnings warehouse stores are not what British customers want.

The full damage of taking Bunnings to Britain has not yet been worked out, but it is likely to have cost shareholders, so far, around $1.2 billion – first in the 2016 acquisition cost of $705 million, plus ongoing day-to-day trading losses.

The next step for Wesfarmers is to find a way out of its disastrous first step into international business, either by scaling down the pace of investment or by dressing-up what’s left of the Homebase chain, and the new Bunnings stores, for sale.

Mr Scott is undoubtedly taking the opportunity to clear up an inherited mess with today’s pre-emptive write-down announcement ahead of the Wesfarmers half-year financial report later this month.

His most telling comments in today’s statement included the need to: “Address underperformance in our portfolio that is distracting from positive performance in other areas” and, “the Homebase acquisition has been below expectations … a review of Bunnings UK and Ireland has commenced”.

There are only two possible outcomes from the review of Bunnings in Britain – forge ahead and invest more capital despite today’s write-off and a forecast loss of a whopping $165 million from trading in the six months to December 31, or scale back and then do what Woolworths did with Masters – cut the losses.

However, what’s happening in Britain is not the big story at Wesfarmers. Coles is a much bigger issue because it has taken a wrong turn through its attempt to lead Australian food retailing through it’s ‘we are cheapest’ marketing push, as seen in its ‘Down, Down’ advertising.

The problem with trying to be cheapest is that Coles simply cannot win that race against the super-cheap international food retailers such as Germany’s Aldi and Lidl chains, which operate smaller stores, carry less stock, and are proud of their bare-bones presentation.

UBS identified the Coles problem in its latest survey of suppliers to both Coles and Woolworths.

On every question, from on-shelf availability of goods, to fresh-food quality and staff morale, Coles came out second best, a result that surprised some people because Woolworths had been the loser in the UBS survey in earlier years.

“Based on supplier feedback, Coles has lost its way,” UBS analyst Ben Gilbert said.

Citi was on the same tack one day later, telling clients it had upgraded Woolworths from a ‘neutral’ view to ‘buy’ based on its stronger sales growth when compared with Coles.

“We expect Woolworths to maintain its lead in like-for-like sales growth over the next two years,” Citi said.

“Differences in execution levels (how the same job is done) explains more than half this sales growth gap, as Woolworths improves and Coles deteriorates.”

What’s happening to Wesfarmers will be a blow to its thousands of WA shareholders, who have seen nothing but success at the company for the past 30 years.

However, where it finds itself today is as a loser in British hardware, admittedly a small piece of a big company, and at Coles, a critical division.

Investors are finally waking up to the British disaster and the potential for Coles to also become a serious issue with the stock market.

Wesfarmers’ share price was down 4.7 per cent, or $2.08, to $42.07 today. Woolworths was down 0.29 per cent (8 cents) to $27.62 – effectively steady on a day when the overall market is down 1.56 per cent, possibly as investors in the retail sector rotate out of Wesfarmers into Woolworths.

There are two common threads linking the problem areas. Both are in retail, and both are businesses run from Perth but with their most important trading operations elsewhere – Sydney and Melbourne for Coles, and Britain for a small bit of Bunnings that is absorbing far more management time than it deserves.

Over the past few decades there has been a seemingly endless line of WA companies failing when they have expanded into other states, national companies failing when they go overseas, and foreign companies failing when they try to enter the Australian market.

In every case, management of the company that got into trouble was brim full of self-confidence, verging on arrogance. Wesfarmers is not an exception to that rule.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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