Bunnings British bubble set to burst

Despite making a €10.25m profit in Ireland in their financial year ending February 2017, Homebase’s overall U.K. and Ireland acquisition has encountered severe volatility, leading to questions being asked of senior management and the perceived failings of new strategies. Steve Collinge – Managing Director of Insight Retail Group Ltd – examines the company’s recent shortcomings, and what the future might hold in store.

On 5th February, Wesfarmers surprised the Australian Stock Exchange by announcing they would be taking a £454m impairment charge on their purchase of the UK-based Home Improvement chain Homebase. Not only that, but they expected to confirm half-year losses before interest and tax of a staggering £97m. The business would also be taking stock write-downs of £37m and a further £40m to cover up to 40 planned store closures.

Commenting on the poor performance, Group Managing Director of Wesfarmers Home Improvement Division Michael Schneider said: “It is clear that a significant amount of change has been driven through Homebase since the acquisition, and the disruption caused by the rapid repositioning of the business has contributed to greater-than-expected losses across the Homebase network.”

This is the first time Wesfarmers have admitted that the issues in the Homebase business are self-inflicted and wouldn’t have occurred without the decisions made by the management team put in place to manage the post-acquisition business from February 2016.

At the time Wesfarmers purchased Homebase for £340m in January 2016, the company was trading from 265 stores and generating a profit of £23.5m on a turnover of £1.46bn. Two years on, however, and turnover has declined to less than £1.2bn, with the company heading for a loss of between £130m and £150m by their July 2018 year-end.

How did they get it so wrong?

The transfer of ownership of Homebase from Home Retail Group to Wesfarmers took place on 27th February 2016 and – following the sale – long-time Bunnings Director Peter ‘PJ’ Davis was appointed Managing Director, Bunnings UK and Ireland. Wesfarmers quickly announced plans to completely rebrand the Homebase business within the next three-to-five years, including all stores in the UK and Ireland. The stores would be rebranded under Wesfarmers’ existing Bunnings Warehouse banner, and a planned further £500 million would be spent on upgrading them to the new format.

It is now believed that a number of fundamental decisions made in the first three months of ownership are directly responsible for the subsequent deteriorating performance of Homebase.

Removal of Concessions

Early on, Wesfarmers made clear its desire to remove all concessions and adopt the same business model as its Australian and New Zealand businesses. The first concessions to be exited were Argos and Habitat (as a result of ownership of the brands moving to Sainsbury’s following their acquisition of Home Retail Group in 2016). Next up was Laura Ashley, and – by June 2017 – their remaining 22 concessions had been exited from the company.

Reduced Prices

Within weeks of ownership, Wesfarmers reduced the retail prices on over 10,000 Homebase lines by an average of 20%. Homebase had historically been more expensive than the competition and this was justified through a better shopping experience, more up-market ranging and a higher-income target market. This single step wiped out the small profit Homebase had been making and did not result in the expected uplift in volume.

Increased stock levels

They believed that by dramatically increasing stock levels in Homebase stores, they could trade the business to a more profitable position. This included filling what were once tidy and inspirational stores with large volumes of lower value lines, including a wide range of entry-price products from unknown Australian brands. As these products had no in-store location, they cluttered up the aisles and promotional ends, giving more of an impression of being a discount clearance store than the inspirational, attractive shopping experience that Homebase once was.

Shopping Experience

The addition of the new brands and cluttered aisles coincided with the removal of the existing Homebase point of sale, and its replacement with hand-written pricing signage, so predominant in the Australian Bunnings format. Also gone was the neat and tidy merchandising, the perfectly filled secondary displays, and the inspirational ideas-driven focus.

What Wesfarmers didn’t realise at the time was that it was the Homebase shopping experience that differentiated the retailer from its functional, warehouse-style competitors. Each of these fundamental changes made by Wesfarmers removed good reasons to shop in a Homebase and – worse still – alienated the once loyal, predominantly female high-spending shoppers, who left in their droves to retailers such as Dunelm, The Range, and a reinvigorated B&Q.

Bunnings Pilot store programme update

The first Bunnings-branded pilot store opened in St Albans in February 2017, and one year on there are now 19 pilot stores currently trading in the UK. The early results from the pilot programme were encouraging, although Wesfarmers have stated the sales uplifts achieved moderated during the winter months of 2017. In an investor call following the recent announcement, they admitted only half the Bunnings pilot stores were currently making a positive contribution to the profitability of the company.

Management Changes

Managing Director of BUKI Peter ‘PJ’ Davis announced his retirement from the business in late 2017. General Manager of Merchandise Craig Castelino will be leaving within weeks, and the retreat to Australia by many of the other executives involved in the original acquisition continues at a pace.

The business is now being led by Damian McGloughlin, previously Retail Director at B&Q, before being head-hunted by Bunnings in June 2017. He is now Managing Director of BUKI, reporting to Bunnings Group Managing Director Michael Schneider.

So, what happens now?

Wesfarmers Managing Director Rob Scott said in February: “The Homebase acquisition has been below our expectations which is obviously disappointing. In light of this, a review of BUKI has commenced to identify the actions required to improve shareholder returns.”

All new Homebase conversions have been put on hold, the strategic review is likely to take three to four months to complete and the outcome is likely to be announced at the Wesfarmers strategy day on 7th June 2018.

With time no longer on their side, and with investors and the media in both the UK and Australia administering increasingly merciless scrutiny, any decision other than a planned exit from the UK and Ireland is now looking very unlikely.