Over the past 15 years Bunnings has come to dominate the Australian home improvement retail industry. As HNN has described elsewhere, this was not a process that benefitted overmuch from luck, nor was it a case of a large company leveraging investment to control a market.
Bunnings' success has been built on risk-taking, experimentation, a lot of hard and diligent work -- and, we have to say, mistakes made by other major retailers in the industry. It bears repeating that at one stage Bunnings and Mitre 10 held equivalent market share in home improvement retail. Mitre 10 launched a programme to gain additional share. When that fell apart, Bunnings emerged with a dominant market position. Mitre 10, much diminished, was then acquired by Metcash, and chose to specialise in trade rather than DIY sales.2016 will challenge independents - HNN
While these are known facts, a feeling persists among independent retailers that something not quite right has gone on here. They can't put their finger on it, but there is a sense that Bunnings somehow is not just another competitor.
They're right. What Bunnings did was not just to go out into the marketplace as a kind of "super retailer" and do everything retailers of the past had done, only better. What Bunnings really did was to restructure the market itself -- or, to put that another way, Bunnings actually changed the customer.
Having done that, while their competitors are still trying to sell to the "old" customer, they remain almost completely isolated from competition.
Getting back to DIY
Any analysis of the state of the home improvement market today is going to conclude that there is one thing that is essential and vital: home improvement retailers outside Bunnings need to think about ways to expand their sales revenue gained from consumer DIY. That is, without doubt, the strongest growth area, not just in revenue, but also margins and hence profit as well.
HNN is quite certain that if we all could get a look at the longer term plans of Bunnings and Wesfarmers, what we would see is an intent to build the retailer up to be twice its current size, through expansion first in the UK and later elsewhere in Europe. That kind of scale is going to give the company extraordinary advantages in the supply-chain.
It might take Bunnings a bit longer than it is presently ready to admit to get the UK business going, more like five or six years than three, but it is highly likely to succeed. That means that Australian retailers have something like a three or four year "grace period" to reclaim market share, and set themselves up for the future.
HNN has six concrete suggestions about how retailers might get started with that process. Before we can get to that, however, we have to delve a little deeper into Bunnings, what it did to change the home improvement market, and what Bunnings really has come to represent to its customers.
The "Bunnings people"
When we discuss market strategies here at HNN, we quite commonly find ourselves mentioning the "Bunnings people". While this is a little hard to define, we all know what is being referred to by that. Go to just about any Bunnings on a busy Saturday or Sunday, and you'll find them there, wandering through the aisles, having a sausage out the front of the store, a coffee in the cafe, their kids trailing after them with a free balloon, or their faces painted to resemble a lion.
It's an energetic scene, and customers at Bunnings quite often experience the store as an energising place. It is also unique, in Australia, in home improvement retailers. Mitre 10 and Home Timber and Hardware stores might bustle and feel active, but there is seldom that kind of Bunnings energy to them.
To understand how Bunnings has come to occupy this position in people's lives, it's necessary to look back a little in history, and understand some features of Australian society and culture as they have developed over the past 50 years and more.
Post-war: the distributive economy
When Sir Robert Menzies began his second term as Prime Minister of Australia in 1949, he set in place an economic and social system that would arguably dominate Australian culture for the next 30 years and more. It was based on Australia operating as a primary producer of agricultural and mining commodities for export, while high tariffs were introduced on imported goods so as to protect domestic industries.
This was what could be described as a "distributive economy". By introducing inefficiencies in terms of the supply of manufactured goods to the Australian populace, high employment was maintained, and the Federal Government retained a range of levers with which it could control business and industry.
It is worth quoting what remains the signature statement of the Menzies government, a definition almost of a core set of Australian beliefs. It's an extract from Sir Robert's speech on what he called Australia's "forgotten people":
I do not believe that the real life of this nation is to be found either in great luxury hotels and the petty gossip of so-called fashionable suburbs, or in the officialdom of the organised masses. It is to be found in the homes of people who are nameless and unadvertised, and who, whatever their individual religious conviction or dogma, see in their children their greatest contribution to the immortality of their race. The home is the foundation of sanity and sobriety; it is the indispensable condition of continuity; its health determines the health of society as a whole.
The fatal blow to the systems set in place by the Menzies Government occurred when Britain joined the forerunner of the European Union, the European Economic Community (EEC) in 1973. What is not widely understood is that Britain was required to sever its economic ties with Australia (and other Commonwealth nations) as a condition of entry into the EEC -- it had twice been rejected at the behest of France's President, Charles de Gaulle, in 1963 and 1967.
The German-born, Australian-based academic Oliver Marc Hartwich describes the effect of this move in an article in The Guardian newspaper:
After Britain had joined the EEC Australian butter exports dropped by more than 90 per cent; the Australian apple trade declined from 86,000 tonnes in 1975 to just 27,000 tonnes in 1990. The economic consequences of Britain's European ambitions for Australia were severe.
For the next 20 years after this event, Australia's economic history is dominated by efforts to somehow balance the expensive social programs put in place by the Menzies Government and enhanced by subsequent governments, with the increasingly dire economic realities.
This began with broad-based cuts of 25% in most tariffs in 1973. These cuts were later continued through the 1980s.
The Australian dollar was floated in December 1983, and in 1986 the Australia Acts were passed in both Australian and British Parliaments, severing the paternalistic legal relationship between the two nations. The latter year was also the occasion for then-Treasurer Paul Keating to make his infamous "banana republic" comment, pointing out that inflation and a rising trade deficit were destabilising the nation. The US stock market collapse of 1987 helped plunge Australia into deeper trouble.
A recession resulted from these factors. This lasted from September 1990 through until September 1991. Full recovery did not arrive until late in 1992. However, the changes made during this period did stabilise the economy, and by 1994 a period of prosperity had begun that lasted for 11 years.
In many ways, today's "Bunnings people" have inherited many of the cultural biases of the Menzies Era's "forgotten people". They, too, are family-orientated, non-trendy, and regard building a good life for their children as important.
Where they differ is that they are also ambitious in ways the "forgotten people" were not. In Australia, however, that ambition does not show itself in the same manner as the ambitions of family people in, say, Los Angeles, London, or Paris.
In most other nations, this kind of ambition translates fairly directly into earning more money at a better job, then spending that money to enhance family life. For these Australians, it's not all about money. It is clear to them that working longer hours at a stressful job cannot possibly create a pleasant life. Instead they have followed a kind of "middle path". They want a good, well-rewarded job, but they also want time at home, and leisure in which to enjoy life.
In the end, their ambition is all about gaining valuable and rewarding life experiences. It is in this sense that Bunnings has come to play an important role for them. When they buy an impact driver, a mitre saw, flooring, decking materials, paint or lighting, their goal is to use these to enhance their dwellings, usually for the purpose of garnering more of these experiences.
They are less interested in the impact driver as a tool, and more as a helpful mechanical device which means they can put together a deck in less time. The purpose of that deck is likely to entertain people, to gather friends close around on certain warm summer evenings, to experience that kind of life. Bunnings makes all of this more possible.
In doing so, Bunnings has become their ally, their aid. Walking into a Bunnings they are not thinking about a lot of dreary chores they have to get done. They are thinking instead about opportunities.
Many independent home improvement retailers today have been more heavily influenced by the way Australian retail operated in the recent past than they know.
If we think back to the time when tariffs were still used to heavily distort the market economy -- which is a scant 30 years ago -- one of its characteristics was that retail really didn't make much sense. Instead of quality, design and manufacture being the main determinants of a product's price, the most important aspect was whether it was made in Australia or elsewhere.
Products also tended to have very similar prices across manufacturers, usually set a specified amount below the tariff-inflated price of superior imported products. There were no, or only very limited, opportunities to work the supply-chain more efficiently to get a product imported at a better price.
So, given high levels of price similarity, how did retailers differentiate themselves? Largely they did this through service, and through building lasting relationships with customers. A butcher became "your" butcher, a shoe store "your" shoe store -- and a hardware store, "your" hardware store.
While the vestiges of that approach have all but died out in most of Australian retail, they still linger in home improvement retail. There is a strong expectation on the part of those retailers that want customers "really" want is personal, informed service to help them make their purchases.
Right from its inception, Bunnings had the idea that this was perhaps not really needed anymore. Freed from the influence of most tariffs, and launched into the aftermath of a recession in 1991, Bunnings understood right from the beginning that it could use price as a strong differentiator. It wasn't really, though, all about selling "cheap stuff". It was just as much about delivering unexpected quality at familiar price points.
That's the deep background. Now let's explore the six key points of what retailers need to do in order to compete more effectively with Bunnings.
Virtually any conversation you might have with an independent hardware retailer about Bunnings will begin with the complaint that they provide better service, which customers just don't seem to appreciate.
There are pretty much just two alternatives going on here. Either the retailer is simply right, and they do provide better service, and the customer doesn't appreciate it, or else Bunnings does provide decent service, it's just that it is in different ways than the retailer does.
Such as, for example, renovating an entire house, and making videos about every step of that process, which can be downloaded from their website. And, indeed, that is just what Bunnings has done. It also offers regular DIY workshops. A new feature HNN has seen developing is that Bunnings offers those workshops in a range of languages, such as Portuguese and Mandarin Chinese.
We're not saying that the service offered by Bunnings is equivalent to that of the best independent hardware retailers, but it is often good enough for customers to get what they are looking for.
In any event, whatever is going on, the numbers truly indicate that if an independent retailer is trying to use service as the main differentiator with Bunnings, it just isn't working in the majority of cases. It might be one, helpful ingredient, but much more than that is needed.
When you speak about community with independent hardware retailers, they will mention the direct support they give back to the regions where their stores are located. They might support the local under-16s footy or cricket team, donate to a charity, repair the equipment in a local playground free of charge, and so forth. All that is very worthwhile and highly commendable.
When you speak about community at Bunnings, however, while it might involve some of those aspects as well, it is as much about the kind of community that gets created in-store. Every decent sized Bunnings warehouse has a cafe, a playground for children, and a room for DIY classes, sometimes grouped together in a single "community pod".
This helps to establish the Bunnings store as not just a place to buy stuff from, but as a fun place to visit. Consequently, people will save up little purchases -- lightbulbs and batteries -- to get at Bunnings, at the same time they pick up a coffee and their children play in the slides at the play-space. And, as we all know, one of the cardinal rules of retail is that often small purchases lead to big purchases.
Obviously, smaller retailers can't afford to set up their own cafe. But one retailer we know of sets out a couple of picnic tables in an open space beside the store on sunny days. The local bakery doesn't have a great place for people to sit outdoors, and it is quite common to see a few Mums and Dads drinking a coffee at the tables on a sunny Saturday morning. This is also community.
The issue of segmentation in establishing a market is a deep and rich one. As HNN has pointed out in the past, the strategy that Bunnings pursues is very much an unsegmented one. In determining its market activities, Bunnings just has two questions it asks: Who is not coming to our stores, and how do we get them in? And, of those people who do come to our stores, what are they still buying elsewhere, and what do we need to do so that they buy from us instead? This is what is known as a segmentless approach.Segmented, unsegmented market advantages - HNNSegmentation could replace price as market driver - HNN
One of the retail principles that can be borrowed from asymmetric (guerrilla) warfare, is that when you are facing off against an overwhelmingly superior force (like Bunnings) you should never compete on the same terms that they do. So, if Bunnings is using a segmentless approach, to compete effectively you may need to consider a segmented approach.
Segmentation often just doesn't make sense to smaller retailers. Their instinct is that by specialising in one key area, they are turning customers away from other areas where they could also be earning revenue.
To understand why segmentation works for smaller retailers, you have to understand that it has three key parts to it. Firstly, it enables the retailer to establish a clear point of difference from other retailers. That means the retailer is giving potential customers a good reason to at least check out what is in their store if they are buying that particular product.
Secondly, segmentation is all about taking a set of limited resources, and using them in the best way possible to get the maximum return.
Thirdly, segmentation is a key element in developing a means of marketing your retail operation on an expertise basis, thus avoiding the issue of low prices or price comparison.
The lawn mower example
To see how all those advantages might play out, let's take lawn mowers as an example. Developing a differentiated, segmented offering in standard lawn mowers is very hard to do. At the same time, if you are just selling ordinary lawn mowers, will you really ever be able to compete with Bunnings on price?
What if, however, a store chose to segment and specialise in cordless electric lawn mowers? The store is still competing with Bunnings in this area, and Bunnings does have some winning products there, but its range is quite limited as compared to regular lawn mowers.
Also, this is one area where it is likely the staff at Bunnings are not going to be all that well informed. Do they know how long each mower will run for? Do they know the types of lawns they are most suited to? Can a prospective buyer turn one on to see just how quiet and vibration-free they are? (No, because of health and safety requirements.)
The display area that the store previously used for a range of lawn mowers that really didn't sell all that well suddenly becomes a dedicated area for a very attractive product range -- a better use of that space. Instead of training staff to understand the general characteristics of three brands and six models of petrol lawn mower, they are learning the basics of how the electric lawn mowers work. This is more limited, but it's a better use of their skills as they can go deep instead of broad.
Consider also how this plays into marketing. External banners, product leaflets, mailbox flyers, online websites -- all these benefit from this kind of specialisation. Segmentation gives a particular shape to the business, and can attract customers who are not going to buy an electric mower, but are sort of interested in the technology, and might buy something else.
Once again, applying the core technique from asymmetric warfare, don't match the big competitor's strategy. Bunnings pursues an everyday low price (EDLP) strategy, so retailers need to consider the alternative, which is generally High-Low (HL) pricing.Tool price plateaus at Bunnings - HNN
Most retailers think that they know how HL pricing works, but often it turns out they don't have that clear of an understanding. Sophisticated HL relies on establishing a set of expectations in the customer, then breaking through those in such a way that it triggers a "buy" event.
Typically this is done by establishing pricing brackets across a product range. A retailer has, let us say, three different impact drivers of low, intermediate and high quality, priced in steps at $180, $130 and $99. The differences between the three products are real and meaningful -- perhaps the high end product has two-speeds and is brushless, the intermediate is brushed with two speeds, and the low end is brushed and one speed.
If these are the regular prices of the tools, when you are executing a HL strategy, which tool gets the discount? It's not uncommon to find retailers discounting the low-end, $99 tool, on the basis that this is the tool that attracts the most price sensitive customer, and will thus produce the best sales results from discount.
It is also not uncommon to see retailers discounting the top-end tool. This is often on the basis that they are carrying the most margin on that tool, and discounting will have a slightly lower effect.
In both these cases, for customers thinking about buying one of these tools, which markets are being attracted? Discounting the high-end tool will attract those customers thinking about buying it, and also those who were considering the mid-range tool. Discounting the low-end tool will attract those considering the low-end tool anyway, and also possibly those considering the mid-range tool.
However, if you discount the mid-range tool, you attract customers interested in it, in the high-end tool, and also those interested in the low-end tool.
The discount buy-trigger isn't really a moment of price rebellion in the midst of a carefully bracketed price structure. It is a pricing technique that makes the most out of that bracketed price structure as possible.
5: The margin is the outcome
"The margin is the outcome" is something the CEO of Bunnings, John Gillam, finally said to investment analysts when he was being questioned about range and pricing. What he meant by this is that Bunnings does not set out to get products on the basis of what their margin is going to be. The retailer pretty much knows from its data what kind of feature-set and price combination is going to actually sell in its stores. The actual margin is the outcome of providing an attractive and quick-selling product, rather than the reverse, where margins are predetermined and this limits the choice of products.
While smaller retailers cannot really pursue that particular technique, as it only works really well in consistent high sales volume environments, there are some aspects of this approach that need to be studied and applied.
Most retailers know they need to solve a certain mathematical problem when they set about pricing a product. What is the optimum price/volume relationship that will provide the most profit for a particular product? It comes down to considerations such as knowing if you charge $20 you will sell only 40, and if you charge $15 you will sell 80, and the base cost to you is $10. Price/volume relationships like this typically are on a curve, which means it is likely the best price is actually somewhere between those two.
What is interesting is that if you have enough data and you graph these relationships, you frequently find that the price/volume curve has two optimal solutions. One is a lower volume/higher margin solution, and the other is a higher volume/lower margin solution. (This occurs because of cost optimisations brought on by volume discounts, and certain supply-chain efficiencies.)
Most retailers instinctively gravitate towards the lower volume solution, because they are aware both that it carries the least risk (higher volume sales in most categories can create additional risks relating to supply-chain, stocking and so forth), and because they know that high volume sales have certain opportunity costs that it is hard to capture in a pricing model. The staff is busy with the sale, so they might miss other sales, there is more space consumed in the stock room, more traffic congestion in the store, and so on.
Bunnings, however, if given the choice, will tend to choose the higher volume solution to the price/volume problem. This holds even if that solution is not as optimal in terms of profit as the low volume solution. That is partly because Bunnings is set up for high volume sales, so the additional risk factor is very small. The main reason, though, is that Bunnings is constructed to take advantage of high traffic flow through its stores. Creating that kind of flow by choosing the high volume solution is likely to create secondary benefits, that are, again, a little difficult to capture in the complete pricing model.
Smaller independent retailers can make use of the high volume solution as well, on selected products and under special circumstances. This is very different from HL pricing strategy, and is, in fact, actually mixing a bit of the EDLP strategy into HL.
6: DIY = Projects
One of the big opportunities that remains almost unexplored in home improvement retail in Australia is doing more to view customers in terms of the projects they are seeking to complete.
There are really four key project areas that DIY consumers pursue: kitchens, bathrooms, deck/outdoor space, and storage. When you identify those four areas, you are probably looking at (easily) over 60% of DIY purchases made. One technique that HNN sometimes uses in assessing a retail space is to take each of those project areas and to count the number of steps a customer would need to take to find everything they need to complete such a project.
Kitchens usually do well, and bathrooms do OK, but both deck/outdoor space and storage are often very poor. Even where there is, for example, a space dedicated to storage solutions, it can turn out you need to walk all over the store to find the things you really need to get the job done. Decking is by far the worst, however.
It would actually be possible to establish an entire home improvement retail operation that offered nothing but tailored solutions to each of these project types. Failing that, it is a relatively simple store optimisation to consider providing some kind of grouping of the components of popular projects.
No magic bullet
It is tempting to find yourself yearning for something of a simpler time for retail. Having to resort to differential calculus to solve a complex dual-hump price/volume curve was probably not so much of a priority in the 1950s. But the reality is that today, we really do need to consider this kind of complexity. Because, of course, Bunnings didn't just change the customer, they also changed the entire business of home improvement retail.
Until next time,
You can contact me directly via email email@example.com or Twitter @HNN_Australia
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