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What we can learn from the Australian hardware market

  • Opinion
  • January 26, 2016
  • Paul Keane
What we can learn from the Australian hardware market

At this time of the year, there is always more focus on the DIY business. Most of us who have spare holiday time do a few household chores and head off to the local hardware store for supplies. These days, the stores are much larger and sell a wider range of merchandise. The product offer appeals to both male and female shoppers. In fact most operators would tell you that DIY stores now have more female shoppers than male. This is sensible reasoning and the merchandise reflects that demographic model.

The lure of the Australian DIY market 

Given the competitive nature of the DIY business, it came as a surprise to us back in 2011 to learn that Woolworths Australia was entering the DIY business through their new Masters brand of stores. Woolworths of course were noted for their expertise and success in the supermarket business, but they felt they had to take on their competitors Wesfarmers who own Coles and Bunnings in an attempt to secure a market share of what was perceived as a lucrative DIY market.

They “sunk” considerable energy into the new chain launch, and in fact there are 10 Masters Stores in Sydney as an example of the growth. The outcome has been a “lemon”, in that the Woolworths board has decided to stop any more growth and put the chain up for sale. One suspects that the likely buyer will be Bunnings who will only take stores that they feel are likely to grow into profit and in the right locations. Those that are left left will probably see out their time and eventually close.

How the NZ DIY market compares

So are there lessons to be learnt for the New Zealand market from the Australian experience? The DIY industry here is very interesting in that the three players, being Bunnings, Mitre 10 and PlaceMakers, are all competing for the same business in what is a relatively small market. Bunnings is part of the Wesfarmers group out of Australia, Mitre 10 is effectively a cooperative, and PlaceMakers is part of Fletcher Building.

So how they all are perceived and what are their opportunities?

Bunnings is a very experienced retailer, certainly over the past year they have dominated the local market through expansion and merchandise range. The Australian expertise has proven to be a good model and has stood the test of time – indeed, Wesfarmers are now expanding into the UK by purchasing the Homebase chain there. Attracting female shoppers to what used to be staid, blokey hardware stores has added markedly to the opportunity for sales growth for all companies, by making the stores interesting and friendly with “advice” available from experienced on-the-floor staff.

Mitre 10 has also been driven from a similar model, but maybe still lacks a little in customer assistance and product knowledge. Also some store locations may not be as well considered as those of Bunnings.

PlaceMakers, has drifted significantly from a “trade/ retail” store to a trade only store. Whilst still “hanging in there” it seems that the stores are a true reflection of the customer base, with an attraction to “robust male customers”. Certainly, the appearance of the stores would not attract a wider customer base. Although they have seen sales growth as the construction sector has picked up, PlaceMakers will need to revisit its retail offerings if they want to compete for the consumer dollar.

Is DIY store expansion at a turning point?

Growth in the NZ market for DIY operators must surely be at the cusp. It was interesting to note over the weekend that Walmart are closing a number of small outlets in favour of strengthening the larger format stores which have the capability of offering a full range of merchandise. Some years ago The Warehouse ventured into a small store “test case” or two but we have noted that this trend has not continued. They have settled, it seems, for large format stores as the basic store size for The Warehouse brand. As a result, we would doubt that any of the NZ DIY operators would consider smaller stores than what they currently have on offer.

This means new store growth will be limited, which suggests a takeover or merging could well be the answer for growth and sales/profit improvement. 

Woolworths Australia also owns the Countdown brand in New Zealand. Some years ago the supermarket chain started to sell a range of general merchandise goods, suggesting that the launch of “Masters” in Australia was going to feed into the supermarket chain. Gradually that level of merchandise has reduced, and the test may well have been abandoned. Dick Smith Electronics also fell into the Woolworths ownership camp before it was sold on, and the result is of course the receivership of that chain of a couple of weeks ago.

Diversify only if you have the know how

It is apparent that the need for expertise in range is essential to the success of any business. The “Masters” example is a lesson for all retailers who want to diversify. Infrastructure and basic “know how” are the key ingredients for success.  In recent years we have seen diversification come to haunt certain retailers, leaving the holding company licking its wounds. The expansion by The Warehouse into food and groceries was one such example.

DIY and any retail offering is all about knowledge that can be passed onto customers in a simple transparent form. Tinkering with food and DIY as a joint opportunity has proven once again that you need different skill sets for each, and mixing them up is not such a good recipe for success.

Sharewatch | Wesfarmers

Wesfarmers was in the news this month for its $700 million acquisition of UK hardware chain Homebase. The company is already one of the world’s largest retailers, with chains including Coles, Bunnings, Officeworks, Target and Kmart.

Wesfarmers is such a large company that it doesn’t report any useful information on its NZ retail operations, but across Australia and New Zealand combined, Bunnings’ revenue grew 11.6% year-on-year, to AUD $9.5 billion. Trading EBIT was $1.0 billion, 11% of sales – pretty good for any retailer.

Coles is also performing strongly in Australia these days – for 2015, its revenue rose 2.2% to $38.2 billion. Coles has grown EBIT in each year since Wesfarmers bought it in 2008.

In New Zealand, Wesfarmers has boosted Kmart’s performance hugely over the last few years. They haven’t been afraid to invest in the chain, opening up several new stores and getting the existing stores back on a better footing. Bunnings, of course, has been a great success as well. It has achieved profitable, steady growth to the point where it has sales of $900 million and is almost as large as Mitre 10.

 Paul Keane is a registered property professional and has vast experience in New Zealand’s commercial property industries. He provides retail and property consultancy including development management to many New Zealand property owners, developers and city councils. 

This post originally appeared on RCG's blog.

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