Hardware wars are coming to a big box near you
The Age
Wednesday August 26, 2009
Wesfarmers must move quickly to counter a challenge to Bunnings. WOOLWORTHS boss Michael Luscombe says his group's entry into hardware retailing isn't just an attack on Wesfarmers, and that's true, to a point.Woolies is not just attacking the "big box" or warehouse-end of the hardware market that Wesfarmers' Bunnings chain dominates, and Luscombe reckons there's room for two big warehouse players, anyway, as there is overseas.But yesterday's 5.7 per cent slide in Wesfarmers' share price to a 2-week low captured the threat posed by Woolworths' double-barrel deal, which was clinched in three-sided negotiations that ran deep into Monday night before being signed early yesterday morning.Woolies is joining with US retail giant Lowe's in a two-thirds/one-third-owned venture that is bidding for Danks, a hardware distributor and marketer that does not compete directly with Bunnings. But the joint venture will also roll out at least 150 big-box, warehouse-style stores that will compete with Bunnings, which operates 160 warehouses and plans to open between 30 and 40 more in the next three years.Bunnings is the best-performing retail unit inside Wesfarmers, by far. Its earnings before interest and tax (EBIT) rose by 11.9 per cent to $659 million in the year to June, it returned 11.3 in the sales dollar, and 20.2 per cent on net assets employed.The only member of the Coles group that Wesfarmers acquired at the end of 2007 that remotely compares is Target, which earned 9.4 in the sales dollar, and returned 10.5 per cent on assets employed. Another former Coles chain, Kmart, showed how tough general merchandising can be, earning 2.7 in the sales dollar before interest and tax, and returning 11.5 per cent on assets employed.So Wesfarmers boss Richard Goyder and the executive in charge of Bunnings, John Gillam, must respond to the Woolies-Lowe's roll-out, and respond quite quickly: Woolies and Lowe's will have no problems with funding, have already locked up 12 sites, are negotiating for another 15, and plan to be running 150 outlets within five years.There is also an indirect threat that other Wesfarmers retail chains picked up in the Coles takeover will be affected. Coles supermarkets and Kmart in particular are delicately poised as they attempt renovation and format changes while under competitive fire from Woolies, and Goyder cannot rob Peter to pay Paul. Rather than diverting resources from existing projects, he must commit new time and money to the Bunnings defence.Luscombe has been looking for ways to enter hardware retailing for years, and the double-edged solution he has found aims to take Woolies into both ends of the hardware market, as the joint-venture company rolls out warehouses around the country, and also takes over the Danks hardware distribution chain through a recommended $87.6 million offer of $13.50 a share.Danks supplies three branded retail chains €” Home Timber and Hardware, which has 205 outlets; Thrifty-Link, which has 212 outlets; and Plants Plus Garden Centres, which has 66 outlets €” and it also supplies about 900 independent hardware stores.The Danks unit will continue to be run by its managing director, Graeme Danks (a member of the family that founded the company in 1859, floated it in 1951 and still controls 49 per cent of the shares), and only the Home chain would consider itself a direct competitor of Bunnings.The other, smaller outfits and the independent stores tend to operate where big-box retailers either do not have the real estate space to set up €” in inner-city areas, for example €” or where there are not enough customers to support the big-box concept, notably in country areas.It is not out of the question that Bunnings will respond by counter-bidding for Danks or seeking a blocking stake.But the Danks family is backing Woolies in the absence of a higher offer and Woolies has started the auction high, at a 65 per cent premium to Danks' market price, and the hardware and home improvement warehouse roll-out is the crucial competitive element.Luscombe was being very coy yesterday about what the Woolies-Lowe's warehouses would contain, or where they would be located, and that's not surprising, because both answers will shape Wesfarmers' competitive response.If Woolies and Lowe's secure high-profile sites with transport links and large population catchments, the threat is more serious and immediate. And the internal look of the Woolies-Lowe's warehouses €” the "offer", in retail jargon €” will decide whether Bunnings needs to reposition itself to defend market share.Luscombe says the new warehouse chain will not be a Bunnings clone, and the positioning of Lowe's in the US is a clue to how it might look.In the US, Lowe's is the No. 2 hardware and home improvement products retailer behind Home Depot, with a market capitalisation of $US31.2 billion ($A37.2 billion) and annual sales of about $US48 billion. It is a giant compared with Bunnings and Wesfarmers €” Bunnings' sales were $A5.85 billion in the year to June, and the entire Wesfarmers conglomerate is valued at just under $A25 billion €” but it has positioned itself in the US as the "we try harder" chain. The underlying assumption in staffing and presentation is that the customer needs help: hardware for dummies, and it may be coming to a place near you.
© 2009 The Age