ABS Building Approvals stats to October 2021

Urban and ex-urban approvals

The COVID-19 pandemic has - it is believed - increased house approvals and decreased non-house approvals, while boosting building in regional areas. We look at the stats to see what has happened.

One of the major concerns around the COVID-19 pandemic is determining the duration and nature of the changes it has wrought.

Some changes are evidently "temporary". For example, when it comes to supply chain issues for building supplies, though these will likely take until Q1 of calendar 2023 to sort out, they are unlikely to have any lingering effects.

Other changes are more permanent, such as the ongoing concern with vaccinations, which will last over the next five to six years. A third category, and one likely to dominate the longer pandemic recovery period, has to do with relatively large changes that live on after the pandemic, but in a reduced form. One example would be working-from-home (WFH).

The COVID-19 pandemic has certainly affected the housing market and construction market in a range of ways. It's unclear at the moment how long-term those effects will be. Australians can be quite confident that the current high rate of growth in the price of housing will retreat, with many suggesting the second half of calendar 2022 as the most likely time period - though it is less certain if the market will see prices fall, or by how much if they do.

A major house market trend has been a shift from multi-unit dwellings, such as apartment buildings, to detached houses in some major markets. Will this trend be completely reversed, with Australia reverting to the same mix of the two evident in 2017 and 2018, or has the market been structurally changed?

Somewhat associated with that trend is for many urban dwellers to move to ex-urban or regional areas. While this was instigated by a desire to escape from locked-down inner-city areas to less constricted areas, there is some suggestion it may continue as a trend - particularly with WFH making longer commutes much less of a problem.

We can get some idea of how these two trends are tracking at the moment by looking at the Australian Bureau of Statistics (ABS) Building Approvals stats. In this series of HNN charts, we've used the ABS stats to work out the number of approvals in ex-urban/regional areas, and used the existing ABS stats for the "greater city" areas of state capitals. By dividing these into stats for houses and for non-house dwellings, we can track the dispersal of building approvals across the four categories that result: houses and non-house for urban areas, and houses and non-houses for ex-urban/regional areas.

To start with, however, it is best to look at some more basic statistics, which outline the recent building approval stats state-wide for houses and non-houses as a monthly time series. These are presented in Chart 1:

As all these charts have the same scale, with a maximum value of 8000, one initial fact is that there are more approvals issued for Victoria (VIC) than for New South Wales (NSW). It is seems that VIC has had more building approvals than NSW through the pandemic period. In fact, since March 2020, NSW has had 50066 house approvals, and 47,662 non-house approvals, for a total of 97,728, while VIC has had 76,489 house approvals and 35,402 non-house approvals for a total of 111,891, or 14.5% more than NSW.

These stats also reveal a trend that is visually evident as well, that NSW has proportionately more non-house approvals than VIC. For NSW, 48.8% of approvals are non-house, while for VIC the number is 31.6%.

New South Wales

Chart 2 shows the breakdown of data for NSW.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

As HNN has commented in the past, this shows a high peak for the 2016 period. While there is a small increase in urban house approvals for that period, the major contribution is from approvals for urban non-house approvals. Chart B shows the highest growth rate for urban and regional non-house approvals was in the 2015 period.

Interestingly, the next low-point for approvals were the 2019 and 2020 periods, with sharp negative growth for the 2019 period, followed by near flat growth for urban approvals, and negative growth for regional approvals. The 2021 period then brings a sharp turnaround to that, with urban non-house approvals growing at a higher rate than urban house approvals.

Finally, the bottom graph (C) shows the month-on-corresponding month growth rate for these four measures from October 2018 to October 2021. What is notable here is that the number of approvals for urban non-house becomes very volatile after September 2020, with sharp upwards spikes in October 2020, from April 2021 to June 2021, and for September 2021. There is a similar spike for regional non-house approvals from March 2021 to June 2021. In house approvals, the only notable strong peak of growth rate occurred in December 2020.

Comparing the proportions of each category for the periods from 2017 to 2020 with the 2021 period, urban houses gain 0.3%, urban non-houses lose 3.8%, regional houses gain 2.7% and regional non-houses gain 0.8%. That would indicate that urban houses retained their appeal, while urban non-houses lost some appeal, which was transferred mainly to regional houses, and to regional non-houses to a lesser extent.

Victoria

Chart 3 shows the breakdown of data for VIC.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

The first striking difference with NSW is that regional non-house approvals are very small proportionally. At their peak, for the 2021 period, they amount to only 1630, which is 28% of the same approvals for that period in NSW. The situation is reversed for regional houses, however, with Victoria for the 2021 period having 25% more approvals than NSW, at 16,868.

Secondly, rather than reaching a peak, building approvals have more of a plateau high from the 2015 period through to the 2018 period, but, like NSW, have a moderately steep dive in the 2019 period.

Thirdly, where the 2021 period for NSW was one of growth for all four categories, for VIC there are widely divergent results. Urban non-house dwellings show a steep rate of decline, while urban houses grow strongly. However, it is both regional houses and non-houses that show the strongest growth - though, as indicated above, the regional non-house approvals remain relatively small in number.

We can see how that situation plays out monthly in the bottom chart (C). Regional house growth begins to accelerate in July 2020, and reaches a peak in March 2021, which is also the peak for urban house approvals. Only in August 2021 do both house categories go into decline, though approvals for urban houses manages to recover in October 2021.

Urban non-houses do show growth for July 2020 to September 2020, but then go into negative growth through to March 2021, before declining to hit a 14-month peak in June 2021. Regional non-house approvals remain highly volatile (partly due to their small numbers versus the other categories) from October 2020 onwards, but mostly on the upside.

Looking at the composition stats, comparing the four categories for the 2017 to 2020 periods against the 2021 period, urban house approvals rose by 5.6%, while urban non-house approvals fell by a significant 13.4%. Regional house approvals rose by 7.1%, and regional non-house approvals climbed by 0.7%.

Essentially this indicates that urban non-house dwellings were sharply reduced, while both urban and regional house approvals grew, and even regional non-house approvals ticked upwards.

Queensland

Chart 4 shows the breakdown of data for Queensland (QLD).

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

Many characteristics of the QLD chart A seem something like a blending of those from NSW and VIC. Where NSW has a sharp peak in approvals and VIC a plateau, QLD has a ledge of two periods, for 2015 and 2016. In fact, there is an interesting interplay between the four categories of approvals. Looking at approvals for regional houses, these show an over 20% growth rate for the 2012 period, followed by five subsequent periods to 2017 of very low growth. Negative growth takes over for the 2018 and 2019 period, before a return to almost zero growth for 2020, and then a spike to close to 50% growth for 2021.

Regional non-house approvals follow a similar pattern: steep growth in the 2013 period, followed by fluctuation around zero growth to the 2018 period, steep negative growth in the 2019 and 2020 periods, then a sharp upwards growth for the 2021 period.

Urban house approvals saw peak growth during the 2014 period, followed by four periods of growth between 5% and 11%, through to the 2018 period. The 2019 period saw sharp negative growth, then a return to 8% growth in 2020, followed by a surge to over 40% growth in 2021.

The real "wild card" in the QLD approvals story, however, is the approval growth rate for urban non-house dwellings. These surged in the periods 2013, 2014 and 2015, recording growth rates of 51%, 42% and 61% respectively. The number of approvals in this category went from 5788 in the 2012 period to 20,004 in the 2015 period, an increase of 250%.

For the next five periods, through to 2020, growth in approvals was volatile, spiking down to negative 48% and 38% growth, before returning to negative growth of around 3%. Only in 2021 did growth go strongly positive again, exceeding 20%.

Chart C shows the month-on-corresponding-month growth from the October 2018 period through to the October 2021 period. Approvals for urban houses and regional houses can be seen to be somewhat related through this timespan. There's a period of negative growth through to the November 2019 period, followed by essentially flat growth through to the July 2020 period. Growth accelerates from the August 2020 period through to the August 2021 period, with growth in regional houses outpacing that of urban houses, showing a peak in the periods for February and March 2021.

The approval growth rate for non-house dwellings tend to be more volatile. For urban non-house, from October 2018 through to June 2020 the growth trend is largely negative, except for a strong spike up to 120% growth in October 2019. In July 2020 the growth trend goes positive through to August 2021, though there is a strong negative spike of negative 40% in October 2020.

The approval growth for regional non-house dwellings is the most volatile. It remains mostly negative through to October 2020, then begins a period of overall positive growth, though there is a strong negative spike down to -48% in January 2021, followed by a strong upwards spike to over 700% growth (from 100 approvals in March 2020 to 817 approvals in March 2021).

Applying the composition analysis to QLD for the 2017 to 2020 periods against the 2021 period, the overall proportion of urban house approvals grew by 3.3% to be 38.2% of the total. Regional house approvals also grew by 2.8% to make up 31.6%. Urban non-house approvals fell by 5.0% to make up 17.5%, and regional non-house approvals fell by 1.1% to provide 12.7% of the total approvals.

The dominant shift, then, is from non-house to house approvals, with also a smaller shift to some more regional house approvals.

South Australia

After the somewhat hectic volatility of the QLD approvals, South Australia (SA) seems relatively calm and predictable. It is necessary to note that in terms of one category, regional non-houses, the raw numbers are so small - fewer than 70 approvals in a 12-month period from 2013 onwards - that percentage measures of growth are less meaningful.

Chart 5 shows the breakdown of data for SA.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

SA shows a sharp dip in approvals to the 2012 period, followed by a rise over the next two periods to reach a peak in the 2014 period. There follows some shallow fluctuations through the 2018 period, then two slightly more substantial declines in the 2019 and 2020 periods, before a sharp increase for the 2021 period.

The underlying growth trends, as shown in chart B show high growth in the 2013 for urban non-house dwellings, at 55%, then slowing but ongoing growth in this through to the 2016 period, a bump upwards in the subsequent period, then four periods of decline through to the 2021 period.

Urban house approvals show growth rates above 16% for the 2013 and 2014 periods, followed by a negative growth rate of around 9% in 2015, a recovery to a positive rate of 10% in 2016, then four periods of very modest growth through to 2020, followed by a sharp increase in the 2021 period to over 40% growth.

Regional house approvals show a peak of 20% growth in the 2014 period, followed by six periods of negative to flat growth through to the 2020 period. Then there is a sharp uptick in growth, to over 75% for the 2021 period.

As was remarked above, the regional non-house approvals are very small, and difficult to track statistically. Perhaps what is of most interest is that there were 248 approvals for the 2011 period, and 101 for the 2012 period. After that, approvals remain under 70, except for the 2016 period, which had 76.

Looking at chart C for the month-on-corresponding-month approval growth rates for the timespan between October 2019 and October 2021, we've had to exclude regional non-house category, as several months have zero approvals, which makes growth rates less useful.

The chart shows the growth rate for non-house urban approvals to be quite volatile, with three major peaks over 150%, and two minor peaks over 30%. The urban house category shows a largely positive growth rate from May 2019 onwards, and then goes strongly positive from November 2020, returning to a negative rate only in October 2021.

The regional house growth fluctuates but is more negative than the urban house growth rate through to September 2020 when it goes strongly positive, peaking at 150% for February and March 2021. By October 2021 it has returned to be close to zero.

Looking at the changing composition by comparing the four categories for the 2017 to 2020 periods against the 2021 period for building approvals in SA, the urban house approvals grew by 8.9% to reach 65.7% of the total approvals. Regional house approvals also grew, by 4.5% to make up 18.4% of all approvals.

Urban non-house approvals fell significantly, down by 13.2% to make up just 15.6% of approvals, and regional non-house was down 0.2%, making up only 0.2% of all dwelling approvals in the state.

This clearly shows a very strong shift towards houses and away from non-houses, as well as a significant increase in regional house approvals.

Western Australia

Western Australia (WA) is, like SA, something unique when it comes to building approvals. Like SA, the numbers for regional non-house approvals are too low to really derive much statistical sense from them.

Chart 6 shows the breakdown of data for WA.

The top chart (A) shows the contribution regional and urban approvals make to the overall total when you sum approvals for a 12-month period ending in October. This is closely linked with the middle chart (B) which shows the percentage change between those 12-month periods.

Unlike the other states profiled above, the peak in building approval for WA was assisted by an increase in approvals for urban non-houses, but the determining fact was an increase in urban house approvals. In the 2013 and 2014 periods, these showed a growth rate of 40% and 18% respectively. After the 2014 peak, the growth rate for these approvals went negative for five periods, recovering to 15% in 2020, and then hitting 75% in 2021.

For regional house approvals, these showed growth to 30% in the 2013 period, then went into negative to flat growth for the next seven periods, before surging by 100% in the 2021 period.

Urban non-house approvals produced strong growth for 2012 to 2015, then remained negative for five periods, before recovering to 30% growth in 2021.

Chart C shows how these changes played out on a month-on-corresponding-month basis from October 2018 through to October 2021. Growth rates for both urban house and regional houses remained slightly negative through to July 2020, then climbed. Regional house approvals reached a peak of 250% growth in February 2021, and urban house approvals reached a peak of 200% in March 2021. Both fell back to a slightly negative growth rate by September 2021, then went strongly negative in October 2021.

Looking at changes in building approval composition by comparing the four categories for the 2017 to 2020 periods against the 2021 period, the two biggest changes were an increase in urban houses in terms of proportion of overall approvals, and a decrease for urban non-house approvals. The former grew by 7.5% to 71.3% overall, and the latter fell by 8.8% to 13.6%.

Regional house approvals grey by 1.5% to 14.6% of approvals overall. Regional non-house approvals fell by 0.3% to 0.5% overall.

The primary shift illustrated is from non-house to house approvals, with regional house approvals now ahead of urban non-house approvals.

Analysis

There is one more set of charts it will be helpful to look at to complete the overview and analysis. These charts look at the ratio of ex-urban (regional) to urban building approvals for all the states for 12-month trailing periods to October.

The top chart shows the ratio of ex-urban to urban house approvals, and the bottom chart shows the ratio of ex-urban to urban non-house approvals.

For the top chart, perhaps the biggest surprise is how high ex-urban house approvals were as a ratio of urban house approvals for QLD. It wasn't until the 2017 period that urban house approvals were higher than ex-urban ones. Since 2018, ex-urban approvals have settled to around 80% of urban approvals.

To a lesser extent the same holds true for NSW, though what this a does is to reveal one problem with these statistics. Really the ABS stats are for not just ex-urban areas, but areas outside of Sydney. Given the number of large towns in NSW (such as Newcastle), the "ex-urban" number is going to encompass a number of urban areas, making it partially a measure of dispersion and decentralisation as well.

For VIC, it's interesting to see that the ratio reached a high of 50% in 2012, hit a low of under 40% in 2017, then grew slightly through to 2021 to a new high of 53%. While the pandemic gave it a boost, it's also true that the trend was on the upswing.

Both WA and SA show a trend of a convergence around 20%, with a slight uptrend for the 2021 period.

Looking at the bottom chart for non-house approvals, this shows some less predictable trends. QLD indicates a level of volatility, though there has been a general upwards in the ratio of ex-urban to urban non-house approvals since the 2017 period. NSW shows the ratio reaching a low in the 2016 period, the lifting to a high of around 25% in the 2019 period, before drifting back closer to 20% for both 2020 and 2021. The other three states show a convergence around 5%, though Victoria shows an uptick for the 2021 period to around 9%.

While the influence of the pandemic is there to see in the lift in the ratio for the 2021 period, yet that lift is, in general, well within the range established by past periods.

The question is, of course, what is going to happen when we add another period or two onto not only these charts, but the other charts as well.

It seems it is most likely that some states will see a more permanent change, others will quickly revert back to a pre-pandemic pattern, and still others will respond to shifts in the states that have been more affected by the pandemic.

It's quite likely, for example, that VIC is going to see an ongoing shift. Regional houses will likely continue to be more popular, though the growth rate in approvals may slow to just 2% or 3% a year over the next five years. Non-house approvals for both urban and regional areas will likely continue to be flat for two to three years, but will inevitably pick up in the face of future pressures.

In contrast, HNN does not see NSW being affected as much. We expect to see it revert to 2018/19 numbers over the next two years.

For the other states profiled here, QLD, SA and WA, it's likely that ongoing immigration from NSW and VIC will play a role in determining their building approvals. For example, we can expect that arrivals from VIC will insist on houses, while those from NSW will consider both houses and apartments. So much of how they are shaped will depend on these external influences.

Playing into all of this are also the general influences on the housing market. It seems fairly certain that 2022 will see some kind of a slowing in these markets, and 2023 will likely see prices retreat, as interest rates become more of a concern. The real question is what comes afterwards, in 2025 or so.

That is likely to be shaped by a range of urban concerns. Sydney and Melbourne in particular, will face a reduction in daytime population as more workers WFH; for the first time they will need to think of workers as a market segment to be catered to, rather than taking them largely for granted. One of the major challenges facing Melbourne is that it will have no choice but to introduce increased density of dwellings in its inner-city areas, which will lead to a possible devaluation of real estate.

While these are difficult problems, they typically present solutions that can be worked out over time. That is a far cry from the emergency measures that have been implemented in the face of the COVID-19 pandemic, which have exacted such a heavy cost from both society and from individuals.

statistics

ABS hardware retail sales to October 2021

Sales lift at the end of 2021

While the second quarter of calendar 2021 showed sales slump, sales from August to October 2021 have showed growth.

The Australian Bureau of Statistics (ABS) has released its stats for retail sales through to October 2021. For the hardware industry, it has become very clear that the full impact of the COVID-19 pandemic boost has diminished. Yet what remains surprising is that overall sales have yet to revert back to the pre-pandemic levels of 2019.

Overall sales

Chart 1 shows the cumulative values of hardware retail sales across Australia. (The statistics omit both the Northern Territory and Tasmania as the ABS does not supply times stats of these regions at this time.)

The increase in sales across Australia for the 2020 period over the 2019 period is a considerable 16.38%, while the increase for the most current period, 2021, over the 2020 period is 4.25%. The state with the highest gain was New South Wales (NSW), which recorded an increase of 7.54%, or $507 million, for a total of $7237 million. In second place was Queensland (QLD) with an increase of 6.85%, or $322 million, for a total of $5030 million. Western Australia (WA) saw a gain of 4.83%, or $113 million, for a total of $2434 million.

The Australian Capital Territory (ACT) managed an increase of 2.01%, or $9 million, for a total of $476 million. South Australia (SA) gained 0.45%, or $6 million, to record a total of $1402 million. In last place, with a loss of 0.40% was Victoria (VIC), losing $26 million, for total sales of $6467 million.

Sales growth trends

Chart 2 maps out the sales growth over the past decade for hardware retail sales.

One of the useful aspects of this chart is typically to trace whether regional or national influences are affecting each state's results. In this chart there is yet another affirmation that the impact of the pandemic itself outweighs almost every other influence. However, it is also clear that the pandemic is having a different impact on each area of Australia. In particular, we can see that both NSW and QLD are doing better than VIC.

Month-on-month growth trends

Chart 3 shows the month-on corresponding-month growth trend over the past two years for hardware retail sales.

This chart shows that by the end of the first quarter of calendar 2021, comparative sales were trending quite heavily downwards, with SA - for example - getting below 20% negative growth, and VIC coming close to that with 18% negative growth.

However, rather surprisingly, what seems to have happened is that the "magical" last four months of the year kicked in again - perhaps combining with the lifting of many COVID-19 restrictions - and sales actually began to grow again as compared to 2020. NSW is leading the way with 13.5% growth in October 2021, while VIC showed a loss of 0.7% in growth for the same period.

Analysis

The hardware retail industry, despite struggling with supply chain issues for lumber and other materials, has continued a strong performance through to October 2021. That said, however, the second quarter of calendar 2021, which saw sales return to 2019 levels, could be a better predictor of the future than the good performance in the final quarter of 2021.

In particular, signs are that demand is slackening behind supply on dwelling markets, and with every passing quarter the possibility of a rise in base interest rates increases. Yet on the positive side, there is more than enough construction work in the pipeline to last through 2022, and into the first quarter of 2023 as well.

statistics

Bunnings links to data through Flybuys

Bunnings signs up to data resource

Why did Bunnings sign on for Flybuys? As privacy becomes more of a concern online, loyalty programs such as Flybuys offers better access to customer data.

After Wesfarmers spun off the supermarket chain Coles in 2018, the company took steps to set up the Coles-based loyalty scheme Flybuys as a separate entity. Coles and Wesfarmers split the ownership at 50% each.

Since that time, it has been something of a puzzle to commentators as to why Wesfarmers did not move to expand Flybuys to cover more of the Wesfarmers-owned retailers - in particular its primary business, the big-box home improvement retailer Bunnings.

The puzzlement ended on 9 November 2021, when Wesfarmers announced that Flybuys would be extended to both Bunnings and the company's office-supplies business Officeworks. That means that Flybuys will now be partnered with 25 businesses. According to Wesfarmers, as of the 30 June 2021 Flybuys is used by 6.4 million active households.

Why now?

One reason for the delay is likely the problem that Wesfarmers has struggled with for 20 years, but with more intensity over the past 10 years. As a conglomerate, it has gained strength from being able to buy businesses that were in a down-cycle, bring them into and up-cycle, and then sell them. Coles supermarkets is the most recent example.

However, to maintain that flexibility, the company has had to retain each business in its own silo. That lack of integration means its easier to sell of these assets without other assets suffering any harm.

While that's good from a demerger perspective, it is less good from an efficiency perspective. For example, if you order goods online from the range of Wesfarmers-owned retailers, you can get a separate delivery from Bunnings, Officeworks, Target and Kmart all on the same day. Wesfarmers clearly has enough delivery business it could set up an entire business segment to handle this - but that would make its individual businesses more integrated, and thus more difficult to sell.

Perhaps just as pressing, the Bunnings culture that was initially developed under former managing director John Gillam and ably continued by current managing director Michael Schneider made keeping your cards close to your chest into something of an art form. The idea of sharing data from Bunnings customers with any exterior organisation, even a 50% partnership, does not sit well with that approach.

So what changed? There's a hint to what changed in the very lucid statement made by Wesfarmers managing director Rob Scott in the press release making this announcement:

Bunnings and Officeworks joining Flybuys will expand the value of the Flybuys program for members and provide exciting new opportunities to support customers. This partnership will complement the development of Wesfarmers' data and digital ecosystem, providing insights that enable our businesses to offer more relevant, personalised customer experiences.

It's that second sentence that matters. At the moment, the internet world is on the cusp of a major change, where users of browsers and other means of information access will find their personal data is being protected by default. Up until now, those protections were available to users, but this often meant going outside the "safe" world of familiar software. For example, the Brave browser offers a wide range of data protections and ad-blocking (including a facility to make micro-payments to some websites as an alternative funding mechanism outside of advertising). But downloading that browser, and setting it up was something that just made users a little uncomfortable.

The first big company to make a significant change was Apple. Its protections are quite comprehensive. For example, its Mail app will make it so that companies using email for marketing cannot track when mail messages are opened, and also hides the internet protocol (IP) address of the computer, iPhone or iPad that may click on any links.

Apple also enhanced its feature that prevents apps from obtaining any information from users without the users granting explicit permission. That means that, for example, your Bunnings iOS app cannot tell Bunnings anything about you, unless you grant permission.

Then there is a new feature to Apple's online storage service iCloud called Private Relay. This is something like a virtual private network (VPN), but easier to implement. Any web request is encrypted on the Apple device, then sent to a relay server, which assigns a random IP address, and spoofs the request to a random geographic location. A second relay then decrypts the request, and forwards it to the correct server.

One thing to remember about Apple is that while it does not have a controlling share of the smartphone market, it does have a controlling share of the market revenue derived from smartphones. iPhone owners simply spend more than Android users do.

If that isn't enough, the parent company of Google, Alphabet has also announced that it will no longer serve ads to users based on their browsing history. The company announced it would remove the core technology that enables that tracking, so-called "third party cookies", and then replace it with an anonymised service that grouped users in cohorts with similar profiles.

Many observers believe that even this privacy hedge will not work, and that the drive for user privacy will simply steamroll such efforts. While Alphabet's Chrome browser has a large market share, the privacy issue might be enough to drive users to adopt alternatives, such as Firefox, or revert to operating system-linked browsers, such as Apple's Safari and Microsoft's Edge browser.

The value of data

Given that push many companies, especially in the US, are accelerating efforts to obtain data from users through other means. This includes competitions, polls, membership deals - anything they can use to secure personal information about their customers.

Part of that has to do with a fear they will soon lose the kind of data they need to make personalised marketing work, but there is also a cost factor involved. If their own systems of information gathering break down, then they will need to rely more on providers such as Alphabet, and it's likely that will become costly.

Against this background, it becomes clear exactly why Bunnings would see a strategic advantage in sharing data with a loyalty program that will aid it in contacting and reaching existing and new customers.

bigbox

HNN Flash #74 podcast: ABS building approval stats

What do they mean for hardware retailers?

A major house market trend has been a shift from multi-unit dwellings, such as apartment buildings, to detached houses in some major markets

Coming out of COVID-19 restrictions and lockdowns, we have been affected by major changes such as supply chain, vaccination rates and Work-From-Home directives. More specifically, supply chain delays have wreaked havoc for many hardware and building materials retailers. We expand a little on the current supply chain challenges and when we expect them to become more manageable.

We explain the background work on how HNN's graphs were developed and how they relate to the business of hardware retailing.

From the data, we have identified that a major house market trend has been a shift from multi-unit dwellings, such as apartment buildings, to detached houses in some major markets. Associated with this trend is a move for many urban dwellers to move to ex-urban or regional areas.

Then we go into some detail about the main changes we have observed across New South Wales, Victoria and Queensland in terms of building approvals.

You can listen to the podcast on the embedded player:

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Or listen to it on Apple:

HNN Flash #74 podcast on Apple

Or go to the Buzzsprout website at:

www.buzzsprout.com/1872420/9655487

HNN's Flash podcast provides a deeper discussion on one or two of the stories we'll be covering each week on the HNN website.

news

Supplier update: TTI

TTI in court for alleged resale price maintenance over power tools: ACCC

Hong Kong based Techtronic Industries Group (TTI) is best known for its power tool sub-brands, Milwaukee Tool and Ryobi

The Australian Competition and Consumer Commission (ACCC) has instituted Federal Court proceedings against Techtronic Industries Australia Pty Limited (TTI), alleging it engaged in resale price maintenance in relation to the wholesale supply of Milwaukee brand power tools, hand tools and accessories, in breach of the Competition and Consumer Act.

Resale price maintenance (also known as RPM) occurs when a supplier engages in conduct which prevents, or attempts to prevent, resellers of their goods or services from advertising or selling the goods or services below a specified minimum price.

The ACCC alleges that, between 2015 and 2021, TTI engaged in RPM conduct, including by entering into 96 agreements with independent dealers (retailers) and buying groups which restricted the sale of Milwaukee products below a specified minimum price.

The ACCC also alleges that TTI enforced these agreements by issuing reminders, warnings and breach notices to dealers that advertised or sold Milwaukee products below the specified minimum price.

In addition, it is alleged that TTI withheld supply from two of the dealers to enforce the restrictions on price discounting below the specified minimum price. In a statement, ACCC Deputy Chair Mick Keogh said:

Requiring retailers to charge at or above a minimum price for products in the way that we allege Techtronic has done, stifles retailers' ability to compete on price, which ultimately hurts consumers. This is particularly so in industries where retailers would otherwise strongly compete on price, such as by offering price match guarantees to consumers.
We alleged that Techtronic's actions meant Milwaukee power tool dealers could not sell the products at a discount below the specified minimum price, depriving consumers of the chance to benefit from lower prices driven by competition.

The ACCC is seeking penalties, declarations, injunctions, a compliance program order, an order for corrective advertising and costs.

According to the ACCC, RPM occurs where a supplier:

  • makes it known they will not supply unless a reseller agrees to advertise or sell at a price not less than a specified minimum price;
  • induces or attempts to induce the reseller not to advertise or sell below a specified minimum price;
  • enters into agreements or offers to enter into agreements for the supply of goods on terms that the reseller does not to advertise or sell below a specified minimum price;
  • withholds supply of goods or services because a reseller, or a purchaser from the reseller, has not agreed not to advertise or sell below a specified minimum price; or has advertised or sold (or is likely to sell) at a price below a specified minimum price;
  • uses, in relation to goods or services supplied or that may be supplied, a statement as to price which is likely to be understood by the purchaser as a minimum resale price.
  • RPM is strictly prohibited by the Competition and Consumer Act and is not subject to a substantially lessening competition test. More information about resale price maintenance can be found at the following link:

    Imposing minimum resale prices - ACCC

    Companies can lodge a notification of RPM conduct or apply for authorisation of proposed RPM conduct, which will be permitted if the likely public benefit from the resale price maintenance conduct outweighs the likely detriment from the conduct.

    In June 2020, the ACCC rejected a proposal by Stanley Black & Decker to set a minimum advertised price for DeWalt brand power tools and accessories, following a resale price maintenance notification it had lodged with the ACCC.

    DeWalt seeks to control dealer ads - HNN Flash #12, February 2021

    In September 2021, Nero Bathrooms admitted to likely resale price maintenance by withholding supply of its tapware products from a small independent retailer who declined to raise its advertised prices.

    Bathroomware brand admits to likely resale price maintenance - HNN Flash #62, September 2021
    companies

    Big box update

    Bunnings MD discusses digital transformation with AFR

    IKEA Australia has introduced an app through its stores in Queensland that will cut wait times at the checkout

    Bunnings Group managing director, Michael Schneider said the retailer's digital makeover is about improving the customer experience as well as encouraging a friendly environment for "digital natives" - people joining the business who are accustomed to digital - and existing employees. He recently gave an interview to the business column Chanticleer in the Australian Financial Review (AFR).

    Part of the retailer's tech transformation has been targeted towards its trade customers. It recently launched a new website for tradies that is mobile friendly, replacing the old process of an email system with a click and collection option through a smartphone.

    Bunnings' product finder app has also been updated with interactive store maps that show customers the best and fastest course around the stores.

    Mr Schneider said Bunnings is gradually moving all of its customer data to a cloud-based platform, which will support the entire group's operations, including inventory management. This project is due for completion by June next year.

    It was reported that most of the digital transformation is being done by an in-house Bunnings team, not an outsourced IT provider. Mr Schneider told the AFR:

    We partnered up with some fantastic external partners, but we also built this wonderful team in-house, which shows a different way of thinking about it. We've now got just over 500 team members in our tech and digital division under a dedicated chief technology officer, Leah Balter.

    Bunnings' digital investment has been about building deeper engagement with its employees. Mr Schneider said:

    This thing for us is not about maximising sales online. It's about improving our business so the next generation of people who are working here can put down roots and grow and build a career.
    Sure, we want to give our customers a compelling offer. But what's been fantastic in doing the work we've done in the digital space, has been thinking about the customer journeys and the blend of our long-term team members and our new people.
    People who understand the Bunnings way understand our product and understand the way that the customer experiences feel, [and] are sharing their knowledge with people who are joining the team.
    We've now got really fantastic tech skills, digital skills, code-writing skills, digital marketing skills and data personalisation skills. That sort of collaboration between the long-term Bunnings team members and newer team members is giving us a best-of-breed when it comes to the customer experience.

    Bunnings has been using social enterprise tool, Workplace by Facebook which developed it as a way of creating online communities within companies and facilitating greater co-operation among staff. Mr Schneider said:

    We've got over 40,000 of our 53,000 team members really active on their platform [and] that's allowing us to keep them informed on what's going on. We've built two production studios in our national support centre where we develop training material, deliver live content, and really connect and engage.
    If you're a buyer, and you bring a new product to life, you can speak directly to the team members who are selling that product and hear feedback on what's working, what's not working with your customers.

    Mr Schneider spoke at the Workplace Transform APAC 2021 Facebook live event earlier this year.

    Facebook's Workplace for employee engagement at Bunnings

    Mr Schneider said he wants to send a "subliminal message" to employees that Bunnings is "a place you can actually hang around for a while and have a bit of fun and do something different". He said part of the challenge of digital adoption within companies is demystifying technology for staff members who have been there for 20 years while making it a place tech-savvy young people want to work.

    The new Bunnings tech support centre is based in the inner Melbourne suburb of Cremorne which has been developed as a technology precinct by the Victorian state government. Mr Schneider said he is keen for Bunnings to be on the radar of graduates considering a career in tech.

    ...We are deep in a really genuine tech transformation - we're going pretty solidly at it, both from a resourcing point of view and an investment point of view.
    Those are the sorts of things that when you're wanting to build your career in the technology space, you're really looking for, and Bunnings is providing that, alongside all the things that we're famous for in terms of culture.

    Related: HNN has reported previously that as Bunnings launches into digital, it's likely to encounter the need for deeper change.

    Bunnings upshifts digital - HNN Flash #17, October 2020

    Related: Bunnings has produced another strong result.

    Bunnings results FY2020/21 - HNN Flash #60, August 2021

    IKEA app in QLD stores

    IKEA's mobile checkout technology allows customers to scan products on their phone and pay on the way out without needing to unpack their trolley. It is being used at its Logan and North Lakes stores in Queensland in the lead up to Christmas.

    The home improvement retailer plans to roll out the technology across all Australian stores in 2022, according to The Courier-Mail.

    IKEA's country customer manager Christian Becker said it took an average of six minutes to stand in line and unload and reload items. The app should make shopping easier for customers. He told The Courier-Mail:

    Our co-workers can now also support more customers where their help is most needed, which is super important in the busy Christmas shopping period. Our goal is to provide our customers with a consistent, seamless, and efficient shopping experience across all channels.
    Mobile check-out is a first for home furnishing retailers in Australia, and we're proud to lead the way with this initiative with the aim of creating a no-wait checkout experience for our customers.
  • Sources: Australian Financial Review, Motley Fool and The Courier-Mail
  • bigbox

    Supplier update

    Macsim secures new warehouse in North Queensland

    NewGen Timber in Mount Gambier (SA) has won a state government grant to help meet the demand for structural timber

    Fastener supplier Macsim has taken on a 1800sqm warehouse in Townsville (QLD), located in the Mount St John industrial estate owned by BM Webb. The building is complete and should be fully operational in early 2022, reports the Townsville Bulletin.

    The new warehouse doubles the company's footprint in regional Queensland. Macsim North Queensland branch manager Ben Doherty said the expansion would enable the company to stock almost all of its 7500 product lines in Townsville, improving delivery across a large part of Queensland. He told the Townsville Bulletin:

    It's about expansion and growth for North Queensland. Having a warehouse this size helps us support our customers more efficiently. We are wanting to increase the business for all of North Queensland so we can better service Cairns, Mt Isa, Mackay, even as far south as Rockhampton and Gladstone and having the stock holdings here instead of drawing it out of Brisbane and Sydney.

    Macsim is in one of three new buildings in the industrial estate. Knight Frank sales and leasing agent Dan Place said industrial was the strongest sector for leasing at the moment with companies like Macsim using Townsville as a distribution hub. He said:

    Anything trade-based is going well.

    Related: Iccons Fasteners established a branch in Townsville to service the growing North Queensland market.

    Supplier update: Iccons Fasteners moves into North Queensland - HNN Flash #57, August 2021

    NewGen Timber

    A South Australian state government grant - over $400,000 - has been awarded to NewGen Timber to develop a recently purchased site in an effort to increase the supply of structural timber, according to The Border Watch.

    NewGen Timber directors Craig Nisbet and Shaun McDonnell took over the H and L Scheidl mill in August 2021 and were successful in obtaining the grant. Mr Nisbet said they were fortunate enough to have a mill which was operating on one shift, which then provided an opportunity to use the equipment and provide a quick boost to the local supply. He told The Border Watch:

    We are now looking at upgrading the yard and the roadworks and providing more lighting which will allow us to operate at night time hours as well. This will allow us to extend our hours of operation and therefore create employment opportunities for people.

    He said alongside employment opportunities, additional operating hours means the mill can increase the timber supply and hopefully decrease the waiting time for building houses.

    Everyone is seeing the timelines for building houses and the strain that is on the timber supply at the moment. We are hoping this upgrade will further help with that.

    Mr Nisbet said with the demand coming from around the world, structural timber within Australia is scarce for those wanting to build a new home or extend on their current one.

    The domains are higher but the supply is actually lower which is a real imbalance in the market at the moment. That is what we are hoping to do, is to help with that balance.

    During a recent visit to the region, Minister for Primary Industries and Regional Development David Basham said the ongoing demand for structural timber provided a unique opportunity for further development to other mills in the region.

    Mr Basham said the state government was looking into investing funds into different timber mills across the state. He said:

    This will get the mills upgraded and bring more structural timber into the market. We are now having the conversations that need to happen within the industry going forward so we understand their needs. This ensures we make the right investments and it is a commitment that we will make sure those future conversations have the best possible outcome.

    The planned upgrades of the NewGen Timber mill are expected to be complete in April.

  • Sources: Townsville Bulletin and The Border Watch
  • news

    Roy Morgan on post-COVID retail

    Forecast predicts high Xmas, 2022 Q1 sales

    Roy Morgan has a rosy picture of post-COVID retail, at least through to February 2022. Christmas sales will retain the high levels of 2020, the company says, and Black Friday sales will be strong. However, there are some real threats that could unravel this forecast as well.

    Roy Morgan has provided a YouTube video of its "The Future of Retail: Latest Industry Trends" webinar. This is an 18 minute video presented by Michelle Levine, the CEO of Roy Morgan, and Ross Honeywill, a social scientist and author, and the moving force behind the premium.net.au website. He has a unique and interesting approach to markets and marketing.

    It's really worth setting aside 20 minutes or so to watch the webinar:


    The Future of Retail: Latest Industry Trends

    The agenda

    One of the most useful functions that these quick introductions from Roy Morgan perform is to develop and discuss a relevant agenda for retail over the following six months or so. Roy Morgan also brings a unique point of view, which is driven by the company's extensive research into consumer opinions and choices.

    That said, however, it's also true that there are times, especially when the company crosses over from markets to broader economics, when the analysis needs to be questioned. It's an understandable expansion, as economics has in recent decades crossed over into psychology/sociology (think Richard Thaler with behavioural economics, and even Robert Shiller in his suggestion that housing markets are driven by opinion), but it tends to lack something in rigour. But, at the very least, Roy Morgan provides a good point of departure for discussion.

    In this particular "Future of Retail" summary, the agenda was outlined as follows:

  • Christmas 2021 retail sales
  • Black Friday/Cyber Monday retail sales
  • Retail sales for Q1 2022
  • While the above generally portrayed retail as having a positive future, the webinar also pointed to some potential problems:

  • Inflation
  • Future lockdowns
  • Experience economy recovery
  • Decline in online retail due to delivery speed
  • Pursuit of price as market stimulus
  • Christmas 2021 retail sales

    According to Ms Levine, in looking at retail sales for Australia overall:

    The good news is that our brilliant data modelling team has forecast retail sales in the run up to Christmas to match last year's record high. This is terrific news for the retail economy. You can see from this slide that the Roy Morgan predictive engine, the green dotted line has a very close correlation with actual sales. That's the solid black line back to January 2019. But what matters is going forward and looking forward, we expect Christmas sales to be more than 11% ahead of 2019.

    Of course, that is a bit of a mixed message. Essentially, while the sales do indicate growth over the pre-pandemic period, they are essentially flat going back to Christmas 2020. Nonetheless, it is better news than a projected decline.

    For Sydney retailers, the rise is expected to be 10%, while for Melbourne retailers it will be 11% over the Christmas 2019 figures. Tasmania is expected to grow by 15% over 2019, which is 4% more than Christmas 2020.

    In terms of retail categories, hospitality is expected to post a gain of 12% over Christmas 2020. However, the household goods category will decline from Christmas 2020, but still be 14% higher than for Christmas 2019.

    Black Friday/Cyber Monday

    While the Roy Morgan forecast concentrated on those two days - at least nominally - it's evident that "Black Friday" applies to a period of between six to 10 days around the US Thanksgiving holiday. While there are some wild apocryphal aetiologies provided for the term, its initial significance was simply that this marked the start of the Christmas sales season.

    In fact, US President Franklin D. Roosevelt (FDR) moved the holiday, from the last Thursday in November, to the fourth Thursday in November, to avoid the situation, as in 2018 and 2023, when the previous timing would have reduced the Christmas sale season to less than a month.

    Cyber Monday was a term coined after online retailers found that online sales soared on the Monday following Thanksgiving (though really it was late in the Sunday night instead, initially).

    Whatever the origin, Roy Morgan sees this season as being especially big during 2021. As Ms Levine states:

    Roy Morgan is forecasting another lift. We estimate that $5.4 billion will be spent over the four days of Black Friday, Cyber Monday. That's just ahead of last year's record.

    That estimate is somewhat above other market estimates.

    First quarter 2022 retail sales

    The biggest question for most retailers is what is going to happen during the first two quarters of calendar 2022. As Dr Honeywill puts it, referring to the predicted surge in Christmas sales:

    The big question, though, is can it sustain past Christmas? Or, what we might call the "rebound party"? And when [will] we return to some kind of normality?

    The answer from Ms Levine is surprisingly positive:

    Our predictive engine, all things going as planned, has January [2022] 15%, up on 2020. It has February 14% up and March 4%, ahead of March 2020. And comparing the first quarter next year to the same period this year, the news remains positive.

    But, as she quickly points out, that prediction is based on ongoing positive business sentiment:

    But so much relies not only on the confidence of people, but on the confidence of businesses to invest in their future by lifting wages, opening more stores and employing more Australians.

    Potential problems

    Like any good forecasters, rather than just nominating a number, Roy Morgan provides an overall context to their predictions. In this case, that context comes in the form of developments that could introduce considerable downsides to the forecast recovery from the COVID-19 pandemic.

    Problem 1: Inflation

    Quite correctly, Roy Morgan has identified inflation as being a potential risk to a post-COVID recovery. However, this is one of those areas where, just as economists sometimes struggle with market psychology, the company does make some assumptions that are, at least, somewhat contentious for economists.

    Introducing the subject, this is what Ms Levine has to say:

    Inflation has both a practical and a psychological impact on retail spending. And of course, as with everything, there are winners and losers. So those who are living off interest or investment earnings with their home paid off are winners in an inflationary environment. They aren't by the way, typically big spenders.
    On the other hand, those who are paying rent or have big mortgages, particularly with variable interest rates will be playing catch up in an inflationary time. And so these typically bigger spenders will have less to spend, and when possible, they'll spend on assets or investments that they believe will grow with inflation, not discretionary spending.

    Perhaps the best thing that can be said about this introduction is that it is not entirely complete. To quote from the European Central Bank Economic Bulletin:

    Other things being equal, when economic agents anticipate that inflation will increase, they perceive the real interest rate to fall. As a result, they spend more and save less to optimise their consumption and investment over a long horizon.
    Making sense of consumers' inflation perceptions and expectations

    There is a less-technical article on the website of the US White House that describes the issues around inflation post-COVID. It's authored by Jared Bernstein, chief economist and economic policy adviser to the US Vice President, along with Ernie Tedeschi, a senior policy economist with the US Council of Economic Advisers.

    Pandemic Prices: Assessing Inflation in the Months and Years Ahead

    One comment from that paper worth noting:

    We expect that moving from a shutdown economy to a post-pandemic economy-with demand fuelled by pent-up savings, relief funds, and low interest rates-will generate not just somewhat faster actual inflation but higher inflationary expectations too. An increase in inflation expectations from an abnormally low level is a welcome development. But inflation expectations must be carefully monitored to distinguish between the hotter but sustainable scenario versus true overheating.

    The role of inflation post-COVID

    For both the US Federal Reserve and the Reserve Bank of Australia (RBA), increasing inflation is a target. The RBA has clearly indicated that it essentially plans to increase inflation to around 2.5%, and sees 3.0% as an acceptable upper range.

    In the US, while there are concerns being raised about the level of inflation, it's difficult to know how much of that is sound economic analysis and how much is purely political. One factor that observers don't always understand about the economic actions of the current US administration is that its economic stimulus plans are aimed not just at repairing the economic problems of the COVID-19 pandemic. They are also an attempt the heal the lingering wounds of the 2008 global financial crisis (GFC).

    Of course, too high a level of sustained inflation is bad. That is due to some cyclical factors. Once a higher level of inflation gets embedded in an economy, it tends to continue to increase. In a simple form, the price of goods increases, wages increase to match those increases, which lifts production costs, which means the price of goods increases, and so on.

    Yet while too much inflation is bad, some inflation can be very good. The reason for this is that inflation tends to promote growth, as it encourages consumers to make purchases now, rather than later, and because it can provide an additional discount on the interest charged on loans, which encourages larger capital expenditure (CAPEX) from businesses.

    A frequent criticism of the RBA since 2018 has been that it underestimated the deflationary impacts on the Australian economy from 2016 onwards. Many of those occurred in the retail sector. Increasing competition, including from overseas sources via online purchases, more price transparency due to online price comparisons, the entry of Amazon into the Australian market, and further utilisation of less expensive labour in China and throughout south-east Asia, all exerted negative pressure on prices.

    This helped, especially in retail, to push retailers towards a business model focused on cost containment, with low levels of CAPEX investment. One key problem with this is that productivity improvements have been, at best, incremental. According to OECD figures, for the key productivity measure of growth in gross domestic product (GDP) per hour worked at constant prices, Australia ranked outside the top 20 OECD nations in 2019, and in 2020 was ranked 37th. Of course, the latter result is affected by the COVID-19 pandemic, but so were the countries ranked above Australia.

    Inflation, wages, productivity

    Where things get really interesting is in terms of wages and inflation. One of the main reasons the RBA is pursuing a higher rate of inflation is to improve overall growth in wages, which has remained at exceptionally low levels for around a decade.

    In a higher inflation environment, employers are forced to make annual cost of living adjustments to wages. This includes not only past inflation, but also predicted future inflation. This leads to wage variations, and workers will be attracted to higher wages. The market becomes competitive, and as the competition increases, employers begin to base wages on not only cost of living increases, but also a share of their annual earnings.

    That leads, of course, to higher real wage growth, and a better distribution of economic growth throughout the economy. Effectively, in a low inflation economy, only managers in the C-suite share in growth, while in a higher inflation economy this tends to extend to more of the workforce.

    This is what is currently taking place in the US economy. That lift in wages then drives further demand, especially at the retail level.

    Problem 2: Lockdowns

    This is a simple and direct threat: will new COVID-19 variants and/or a return of non-quarantined international travellers create the need for further lockdowns? If so, as Roy Morgan points out, the results could be severe. According to Ms Levine:

    There is every possibility that a new COVID variant could emerge somewhere in the world spread to Australia and challenge our vaccination effectiveness. And according to our always-on predictive engine, if that did happen, the cost to the retail sector from a new round of lockdowns could top $4 billion a month. Over the worst of 2021, the New South Wales retail economy had a $14 million hit each and every day. And it was even worse in Victoria at 55 million every day of lockdown.

    In an article from The Guardian newspaper, Dr Marc Baguelin, from the UK's Imperial College's COVID-19 response team, and also a member of the government's SPI-M modelling group, suggested that an out-of-control situation would be unlikely:

    It is unlikely that such a new virus evades entirely all immunity from past infection or vaccines. Some immunity should remain at least for the most severe outcomes such as death or hospitalisation. We would most likely be able to update the current vaccines to include the emerging strain.
    But doing so would take months and means that we might need to reimpose restrictions if there were a significant public health risk. The amount of restrictions would be a political decision and would need to be proportionate with how much this virus would evade current vaccines.
    New Covid variants 'would set us back a year', experts warn UK government

    So this could be ranked as a moderately severe risk, but one with a low probability of occurring, and with solutions to hand.

    Problem 3: The experience economy

    One of the problems for retailers identified by Roy Morgan is the re-emergence of the "experience economy", with a shift back from purchases of goods to purchase and/or subscription to experiences. During the webinar, Roy Morgan used the following diagram to illustrate its view of how the experience economy functions:

    The core difficulty Roy Morgan identifies is that retailers will be disadvantaged by a shift in spending from purchases of goods to purchases of experiences.

    McKinsey & Company has also done some interesting research into this area, and what happens to spending post-COVID. This research can be accessed online:

    The consumer demand recovery and lasting effects of COVID-19 Report

    While the research does not cover Australia specifically, it does include details from the UK and the US, which have some similar characteristics. One element of the pandemic consequences McKinsey points to is that, unlike other economic crises, this one affected goods and services differently:

    As the diagram illustrates, services were especially hard hit, a consequence of both social distancing requirements and the hard lockdowns of commercial businesses.

    One comment on this is that the return of the experience economy seems more like a problem for 2023 rather than 2022, as it will take most of the coming year to fully come to terms with the COVID-19 pandemic. If retail will be hit by a renewed experience economy, it's not likely to have too much of an effect until the second half of calendar 2022, at the earliest.

    Decline of online retail

    Roy Morgan sees difficulties with timely delivery of goods ordered online as potentially limiting future growth in ecommerce. According to Ms Levine:

    [Delivery delay] is a real threat to digital acceleration continuing at the same rate of growth through 2022. There's no doubt that online and omni channel retailing in particular is here to stay. But if consumers are turning their mind to experiences, and at the same time are frustrated by delays in deliveries, it's a stumbling block for retailers.

    Again, this is a pretty complex area. For example, how do you model the influence of click and collect on online retail and deliveries? What is the role of Amazon, which has pretty much evaded delivery concerns, at least through its Prime delivery subscription services?

    It's helpful to unpack that a little. If retailers have seen online retail purchases grow from 10% in 2019 to 20% of total revenue in 2021, only to contract by, say, 5% in 2022 as delivery concerns continue, what happens to that 5% of revenue absent from online sales? Does it leave the retailer entirely, or will a proportion shift to click and collect and/or direct in-store purchases? Will it simply go to Amazon?

    It's a bit difficult to see a scenario where someone wants to order a $200 set of headphones, sees that delivery will take three weeks, and decides to spend the money on a flight to Queensland or New Zealand instead.

    What does seem likely is that retailers who can sort out and solve delivery issues are likely to see their online sales do better in 2022 than those who do not. This also creates an opportunity for specialist delivery services.

    Price as market stimulus

    While this is presented by Roy Morgan as playing a part in post-pandemic retail recovery, the issue of addressing markets less dependent on lower prices was a concern of the company pre-pandemic. This draws heavily on the work by Dr Honeywill, which relates to his ideas concerning the formation of a market segment he terms the "New Economic Order", or NEO. This segment is motivated by product experience, including design, innovation, and quality of construction. Outside of that segment is what Dr Honeywill identifies as the "traditionalists", who remain motivated mainly by price.

    The best introduction to this segmentation is provided in an animated video on YouTube:


    Essentially, what is being suggested is that high-value consumers can be identified in the marketplace through their attraction to specific forms of consumption. Retailers who continue to market to the traditionalist segment will experience slower growth than those who market to the NEO segment. As Dr Honeywill puts it:

    The real threat is that too many retailers think the 10 million price-based consumers - the traditionals you mentioned - are all there is, that they are the entire economy. So they constantly drive prices down into the commodity space to attract these traditional consumers and ignore the huge upside that comes from premium consumers and the premiumisation strategy.

    Analysis

    The major takeaway that most retailers should get from the Roy Morgan retail update is that the crucial period to focus on will from March 2022 through to the end of the third calendar quarter, in September 2022.

    There are certainly going to be challenges in December 2021, January 2022 and February 2022. However, many of those challenges are going to be the sort that are "good to have": shortage of supply to meet demand, moderate price inflation, logistical problems created by the volume of orders, finding enough staff to handle customer numbers, and so forth.

    One pattern that has repeated throughout the pandemic is that the economy and supply chain are placed under temporary stresses that overwhelm it for a transitory period of time, as there is no systemic solution available. For example, the toilet paper shortage of early 2020 was partially caused by hoarding and "panic" buying, but it was also the result of genuine supply problems.

    The core problem was that demand for domestic toilet paper increased by around 40% as more people were forced to stay home, rather than going to workplaces, shopping or recreational facilities, such as gyms. There was a surplus of business grade toilet paper, but that would have been difficult to repurpose in the home. It would not have made sense to convert many factories to producing consumer toilet paper, because that investment would not be recouped, since eventually demand would revert.

    The same thing is happening with container shipping today. There are only so many container ships, and also only so many containers to go on those ships. A container ship takes close to three years to build, so there is little point in accelerating construction plans in 2020, only to see demand fall again in 2023, just as they came online.

    In the hardware retail industry in late 2021 we're seeing some of the same forces at work. Building demand is soaring in residential detached dwellings - which intersects with both the big box retailer, Bunnings, as well as smaller independent retailers. Fortunately, the building industry is a little saner in this regard than many other industries, and what we will see with that high demand is that it will spread itself out not only through all of 2022, but probably into early 2023 as well.

    The real risk to the hardware retail market will originate in the housing market. We are currently in a puzzling time where ultra-low interest rates, and a changed view of the values of homes, have resulted in a surge in house prices. It is very difficult to see how that will not lead, certainly by 2023, to some rapid falls in house prices, particularly as the certainty of increased interest rates grows closer.

    That's the risk, at least in terms of the trade business. The consumer/DIY end of the business will likely experience some of the same slowdown as more general retail from March 2022 onwards. The risk will be that hardware retailers pivot from DIY to their ongoing strong trade business. That will reduce the resilience of retailers, which could be important if the industry sees a downturn in trade business in 2023.

    retailers

    ABS building work done stats

    ABS reports to the September 2021 quarter

    While the patterns of construction work vary between the states, the overall pattern that emerges is an ongoing response to the pandemic. Renovation construction continues to trend upwards, while construction on multi-unit dwelling continues to decline.

    The Australian Bureau of Statistics (ABS) has released statistics for construction work done through to the September 2021 quarter.

    Chart 1 shows these stats for Australia as a whole:

    The top graph shows the trailing four quarters to the September quarter. The general characteristics this reveals is that while there was a contraction in the four quarters to the September 2020 quarter, this only returned the level of work down to that of 2015, maintaining a level above $70 billion. Also, the recovery from that dip in the four quarters to the September 2021 quarter has not been particularly high.

    Looking at the second, middle graph on the chart, this shows the percentage change based on trailing four quarters to September. Other residential, which is mostly multi-unit dwellings, fell steeply in an over 15% decline in the four quarters to September 2020, continuing the previous decline for the four quarters to September 2019. New house construction also fell, but only to a level close to 6%. Alterations & additions (essentially, renovations), however, actually went up by a modest 2% or so.

    For the four quarters to September 2021, both new houses and alts & adds showed strong growth, with houses reaching 12% growth, and alts & adds over 16% growth. Other residential, however, declined at a lesser rate, but still continued to fall.

    Finally, the bottom graph, shows the quarter on corresponding quarter percentage change for these three construction types. For houses, it's notable that growth was negative beginning in the March 2019 quarter through until the June 2020 quarter. It is only in September 2020 that growth begins, then accelerates though the next three quarters.

    For alts & adds, there is a contraction in the March 2020 quarter, and then consistent growth through to the June 2021 quarter, followed by slowing growth in the September 2021 quarter. For other residential, this goes into negative growth in March 2019, and that continues through to the September 2021 quarter.

    New South Wales

    Chart 2 shows theses stats for New South Wales (NSW).

    The top chart shows that NSW experienced a steep decline for both the trailing four quarters to September 2019 and September 2020. Most of that decline, however, is evidently due to a contraction in the other residential category. The mild recovery evident for the trailing four quarters to the September quarter 2021 is mostly made up of growth in new houses and alts & adds.

    The middle chart, which shows the percentage change for the above numbers, shows that after relatively strong growth through to the four quarters ending in September 2018, other residential entered into a steep decline through to the four quarters ending in September 2021.

    New houses followed other residential down, though not quite so steeply, but then recovered with strong growth through the four quarters to September 2021. Meanwhile, alts & adds followed the other construction types down in the four quarters to September 2019, but then returned to neutrality in 2020, and showed the strongest growth of all construction types in the four quarters to September 2021.

    The bottom graph shows the percentage growth rate on a month to corresponding month basis. For other residential, this entered negative growth territory first in the December 2018 quarter, and reached around 30% negative growth in the September 2019 quarter. The decline slowed, with it almost reaching flat growth in the September 2020 quarter, before falling through the subsequent quarters to the September 2021 quarter, with negative growth of close to 24%.

    Growth for new houses to some extent followed other residential down, but at a delay of one quarter, going negative in the March 2019 quarter, stabilising at a 15% decline for the June 2019, September 2019 and December 2019 quarters, before reaching its sharpest contraction in the March 2020 quarter. It recovered at that point, but only reached positive growth in the December 2020 quarter, to peak at over 25% growth in the June 2021 quarter, before a decline for the September 2021 quarter.

    For alts & adds, there has been overall less negative growth since the March 2019 quarter, recovering to almost flat growth for the December 2019 quarter, then growing strongly from the June 2020 quarter onwards, to reach a peak growth of over 40% for the June 2021 quarter, before retreating to 20% growth for the September 2021 quarter.

    Victoria

    Chart 3 shows theses stats for Victoria (VIC).

    The top chart, in comparison to that of NSW, shows a relatively mild dip in the four quarters to September 2020, but also indicates that there has not been, overall, a recovery in the four quarters to September 2021. The state did not see that great a contraction in other residential activity, while both new houses and alts & adds show some improvement.

    The middle chart, which maps out these changes in percentage growth terms, shows a lower level of overall volatility as compared to NSW. Growth in new house construction activity has been positive from the four quarters to September 2015, and saw only a mild contraction of around 2% in the four quarters to September 2020, recovering to around 8% growth in the four quarters to September 2021.

    Similarly, the work done on alts & adds has fluctuated in a narrow band of growth and contraction to slightly less than 5% in both directions. It's also notable that it did not take off even in the four quarters to September 2020, growing at just under 5%, and increased growth only marginally in the four quarters to September 2021.

    Other residential, however, has shown a higher degree of volatility. Surprisingly, it has remained in positive or neutral territory from the four quarters to September 2012 through to the four quarters to September 2019, but has fluctuated to over 20%. This has been followed by a steep dive during both 2020 and 2021.

    Looking at the third, bottom graph, which charts the month on corresponding month growth patterns, it's clear that COVID-19 has left its mark on these statistics. As the pandemic started in the March 2020 quarter, other residential immediately trends steeply downwards, alts & adds surge to 10% growth. New houses lags this slightly by three quarters, but for September 2020 reaches 8% growth. Then, as lockdowns continue, it falls to close to 3% growth in the June 2021 quarter. Then through to the September 2021 quarter new houses surge again, along with alts & adds.

    Queensland

    Chart 4 shows theses stats for Queensland (QLD).

    The top chart shows a building activity peak that is shifted back to the four quarters ending in the September 2016 quarter, with the bulk of the peak made up of activity in the other residential category. As with NSW, there is a sharp dip in 2020, but this contributes to what is a four year fall in activity, back to the level of 2014. This is made up mostly of a decline in other residential activity, though it is joined by a decline in new houses activity, which starts in 2019. Meanwhile, alts & adds has increased steadily since 2017.

    The middle graph shows the extent of some of these shifts. Its most outstanding feature is the shift in other residential, which shows strong growth from 2014 to 2016, then a series of volatile further declines through to 2020. Perhaps the biggest surprise is its return to reasonable growth in the four quarters to September 2021.

    In fact, there seems to be something of a general inflexion point around the four quarters to September 2017, where all three categories have partially converged. At that point other residential begins its steep decline, new houses goes flat before declining for both 2019 and 2020, while alts & adds takes off for an over 10% growth, which it largely maintains through to 2020.

    The three categories then act in concert once again for the four quarters to September 2021. Alts & adds hits growth of over 25%, new houses shoots up from negative growth of 9% to positive growth of 18%, and even other residential climbs from negative growth of 25% to positive growth of 8%.

    Looking at the bottom graph, which shows a quarter on corresponding quarter growth rate, what is unusual is the high growth rate for work on new houses. This begins to accelerate in the September 2020 quarter, and continues a steep climb through to over 35% for the September 2021 quarter. Even other residential recovers from a negative 25% growth rate to enter positive territory in the September 2020 quarter, then continue to climb up to a 15% growth rate in the September 2021 quarter. Over the same period alts & adds stabilises its growth at between 25% and 30%.

    Analysis

    When it comes to the construction industry and the available stats in the wake of the COVID-19 pandemic, the question that keeps recurring is what kind of changes can we observe? Are we seeing temporary changes that are a direct response to immediate needs in the face of the pandemic, more permanent changes that will alter the structure of demand, or some kind of medium-term change, where homeowners are committing to something like a four or five year plan?

    The two characteristics we can see clearly are an increase in activity for alts & adds, and a shift in the role that other residential construction is set to play. The significance, for example, of the recovery in activity for other residential in QLD is that this indicates the rejection of other residential in both NSW and VIC is highly COVID-19 related.

    But perhaps the most reassuring element of the statistics is that, while the house price market is showing signs of performing in unexpected way for established residences, and while the construction activity charts might be touching the edges of historical conditions, they are still remaining within the bounds of previous performance.

    In fact, what we are likely seeing here on the part of people contracting for construction is something that is really a medium-term plan at work. While economists and others are very concerned that the housing market is heading for an interest rate increase cliff, it's possible that these new homeowners have already factored that into their thinking.

    Their overriding concern, in other words, is not finding the perfect timing to enter the housing market, but rather to take action that will provide against the possibility the COVID-19 pandemic will have long-lasting effects. In that case, the plan would be to buy the house, or pay for the house renovations, and simply endure a period of both higher interest rates and an apparent decline in house value.

    statistics

    Retail update

    Pearcedale Hardware Thrifty Link has closed down

    The township of Pearcedale, located an hour's drive south-east of Melbourne, has lost its local hardware store

    Adrian and Liz Scialpi have run the hardware store in Pearcedale (VIC) for 21 years, building up a loyal customer base that included farmers and boat builders, according to ABC News. On its Facebook page, they posted the following message on November 20:

    Today after 21 years we have had to walk away from our hardware business. It's been an amazing journey only to be ended by corporate greed.
    To the Pearcedale community and surrounding suburbs THANKYOU for all your support. But most of all the friendships we have made and the bonds we have created.
    We wish you all the very best and we will never forget our time at 3912.

    There have been dozens of certificates of appreciation stuck on the wall above the shop's entrance, thanking them for their donations to organisations such as the local school, CFA and pony club. Mr Scialpi told ABC News:

    I used to call on this little shop as a [sales] rep back in the late 90s. When it came up for sale ... I went home, and I said to Liz, 'Do you want to buy a hardware store?', and you know, her jaw hit the ground!
    What we did is we actually fell in love with this place, we fell in love with Pearcedale, we fell in love with the people and lifestyle of Pearcedale, and it's just become our life now.

    The store was their retirement plan. They hoped to rebrand it and work towards selling it, believing they could get a few hundred thousand dollars. But they say things began to look shaky when their lease lapsed in 2019, and the owners wouldn't sign a new agreement with them.

    They were on a month-by-month arrangement, when in May this year their property agent emailed them a new leasing agreement. The landowners were tripling the rent - from $29,687 a year to $88,638 a year. Mr Scialpi said:

    [I was in] disbelief. I couldn't believe what they were asking. So for my little store here, which is 180 square metres, in a country town, they're asking me for nearly $100,000, in rental, [if you include] outgoings as well. So it's a huge jump. It's impossible to survive.

    The ABC reports that a perusal of commercial rents show it's substantially more than what other landlords are charging in nearby towns like Somerville and Hastings, where the population is double that of Pearcedale. A similar-sized shop in Hastings, in a prize spot next to the local Kmart, was just rented for $68,540 a year.

    It's even cheaper to rent a similar-sized shop in one of Melbourne's most desirable suburbs, with one retail spot currently available in Brighton for $55,000 a year. Mr Scialpi said:

    The little shopping strip here services purely just our local residents, so we have no passing traffic at all.
    There's a limited market of 3,000 people that live in town, and the rate of $500 per square metre, which is what they're asking, is almost double the market value.

    The Scialpis admit they were on a good deal previously, and say they were willing to pay more. They sought legal advice and put in a counter proposal to increase the rent by 50%, but it was rejected by the owners.

    Moving isn't an option, said Mr Scialpi. The closest shopping centre in Somerville 10 minutes away already has a hardware store, while the next closest shops in Tooradin don't have a property big enough.

    The Scialpis have closed their doors for the final time, with losses they estimate at more than $300,000. Both of them will need to find other jobs. Mr Scialpi said:

    We're going to have to walk away with nothing. It's just devastating. I mean, we put our heart and soul into this place ... to walk away under these circumstances, it's pretty hard to take.

    Rent increases

    Pearcedale locals didn't bat an eyelid when the owners of United Petroleum - Avi Silver and Eddie Hirsch - bought the shops in 2015, under a company called Jasman Pty Ltd. Both Mr Silver and Mr Hirsch are worth a combined $3.6 billion, according to The Australian newspaper's 2021 rich list.

    But now, they are concerned that transaction may cost them the heart of their town. In addition to the hardware store, two other shops have closed their doors for good, with fears more will follow, after Mr Hirsch and Mr Silver hiked the rent substantially on some tenants.

    The other businesses are still under existing lease agreements, protecting them from dramatic rent changes.

    While Mr Hirsch and Mr Silver own the Pearcedale shops through their company Jasman Pty Ltd, they rent them out through United Petroleum. In a statement to the ABC, a spokesperson for Jasman Pty Ltd said it was seeking new leases in line with the rental market.

    As the rental the tenants enjoyed for [a] number of years was well below market rental rates, the tenants have decided to not take up new leases and leave the shopping centre.
    Jasman has honoured a small number of historical leases with below-market rents for some years. Jasman has every right to negotiate market rentals with its tenants as new leases are negotiated.

    But Alexi Boyd, from the Council of Small Business Organisations Australia, believes the increases are unreasonable. He told the ABC:

    I think it's really disappointing to see a large company like this take advantage of a situation for small businesses where things are really difficult, we're trying to get back up on our feet again, and then they get hit and slugged with this enormous rent increase.
    It doesn't just impact this small business person, it impacts all of their workers, their community. Often these shops are really an integral part of a small business community and part of the community as a whole.

    Several valuers the ABC spoke to, said the owners would struggle to get new tenants in, while it would be tough for those who decided to stay to keep afloat.

    The increases bucked the general trend of rents in and around Melbourne, which were flatlining as retail rental vacancies rose due to the pandemic.

  • Sources: ABC News and Facebook
  • retailers

    Supplier update: Big River Group

    Acquisition of United Building Products

    With this acquisition, Big River Group continues to expand its national network into major population centres around Australia

    In early October, Big River Industries (Big River) announced that it had entered into an agreement to acquire the trading business and assets of United Building Products (United) located in Albion Park (NSW). The acquisition is now complete.

    With annual revenue exceeding $20 million, United complements the company's existing site at Kiama (NSW), which services the South Coast and Southern Highlands areas. United has a strong presence in the Shellharbour and greater Wollongong markets in NSW. In its statement to the ASX, Big River said:

    The purchase consideration of $9 million at completion, comprises $7 million of cash and $2 million in BRI (Big River) shares (to be issued at the 10-day weighted average trading price prior to the completion date). There is the potential for the vendors to receive an additional earn out payment of up to $1.5 million, payable over a two-year period, if certain profit growth targets are achieved. The acquisition is expected to be earnings per share accretive from year one and will be funded out of the Company's available debt facilities.

    Big River CEO Jim Bindon, said in a statement:

    Whilst the founders, Nick and Steve Grozdanov no longer have operational roles in the business, I am pleased they will become meaningful shareholders in BRI and maintain their connection to the business they developed for over 30 years...
    There is a quality team already running United Building Products who will remain and continue to manage the business with Mark Hogan as Branch Manager. I look forward to their contribution right across the Big River business in the future.

    About United Building Products

    United's original building supply business opened at Fairy Meadow (NSW) in 1989 with two staff and $20,000 in stock. It grew to become a major supplier of doors, timber mouldings, locks and bathroom products to both trade and DIY customers.

    In 2004, it opened in its current location in Albion Park (NSW). During its first year of operation, the store won the NSW Hardware Industry Store of the Year award and the Illawarra Business Chamber's 2004 Retail Business of the Year award.

    In 2005, it opened a second outlet in Corrimal (NSW) - that is no longer part of the business. United is a joint venture of Mitre 10 and United Building Products.

    United complements Big River's building products sites, supplying mainly into the residential and commercial construction markets and offering an enhanced service and product range for existing Big River clients.

    About Big River Group

    Big River has been operating for over 110 years, manufacturing and distributing timber and steel formwork products, timber flooring, building products, structural plywood and related timber products. It also distributes a broad range of other building products, including MaxiWall and MaxiFloor, primarily to the commercial, residential and infrastructure construction markets.

    It owns and manages 23 sales and distribution outlets in Sydney, Gold Coast, Brisbane (2), Sunshine Coast, Townsville, Illawarra, Melbourne, Canberra, Geelong, Adelaide, Perth and New Zealand. The company also owns and operates manufacturing facilities in Grafton, Geelong, Perth and Auckland, New Zealand.

    Earlier this year, Big River expanded its plywood and architectural panels offering with the acquisition of Timberwood Panels.

    Timberwood is a manufacturer and distributor of a range of panel products including veneers, veneered and coloured boards, plywood, particleboard and MDF. It has operated in the market for 13 years and has three sites in Victoria and the ACT.

    It also agreed to acquire Revolution Wood Panels in Brendale (QLD) for $8 million in August which is now finalised. Under the terms, $6 million will be paid in cash and $1 million will be paid in BRI common stock. Also, $1 million will be paid in additional earnout payments, payable over two years subject to certain profitability targets being met.

    Revolution distributes a diverse range of plywood and specialised timber panel products and has been established for over 15 years.

    During its full year results presentation, Big River reported revenue of $281 million, up 13% on the previous year. Mr Bindon said of its acquisition strategy:

    Growing scale, obviously, a critical part of our overall strategy. We've already spoken about both Timberwood and Revolution. So we continue to expand our network there. And it is particularly pleasing that all of those businesses are in the highest margin category and the most specialised where there's distinct product differentiation, which is not the case in all market segments we're involved with...

    In response to a question from Sean Kiriwan, vice-president - Australian Equities, Ma Moelis Australia Securities about future acquisitions, Mr Bindon said:

    ...[T]he last couple of acquisitions have been in this panel space, but that's not say that there's not still really good growth opportunity in building products and formwork material. We think there is, and we think that diversity is what's held us in such a good state in the last few years.
    So we want to continue to make sure that we've got strong position in all three of those product categories. And hence, we're looking at acquisitions in all of those categories, Sean, and then also in all geographies, all four of our operating regions. So I think that's an important part of the acquisition strategy.
    ...[W]e're certainly continuing to look at more acquisitions, and we still see ... in terms of industry consolidation, aging business owners, they have a succession plan that absolutely holds true. And it might be only being enhanced with lots of people thinking about their future in this COVID environment, particularly aging business owners. So I think there are great opportunities to continue with that ... I think has worked well for us so far, and certainly, we can extend it much further than what we've already achieved.
  • Sources: Australian Stock Exchange, Illawarra Mercury and Fair Disclosure Wire
  • companies

    HNN Flash #73 podcast: The future of retail from Roy Morgan

    Forecasts for Christmas and first quarter of calendar 2022

    Roy Morgan identified five potential problems for retailers: inflation, future lockdowns, competition with experience economy, delivery speed impacting ecommerce and pursuit of price as market stimulus

    A discussion of Roy Morgan's webinar, "The Future of Retail: Latest Industry Trends" is the focus of this week's podcast.

    We go through the company's retail forecasts and the challenges that could negatively impact their predictions.

    Specifically, we explain some of the limitations of Roy Morgan's analysis when it comes to inflation and its relationship to retail spending.

    In terms of delivery, another challenge that could face retailers as identified by Roy Morgan, we point out a number of delivery options that have been developed for the hardware-home improvement sector including Wing Aviation, Getter and Rendr. All have been subject of previous stories on the HNN website.

    To finish up the discussion, we also highlight Roy Morgan's perspective on retailers possibly losing revenue if they concentrate on price as the main stimulus for purchase decisions.

    You can listen to the podcast on the embedded player:

    %

    Or listen to it on Apple:

    HNN Flash #73 podcast on Apple

    Or go to the Buzzsprout website at:

    HNN Flash #73 podcast on Buzzsprout

    HNN's Flash podcast provides a deeper discussion on one or two of the stories we'll be covering each week on the HNN website.

    news

    Big box update

    Bunnings "hotel" expected to open before Christmas

    A Mercure brand hotel in the Melbourne suburb of Doncaster will open atop a Bunnings store

    Construction works are progressing at the multi-level Bunnings Doncaster site, next to Westfield Doncaster shopping centre, according to a report in the Whitehorse Leader.

    The new warehouse store sits below a high end Mercure Hotel, which is also preparing to welcome guests in December. Bunnings area manager Craig Bleksley said the store would include familiar features such as a main retail area, timber and building materials yard and an outdoor nursery. He told the Whitehorse Leader:

    It represents an investment by Bunnings of more than $90 million and will span just over 11,000sqm, with over 300 carparking spaces.
    We're excited to be creating 180 new jobs in the local community, with recruitment now complete.
    We look forward to opening the doors and welcoming local residents to the new store, offering a wide range of home and lifestyle products, backed by great service from our team.

    At the time of its announcement, Bunnings acting general manager - property, Garry James, said:

    We identified a need for Bunnings in the Doncaster area and this site provided an opportunity to build something in line with Manningham Council's vision for Doncaster Hill.
    We are always looking at opportunities to innovate the design of our stores and we have a number of different formats that cater for the local markets where we operate. There's no cookie cutter approach - we always assess the local need and what can be achieved in a space.

    The Mercure Melbourne Doncaster has 183 contemporary guest rooms along with an elite fitness centre, expansive outdoor terraces and indoor/outdoor swimming pool. The property will also host functions, with One2One Events to be launched on level three of the hotel, with the space offering views over the city skyline and Yarra Ranges.

    Mercure Melbourne Doncaster will also introduce contactless options for room keys, parking, minibar and room service along with environmental initiatives such as the elimination of single use plastic bottles and guest amenities.

  • Source: Whitehorse Leader
  • bigbox

    Supplier update

    Timberline Bathroom Products expansion

    There is speculation that Coates (Hire) may be put up for sale by owner, Seven Group

    Bathroom vanity manufacturer, Timberline Bathroom Products based in Armidale (NSW) has received $1.44 million in state government support to expand its operations. The company was established in 2006.

    Northern Tablelands MP Adam Marshall announced the grant from the government's Regional Job Creation Fund. Mr Marshall said the grant would aid Scott Group Management, owner of Timberline Bathroom Products (and Uniplan Group) to build a new facility and buy the equipment needed to fulfil more national retail supply contracts. He said:

    ...Timberline's reputation for quality is growing at a rapid rate with national contracts. Scott Group will use these funds to build a bigger manufacturing facility with additional offices to accommodate its growth.
    It will relocate machinery and make an initial investment in automation equipment and control systems for a future new manufacturing line, to help it meet increased demand for bathroom vanities.
    The output which will result from this upgrade, through automated machinery and robotic handling systems, is eye watering as production ramps-up from 180 to about 350 bathroom vanity units per day.

    The Scott Group forecasts it will increase its manufacturing capacity by 75% over three years, helping it secure new supply agreements with retailers. Mr Marshall said:

    Timberline Bathroom Products is a real success story and Armidale should look forward to the benefits its success delivers the local economy, both in the form of employment opportunities and investment in the local community.

    Deputy Premier and Minister for Regional NSW Paul Toole said the $130 million Regional Job Creation Fund aimed to create more than 6,500 new direct jobs in regional NSW by providing incentives to expand and keep operations in regional areas.

    Innovation is the backbone of our economy and helping companies like the Scott Group expand its operations stimulates local and regional economies, boosts livelihoods and increases local employment opportunities.
    Setting businesses up for success helps the local community grow and new jobs mean more people earning a wage and spending their pay packets in local stores, cafes, and restaurants and on local goods and services.

    The Regional Job Creation Fund supports eligible businesses with grants to purchase new equipment, expand facilities, acquire technology, create new production lines or establish businesses in regional NSW. Round one of the Regional Job Creation Fund has now closed. A second round will open in early 2022.

    Coates

    The West Australian-based hire company owned by Seven Group has been performing well on the back of the mining and construction boom. Now there are suggestions that Seven may be contemplating whether to capitalise on its success by divesting it, according to Data Room in The Australian.

    Seven bought full control of Coates back in 2017, paying private equity firm The Carlyle Group AUD517 million for the 53% it did not own. The Australian reports:

    While there is no current confirmation it is on the block, what analysts believe is telling is a move by Coates to tap the US private placement market for USD900 million in recent weeks.
    Coates has about AUD1.5 billion worth of loans outstanding to Seven, which offers debt at a cheaper rate than it normally would pay as a standalone business.
    Analysts believe the bond market raising indicates something is afoot with Coates - which has been valued at AUD2.2 billion - with Seven probably creating a more palatable debt structure for a buyer or ahead of a move to vend it into Boral.
    With an AUD8billion market value and about AUD4.5 billion of net debt, Seven is one of the most leveraged industrial companies on the ASX 100. Paying off loans remains a priority...

    In June 2021, Coates Hire relaunched as Coates. The company said the re-brand represents its evolution into a leading end-to-end solutions and specialist services provider. Coates operates across a range of markets including engineering, mining and resources, infrastructure, manufacturing, construction, agriculture, and major events.

    Related: In a research note, Macquarie identified that Seven's Coates subsidiary could have opportunity through Bunnings' rental shops.

    Seven's Coates subsidiary may have a AUD150 million opportunity - HNN Flash #54, July 2021
  • Sources: Adam Marshall MP and The Australian
  • companies

    UK home improvement retailers

    Kingfisher and Homebase have flourished

    While Kingfisher's Q3 results are down on 2020, they are still up on 2019. Homebase has lifted itself out of loses to make a profit in 2019, and was nearly sold for GBP300 million in early 2021.

    While home improvement in Australia and the UK has shown positive growth, which seems set to continue into 2022, the earnings picture in the UK and European Union (EU) is less certain.

    Yet while Kingfisher, the number one UK home improvement retailer through its B&Q and Screwfix stores, has seen revenue decline for 2021 over 2020 numbers, it still remains strongly positive in terms of 2019 sales.

    In other news, Homebase, which Wesfarmers sold for a nominal GBP1.00 in early 2018, has returned to profitability. In April 2021 it seemed for a while that it would even be sold for GBP300 million, but the deal failed to close.

    Kingfisher

    UK big-box home improvement retailer Kingfisher has released its results for the third quarter ended 31 October 2021. The group overall reported revenue of GBP3246 million. That is a decline of 6.3% compared to the previous corresponding period (pcp), which is the third quarter of 2020. Excluding the contribution of the company's Russian operations, which were sold off in September 2020, revenue fell by 4.2%. However, on a two-year, like-for-like basis (2YLFL) with constant currency, this represents an increase of 15%.

    UK & Ireland

    Regionally, sales for UK and Ireland were GBP1544 million, a decline of 2.1% on the pcp, while in 2YLFL this represents an increase of 15.7%. Breaking this down further, home improvement retailer B&Q saw sales fall by 5.3% on the pcp, while Screwfix grew by 3.9%.

    The company reports that the strongest categories were outdoor, building, and kitchen. The company's own exclusive brand of kitchens were a particularly strong performer. B&Q's Tradepoint initiative, focused on the trades, saw sales on the pcp increase by 5%.

    France and international

    For France overall, sales were GBP1111 million, a fall of 9.5% on the pcp, but a gain of 14.1% on a 2YLFL basis. Castorama sales fell by 12.0% on the pcp, while Brico Depot fell by 6.7%.

    For the other international operations of Kingfisher, excluding Russia, sales were GBP591 million, up by 1.2% on the pcp, and up 15.3% on a 2YLFL basis. Poland returned sales of GBP420 million, a lift of 1.4% on the pcp, and up 12.7% on a 2YLFL basis.

    The company is predicting a strong end to the year, with sales in the fourth quarter up by 0.4% on fourth quarter 2020, and up 13.2% on a 2YLFL basis. For the full year, Kingfisher is predicting adjusted pre-tax profit to be near the upper end of its forecast range of GBP910 million to GBP950 million.

    According to Kingfisher CEO Thierry Garnier's prepared remarks:

    We continue to grow our market share, driven by strong execution of our new strategy. We are pushing forward with investments in key areas of the business to drive long-term growth, including further enhancements to our e-commerce proposition and Screwfix's launch in France.
    Since the start of this year we have maintained, and in many cases improved, our product availability, which is amongst the best in our industry. This has supported our market share gains and allowed us to upweight promotional initiatives in the quarter. We have also continued to manage inflation pressures effectively, while retaining highly competitive pricing.

    Homebase

    Homebase, the UK home improvement big box retailer previously owned by Wesfarmers, and planned as an international extension to Bunnings, has continued its recovery.

    For the previous year ending 29 December 2019, the company provided GBP3.2 million in EBITDA profit, up from a loss of GBP114.5 million in 2018. The company has continued to be profitable since then. In April 2021 the company's current owner, Hilco, was reportedly close to selling Homebase to British entrepreneur Hugh Osmond for GBP300 million, though that deal did fall through.

    Homebase was turned around after Wesfarmers sold it in 2018 by reverting to the approach which had made it revenue neutral shortly before Wesfarmers acquired it. That involved a "softer", home furnishings approach to home improvement, and the incorporation of many store-in-store concessions from a range of British retailers.

    retailers

    Ryobi Link disrupts tool storage

    Mobile storage meets wall storage

    Released in the US in mid-November 2021, the Link storage system offers a unique way to store and access tools for the next generation of DIYers, as well as trades.

    The Link system from Ryobi is a new design that combines mobile toolboxes with fixed tool storage. There are two core ideas behind Link. At the heart of Link, and what makes it so unique, is the system used to stack tool storage on a mobile trolley, making it easier to move tools from a ute, truck or van to the actual worksite.

    The second idea, and the one which gives this system its name, is that it "links" fixed storage and mobile storage into a single system. Fixed storage organises the tools, which are then selected to be included into mobile storage, customised for the tasks needed for that day.

    Toolboxes

    The other meaning of "link" is that the system relies on a unique way of attaching toolboxes to each other. It resembles Lego bricks in some ways. Place one toolbox on top of another, push down, and a passive latch joins the two together. To release, simply pull up on a handle, and the teeth securing the joint are retracted.

    This is down to a hexagonal design, with hexagonal depressions on the upper surface, and hexagonal bumps on the lower surface. The slanted sides of the hexagonal pattern easily position the two surfaces so that the latches align. There is no need for a secondary action, such as securing latches.

    The system is built, according to Ryobi, to be very tough. The mobile trolley can support a little over 90kg, riding on 230mm wheels. The trolley handle extends up to a length of 1120mm and can be detached from the trolley to make it easier to store in utes and vans, and is made of heavy-weight steel, rather than the aluminium channel found on some toolbox systems.

    Link tool boxes are certified to IP65. The first digit of that certification - "6" - indicates it is dust-proof to a high standard. The second digit - "5" - indicates it is waterproof against jets of water, which means rain or even being hosed down.

    Wall storage

    The fixed storage part of Link is anchored by wall rails that are 838mm wide - which means users can always find a pair of studs to anchor them to, providing better sturdiness and strength.

    The mobile tool boxes click directly onto these, using the same hexagonal mechanism. There is a range of different hangers that click on as well, making it possible to store everything from brooms and rakes to bicycles.

    Combining these results is a highly versatile system that "links" the mobile and fixed storage (which could be fixed to a garage, workshop wall, a van, or trailer) together, helping to keep everything organised. Instead of having to load and unload toolboxes, the toolboxes transition between fixed and mobile storage.

    There is no indication as to whether Link will come to Australia, which would mean it would go on sale at Bunnings, the sole distributor for Ryobi.

    The strategy

    Over the past year or so, Ryobi has been accelerating its product development, especially in areas such as cordless, battery-powered outdoor power equipment (OPE). This is likely in part a response to environmentally conscious US states such as California imposing curbs on OPE relying on petrol fuelled motors.

    That said, though, there has also been a growing expansion into tools that were somewhat outside of what has been Ryobi's previously self-declared focus on DIYers, as well as the handyman market, and workers in what US experts term "MRO" - maintenance, repair and operations, usually involving plant and buildings, but including areas such as road signs and bus shelters.

    With the release of Ryobi's Link system, the company has clearly broken out of the confines of those categories. Now it is targeting what in the US is called the "Pro" market, basically trades and tradies. That was made clear in an introduction to the Link system by a Ryobi representative:

    A significant part of our Ryobi user base is our Pros. This is our remodeller. This is our MRO. This is our handyman. This is our roofer. This is our siding guy, right? They are out there on the jobsite using Ryobi tools every single day. What's important to these guys is to have one cohesive system, that not only transports their tools to the job site, but they can use for their entire storage needs.

    That quote comes from a video recorded by Clint at Tool Review Zone. His video covers an introduction to Ryobi Lihk provided to him at Ryobi's factory in South Carolina. You can view that presentation below:


    Another good introduction to Link is provided by Ryobi itself, showing the system in detail:


    Whether Ryobi has any place in the toolboxes of "pros" has long been something of a vexed issue. As Pro Tool Reviews states on their website:

    Often when we tackle Ryobi tool reviews we suffer a backlash from Pros. Yet, we see professional tradesmen using RYOBI tools on the job site every day. When we do hands-on field testing, we find that while Ryobi underperforms some of the top brands, they offer an incredible value. Pros appreciate tools like the Ryobi 18V brushless impact driver. It provides plenty of power for most tasks and costs just USD99 for the bare tool. RYOBI also makes some of the handiest and creative tools we've seen on the market - all of which work on the Ryobi ONE+ platform.
    Ryobi review: Pro Tool Reviews

    It's not just the tradies who object to Ryobi being taken "too seriously". In the past, there has sometimes been some gentle pushback from TTI as well. The most likely reason, one imagines, is that they have been concerned about Ryobi "cannibalising" Milwaukee Tool, as well as the other TTI pro brands, Ridgid and AEG.

    Link provides an interesting window into that concern as, of course, it is a similar system in some regards to Milwaukee Packout. It's similar, but significant differences are immediately obvious. Packout is all about transporting tools on a worksite. Link is about storing and selecting tools, allocating them to the task at hand.

    Strategically, where Link aids the Ryobi brand is in taking advantage of some of the brand weaknesses in the lines of Stanley Black & Decker tools. There's a chart from a 2019 investor report (repeated in 2021 materials) by SBD that sets out how the company sees its tools relate to the market:

    As several commentators have noted, there is quite a bit about this chart that doesn't make all that much sense. It's important to note, though, that many of the SBD brands make hand tools as well as power tools, which explains some of its oddities.

    For example, Stanley FatMax is widely regarded as being a better version of Stanley tools, but it's difficult to see how FatMax qualifies as industrial quality tools (though the brand does have, for example, some very good hammers). Similarly, suggesting that the trades don't use DeWalt, but do use Stanley doesn't jibe with international experience, especially in Australia.

    The huge amount of the market, around two-thirds, allocated to the newish Craftsman brand is also quite unexpected. It sweeps all the way from consumer - overlapping with the low-end Black & Decker brand - to touch specialist industrial brands such as MAC.

    The Ryobi mission seems to have become, over the past year in particular, to move the focal point of the brand further to the right, but without sacrificing its reach to the left as a consumer brand. Link is great for that purpose, because its appeal is broad, but also particular. In terms of usage, for example, consumers will make the most use of the wall storage, while for the pros, it will be more about the mobile storage.

    Of course, SBD does offer tool storage. In fact, it seems like just about every tool brand in the company - Black & Decker, Stanley, Stanley FatMax, Craftsman, Porter Cable and DeWalt - has its own storage system. It's quite a jumble, with seemingly little interconnection within brands, and almost none between brands.

    The language of Link

    One of the most interesting aspects of the Link launch was a shift in the language being used to describe how to use Link. The Ryobi staff member said:

    So you can get all your things up off the floor onto the wall in an organised way, to use as an application-based menu based on your daily tasks that you need to execute that particular day. You can take your organiser bins off the wall, take your power tools off the wall, load them up in your toolboxes... So you make it application-based, cater to your user needs, everything you need to do for that particular task that particular day.

    "Application-based" is really a software use/development term, but it is no accident it is cropping up in the Ryobi Link introduction. It's an overt effort by Ryobi to appeal to a segment of the market that might be much more familiar with soft rather than hardware. That's not just a potentially younger generation, it's a younger generation more likely to have a good income and the capability to learn new things. Not to mention, an attraction to systems of organisation.

    Analysis

    The business case for Link is easy to make: more people are doing DIY, there is increasing pressure for more effective use of space in homes as they increase their multitasking use cases (work-from-home, hybrid-schooling, gym/exercise, etc.). Link enables homeowners to establish a flexible, organised place for DIY tools in shared space environments, such as garages and garden sheds.

    However, there is more than just that going on with Link. While there is information which indicates some kind of structural change in DIY spending - both in the US and in Australia - the source of that change is not only a "revaluing" of home spaces. It is also that, as house prices increase, and the construction industry gears up to build more dwellings, prices for renovation and repair have increased. Combine that with less expensive tools and instructional videos on the internet, the result is homeowners taking on more routine and non-complex tasks.

    Which is something to watch, of course. If house prices fall off a cliff in 2023, and the construction industry slows, tradies could find that they've permanently priced themselves out of the market for minor home repairs.

    Similarly, for the tradie/pro market the problem now is how to increase productivity. Link offers a rare - and very rare, in the industry - contribution to this.

    For the moment, though, let's hope that Link makes it way to Australia. There is certainly a market for it here, but it would likely see a sharp adjustment made at competing brands which have not innovated much over the past two decades.

    products

    RBA reduces debit fees

    Central bank looks after smaller retailers

    In late October 2021 the RBA released details of its review of debit payments systems. In particular, it sought to reduce the fee burden on smaller businesses, and has mooted allowing merchants to apply a surcharge for buy now, pay later services.

    The Reserve Bank of Australia (RBA) has completed a review of retail payments regulation. The main focus of this review has been on least-cost routing (LCR) of debit card transactions. The review included examining costs, especially as these apply to smaller merchants.

    In addition, the RBA has also looked at providing merchants with the option to add a surcharge to buy now, pay later (BNPL) transactions (something currently largely excluded in agreements with BNPL suppliers), and provided guidance around competition and regulation concerns about "mobile wallet" payment systems, currently offered by providers including Apple, Alphabet and Samsung.

    Key points of interest

  • The RBA supports full access by merchants to LCR wherever possible. This means it will continue to place pressure on providers to supply dual-network debit cards (DNDCs) in preference over single-network debit cards (SNDCs).
  • In particular, the RBA "expects" all card issuers processing more than $4 billion in debt transactions a year to issue mainly DNDCs. This is an expansion from previous guidance, which addressed only the largest four banks in Australia. The new guidance would include eight issuers of debit cards.
  • LCR is expected from all payment service providers for in-person transactions.
  • LCR is expected to be implemented for online transactions by the end of 2022.
  • The RBA is set to reduce the cap on set rate interchange fees for debit transactions from the present $0.15 to $0.10.
  • The RBA is reviewing whether merchants offering BNPL payment alternatives can pass on all or part of the amount they are charged for these services, which can be as high as 4% of the total transaction.
  • Stakeholder concerns

    The RBA outlined the concerns expressed to them by retail merchant stakeholders which helped to shape the review in Box B: Implications of the Review:

    Central to [the stakeholders'] concerns was the low take-up of LCR by merchants, arguing that most merchants were not benefiting from the considerable savings that could be made through LCR. This was occurring at a time when changing payment behaviour - such as the ongoing shift towards contactless, mobile and online payments (and card payments more generally), as well as the rising popularity of BNPL products - was putting upward pressure on smaller merchants' payment costs. Merchant representatives also argued for the removal of the no-surcharge rules that are imposed by most BNPL providers, consistent with the approach that has already been taken by the Bank in relation to card payments.

    Managing LCR

    While most retailers are familiar with LCR, it's worth going over the details briefly.

    LCR applies to the way in which payments made by debit cards are managed. Most consumers are familiar with the "old" way of paying via a debit card: the card was inserted into the payment terminal, the personal identification number (PIN) typed in, and then a selection would be made between a "CHQ/SAV" option and a "CR" option. If the first was chosen, the transaction would be routed via the eftpos network, while the CR option routed it through the credit payment systems run by VISA Debit or Debit MasterCard.

    The consequences for consumers would be similar, with the amount withdrawn directly from their bank accounts. The merchant experience would be quite different. As the RBA puts it:

    For many merchants, payments via the eftpos network can be significantly less expensive than payments via the Debit Mastercard or Visa Debit networks.

    Where this gets more complex is when contactless payments are made. As the RBA explains this:

    When a customer makes a contactless ('tap-and-go') payment with their dual-network debit card, the merchant may choose to send the transaction via the debit network that costs them the least to accept. This is least-cost routing (also known as merchant routing). If the merchant chooses not to route, the transaction will be sent via the default network which is programmed on the card, typically the Debit Mastercard or Visa Debit network.
    If a merchant uses least-cost routing, it should not affect which deposit account the funds are paid from, and the three networks offer similar protections to the cardholder from fraud and disputed transactions. A customer can always select a particular debit network by inserting their card and selecting a network rather than tapping their card. And least-cost routing only applies to dual-network debit card transactions; it will not affect customers using credit cards.

    Modern complexities

    While the RBA has enjoyed some success at encouraging LCR, there are new challenges emerging. One of these is the mobile wallet system available on smartphones. As the RBA puts it:

    The Bank has observed a number of emerging challenges to the viability of LCR over the longer term. One challenge is that technological changes have driven a significant shift away from the use of physical (plastic) cards at the point-of-sale to the use of new 'form factors', such as mobile wallets, which is increasing the pool of transactions that cannot be routed.

    This shouldn't be confused with another issue regarding mobile wallets, where Apple restricts access to the near field communication (NFC) technology needed to implement a mobile wallet, thus making itself the only possible provider. That's an enquiry being pursued by the ACCC (Australian Competition and Consumer Commission).

    What the RBA is concerned about is that, effectively, most mobile wallets are like other contactless payment systems, but don't give the merchant the option of LCR. That is because the routing depends on arrangements established by the provider of the mobile wallet, and these favour the large international providers.

    While there have been some efforts to overcome these difficulties, they remain technically complex. What enhances the protection mobile wallets offer against fraud is that they never transmit or reveal any of the details of the consumer's account. Instead they generate a single, unique token (a cryptographic entity) that identifies the transaction itself.

    To introduce LCR, it would be necessary to either decrypt that token, so the payment could be re-routed, or for two tokens, one for each payment system, to be produced. The first would undo much of the extra security layer, and the second introduces considerable complexity.

    In responding directly to this issue, the RBA stated:

    Accordingly, while the benefits of enabling LCR in the mobile-wallet context could be substantial, the Board's view is that these would likely be outweighed by the significant implementation costs, as well as other legal and practical challenges. The Board is also mindful that mobile payment methods could change significantly in coming years (through, for example, the use of quick response (QR) codes).

    The use of quick response (QR) codes has grown in popularity in China (though its initial implementation was in Japan). Both Alipay and WeChat rely on this system of mobile payments. PayPal added this capability in 2020 to its mobile app. Since the start of the COVID-19 pandemic, QR codes have offered an option that requires no contact at all, which has further advanced its popularity.

    It is, however, somewhat more time-consuming and complex than the simpler wallet systems. While it might be attractive in nations where contactless card payment are not popular, its ability to penetrate the highly contactless Australian market would be limited.

    RBA actions

    As with many aspects of payment systems, the RBA seems to prefer to set expectations rather than make explicit rules apply. Thus its overall approach is to state:

    The Board's preferred policy to promote LCR is to state an explicit expectation that all acquirers and payment facilitators will both offer LCR functionality for device-present transactions and promote the functionality to their merchant customers.

    Online transactions and LCR

    As with many issues regarding technology, the path the RBA is taking with LCR for online (formally, "device not present" transactions) is a little odd and confusing. Essentially, the RBA is mandating that LCR should be available universally:

    First, all acquirers, payment facilitators and gateways will be expected to offer and promote LCR functionality to merchants in the online environment by the end of 2022.

    From that point there are two pathways a merchant can take. The merchant can allow the customer to choose which debit network will be used to process their payment, or the merchant can offer no choice.

    In the first case, the merchant has to ensure that choice is not overridden at any point. As the RBA states:

    This would apply, for example, where the checkout page provided the explicit choice of debit network or where the customer used a mobile wallet with a preselected debit network.

    In the second case, the RBA's principles state that:

    If a customer has not made an explicit choice of network, and the transaction may be routed by the merchant or another party in the transaction process away from the 'front-of-card' network, there should be reasonable notification that routing could occur. In the case of new recurring transactions, it would be appropriate to notify customers only at the time of setting up the arrangement. In the case of existing recurring transactions, merchants should notify customers that their transactions may now be routed. The Bank is not prescribing exactly how such notifications should occur.

    The use of "recurring" is a little confusing here, but it likely refers to whether this is an account setting - for example, an Amazon login, or paying a telephone bill - or a one-off purchase. This is also one of those cases where the RBA is waiting to see what the market comes up with, which it will then comment and criticise.

    Where this all starts to get a little difficult is with the examples provided by the RBA as to how this might get implemented.

    Anyone with experience in online commerce knows that the payment process is a very delicate one - many purchases are abandoned at this point. The real, underlying problem is simply that, because the choice of payment network has little if any effect on the customer, but does have an effect on the merchant, it's hard to see how leaving the choice up to the customer actually achieves anything at all.

    For example, if the merchant does choose the payment network for the transaction, then the RBA recommends a message is shown to the customer stating that: "If using a debit card with two networks, your payment may be processed through either network". It would be surprising if as much as 10% of customers actually know what that statement means, and the general advice that will emerge will be "simply ignore it" - which begs the question of why it should be implemented in the first place.

    It's probably going to be worse if the customer is asked to choose a network. Not knowing what that means, they would be forced to make a guess, or spend an hour researching exactly what is going on.

    One option that could emerge, especially where routing preferences are part of customer account settings, is to offer some incentive for customers who choose the most cost-efficient option. That might be, for example, providing a small discount on shipping costs, or early access to discount sales.

    In general, though, this aspect of LRC seems so poorly thought out that it will likely be revised before the end of 2022.

    Interchange fees

    While the RBA expressed itself satisfied with the overall structure around interchange fees, it did consider there was one class of transaction where problems emerged. This related to relatively low value transactions that were charged at the set fee rate of $0.15. As the review points out, this would mean that a transaction worth $15.00 would be charged an effective interchange fee rate of 1%.

    Equally, however, the RBA noted that adopting an "ad-valorem" - value based - approach would not work, as the interchange fee should reflect the underlying costs, and most of those costs for debit cards are fixed on a per transaction basis. The RBA set out an alternative:

    Instead, the Board favoured a reduction in the cap on debit card interchange fees that are set in cents-based terms, which will reduce the possibility of very high effective interchange rates on low-value transactions, without significantly changing the overall interchange framework.

    In practice, this means:

    The Board favoured a modified version of the proposal for lower caps presented in the Consultation Paper, whereby the 15-cent cap on debit interchange fees set in cents-based terms would be reduced to 10 cents for transactions on both SNDCs and DNDCs.

    Surcharging

    It has been previously established by the RBA that merchants can charge an additional fee on transactions where processing costs are high. Just such a scheme has been implemented recently by Amazon in Australia (and previously in Singapore) where transactions using Visa cards are charged an extra 1% fee.

    However, BNPL transactions have escaped that requirement, even though the RBA sees this as a relatively helpful tool:

    The Board's long-standing view - which has been supported by developments in merchant service fees over the past two decades - is that the right of merchants to apply a payment surcharge plays an important role in promoting competition in the payments system and keeps downward pressure on payment costs for businesses.

    One reason why a surcharge for BNPL transactions might make sense is the high cost.

    Data collected by the Bank from 9 BNPL providers indicate that the average BNPL merchant fee was a little over 4 per cent in the June quarter 2021, which is significantly higher than average merchant fees on card transactions. Some stakeholders have also emphasised that BNPL merchant fees can be much higher for individual merchants, particularly smaller businesses, and that there is considerable variation across BNPL providers. While it is possible that competition from newer providers could result in downward pressure on BNPL merchant fees, it was also observed that competition may take some time to have a meaningful impact on BNPL merchant fees.

    Weighed against this, the RBA states, is that payment systems are based on networks, which means there are substantial barriers to market access. However, the RBA eventually does come down on the side of removing the barriers to charging a surcharge on BNPL.

    The Board has formed the view that the costs of BNPL no-surcharge rules - in terms of efficiency and competition in the payments system - outweigh any potential benefits in terms of supporting the entry of new players into the market. BNPL has continued to grow in popularity and is now used by a significant number of Australian consumers, particularly for online purchases. Accordingly, it is now likely to be difficult for many businesses to decline to accept BNPL services, even if they wanted to, and the high cost of these services is pushing up their payment costs.

    What this means in practice is that:

    Accordingly, consistent with the Bank's current approach to surcharging card payments, the Board's preferred approach is that merchants should, if they choose, be able to recover an amount up to the total cost of accepting payments, including those from BNPL providers. As noted, businesses may choose not to surcharge if they perceive that they benefit from accepting BNPL payments.

    However, the RBA does face some challenges in regulating BNPL systems:

    While BNPL arrangements facilitate payments between consumers and merchants (just as credit and debit cards do), there is some uncertainty as to whether they meet the legal definition of a 'payment system' or whether providers of these arrangements are 'participants' in payment systems under the PSRA [Payment Systems (Regulation) Act].

    Analysis

    It is likely that within three years the financial industry will look back on this recent review by the RBA with something of a sense of nostalgia. The reality is that current payment systems are simply not keeping up with the rate of technological change that is needed.

    An analogy is the current telecom system. The technology of fraud - especially spoofing phone numbers - has outgrown the ability of telecoms to police this, resulting in an ever-expanding pool of fraudulent behaviour, which is gradually making voice communication more and more irrelevant.

    One rapidly expanding possibility is the move to what has become known as "OpenBanking". This is where banks partner with third-party providers, who use a secure application programming interface (API) to render services to clients.

    Of even more interest is the possibility built into cryptocurrencies such as Ethereum that enables what are termed "smart contracts". These are essentially a system of very low-cost escrow agreements, controlled by "contracts" made out of code.

    A good example would be ordering goods online that need to be delivered to your home. Typically, when these goods are substantially delayed, or even not delivered, it can be difficult to get the merchant very involved in the problem - after all, they've already been paid their money.

    Using smart contracts through Ethereum, the actual payment to the merchant would be triggered only when the recipient digitally accepts delivery. The delivery company would be incentivised to make that happen, because they would have a similar contract with the merchant. No delivery, and no one gets paid.

    That has consequences for quality of service delivery, but it would also effect pre-order cash flow. Extended to its furtherest extent, goods could be offered for sale by a retailer, and the payment for their initial supply could be made immediately on their actual sale - a way to supercharge consignment selling.

    The question that we end with, then, is whether what the RBA does today is establishing the future of payments processing, or really more administering a transitory phase before more technology upends the existing links to the banking system.

    retailers

    Home Depot, Lowe's show growth

    Third quarter shows expansion beyond pandemic

    Both The Home Depot and Lowe's Companies showed growth as the US economy moves into autumn. There is some optimism that this represents positive structural change in both DIY and build/trade markets.

    The two largest home improvement retailers in the US, The Home Depot and Lowe's Companies, have released their results for the third quarter of 2021. Both showed unexpectedly strong growth, and both support - to some extent - the idea that demand for DIY and renovations in general might have grown in ways initially stimulated by the COVID-19 pandemic, but which have now become more structural than episodic.

    The Home Depot

    For the three months ended 1 November 2021, sales at Home Depot were USD36.82 billion, up 9.8% on the previous corresponding period (pcp), which was the three months to 31 October 2020. Operating income - essentially earnings before interest and taxation (EBIT) - was USD5.80 billion, up a substantial 19.4% on the pcp. Overall net earnings were USD4.13 billion, an increase of 20.3%.

    Customer transaction numbers actually fell, from 453 million to 428 million, but the average "ticket" (transaction value) was up by 12.9% to USD82.38. Overall sales per retail square foot were USD587.28 (USD54.56 per square metre), an increase of 6.2%.

    Comparing the year-to-date numbers, over the first nine months of 2021 to the first nine months of 2020, sales grew by 15.6%, operating income by 28.3%, and net earnings by 30.7%.

    The Home Depot results for Q3

    The company's chief operating officer, Ted Decker, made the point in remarks to investors that the comparisons to pre-pandemic results showed especially strong gains:

    On a two-year basis, each of our departments posted healthy double digit positive comps. Our comp average ticket increased 12.7% and comp transactions decreased 5.8%. Growth in our comp average ticket was driven in part by inflation across several product categories. Our commodity categories positively impacted our average ticket growth by approximately 70 basis points in the third quarter driven by inflation in copper and building materials, which was partially offset by deflation in lumber.

    Mr Decker also pointed to space optimisation as a key area for future growth:

    While we navigate these challenging environment, we continue to invest in our business to enhance the customer shopping experience while also driving productivity and efficiency. We believe we have a significant opportunity to further optimize space productivity in our stores by balancing the art and science of retail. This is a continuous process that we believe leads to better, more productive assortments and space allocations, which ultimately drives value for our customers.

    Questions

    Simeon Gutman from Morgan Stanley started off the analyst Q&A session with the burning issue for home improvement and hardware retailers:

    My first question is actually something I've asked last quarter and it's around demand reversion and whether the industry goes through some digestion phase or it continues to compound. And just to add, this quarter, it looks like there was very little reversion and demand seems to be holding even though we're probably getting out of stimulus. So curious if you have any different thoughts about the demand progression.

    Home Depot CEO Craig Menear responded in part:

    I wish we actually knew the exact answer to that. Clearly, we don't. And so one of the things that we've stayed focused on as a result then is how do we make sure that we're as flexible and agile as possible and deal with whatever comes our way. That has worked well for us so far.
    ...
    Demand continues to remain strong. Customers continue to tell us that they have projects on their list. Pros tell us that their backlogs are significant. So we're going to stay focused on filling that demand.

    Home Depot's chief financial officer, Richard McPhail added a comment as well:

    Just to add something, obviously, we saw acceleration in October. What's interesting to note is that we saw improvement in both ticket and transactions sequentially from September to October. So we think that's a sign that the customer is engaged and demand is healthy.

    Later in the session, Karen Short from Barclays asked a further question on consumer demand:

    So one bigger picture question is just, I think I've definitely heard from investor pushback that this elevated demand that we've seen is basically just going to be reduced back to the normal TAM [total addressable market] once we get into 2022. And I'm wondering what your perspective is on that because that doesn't seem likely.
    It just seems to me that the actual TAM is significantly higher on a much more permanently embedded basis.

    Mr Menear responded by largely agreeing with her:

    Karen, I think most people and if you looked at what economist were saying as the year started, everybody believed during 2021 that we'd see a significant shift away from goods back to services as the economic environment opened up as we got our arms around the pandemic. Clearly, we have not seen that. I say that from the standpoint that yes, you've seen things like travel and restaurants open up, but the customers continue to spend in the home improvement space. And to date, we have not seen that dramatic shift back that everybody predicted.

    Asked about cost pressures driven by inflation and how that affects growth, Mr Decker pointed to innovation as providing a balance to this:

    So think of things like appliances, the technological features and benefits that have been introduced into appliances, grills and pellet grill smokers, our outdoor power equipment and power tools with our battery platforms. We just launched a new exclusive paint from Behr and DYNASTY. This is the best paint that Home Depot has ever introduced. It's over $50 a gallon on shelf.
    It's performing incredibly well as customers trade up to the innovation, etc. So yes, there's cost pressures that the merchants have offset, but equally doing a terrific job finding new and innovative product that our customers are engaging in.

    Mr Decker also pointed to the growth potential that is being achieved with the pro customer through the use of Home Depot's specialist pro smartphone app:

    The Pro traffic on the app is growing. Basket sizes and tickets and engagement is growing. And our teams are doing an excellent job in stitching what we call households together. So our understanding and knowledge of all our customers, but particularly our Pro customers because they're engaging with us at a much higher frequency than the average consumer, we're able to stitch all that behaviour together in a much more robust understanding of that customer and able to make direct contact with them through our digital marketing channels and our outreach with our field sales teams, as well as our Pro associates in the store.

    Lowe's Companies

    Lowe's reported subdued growth in sales, but strong growth in profitability. Sales for the third quarter of 2021 were USD22.92 billion, up by 2.7% on the pcp. Operating income was USD2.79 billion, an increase of 23.2%, while net earnings grew substantially, boosted 174% to USD1.90 billion.

    In terms of the year-to-date numbers for the first nine months of 2021, sales stood at USD74.91 billion, up 8.1% on the pcp. Operating income was USD10.24 billion, up by 26.1%, while net earnings rose by 49.0% to hit USD7.24 billion.

    Lowe's results for Q3

    Analysts Q&A

    The key question was asked this time by Michael Lasser, an analyst with UBS:

    The traffic has been declining as the DIY - smaller DIY projects have been under pressure as we return to normalcy. Do you think that this is a good barometer, a good proxy for how traffic is going to unfold over the next few quarters? Or could you be in a prolonged period where traffic is going to be down for quite some time as we have this road back to whatever the new normal is?

    The CEO for Lowe's, Marvin Ellison, responded:

    2020 was one of the most unique periods, not only in retail but in the history of our country and our globe. And we saw a significant number of low-dollar transactions for cleaning supplies, for PPE and for other around-the-house-related projects. So when we look at traffic trends for DIY and for Pro, Dave cited the numbers on a two-year basis. The reality is the only way we can really get a true understanding of the trends of our business is to look at everything on a two-year basis because last year was such a unique anomaly when it comes to revenue and traffic and, quite candidly, as it relates to operating expenses.
    At a high level, we feel great about our performance. As a company, we feel great about the macro indicators that support home improvement. And as Joe mentioned in his prepared comments, our Pulse survey with our Pro customers give us enormous confidence that they're going to continue to see growth in their business based on what they're seeing in their pipeline. And as we look at initiatives like our Total Home strategy and our Lowe's Livable Home strategy, we think that we have great initiatives to support our DIY customers to create ongoing demand.

    Brian Nagel an analyst for Oppenheimer & Co. asked about how the company was improving its offering for the pro customer:

    Clearly, a lot of emphasis from the management team over the past several quarters to really improve the Pro offering. And you've talked about it in prepared comments, but the question I have is as you look at it now, is the infrastructure basically built? Or are there still tweaks you have to make in order to sort of, say, make your offering even more compelling to the professional customers?

    Mr Ellison responded:

    I would say the short answer is that the foundation of the infrastructure is built. If you think about it, we started with what we call retail fundamentals in Pro. And Joe and his team started with basic things like staffing at the desk, loading assistance, something as simple as having the ability for the Pro to actually check out at the Pro desk.
    We had no point-of-sale terminals at the Pro desk where Pro even check out. And so those things were just problematic. Then Bill, and in partnership with supply chain - and Joe has tried to work on things like job lot quantities. And then Bill and his team have been working tirelessly on improving the number of national brands.
    Over the past 10 years prior to coming here, Lowe's had diluted most of their national brands out of the assortment, supplementing them with proprietary brands. And we know that Pros are more attracted to national brands. And so Bill and his team - Bill gave the list that we're adding, and we're continuing to build on that. Now we're building our loyalty platform.
    And now we're building our CRM platform. And now we're going to be building fulfilment platform. So the foundation is in place. We just have to earn the Pros' trust and respect.
    Because for so many years, they would show up, service was terrible, were out of stock. And we couldn't allow them to get in and out quickly or to grow their business. Now that we have the foundational elements in place, it's all about consistent execution and reaching out and engaging the customers. And I give Joe, Bill and our Pro teams a lot of credit for getting us where we are thus far.

    Analysis

    The ongoing growth for the two biggest home improvement retailers in North America is heartening. At the same time, however, this comes tinged with some concerns.

    It is always somewhat risky to draw conclusions about the Australian market based on what is happening in the North American markets. That said, there are some strong similarities between US and Australian home improvement activity as we move to a post-pandemic status. In both cases, there has been considerable concern that the TAM would decline to below 2019 levels, due to homeowners "pulling forward" tasks while in lockdown. Instead, what the US market seems to be showing, is ongoing growth post-pandemic, in both the DIY and trade/builder markets.

    However, it is necessary to highlight that while these markets may be similar for the moment, the overall economies in which they operate are quite different, despite surface similarities. In both nations, the housing market has taken off in part because there has been a revaluation of the worth of dwellings. Yet in the US this is also being driven by both growth in productivity across many sectors, as well as massive government spending in support of infrastructure. In Australia, productivity has mostly gone backwards over the past 18 months, and government spending is set to be subdued, at least until 2023.

    There is a constant confusion in Australia, where the housing and construction markets keep being construed as productive sectors that generate national wealth. They certainly contribute something, but largely they are economically distributive rather than creative. Construction cannot drive success in an economy, but it can support success when it is driven by other sectors.

    In a brief speech to the Committee for the Economic Development of Australia on 18 November 2021, Reserve Bank of Australia assistant governor (economic) Luci Ellis made an effort to diagnose what seems to be lagging in the Australian economy (that is HNN's description; no doubt Dr Ellis would have a description at variance with that). Entitled "Innovation and Dynamism in the Post-pandemic World", she posited that this notion of "dynamism" might be used to describe the difficulty Australia is currently facing.

    Innovation and Dynamism in the Post-pandemic World, Luci Ellis

    In short form (to provide a parallel interpretation of this to that of Dr Ellis) the lack of dynamism mostly manifests itself in businesses that seek to increase profits by decreasing expenditures. They may invest in innovation, but this tends to be a very mild form of successive improvements, rather than the development of anything truly new.

    In short, real innovation and real dynamism can only derive from business activities directed not at attempting to serve existing markets in an improved manner, but rather at creating and serving entirely new markets.

    As Dr Ellis points out, finding a single source for this behaviour is not possible. While she does a good job of canvassing a number of potential causes (though HNN entirely disagrees with her stand on new technologies, such as artificial intelligence, being "too difficult" - it's a confusion between the world of software development and software usage), the one she omits is the role government has been unable to play. Australia has struggled for the past 20 years with the tensions between cultural imperatives and economic necessities, and the last five years have seen this reach a certain peak of ineffectiveness.

    The real question then, as Australia emerges from the worst of the pandemic, is when those necessities will exert more pressure than the imperatives. Until that point is reached, the nation will continue to see a low level of dynamism, simply because it will not be going in the best direction.

    bigbox

    HNN Flash #72 podcast: Rybobi Link storage system and why it matters

    What DIY might mean for younger consumers

    Gen Z - those aged roughly 18 to 24 - and Gen Y Millennials are more about fix, recycle, repair and results when it comes to DIY. Can hardware retailers adapt to their needs that are different to the traditional needs of Gen-X and boomers?

    In this week's podcast, Scott explains why the Ryobi Link storage system should be included in the latest HNN Flash e-newsletter.

    This led to a discussion a new type of DIY customers that was sparked by a recent survey from human resources software company ELMO shows nearly three in four, or 71%, of Generation Z workers would refuse to work for a company they felt was not doing enough to deal with climate change. Sustainability is far more important to consumers aged between 18 to 24 and their approach to DIY is quite different.

    Other companies mentioned include BlueScope Steel, the Cordell Construction Cost Index from CoreLogic, Bunnings and Elders' Australian Independent Rural Retailers group.

    You can listen to the podcast on the embedded player:

    %

    Or go to the Buzzsprout website at:

    www.buzzsprout.com/1872420/9574851

    HNN's Flash podcast provides a quick overview of the stories we'll be covering each week on the HNN website.

    news

    Dramatic rise in home building and renovation costs

    Cordell Construction Cost Index (CCCI)

    The CCCI shows costs have increased by 3.8% around Australia in the three months to September - more than four times the consumer price index of 0.8% during the same period

    The huge demand for home renovations and new builds as a result of lower interest rates and the federal government's HomeBuilder program - along with major shortages in materials and labour - is leading to the steepest jump in construction costs in more than 16 years.

    The latest CCCI figures show annual construction costs have risen 7.1%, the highest growth since March 2005. CCCI is CoreLogic's quarterly measure of the change in residential construction costs and as such does not provide the actual costs.

    Construction costs rose 3.8% in NSW during the quarter, more than double the previous three months. Over the year, they rose by 6.6 per cent - the highest annual growth on record for the state.

    Western Australia posted a 4.3% rise in construction costs for the quarter, up on its June quarterly growth rate of 1.4% and the fastest pace of growth in more than two decades.

    Queensland recorded a 3.8% quarterly rise, Victoria was up by 3.5% and SA jumped by 4.4 per cent - the highest quarterly increase across the five largest states.

    Tim Lawless, research director at CoreLogic, said the surge in housing approvals had progressed to construction, causing widespread demand for materials and trades. And that was putting even more pressure on the building industry, which was dealing with a severe shortage of timber and other construction materials. In a report in The Australian, he said:

    The quarterly rate of growth in construction costs is happening everywhere and is not restricted to one city or state, it's a national trend.
    There was a much bigger increase in our index when the GST was introduced [in 2000]. However, outside of that structural adjustment this is by far the biggest quarterly change on record. This would be the largest market-driven increase we've seen.

    Mr Lawless said Australia was in the midst of an extended period of heightened residential construction activity, and that was likely to flow through to higher costs for the consumer.

    This doesn't look like a short-term spike - the surge in construction costs is due to the amount of activity that's been approved at a time when we can't import more skilled labour and are facing significant supply chain disruptions.

    Mr Lawless said construction costs could rise further in the years ahead.

    There's already evidence that the cost of new housing and residential construction is placing upward pressure on Australia's inflation rates and these figures will only add to that pressure.
    This construction cost inflation could continue for another 12 to 18 months. It's unlikely the industry can absorb a cost increase this significant into their margins and higher construction costs will ultimately be passed on to the consumer, placing further upwards pressure on the price of a new dwelling or renovation.

    The Australian Bureau of Statistics (ABS) said increased input costs lifted the cost of home construction 8% in the year to September, but different projects have very different outcomes. According to its latest producer price index, timber prices rose 12.2% in the year to September while the price of steel products climbed 23.7% and other materials, such as carpets, lifted 3.9%.

    Housing Industry Association chief economist Tim Reardon said the sector was experiencing "the most acute labour shortage on record", which had pushed labour costs up 5.2% in the year to September.

    Mr Reardon also said demand for new homes was likely to outstrip the supply of labour and materials well into next year, leading to even higher costs.

    I don't think that we've seen the end of this price escalation cycle - it's not just a domestic issue, it's a global issue.

    Bob Richardson, chairman of the Australian Construction Industry Forum, said the most significant challenges were the shortages of materials and skilled trades, as well as broader supply chain disruptions. He told The Australian:

    With international borders reopening, immigration resuming and restrictions on movement interstate lifting, this will improve the constraints on supply, especially in the states where demand growth is strongest.

    In its most recent Container Stevedoring Monitoring Report, the Australian Competition and Consumer Commission noted that COVID-19 had "derailed" the global container freight supply chain, with a surge in demand for containerised cargo and extreme congestion causing major disruptions and delays. The resulting shortages of timber, steel and other metal products have delayed local projects and increased the cost of building materials.

    The rising costs are expected to hit new-home building in 2022. Mr Reardon said:

    The increase in the cost of materials has not flowed through to an increase in costs of a new home as yet, but that will occur over the course of the next year. If builders incur those fixed costs within contracts, as new contracts are written they will include the new materials and labour costs ... those costs will be transferred through to consumers.
  • Sources: The Australian and Australian Financial Review
  • reports

    Supplier update

    BlueScope Steel building hub in South Australia

    The company has also acquired a US-based scrap steel recycler and has appointed a chief executive of climate change

    A new $30 million manufacturing and logistics facility for BlueScope Steel is being constructed at the Adelaide Airport Business District, reports the Adelaide Advertiser. The site includes 17,000sqm of warehouse and office space on a 50,000sqm site. It will become the central hub for the BlueScope Building Components division in South Australia, which includes the Lysaght and Fielders brands.

    Roofing, cladding and flooring products, as well as patios, sheds and other steel products will be manufactured at the site. It will replace BlueScope's existing factories at other South Australian locations in Keswick Terminal and Gillman. The company has signed a 12-year lease and will relocate about 200 staff to the new facility when it's completed at the end of next year. BlueScope Building Components state manager Brad Bairstow told the Adelaide Advertiser:

    We believe the central location gives us a competitive edge because most of our competitors are located out in the northern corridor. The Adelaide Airport precinct suited us really well, and we were able to maintain that central location with really good access to transport routes and a good size site. It's 30% bigger than our current sites combined.
    A lot of businesses have spent time consolidating their manufacturing, and servicing other states out of hub states like Victoria and NSW, but this is a show of our commitment to SA. We're committed to the state, and we're committed to manufacturing in Australia.

    Mr Bairstow said the company would also invest about $20 million in state-of-the-art manufacturing technology and equipment.

    It's about doing things differently - safer, more accurate, more efficient - to be able to service the market better and to keep our people safe.

    Located on James Melrose Road, south of the airport terminal, the manufacturing centre will be built by Sagle Constructions, while Leyton Funds will retain long-term ownership of the property.

    BlueScope's investment comes amid a boom in the construction sector, with demand for building materials surging in response to the HomeBuilder stimulus and strong commercial activity. Mr Bairstow believes the heightened level of demand was likely to continue well into next year. He said:

    Residential, commercial and home improvement, which is sheds and patios, are all performing really well all over the state. I think there's a good 12 to 18 months, or two years, left in the pipeline of current work. The supply chain is a bit restricted, which is dragging it out. It's probably good for the industry otherwise you're left in that boom-bust environment.

    Sustainability

    In a move towards sustainability, Bluescope has an executive in charge of climate change whose job is to develop and maintain the company's climate strategy, including driving innovation and delivery of emissions reduction across the group, setting and monitoring progress towards emissions targets and engaging with staff and external stakeholders. In addition to her climate change role, Gretta Stephens is also chief executive of the steel maker's New Zealand business.

    In late 2020, BlueScope managing director and CEO Mark Vassella tapped Ms Stephens to take on the additional role of executive in charge of climate change. Auckland-based Ms Stephens said "yes" immediately. She told the Australian Financial Review (AFR):

    [The role] combines a number of things I am passionate about, that will combine to ensure the long-term sustainability of industry via technical development.

    Bluescope released its first climate action report in September. The company has set itself a zero net emissions target by 2050, although the goal is "highly dependent" on external factors, such as "the availability of affordable and reliable renewable energy and hydrogen, availability of quality raw materials and appropriate public policy settings."

    The company will allocate up to $150 million over the next five years to help it meet its 2030 target of reducing emissions intensity in the production of both steel and non-steel products.

    Steel making accounts for about 7-8% of the world's carbon emissions, according to the Australian Financial Review. It is an industry that is under pressure to move faster to try to reduce carbon emissions.

    BlueScope's biggest challenge - like its competitors - is that the majority of its steel is made in blast furnaces, where the chemical reductant is coal. Ms Stephens expects the technologies required to reduce the requirement for coal will be available sometime between 2035 and 2045. She concedes it's a big range.

    BlueScope has signed up with mining behemoth Rio Tinto to explore the direct reduction of iron ore using hydrogen produced from renewable electricity. The direct reduced iron from this process would be melted in an electrical furnace, powered with renewable electricity, to produce iron suitable for steel making.

    Australia's biggest steelmaker also announced it would pay USD240 million for MetalX, a scrap steel recycling business in the United States. MetalX is already one of the big suppliers of feedstock for the company's most profitable business, the North Star steel mill.

    Mr Vassella said the acquisition of MetalX, which runs two scrap steel facilities in Indiana and Ohio, would ensure security of supply and add to the competitiveness of the North Star facility, currently in the final stages of a AUD1 billion expansion.

    The acquisition will also go some way to improving BlueScope's "green" credentials.

  • Sources: The Adelaide Advertiser and Australian Financial Review
  • companies

    Retail update

    Elders' AIRR acquisition helps drive profit

    The agribusiness has posted a higher full-year profit and dividend, helped by the purchase of a group of farming stores

    Agribusiness Elders has posted a higher full-year profit, assisted by the first full financial year of ownership of Australian Independent Rural Retailers (AIRR). Sales of rural products improved by 24% as a result of the AIRR purchase.

    The company posted a 22% increase in full-year net profit to $149.77 million for the 12 months to September 30 as revenue lifted 22% to $2.548 billion.

    The bumper profits were also driven by favourable market conditions, ranging from overseas pension funds pouring money into farm purchases to strong demand for cropping products.

    The high demand for cropping products improved crop growing conditions that will continue to drive demand for its range of pesticides and chemicals, and a real estate boom is having a positive impact on the agribusiness giant. Chief executive Mark Allison told The Australian:

    The diversified model for Elders allows us to continue to make increased profit even though there are droughts and floods or whatever, so the philosophy from day one has been we have to get the cost of capital for Elders at a position so that in bad conditions we make money, and then in good conditions we make lots of money...
    Last year when we hit $120 million (profit) a bunch of commentators said this is as good as it gets, but hold on a minute, only 30% of our upside in profit this year has come from strong market conditions, and 70% has come from our bolt-on acquisitions and backwards integration and organic growth.
    So acquisition and organic growth is 70% of Elders growth, it has nothing to do with seasons or cycles or cattle prices or rain or anything.

    Like many other companies in Australia, Mr Allison said Elders was facing shipping and logistics problems caused by COVID-19 and the extra strain of supply chains, which had delayed shipments of key crop chemicals.

    Around 70% of crop protection products come out of China. We have had examples of ships being sent back to China empty so they can send another shipment of inputs back here. Our supply chain has gone from eight weeks to 12 weeks, it has added an extra month for ordering.

    This would still enable Elders to have enough stock on hand for next year's winter crops but the price of the products and as well as shipping and freight costs would need to be passed on to customers.

    Elders' property arm was boosted by soaring demand for farmland and residential property. Gross margin improved by 33%. Prices in the property market were also expected to stay high, helped by low interest rates.

    Looking ahead, Elders said favourable seasonal conditions and demand for agricultural commodities made for excellent trading conditions in the first-half of this financial year. The company also said there were good opportunities for more acquisitions.

    Seed business

    Elders is also looking to the expansion of its growing seed genetics business, EPG Seeds. EPG Seeds is investing in new distribution channels so its products will be available beyond the Elders branch network through AIRR and all national reseller networks.

    Mr Allison said the company has been involved in plant breeding and introducing crop genetics to Australian farmers for decades.

    These added investments will take these operations to a new level and expand the distribution of innovative grain and forage varieties to new customers, with the backing of Elders.

    Related: Elders continues to grow its branch network through its AIRR ownership.

    Elders expects more retail members - HNN Flash #24, November 2020

    Related: Elders' AIRR acquisition delivers customer growth.

    Elders grows its customer base - HNN Flash #14, June 2020
  • The Australian, Yahoo Australia and Wimmera Mail-Times
  • retailers

    Big box update

    Bunnings Hervey Bay store development sold

    In New Zealand, the Bunnings Trade Centre site in the suburb of Naenae is up for sale

    The Bunnings store being built in Hervey Bay (QLD) has been sold to New Zealand-based Cook Property Group for $58.6 million. The 17,421sqm store is due to be completed late next year. It has been sold on a 10-year lease to Bunnings with options extending until 2080.

    Bunnings itself is the developer and vendor in the transaction that was struck on a 4% yield, reports the Australian Financial Review (AFR). Garry James, Bunnings' general manager of business development and property finance, told the AFR:

    The Bunnings Warehouse is ideally situated to support the growing area of Hervey Bay, and we are pleased to have completed a successful sale at a yield that is reflective of the market on lease terms that take into account our operational objectives.

    The Bunnings Hervey Bay transaction was jointly negotiated by Stonebridge's Phil Gartland and Justin Dowers, and Savills' Peter Tyson. Mr Gartland said:

    The Bunnings covenant and asset genre continues to come to the fore for savvy investors. This was certainly reflected in the depth of bidding across private investors, syndicates and institutional capital alike.

    The offering attracted more than 200 buyer inquiries with interest from interstate and overseas investors.

    Naenae (NZ)

    Commercial real estate company CBRE New Zealand is selling the Bunnings Trade Centre property located in Naenae, a suburb of the city of Lower Hutt, New Zealand. Bunnings has leased it for 17 years with no plans to vacate.

    The lease area has a gross area of approximately 9385sqm and has 84 car parks.

    The building's trade layout is undergoing refurbishment to bring it up to Bunnings' current standards and the work includes major upgrade works.

    CBRE Wellington managing director Matthew St Amand said the trade centre sale gave a chance to enter into the investment market with a leading market retailer tenant, and the lease arrangement allowed for annual rental growth. The property currently draws a net income of NZD650,000 per annum plus GST.

    Mr St Amand said that with residential development continuing in the region and construction under way, Naenae was a growing area.

  • Sources: Australian Financial Review, The Dominion Post and Commercial Real Estate
  • bigbox

    Bunnings' "Make It Happen" marketing

    Will the big-box retailer keep up with social media trends?

    In 2019 Bunnings release its video series "Make It Yours", which made use of "influencers" to encourage younger customers to explore DIY. In 2021 the big box retailer released "Make It Happen" - which was a return to the way it marketed in 2017. What's behind that, and what will it mean?

    Pandemic lockdowns have boosted DIY sales at independent retailers since April 2020, especially in Melbourne and Sydney. With Australia-wide full vaccination rates likely to go past 90% next January, while domestic and international travel restrictions ease further, most retailers are preparing for reduced DIY sales in 2022.

    Lockdown was certainly an activity incentive, but just as importantly, customers had few other opportunities to spend money to improve their circumstances. Some genuinely new demand was created, but there has also been a considerably bringing forward of future demand. Few homeowners will add a second deck, a second pool, or a third storey onto their houses.

    That's not to say, however, that independent retailers intend to simply surrender the additional (more profitable) sales they've reaped from DIY over the past 20 months. The question is, though, what tactics should they adopt to hold onto more of those dollars?

    Competition

    The first part of the answer to that question is to acknowledge that what is being discussed here has less to do with changing consumer behaviour, and more to do with industry competition. While it is true that DIY spending in general rose considerably during the more difficult periods of the pandemic, independent retailers likely benefitted as much from the restrictions themselves as the increase in activity.

    In both Sydney and Melbourne, during the strictest lockdowns, people were restricted in how far they could travel, and over which local government authority boundaries. While the increased volume of sales benefitted Bunnings, the proximity rules - as well as the volume of traffic through each Bunnings store - made the nearest hardware store often a more attractive option, and in many cases the only option.

    With lockdowns essentially over, independent hardware stores need to revisit how they can compete with Bunnings for DIY sales in 2022. To do this effectively, they need to acknowledge that past competitive practices have simply not worked.

    Back in 2019, the industry saw the first signs, in 20 years, of independent retailers coming to terms with what Bunnings really meant as a competitor. One catalyst for this was that the merger of Home Timber & Hardware (HTH) with Mitre 10 to form the Metcash-owned Independent Hardware Group (IHG) really did not deliver the kind of market competitiveness that then-CEO of IHG, Mark Laidlaw, seems to have at one time suggested.

    Pre-pandemic, IHG did OK, but did not attract enough additional stores post-merger to noticeably change the structure of the hardware retail market. Competing with Bunnings seemed to work better as a recruitment and member retention strategy than it did as a functional, working competitive strategy.

    Prior to that, the message most independent retailers agreed with was that the Bunnings business model was flawed, and that its ongoing aggressive expansion would not generate adequate returns. Independents, it was suggested, would eventually triumph due to the greater expertise of their floor staff, the ability to build relationships with customers, and their enduring role in regional communities.

    Bunnings did not fail. It succeeded at doing better than any other major retailer in Australia. Today, Bunnings continues to expand, recently into both hard surfaces with the acquisition of Beaumonts, Tiles and into trade tools through its launch of Tool Kit Depot, while also continuing to grow its trade business through its existing warehouse stores.

    Hardware retail has come to accept this. Very few (though there are some) would continue to voice the opinion that Bunnings is somehow strategically flawed. The reality is, most realise, that Bunnings is a major influence in certain key markets, and it is likely to continue to dominate those markets through to the end of the current decade.

    New markets

    That's not a message of despair - for one thing, the Australian Competition and Consumer Commission (ACCC) is more attentive to the monopolistic power of Bunnings than it has been at any time over the past 20 years.

    Beyond that, however, Bunnings will also, within the next five years, begin to struggle with changes to its base markets. The baby boomers which boosted it to its current pre-eminence are ageing out of the DIY market, and generations that are replacing them - Millennials and the younger Gen Z - have different values, and a different approach to both home ownership and DIY.

    There are, HNN would argue, already clear signs of this struggle in Bunnings. The best single example of this is in the two major DIY video series that Bunnings has brought out, 2019's "Make it Yours" (MIY), and 2021's "Make it Happen" (MIH). Exploring those series, and also looking at what overseas home improvement retailers such as Lowe's Companies are doing with video, can provide some sense of the new, emerging markets that Bunnings may be less equipped to capture.

    Bunnings goes backwards?

    It has been somewhat surprising to see Bunnings, which has a very good history of execution, produce a quite good DIY series in MIY, then go considerably backwards with its next production, MIH. There is the pandemic to account for, of course, but Wesfarmers/Bunnings is a very large, national company: it has the resources to overcome those difficulties.

    The answer, in HNN's opinion, may lie in the different strategies behind each series. In MIY, the show was overtly aimed at younger DIYers, with at least some attention to the possibility they might be renters. It relied on taking a very modest - in fact somewhat drab - suburban house which Bunnings bought, and engaging with a series of designers/social media influencers to renovate it. Each of them took responsibility for redesigning and then rebuilding one aspect of the house, with relatively high production values in the shoot.

    By contrast, MIH is perhaps the most Bunnings video series ever. The host of MIH, Lucy Glade-Wright who runs a successful blog/marketing company named Hunting for George with her partner, Jonno Rodd, presented the MIY series on Channel 7Two. The association with Bunnings has extended to the remodelling of her own house, presented in a series of videos, which, while somewhat variable in their quality, highlight her ability as both a designer and a presenter.

    One of the standout examples of this is the video capturing the remodelling of the couple's kitchen, in a late 19th Century house somewhere in Melbourne:


    This is one of the best DIY home renovation videos that HNN has seen. There is genuine passion, coupled with lots of hard work by both Ms Glade-Wright and her partner Jonno (who has a background in marketing). Part of what makes it so interesting is the constant planning interrupted by the necessity to change up those plans to match the reality of the renovation. It begins with a desire to preserve the exposed brick of the kitchen, which then needs to be painted white, and then cabinets do not fit in spaces and need to be replaced.

    Yet in that constant juggling, a very particular and real aesthetic emerges, producing a room that is hyper-modern in some aspects, yet also conforms to the contours of a 150 year past. It's a kind of ongoing salvaging, but what is salvaged comes from both the past and, seemingly, the future.

    What really distinguishes this particular video is that Ms Glade-Wright makes evident the actual meaning of this kind of renovation. The kitchen really matters to her in a way that interior design really does matter to many, if not most, Australians. It's an expression of self, of culture, and even of the community one builds over time with friends. Australians tend to "mock up" a sort of "happy go lucky" surface life, but underneath this is a deeply felt sense of place.

    This video also contains perhaps the single most effective promotional piece ever made for Bunnings' DIY kitchen supplier, Kaboodle. It illustrates effectively how the inexpensive Kaboodle components can be used as the basis for a modern, functional and stylish kitchen, when they are taken out of the standard, prosaic patterns of the "kitchen in a box".

    Indeed part of Ms Glade-Wright's charm is an ability to "spruik" for a particular sponsor - Kaboodle, or Electrolux appliances - in a way that seems to reflect her genuine appreciation for these products.

    When it comes to her role on MIH, however, these abilities are, at best, tamped down somewhat, if not at times nearly excised. While the series has some pretensions to be about DIY, the fact is that, as the majority of work is performed by the Bunnings staff, it's more about how to renovate a room by hiring tradies.

    There is some attempt at DIY activity, which means that every episode focusing on an interior room has the hapless homeowner forced to undergo the trifecta of modern room transformation: painting, tiling something like a backsplash, and laying laminate floorboards. You see the participants paint about a quarter of a square metre of wall, actually hold tiles but not do much with them, or hit a laminate board with a rubber hammer.

    The really difficult parts, such as working out how much of a partial laminate board will be needed to span the surface of a room, and cutting those boards laterally - not on a right angle, of course - to fit the room's contours, are simply not even mentioned. If you know anything about actual renovation, it's a bit like joining a Zoom meeting where a good friend has accidentally turned up the "pretty", face-smoothing filter to the max: all the wrinkles are gone, but it doesn't improve anything, and the result is barely recognisable. It's essentially DIY renovation mime.

    The other problem is that the results of all these efforts certainly demonstrate an improvement over how the rooms started out, but the end-design is far below what Ms Glade-Wright would be able to achieve given a free hand. That's not a mistake, really, by either Ms Glade-Wright or the producers, because the homeowners are very evidently somewhat conservative (to put it mildly).


    Looking at the "before" and "after" of the kitchen, there is no doubt that some improvements have been made, but it is more about updating than anything else.

    For example, it's difficult to reconcile the floor with the new design. It's not quite a clash, but you know instantly that it would look great with the kind of limed-white floorboards Ms Glade-Wright used in her own kitchen. That accounts for the somewhat heavy over-counter pendant lamps: it's a device to link those disparate elements together, a counter-balance between a light and heavy tonality.

    Generational

    Of course, what is really going on here is as much generational as anything else. The designs and approaches used in MIH very much belong to the baby-boomer/Gen X side of things, where in MIY it was slanted to the Millennial/Gen Z demographics. The clearest illustration of that shift is in Episode 2 of the MIH series. The task is to take a living-room which has been split to create a third bedroom for a Gen Z young adult Max. As his sister is now moving out of the originally two-bedroom home, he can now have her room, freeing up the space.

    In some ways, it's almost emblematic of the shift between MIY and MIH. The Gen Z is moving out of the main space, and this is being reclaimed.


    It's also worth noting that Ms Glade-Wright and her partner Mr Rodd belong to the late-Gen X/early Millennial demographic, which makes their business (formerly a retail operation) Hunting for George an ideal vehicle for presenting this aspect of Bunnings. Probably the most evident effect of that generational influence is the constant battle of the TV that takes place in the living-room designs they produce.

    It's increasingly the case that TVs create a kind of design confusion as, in a screen-intensive world, there's a sense they need to be the secondary focus of a room, which, as TVs have become huge, is difficult to achieve. In late Millennial/Gen Z houses that's not an issue - because they don't have TVs (because there is an iPad/laptop/big smartphone), or the TV is allocated to a secondary space.

    Alternatives

    It's all very well to criticise this particular effort by Bunnings, but is there a better alternative available?

    Indeed there is - in fact several. The most on-point is a series produced by Lowe's Home Improvement titled "The Weekender". This uses a very good, experienced DIYer and presenter, Monica Mangin of East Coast Creative, who transforms spaces in people's homes by breaking them down into a series of four or five projects.

    In series 4, episode 8, Ms Mangin tackles a very small kitchen in a small house (less than 75 square metres) located in a lovely part of the city of Philadelphia, PA. The house is owned by Katelyn, a young Gen Z woman, who has saved up to buy a home she can barely afford, and really cannot pay for renovations.


    So, already you can see the boxes that Lowe's is getting ticked off: small house, small space, first homeowner, Gen Z, limited funds, and a space that needs renovation, but has great potential.

    The process is also very different from both MIY and MIH. While there is a tradie working to take care of essential tasks such as demolition, Ms Mangin does much of the work herself, including activities such as cutting out the hole for the sink in the wooden countertop. She walks Katelyn through every step of that process, including using a hole-saw to drill out the rounded corners, then cutting the lines with a jigsaw.

    The outstanding part of the project is replacing the floor. After tearing up the old linoleum, a wood floor is revealed. Unfortunately, that wood floor would take too much work to restore, and the show has only the weekend to work with.

    What is really interesting here, though, are the choices Ms Mangin makes to advance the project. She does not choose laminate flooring, but instead tongue and groove hardwood boards - which install almost as easily as laminate. Of course they are more expensive per square metre, but this is a very small space.

    Then, instead of a simple treatment, she has Katelyn help her to stain these boards in a range of different colours. The goal is to make the boards look as though they are repurposed timber taken from warehouses and other sources. To add to the effect, she topnails the boards, emulating the way standard floorboards would be fastened.

    This is what the final result for the kitchen looks like:

    The real difference between the "Weekender" and both MIY and MIH is that there is really a very clear focus on actual, useful DIY tips. When Ms Mangin does the backsplash, for example, there is a virtual tutorial on tile selection, working with mosaic pattern tiles, how to cut the tiles, and how to fill in gaps in the pattern.

    Seeing the difference between these two approaches, you really do wonder if the Australian series is not a little haunted by the remainder of the British class structures, where doing things by hand, as "trade", is still seen as a demeaning. In the US DIY is almost universally seen as "canny"; in Australia it's as though it is a barely OK alternative to using tradespeople. At least, that is, for the baby boomer generation.

    The marketing opportunity

    What we're really discussing above is that interesting area where design and DIY cross over. Is that all just about promotion, however, or does it really sketch out how people think about DIY today?

    One answer to that question is that the market is a lot more complex than just a single division between those who can/will DIY, and those who can't/won't. It goes all the way from people who can (just) replace the washer in a tap, but panic when the toilet cistern starts to leak and needs its gasket renewed, to those of us who sigh at every DIY renovation TV show, because no one, anywhere, sands the walls of older houses before painting them (really, minimum of an hour per wall, easily).

    One thing that is clear is that for people with some interest in DIY, and the minimum set of skills required, today represents something like a bonanza of possibilities. Power tools are so cheap, so powerful, so well-designed. Products like paint seem to get a little easier to use every year. There has been fantastic product development in everything from waterproofing (pre-made corner membranes - amazing!) to sealants to fasteners.

    That is, to some extent, the "missing piece" when we talk about the boom in DIY sales during the pandemic. It wasn't just the demand, it was also people discovering how much DIY has changed over just the past decade, how much easier and safer it is now.

    One of the slight distortions we all have in the hardware industry, and which we need to compensate for, is that we all believe that there is something in DIY that is just good for people. Amidst all the blathering we hear about conservation, climate change and so forth, we know that being able to repair stuff instead of replacing it is just a good thing. It's, well, it's respectful, in some way that is really difficult to define.

    Yet those values are simply not the values (for the most part) of today's DIYer. One of the phrases that keeps recurring in the Lowe's Weekender video series is "it's Pinterestable". The fact is that much of interior design is really influenced by the community that is formed through social media. What is shareable has become what is valuable, to a growing, important sector of the market.

    It is this that is really the differentiator between the early MIY and the later MIH video series by Bunnings. In MIY, the designers doing the design and DIY were all "influencers", dependent on social media for their personal and business reputations. For MIH, Bunnings chose another influencer in Ms Glade-Wright, but one that is very much something of a cross-over.

    That's evident because she is acutely conscious throughout the MIH series of the level of discomfort she may be causing the homeowners with whom she interacts. Because they, coming from older generations, are evidently not always all that happy being exposed to this particular social media driven world.

    What does this mean for hardware retailers? There are several steps that retailers can take to help boost their profile and increase sales.

    Your own influencer

    On a simple, direct level, if the younger generations are greatly inspired by the "influencer" economy, can they locate influencers who are local to their suburb, town or region? One way to do this is to search resources such as Instagram using the hashtag for your local area.

    If they can locate influencers who are at the start of their design careers, it's possible to work out relatively inexpensive promotional deals. Any kind of commercial deal is helpful to beginning influencers, as those deals actually enhance their reputation in the community, acting as a form of validation.

    Instagram rather than Facebook

    While some see this as something of a joke, the reality is that for the younger portion of the market, Facebook has become to Instagram (and to some extent Pinterest as well) as email is to text messaging.

    What this really means is that there is a big change to the narrative of sales. Facebook fosters (to sometimes negative consequences) the sense of a particular community involvement. Instagram instead measures something like the visual "beats" to a person's life. It's an association of less-judgemental "likes", a WhatsApp conversation rendered more universal and available through using the visual as the means of communication.

    The task of the retailer in this situation is to render the individual items of DIY to having some kind of meaning in that narrative. Let's take, for example, the "forest of taps" displays at most Bunnings warehouse stores (which HNN would argue was originally a development of a similar display pioneered by Masters Home Improvement, during its brief presence). To older generations, this is useful, as it makes it possible to easily compare different taps on appearance, price and utility.

    To younger generations, however, it is something more towards a mass of noise and interference. The decisions that are being about tap choice are associative, and apply to the narrative of the space that is being developed. A simpler display, with simple classifications might work better.

    Yet the prime ingredient that might really work is a QR code that links smartphones to more product information, but not that provided by the manufacturer. Rather, this should provide links to social media and other sources where the product has been featured or discussed.

    The important thing to realise is that this is not a matter of developing a "digital" virtual store. What it is really about is the communal, the shared, and it is only incidental that this is best realised through the digital.

    Of course, what is important about this for smaller retailers, is that it means not that scale - such as that used by Bunnings - means nothing, but that it will mean much less than it has in the future. Smaller retailers cannot stock and feature 80 different taps. But they can stock 30, and provide the linkages these customers seek in a satisfying form.

    Analysis

    One of the potential big shifts we could see in the future for small independent hardware retailers is the development of industry-wide services for social marketing.

    It's fairly evident that when we enter into this area that succeeding at this type of marketing will require not only considerable effort and time, but also a high degree of expertise. It's also a series of highly repeatable tasks that need to be done by each retailer.

    The possibility would be that these promotional efforts will be consolidated, and see the formation of "marketing groups" somewhat along the lines of buying groups, such as the Hardware & Building Traders (HBT), or even the extension of groups such as HBT to cover marketing as well.

    The other possibility is to see more product suppliers become engaged in influencer marketing, offering retailers "marketing packages". This could extend both to online media, and to in-store facilitation through store displays and QR code links to further content.

    retailers

    ABS Building Approvals: Capital cities

    Surprising resiliency in non-house approvals

    The latest housing approval numbers confirm that, as predicted, the load on the construction industry is set to exceed its ability to supply dwellings.

    The Australian Bureau of Statistics (ABS) has released its figures for Building Approvals to September 2021. In reviewing the actual number of approvals for Australia's capital cities, it's clear the non-house dwellings have proven to be surprisingly resilient.

    Number of approvals

    Chart 1 shows the graphs for the numbers of approvals in capital cities, based on the trailing 12 months to September.

    The top chart, for houses, shows ongoing strong growth for greater Melbourne from October 2020 to September 2021. Surprisingly, growth for greater Sydney has been more subdued, and has even been surpassed by greater Perth, while greater Brisbane is not far behind. However, these other states did not experience the strong growth for both the year ended September 2020 and September 2021. Adelaide also shows strong growth for the final year.

    The middle chart shows the growth in non-house dwellings. A little surprisingly, for Sydney the fall to 2020 is less steep than in the previous year, while Melbourne shows an increase in numbers. For 2021, Sydney shows a steep increase in numbers while Melbourne virtually mirrors that move, reversing its previous gains. Brisbane shows ongoing mild gains through both years, while Perth shows a modest increase in number to 2021.

    The bottom chart shows the percentage of total building approvals taken up by non-house approvals. While the Australian Capital Territory (ACT) shows the highest percentage overall, most of the states show a steady decline in the percentage since the year ending September 2017. For the most recent period to September 2021, only Sydney shows an increase in the percentage.

    Percentage change in approvals

    Chart 2 shows the percentage change in building approvals for the greater capital city regions.

    The top chart shows the change for house approvals. The general pattern is for a flat or negative result for 2019, followed by a flat or gain under 10% for 2020, then a sudden acceleration for 2021. The gain for Perth is particularly unexpected, while both Sydney and Melbourne have gains of around 20%, and both Adelaide and Brisbane show gains of around 40%.

    The bottom chart shows the same growth figures, but for non-house dwellings. The strong gain for Perth is reflective of the small base it had previously for this type of dwelling, while Sydney's sudden surge is unexpected. Brisbane shows moderately high gains for 2020, followed by further growth into 2021. Melbourne shows reasonable growth in 2020, followed by a strong plunge to negative growth for 2021.

    Percentage change month-on-month

    Chart 3 shows the month-on-corresponding month percentage change for building approvals across the greater capital city regions.

    The top chart shows these figures for houses. It's interesting to note that it is not until September 2020 that the growth for Sydney starts to accelerate, before dipping down close to zero for March 2021. More recently, since June 2021, the growth rates for Melbourne and Sydney have been tracking very close to each other.

    In terms of overall growth, both Brisbane and Adelaide have been performing strongly since September 2020, while Perth began strong growth in August 2020, then achieved an extreme high in February 2021, but has entered negative growth in September 2021.

    The bottom chart shows the numbers for non-house building approvals. The chart omits all capitals except for Sydney, Melbourne Brisbane and Adelaide because the numbers for the other regions are so volatile on a month-on-month basis that they make no discernible pattern. The chart shows a strong peak for Sydney in October 2020, while Brisbane has a peak in December 2020 and Adelaide in January 2021.

    Melbourne, however, shows a series of lows from September 2020 through to March 2021, followed by a recovery in June 2021, and then a retreat to negative growth by September 2021. The chart finishes with a very strong surge in approvals for Sydney, while both Brisbane and Adelaide end in negative growth.

    Analysis

    Analysing the housing at the moment is a very difficult task. That's largely because much of the market has adopted a short-term approach to investment estimates. While most economists see a market that must be set to collapse, that collapse will likely not take place for another two to three years, given the ongoing support for low interest rates from the Reserve Bank of Australia (RBA).

    There are just so many questions around the ongoing growth in housing valuations. The situation is becoming so extreme, that it's possible to question whether investors are banking on government bailouts in the event of a collapse in prices - which would see less well-off Australians basically subsidising more well-off Australians who have made poor investment decisions.

    The most worrying number is really the exceptionally high number of house approvals for the greater Melbourne region. There is a degree of unbalance to this.

    Hopefully, as the country and the economy continue to open up, some of this irrational exuberance will dissipate, and over the next two years, as homebuyers see the end of fixed-rate three-year mortgages approaching, there will be some slowdown in the market.

    statistics

    Supplier update

    Renovators boost James Hardie's latest results

    The company said marketing its range of products directly to consumers has paid off, contributing to record second-quarter net sales

    James Hardie chief executive Jack Truong said renovators are increasingly the main driver of the company's strong financial performance, according to a report in the Australian Financial Review (AFR). He expects that as economies open up, renovators will continue to invest in upgrades of their biggest asset after a shift in mindset during the pandemic which has led them to view their homes as their "castle".

    Dr Truong said by marketing directly to households through advertising on homemaker television shows and magazines, James Hardie was becoming more of a consumer brand. He said:

    That creates a pull-through. Our approach is more about the pull and creating demand with the homeowners.

    The Australian reports that this elevated demand had shown itself in key metrics for the group. In the six months ended September 30. it recorded 109% growth in its key brand metrics, an 81% lift in company website traffic and 61% increase in leads within its target markets.

    Dr Truong said new exterior panelling in different colours was proving popular and achieving the right look was the main priority for households, with price a secondary consideration.

    That is what the household makes their decisions on.

    For the six months to September 30, net sales rose 28% to USD1.75 billion and net profit more than doubled to USD271.5 million. Net profit rose 182% to USD271.5 million in the six months, and global earnings before interest and tax (EBIT) lifted by 34% to USD386.2 million.

    Dr Truong said a strong performance in the September quarter marked the fourth three-month period in a row where all its main regions of North America, Europe and the Asia-Pacific produced double-digit sales and EBIT growth. He said:

    We continue to make excellent progress on our stated global strategy. Our strong execution on this strategy is reflected in second-quarter global price/mix growth of 9%.
    Our growth momentum in accelerating high-value products penetration, which underpins price/mix, is the result of enabling our customers to make more money by selling more James Hardie products and marketing directly to the homeowners to create demand of our high-value products through our customers.

    James Hardie plans to invest in new facilities including a greenfield manufacturing site in Victoria to help its Australian operations meet demand. The company closed a small plant on the Sunshine Coast in Queensland last year. Overseas, there is the expansion of an existing plant in Alabama (USA) and a fibre gypsum plant in Spain.

    Expecting continued market growth, particularly in the US, James Hardie raised its guidance for the 2022 financial year. It has lifted its profit forecasts for the full year to between USD580 million to USD600 million, from a previous band of USD550 million to USD590 million.

    Fine Texture Cladding

    James Hardie recently launched its Hardie[tm] Fine Texture Cladding, a fibre cement wall panel embedded with a fine texture to create a contemporary aesthetic for houses.

    The pre-textured fibre cement panels connect with shiplap joints, bringing subtle shadow lines, geometric precision and a gentle vertical rhythm to the façade. The ready-to-paint, pre-sealed surface has a textured finish of fine render which diffuses light and gives a matte finish.

    For minimal joints and maximum coverage, Hardie Fine Texture Cladding comes in 120mm wide sheets in common wall heights of up to 3600mm. It is the ideal cladding choice for non-combustible construction with the added performance benefits of fibre cement such as long-term durability and low maintenance.

    Neil Hipwell, builder and founding director of FutureFlip, said Hardie Fine Texture Cladding speeds up the building process with the render texture embedded in the fibre cement panel, minimising the number of trades required on site at any one time. (Mr Hipwell is a James Hardie ambassador.)

    For builders, lightweight building material such as Hardie Fine Texture Cladding is an ideal choice for ground floor renovations and additions as well as optimising a home's usable floor space. For homeowners, it is durable, low maintenance and built for tough Australian conditions.

    Hardie Fine Texture Cladding also offers architects and designers creative freedom to explore the possibilities of lightweight construction and considered joint detailing. Panels are supported by a range of corner and junction accessories, also produced by James Hardie. These combined systems streamline the installation process and deliver a consistent, quality finish whilst upholding the integrity of the design.

    Related: James Hardie ambassador provides tips for social media.

    Social media and builders: Customer insights for hardware retailers - HNN Flash #28, January 2021
  • Sources: Australian Financial Review, The Australian and James Hardie
  • companies

    HNN Flash #71 podcast: Bunnings' "Make It Happen" and James Hardie

    Influencer marketing in hardware retail

    Can independent hardware retailers take advantage of a potential gap in Bunnings' marketing to specific demographics?

    In this week's podcast, we take an in-depth at two video series released by Bunnings. The first "Make It Yours" was made in 2019 to encourage younger customers to explore DIY. In 2021 the big box retailer released "Make It Happen" for what looks like a more traditional audience. We look at the different approaches and whether there are opportunities for independent hardware retailers.

    We also highlight James Hardie's consumer led strategy that has increased demand for its products in Australia.

    Other top line stories include Bunnings joining Flybuys and Farmers Warehouse recent launch in McDougalls Hill (NSW). In the UK, B&Q is rolling out more Speedy Hire store concessions after a successful trial that started in late 2020. And Lowe's Home Improvement in the US has released a beta version of a measuring tool that takes out the guess work for flooring, and can be accessed through its app.

    The Australian Bureau of Statistics has also released figures for Building Approvals to September 2021.

    You can listen to the podcast on the embedded player:

    %

    Or go to the Buzzsprout website at:

    www.buzzsprout.com/1872420/9536888-hnn-flash-podcast-71

    HNN's Flash podcast provides a quick overview of the stories we'll be covering each week on the HNN website.

    news

    Big box update

    Bunnings will join Flybuys

    Bunnings landlord Newmark REIT is preparing plans for an initial public offering and battery recycling program expanded

    Flybuys has opened up its rewards program to Bunnings and Officeworks; Bunnings property trust owner is launching an IPO; and national battery recycling program rollout across 338 Australian sites.

    Flybuys signs up Bunnings

    Starting in early December, Flybuys points will be able to be collected at more than 350 Bunnings stores. As part of the announcement, Wesfarmers managing director Rob Scott, said:

    Bunnings and Officeworks joining Flybuys will expand the value of the Flybuys program for members and provide exciting new opportunities to support customers. This partnership will complement the development of Wesfarmers' data and digital ecosystem, providing insights that enable our businesses to offer more relevant, personalised customer experiences.

    The addition of Bunnings and Officeworks is expected to boost the value of the loyalty program for more than eight million Flybuys members around Australia. Steven Cain, Coles Group chief executive officer, said:

    We know millions of our customers will be excited because Flybuys member research shows that Bunnings is the most preferred partner in Australia to join the program and we know that Officeworks is an essential part of helping Australians increasingly working from home...

    Flybuys is Australia's fourth-largest loyalty scheme, according to the Australian Financial Review (AFR). Bunnings and Officeowrks will increase the number of partners for the joint venture loyalty program between Coles and Wesfarmers to 25. Mr Scott said the addition of Bunnings and Officeworks "significantly strengthens the program".

    Not only is it an opportunity [for consumers] to earn more points at trusted retailers, but also an opportunity to redeem points through a much broader range of retailers [giving them] access to a whole lot of new DIY products and office and technology products that previously Flybuys members weren't able to redeem their points on.

    The expansion came after customers indicated they wanted a broader range of stores in the scheme. Mr Scott told The Australian:

    It's very much customer-led so customers have been telling us and Flybuys members have been telling us that their two most preferred new members would be Bunnings and Officeworks. So this is responding to very strong customer demand. But also it's an opportunity for both Wesfarmers and Coles to further strengthen our commitment and investment in Flybuys.
    Bringing Bunnings and Officeworks into the program gives us the opportunity with Coles to invest even more in the program to improve the redemption opportunities.

    Bunnings real estate trust

    Melbourne-based fund manager Newmark Capital as begun a $128.3 million initial public offering (IPO) for its Bunnings-anchored large-format retail property trust, according to the AFR.

    It comprises seven Bunnings warehouses held in its unlisted hardware trust and a homemaker centre in Chadstone anchored by Bunnings, Joint managing director Chris Langford told the AFR it was getting "exceptionally positive responses" from its initial IPO presentations. He said:

    This listing provides an opportunity to continue the expansion of our large-format retail holdings [which have] consistently delivered exceptional total annual returns.

    The trust, to be called the Newmark Property REIT and assigned the ticker of NPR, will have a market capitalisation of $344.6 million based on an offer price of $1.895 per unit.

    More than three-quarters of the property income generated by the trust will come from long leases to Bunnings, one of the most sought-after by property investors.

    The listing has been slated for December 6.

    Established in June 2014, Newmark's trust was bolstered this year with a Bunnings Warehouse in Sydney's Eastgardens acquired for $75 million, another in Preston in Melbourne's northern suburbs, acquired for $85 million, and a third in Melton (VIC) bought for $44 million in August.

    Used battery collection

    Bunnings' battery recycling program will have Australia's largest network of battery recycling locations and all stores will be on board by mid-November after a successful trial.

    The collection units at each store entrance have been designed to accept standard household and power tool batteries.

    The retailer has teamed with battery recycling company Envirostream Australia to manage the program.

    More than 240,000kg of batteries are expected to be recycled in the first year. According to the CSIRO, only 2% of Australia's annual 3.3 million kilograms of lithiumion battery waste is recycled each year. If recycled, 95% of battery components can be turned into new batteries or used in other industries.

    Related: Battery collection in Bunnings stores.

    Envirostream in battery collection deal with Bunnings - HNN Flash #68, October 2021
  • Sources: MediaNet, Australian Financial Review, The Australian and The West Australian
  • bigbox

    Retail update

    Farmers Warehouse gets major upgrade

    The rural merchandise store held its official opening recently in McDougalls Hill (NSW), located next to the Bunnings Singleton store

    Farmers Warehouse is now in an expanded premises in McDougalls Hill, a suburb of Singleton (NSW). There is another Farmers Warehouse store in Dungog and both are owned by James Ramm.

    According to the Singleton Argus, the Ramm family have been in agricultural supply services for many years with Mr Ramm starting out in the business running Farmers Warehouse as an online store.

    He opened his first bricks-and-mortar location in Singleton on Ryan Avenue in 2009 before building a new facility across the road from his latest venture located next door to Bunnings. The need to have more supplies both undercover and in the yard meant they had outgrown their original site and further investment was required. He told the Singleton Argus:

    Most of our biggest customers have probably never been in the shop. But they come to us because of excellent supply, delivery and pricing. The larger facility means we have more stock on hand to service our customers.

    Three trucks ranging in size from 4 tonnes to 29 tonnes will enable more efficient deliveries for its customers.

    With record prices now being received for many farm commodities, in particular beef cattle, farmers are keen to invest in farm infrastructure. With this in mind, Mr Ramm said he would love to see more local manufacturing of farm supplies.

    We are at the mercy of overseas producers for so many farm inputs like herbicides, fertilisers and fencing equipment. It would be great to see these products made in Australia and therefore farmers would be less likely to be hit by sudden price rises and no supply.

    Background

    Farmers Warehouse began as a web-based store in 2008. While Mr Ramm, was working at his father's store in Rutherford (NSW), he saw the need for rural products to be available on the internet as a way of reaching a broader regional customer base. He started www.FarmersWarehouse.com.au from his home.

    It is a member of AIRR (Australian Independent Rural Retailers) which allows better buying power and provides access to distribution warehouses in most states.

  • Sources: Singleton Argus and Farmers Warehouse
  • retailers

    USA update

    Lowe's launches room measurement tool

    It is powered by LiDAR, a technology that gauges how long light takes to travel to and from a surface to measure a space

    A new beta experience in Lowe's app combines emerging technologies to empower customers to plan, visualise and shop for flooring. The Measure Your SpaceBETA from the home improvement retailer uses LiDAR to take the guesswork out of home improvement.

    The tool is made possible by a recent hardware upgrade to certain iPhone 12 and 13 models that make LiDAR-enabled applications possible for developers. Apps like Ikea Place and TikTok have already made use of the new capability to support more precise augmented reality effects.

    Lowe's said its Measure Your Space BETA is an intuitive, end-to-end room scanning, measurement and estimate experience in the Lowe's iOS app.

    Few home improvement projects can move forward without data about a home's space, which can be tough to gather. Seemantini Godbole, Lowe's executive vice president and chief information officer, said:

    Home improvement can be complex, but at Lowe's, we're investing in emerging technologies like LiDAR, AI and mixed reality to make home improvement simple and intuitive. We see a future in which the devices customers already own can sense, understand and compile information about their home, putting it in their hands the moment they need it. We call this future spatial commerce, and we're excited to bring it to our customers.

    iPhones and iPads with the LiDAR Scanner use purpose-built sensors and software to sense depth and map dimensions of a space and the objects in it. Lowe's will leverage this technology to get detailed room measurements.

    Its customers will be able to access the feature simply by pressing the Measure Your Space BETA button on the product detail page of select flooring products in the Lowe's iOS app. The app will guide them to scan a room, automatically generating a floor plan, room measurements and a personalised estimate. They will be able to access this information in their app from anywhere, whether that's on their couch or in a store.

    Measure Your Space BETA is developed by Lowe's Innovation Labs that is focused on building experiences that will shape the future of home improvement. It worked with Streem(r), an AR and AI company whose mission is to make the world's expertise more accessible.

    This offering follows Lowe's for Pros JobSIGHT[tm] powered by Streem, an augmented video chat service launched in 2020 the midst of the pandemic to allow Pros to conduct virtual home visits with customers. Ryan Fink, Streem president and co-founder, said:

    Lowe's and Streem together are applying the use of complex augmented reality tools to create a simple, user-friendly app experience with the unique ability to make DIYers' lives easier. This partnership is proving the value of spatial commerce today by using guided AR and AI experiences to empower consumers with the practical tools and data they need to dream, plan and accomplish home projects.

    According to Ad Week, tools for virtually trying on products or placing furniture in homes have accelerated in popularity since the start of the pandemic, which made perusing items in brick-and-mortar stores more challenging. At the same time, better developer platforms and new smartphone capabilities like LiDAR have made mixed-reality and other virtual mock-up tech easier to create.

    That trend has also coincided with a boom in the home improvement space and a greater willingness on the part of consumers to buy big-ticket items online.

    Measure Your Space BETA will be available before the end of Q1 2022 in the form of a commercial beta launch available to iPhone 12 Pro/Pro Max, iPhone 13 Pro/Pro Max and iPad Pro users via the Lowe's iOS app.

    To learn more about Lowe's Measure Your Space BETA, please visit:

    Lowe's Innovation Labs: Spatial Commerce
  • Sources: PRNewswire and Ad Week
  • retailers

    UK update

    B&Q will have more Speedy Hire store concessions

    The partnership between the home improvement retailer and provider of tools and equipment hire has been formally extended

    B&Q will be able to offer tool hire to its DIY customers through more stores across the United Kingdom after expanding its partnership with Speedy. The roll-out follows the successful trial in 16 B&Q stores with a further 23 in-store outlets scheduled to open by January 2022.

    B&Q said it is committed to making it easier for customers to improve their homes. Partnerships are an essential part of this, with shop-in-shop and concession partnership models enabling B&Q to adapt quickly to changing consumer demands. The Speedy Hire partnership demonstrates the pace, scale and agility that's central to B&Q's growth strategy to get closer to customers and ensure their needs are met. Chris Bargate, director of business development, B&Q, said:

    Our customers are continuing to adapt and change to new ways of living and shopping, and the Speedy concessions are just one way in which we're making it easier for people to improve their homes.

    The Speedy in-store concessions will give B&Q customers with access to the company's four-hour delivery promise on 350 of its most popular products. These range from angle grinders, floor sanders, hammer drills and mixers to tower scaffolds, generators, lighting and dust extraction units.

    Speedy's existing customers will also have access to the new trade counters seven days a week to order and collect products, adding to its existing 200-strong national Service Centre network. Russell Down, Speedy chief executive, said:

    We have seen growing demand from B&Q customers for our products since we opened our first in-store outlet last year, and we're excited about supporting more DIYers up and down the UK as we continue to grow.

    With sustainability high on the agenda, hiring tools that would be used a handful of times and then stored away, potentially destined for landfill will also benefit the environment. This reflects a more circular economy in the re-use of DIY tools and equipment, according to UK-based Building Design & Construction Magazine.

    Related: Speedy brings tool hire into more B&Q stores.

    B&Q expands its tools hire trial with Speedy - HNN Flash #32, February 2021
  • Sources: The Business Desk and Building Design & Construction Magazine
  • bigbox

    ACIF forecast: Housing, infrastructure to rise

    Demand will exceed possible supply

    The ACIF has released its forecasts for the current financial year. Presented by Kerry Barwise, the forecast predicts considerable upside for residential and infrastructure, but a decline in non-residential construction, particularly offices.

    The Australian Construction Industry Forum (ACIF) has released its forecasts for the current financial year and beyond. Judging by the launch presentation provided on 4 November 2021, delivered by Kerry Barwise, ACIF chief forecaster and managing director of FTI Consulting, who helped prepare the report, this is one forecast that would be worthwhile obtaining.

    The presentation was managed by Bob Richardson, Construction Forecasting Council chair and the managing director of Xmirus, a professional management consultancy to the construction industry. Some very interesting commentary was also provided by Eliza Owen, head of Australian research at the well-known data-driven real estate investment experts Corelogic, and Andrew Scott, head of industrials research for investment management company Morgan Stanley.

    Mr Barwise is well regarded in the construction industry, and provided an excellent presentation. He managed to explain the issues facing the construction industry in clear, understandable terms, without over-simplifying.

    In summary, Mr Barwise sees ongoing demand increasing in two key areas of the construction industry: residential dwellings (especially detached houses, though also for alterations and additions) and infrastructure. He sees industry constraints leading to this swelling demand not being serviced immediately by the industry, so that the effects of the demand will be spread out through to 2024 (at least). Importantly, while those two sectors may flourish, other construction sectors will see modest declines.

    Mr Barwise does see this increase in demand as being something of a "spike", rather than a stronger, structural change in demand. As such, he's also concerned about "how all this ends", how the industry will exit a period of high demand in another three to four years.

    Policy settings

    Mr Barwise began by usefully rehearsing the key policy settings that set the framework for activity in the Australian construction sector for both FY2021/22 and FY2022/23. This relates to the Reserve Bank of Australia (RBA) using ultra-low interest rate settings to increase consumption and boost inflation to a sustainable level between 2.0% and 3.0%. Secondarily, the RBA is also seeking to boost employment, so that the wage price index lifts to indicate growth of around 3.0% at least.

    In this description, Mr Barwise also described some of the assumptions he is making in these areas.

    The Reserve Bank has foreshadowed that it won't be raising interest rates, while we still have a pool of capacity - I guess you might say, unemployed persons looking for a job. So they'll probably maintain interest rates at their very low levels for the next two years or so. But we are very concerned to keep an eye on what's happening also with inflation. And that has an implication for when they may change interest rates, they may be forced to in time.

    Pandemic effects

    Interacting with those overall policy settings are, of course, the effects of the COVID-19 pandemic, as they work their way out through government policies, and the response in various sectors of Australian - and global - industry. One of the areas that Mr Barwise sees as playing a substantial role in the future of construction is immigration. As he states:

    One of the key restrictions, of course, has been the restrictions on the movement of people into and out of Australia. That's had a significant impact in terms of constraining net immigration. In fact, we had negative net immigration, up until June 2021. That is a lot of people, and that really hammered overall public population growth.

    While most economists have focused on the effect this has in terms of market growth, Mr Barwise points out that, for the construction industry, it also affects supply:

    That has significant implications for both demand and also for supply. We obtain an awful lot of skilled workers from immigration and, and even some unskilled workers that had an impact on wages and wages growth.

    Looking beyond the immediate impact on the construction industry itself, Mr Barwise points out that the pandemic restrictions benefitted some industry sectors, but also created both job losses and falling demand in other sectors.

    We can see that there have been some sectors which have grown [such as] public administration and health, and other services, through the provision - through the response to COVID. But there's also been quite a long list of sectors, which were most directly affected by the social distancing and other restrictions, which have seen sustained job losses. That includes accommodation, arts, recreation, education, and transport.
    Now the trick is, is that in addition, the accompaniment to those job losses was a contraction in demand. So decision makers in those sectors are likely to be thinking very hard about what building needs they [will] have in the future.

    Residential building dominates

    One of Mr Barwise's contentions is that the increase in residential dwelling construction has essentially replaced the boom in mining construction which peaked in FY2013/14. As he states:

    The mining boom pushed the level of work to clear more than $70 billion way back in 2013/14. Following the mining boom, there was a very conscious stimulus decision taken to cut interest rates. And we got building activity going again, in residential building, building new houses and apartments. And we actually had a housing boom - actually, it [should] really be more appropriately called an "apartment building boom". That also pushed building activity up to around about $70 billion. Almost what we'd spent in the mining boom. The new residential building [category] remains the single largest, the dominant source of building work across the economy at the moment.

    One particular feature of the lift in residential dwellings, as Mr Barwise points out, is the sharp increase in spending on alterations and additions.

    It's interesting to see again, when you add both new residential building and residential alterations, you get to $100 plus billion in building activity. So the point is, is that residential building dominates the agenda, in building and construction activity.

    Commenting further on this, he suggests one reason for this is the ongoing increase in house prices.

    We're also seeing ... a strong spike in alterations and additions. So if you can't buy a new house, the next best thing to do is to fix up the one you're in and we're expecting that to carry forward for the next year or two.

    Non-residential building drifts downwards

    Mr Barwise sees something of a mixed result for non-residential construction. While building in the public sector, particularly for health and aged care, has seen some uplift, the more commercial areas, including offices, retail and wholesale business construction has been declining. He concludes:

    There's a drop off, even in nominal dollar terms, in building approvals in those commercial categories. And that's been offset, but not fully offset, by the increase in activity in areas including health and aged care. Though the overall pattern is quite mixed, we think it sort of suggests things are going slightly sideways and maybe even dropping off slightly.

    He also offers a little more detail into what is dropping, and by how much:

    The picture is a pretty mixed outlook for non-residential building. When we put that into numbers, in terms of value of work done, the growth is largely being offset by the areas of contraction. And in aggregate, we see building activity hovering around where it is now roughly around about $46 billion for the next three years. And there's, of course, some really quite strong changes in all of that. There's a 13% contraction in entertainment and recreation, you know, there's only so many casinos you can build. And we've just finished the Barangaroo casino in Sydney. So it's going to drop off from here. And we have factored in a fairly, you know, a 9% contraction on top of the 12% contraction seen last year in offices. And it is offset by some things which are growing. But as we say, in aggregate, it's tracking sideways.

    Engineering construction

    The overall story for engineering construction, as it applies to building infrastructure, is nearly as positive in terms of growth as the residential construction sector. Mr Barwise sums up the growth in these terms:

    We're foreshadowing a very strong ramp up in engineering construction activity in the next three years. It's not going to happen straightaway. It always takes a little while to get infrastructure projects underway on average, but it will, when it arrives, contribute to a very significant expansion in the overall spend in this area. And it's also being joined as well by an increase in mining. And so that overall spend spells a very significant uplift of 9% in the year ahead, growing a further 5% thereafter, and that pushes the activity from $88 billion, right up to about $106 billion by 2024.

    There are some nuances to this, of course. For example, spending on telecommunications infrastructure will decline, as the burst of activity from the National Broadband Network (NBN) is set to end soon. Also, Mr Barwise points to limited growth in spending on road construction as not being as bad as it might seem, as it's less a decline as an already high level of spending being maintained into the future.

    Overview

    Mr Barwise provided a number of very interesting charts during his introduction, but the one that summarises the overall picture best is presented in Chart 1.

    Mr Barwise describes his interpretation of these numbers:

    When we look at growth in construction activity by sub-sector, the four key categories, again, you see, residential building dominating the picture. Infrastructure construction, we've got a lovely lift coming through. And in some respects, we're hearing from industry, the outlook is actually looking challenging, because we've got two very strong booms going on at the same time, which hasn't really happened in the past. And this is presenting challenges for folks, for builders and people involved in construction activities.
    We're factoring in what is quite a strong uplift, and it's going to coincide in two to three years. It's already causing problems with skill shortages, and material shortages, and cost increases, and the possibility of delays in some of these activities. And in some states, for example, in Western Australia, we've got all three, we've got residential, infrastructure construction, and an expansion in in mining activity in Western Australia. So they're dealing with three surges. So there's a source of risk.
    I think the industry welcomes the work. All of this is going to contribute towards quite a significant growth in building and construction activity of about 6%, on average, which is a significant uplift. And that will help with GDP, and with jobs across the Australian economy.

    The big spread

    One consequence of the predicted ongoing increase in residential construction activity is that it will induce a shortage in personnel, tools and materials. Mr Barwise is of the opinion that this will see the spike in demand spread out over several years, as construction clients agree to cope with both ongoing delays and increased prices for both materials and labour.

    There's a limit to the capacity of builders to deal with this surge in demand. So we think it will take them well into next year, [through] this year and into next year, to work through the spike. \
    So we see that being smoothed out over the next two years ... The expected spike up in new houses is going to probably at least be 10%, which is a very strong result, on top of the 5% or 6% that we saw last year. If there's any admission of risk at the moment, we're probably underestimating the size and magnitude of the spike in residential building activity, in the next little while.
    Or the other way, there's also another risk, which is we're probably overestimating the capacity of the industry to address this spike. There are already signs that in some states that it's putting a lot of pressure on builders, and that there's also a pressure on, if you like, skills, shortages of key skills, and increases in prices. And also the prospect of some delays, even in residential buildings.

    Exit strategy

    After providing the core presentation, Mr Barwise asked a very interesting question, which he put to Ms Owen and Mr Scott to answer:

    We've always had the view, as well, that this spike is bringing forward demand. These measures, these policy measures, don't create new demand. It's important for the industry to figure out, first of all, how they're going to deal with this spike. And then what are they going to do when the spike ends? How are they going to adjust to that?
    I guess I would ask them if they have any insight that they would share about that. About when - what do they see happening, when we finally do work through this backlog?

    Ms Owen responded to this issue by saying:

    I think just to say on the [residential] space, it's hard because the industry is dealing in such extremities. Like the current environment is so difficult because you have a spike, not just in new dwelling creation under HomeBuilder stamp duty concessions, and the first home loan deposit scheme for new homes.
    I think it's very clear looking at the finance data that that has created a concentration, a vacuum effect if you like. So you have an industry that's challenged by labour costs, supply chains, and then all of these bottlenecks in development. But then as you say, as the housing market performance becomes more volatile, as well, we see more extreme reactions in the construction space.
    So I think there could even be something to, you know, making that case to government to timeout these policies in such a way that it does help ongoing demand. [And] that is perhaps a bit more moderate as well.

    Mr Scott added some very significant detail to what Ms Owen had to say:

    I think it's really important to remember that we went into this already, in the end, we went into COVID already under what was a typical housing cycle decline ... None of us predicted this, but a global pandemic actually derailed that [decline] and got the housing market firing again. So we didn't have that [extended] period of decline, and that underbuild that we arguably needed after absolute record levels of activity - never before seen levels of activity.
    The other thing that I think is really interesting to sort of factor into that is we've had this absence of migration and Kerry mentioned a negative migration for a period now. We spent a lot of time speaking to participants through all elements of the housing market, through the COVID evolution, and really trying to understand the [time] gap between a new migrant and a home buyer. It's not immediate. There is the argument, you would guess these people need to be housed somewhere. But generally, discussions we've had, the best we can tell, it's a couple of years. You land in the country, you figure out your employment situation, you understand the area, and it's a couple of years between new migrant and home, a potential home buyer. So the period that [low level of migration] starts to bite [in the market], isn't until early next year.

    Future thinking

    At the very end of the presentation, the discussion was taken up by thoughts about the future of construction. As this is an industry not known for adopting new technologies with any kind of alacrity (the history of the adoption of Building Information Modelling is a case in point), it was surprising to find how forward thinking both Mr Scott and Ms Owen were.

    In particular, Mr Scott mentioned that climate change had to be a growing concern for the industry.

    I think one of the things that these points of tightness prompts is a rethinking about how we build. At times, the construction industry isn't given credit for being particularly forward thinking. But I think these times do bring some forethought, so that we're seeing a lot of discussion about the future of building. Do we move to more of a systems-based approach in housing? Maybe it's modular, potentially even 3D printing.
    The other thing that I think plays into that is really around decarbonisation of the building space. And it's something that I can tell you is coming, whether it's the actual making the building itself more carbon conscious, but also materials. In these things Europe generally leads, and certainly our European colleagues are very much focused on decarbonizing the cement chain. That probably brings an element we've never thought about, which is, in cases where there is concrete cement, where is my concrete sourced from? How do I think about that? And while perhaps it's not that relevant, we're already hearing here in Australia, particularly if you're building for a sovereign wealth fund, a large super fund, that that is important.

    Ms Owen agreed with Mr Scott that there needed to be an increased focus on environmental concerns. But she also emphasised just how important innovation has become.

    More broadly, there does need to be a real emphasis on innovation, increased productivity, and kind of dealing with the materials and labour that you can get, that you have access to in the current period. And yeah, I think that's probably the main thing for me as well: engaging with government on really, you know, supporting the efficiency and productivity of the industry too, particularly with on-site training. I think is really important if you have the opportunity for that kind of job creation.

    Analysis

    Forecasts always come from a particular context. In the context of the construction industry overall, the forecast for a good FY2021/22, followed by a slightly better FY2022/23 seems very apt.

    From the perspective of the Australian hardware industry, however, it's likely that a slightly more cautious forecast would be helpful. Hardware retail is not going to gain so much directly from infrastructure investment, and is much more sensitive to a potential switch from detached dwellings to large apartment buildings, for example.

    To see what we can take from this forecast information, we really need to get back to certain fundamentals of the markets and the economy.

    To start with rising house prices, there are three basic reasons why any price increases: innovation creating more value, scarcity of supply, usually linked to increase in demand, and increased costs. To those we can add a fourth, where value increases through context: a new use is found, or a new need is answered.

    It is fairly evident that of those four, it is the last which has had the most influence on house prices since mid-2020. The COVID-19 pandemic has seen the utility factor of the house increase substantially, to include refuge, office, school and comprehensive entertainment centre. Given those increased pressures, and the decrease in other expenditures (e.g., dining out, holiday travel, commuting, events, etc.) it's no wonder there has been such a surge in prices.

    The question is whether this increase in prices is structural or adventitious. If it is (at least in part) structural, then price changes will tend to be persistent. If it is adventitious then it will likely increase and decrease in influence along a curve.

    The answer seems to be that the perceived change in value is likely to be mostly adventitious, but with some structural elements. For example, work from home (WFH) will become a permanent feature of employment, but it will likely mean an average 50% of employees will WFH for two to three days a week, outside of areas where physical presence is required. Equally, it won't be surprising if dining out, after an initial surge through to the end of 2021, will return at a reduced level. Balancing that out, though, it's probable that in 2023 we'll see a sharp uptake in holiday travel outside Australia.

    The revaluation of housing that could occur in the second half of calendar 2022 could see house price increases slow radically, if not retreat below a 3% annual rate. The real, future problem, however, is what could happen in late 2024, as homeowners are forced to consider the expiration of five-year fixed interest rate mortgages in an environment of increasing interest rates.

    Which brings us to those interest rates, and the policies of the RBA. The RBA has stated it plans to keep interest rates low until the current rate of inflation is clearly above the 2% level, which in the past was interpreted as meaning over 2.4% or so. This is linked to the central bank's aspirations to see the rate of growth in the national wage price index return to a reasonable level, which is sometimes interpreted as being at least 3.1% or so. There is also a third goal, which while not so prominently stated is clearly important as well: lifting business investment as a percent of gross domestic product (GDP). It is currently at historic lows not seen since the recession of the 1990s.

    There is one single principle that unites these three diverse goals: growth. The reality is that Australia has seen low growth in GDP since the global financial crisis (GFC). A panel of 23 leading Australian economist assembled by the Australian Broadcasting Corporation (ABC) provided forecasts in July 2021 (before the second, Delta wave of COVID-19) that averaged out to 4.0% growth in FY2021/22, followed by 2.6% growth in the following year, and 2.2% growth in FY2023/24.

    In very simple terms, GDP and productivity are both seeing slow growth due to a lack of investment. Instead of investing today in hopes of obtaining higher returns in the future, most Australian businesses concentrate on optimising their current returns through cost-cutting and consolidation rather than expansion.

    A further problem is that, as Australia has comparatively high corporate taxation, the economy is reliant on the government investing those extra taxes into productive and profitable enterprises. There is nothing wrong with that in principle as a governmental system, at all. But the difficulty is that in Australia, the federal government continues to invest more in supporting legacy industries than in high growth industries that could generate better returns for the economy.

    A good example is the very low level of investment provided for the NBN, even though that turned out to be one of the elements that saved the Australian economy (try Zooming at 1mBit/s) during the COVID-19 pandemic lockdowns.

    Focusing on house prices and the construction industry, another way of looking at this is through the prism of what economists call self-liquidating and non-self-liquidating loans. Self-liquidating loans are common in business, and the typical example given is a retailer borrowing money to buy stock for a seasonal selling season. At the conclusion of the season, the retailer repays the loan with the proceeds from sales. Genuine value has been generated for the economy, and the extent of that value will depend both on market conditions and the level of productivity.

    A non-self-liquidating loan is usually used to buy fixed assets, such as a house. The loan is drawn to pay for an existing building, and paid off over time based on activities performed that have little reference to the asset itself. There is no real value delivered to the economy, and any profit made relies purely on the market, and not on productivity.

    Of course, you can make the case that something different happens when the loan is taken out for the construction of the asset. People are employed, something of value is built (though a large proportion of the loan will be for the land itself, which does not return value). The problem with this, however, is that construction is an industry that returns the least value in terms of productivity gains of just about any industry.

    So, to conclude, in the medium- to longer-term, boosting construction can create instability that will in the end harm the construction industry itself. The difficulty with that kind of instability is that once it has begun, it is very hard to get out of. Effectively, as more and more credit goes to non-self-liquidating loans, self-liquidating loans become increasingly risky, making it very difficult to reverse the trend.

    Conclusion

    Finally, HNN would like to recommend that if forecasts relating to the construction industry are useful to your enterprise, you consider buying the information packages supplied by the ACIF. (For the record, HNN has no commercial arrangements with ACIF of any form.) We think these are reasonably priced, and provide useful, highly accessible information.

    The Construction Market Report and Customised Forecasts Dashboard November 2021 is available for $600. The Australian Construction Market Report on its own is $350, and the Customised Forecasts Dashboard is $300.

    ACIF reports purchase

    You can preview the products on YouTube as well:


    reports

    ABS stats: Hardware retail turnover

    NSW outperforms, VIC lags a little

    Turnover growth remains relatively robust, with past gains largely retained. The only puzzle is Victoria, which shows less resilience than other states, while New South Wales continues to be a leader.

    The Australian Bureau of Statistics (ABS) has released stats for retail turnover to September 2021. While the explosive growth in hardware retail sales during 2020 has declined, the states have retained most of their gains in sales, and some have continued to grow at a surprisingly high rate.

    As we are dealing with highly volatile data, the most relevant chart compares each month to the previous corresponding month, as shown in Chart 1.

    As this chart illustrates, the reductions seen from March 2021 through to July 2021 turned more positive (except for the Australian Capital Territory), and then remained relatively stable from August to September 2021. For September 202, Australia overall saw an improvement of 2.8% over the pcp. Western Australia (WA) posted the highest gain for the month, of 9.9%, followed by South Australia (SA) on 6.4%, New South Wales (NSW) at 4.7% and Queensland (QLD) with 3.8%. The Australian Capital Territory (ACT) saw a decline of 32.0%, but this is in comparison to a very strong September 2020, in which the territory posted a 39.9% increase. Victoria (VIC), which has had negative growth rates since March 2021, went down by 0.9%.

    Chart 2 shows the direct comparison for the trailing 12 months to September.

    It is very clear that the most recent period shows less growth than the preceding period. The change from 2020 to 2021 was around $1.2 billion or 5.2%, while the change from 2019 to 2020 was close to $3.0 billion.

    In terms of the states, NSW remains the top performer for growth, increasing by 8.5%, which amounts to an extra $557 million, followed by QLD at 8.2%, a gain of $380 million. WA gained 6.24%, the ACT 4.5%, and VIC posted the lowest gain of just 0.1% or $7 million over the pcp.

    Chart 3 shows the trend pattern for percentage increases based on the trailing 12 months to September.

    Perhaps the most surprising element of this chart is the extent to which VIC has declined more steeply than NSW. That is despite both Sydney and Melbourne experiencing lockdowns

    Analysis

    One thing that seems quite clear is that the hardware retail market has not undergone the kind of shift back to 2019 in turnover numbers that had been expected. Instead, we are seeing relatively good growth in most states and territories.

    Looking towards the future, as HNN outlines in its review of the latest forecast released by the Australian Construction Industry Forum (ACIF), there is some hope that the current robust numbers will continue for another year, if not two. Alterations and additions are forecast to continue to grow, as is the overall residential construction market, led by - for the moment - detached houses.

    statistics

    Big box update

    Opposition to Bunnings store plan in Glynde

    Bunnings has completed its acquisition of South Australian headquartered retailer Beaumont Tiles

    Local residents in the suburb of Glynde (SA) are concerned that a proposed two-storey Bunnings, with nearly 300 carparks, is too large for the area. Fourteen residents have raised concerns with traffic congestion on Glynburn Road, "rat running" and heavy vehicles in residential streets, reports the Eastern Courier Messenger.

    The hardware retailer has lodged a development application (DA) with Payneham, Norwood & St Peters Council's assessment panel to build on vacant land in Glynde.

    One resident submitted to the panel that "there is no need for another hardware store in this location". There is a large Mitre 10 store situated a few hundred metres away, on the corner of Glynburn Road and Montacute Road.

    The DA comes after two previous plans were rejected by the panel in May 2017 and January 2018. However, the new Planning and Design Code replaced the council's development plan as the "relevant instrument for the assessment of development applications". As a result, the subject land has been zoned for "Employment" rather than "Light Industry".

    Bunnings property and store development director Andrew Marks said the store would create more than 100 ongoing jobs and around 130 during construction. He told the Eastern Courier Messenger:

    The Glynde site is well positioned for a Bunnings store that will provide residents living in the area with a much wider range of home and lifestyle products ... We have been working closely with the relevant authorities throughout the development application process, and we look forward to learning the outcome of the application in due course.

    Related: Adelaide could be the next location to have one of the biggest Bunnings stores in the country, with a proposed build for Glynde.

    Big box update: Two-storey Bunnings proposed for Adelaide - HNN Flash #53, July 2021

    Beaumont Tiles acquisition

    Bunnings Group managing director, Mike Schneider, said of the acquisition:

    Beaumont Tiles is a trusted Australian business with a great team and a proud 61-year history, and we're really pleased to have completed the transaction...
    The acquisition will help us better cater to the needs of our builder and flooring trade customers who will benefit from Beaumont Tiles' specialist design knowledge and extensive hard surfaces range.
    Beaumont Tiles has a strong management team in place and will continue to be run as a separate and distinct business and we're looking forward to investing in the company's future growth.
    The Beaumont Tiles team and franchisees are known for their passion and dedication, and we're excited to welcome them to the Bunnings family. I'd like to thank Bob Beaumont and his family for building such a fantastic business and team and entrusting us with building on their legacy.

    Danny Casey, CEO, Beaumont Tiles said:

    We're excited to write the next chapter for the business while preserving the unique culture, service expertise and design knowhow that has made Beaumont Tiles such an industry leader.
    We know that with Bunnings' backing, we are well placed to continue to innovate and evolve for ongoing success and growth.
    The completion of the transaction gives the entire Beaumont Tiles team and our dedicated franchisees exciting new opportunities and we're pleased our national support office will continue to be based in Adelaide.
    On behalf of the entire team, I want to pay tribute to Bob Beaumont for his contribution and leadership for over 53 years. It's been my privilege to work alongside Bob who is an icon of the tiling and building industry.

    With a specialist offer across hard surfaces products, floor and wall tiling, bathroomware and other hard surfaces accessories, Beaumont Tiles has 116 outlets across Australia. It has company owned and franchised stores servicing trade, home builders and renovators, and the commercial sector.

    Prior to the announcements from Bunnings and Beaumont Tiles, the Australian Competition and Consumer Commission said it would not oppose the acquisition on the grounds that Bunnings is not already a strong competitor in the tile sector.

    Bunnings entered an agreement to acquire Beaumont Tiles in late April 2021.

    Related: As Beaumont Tiles becomes part of Bunnings, it will end the era of the Beaumont family's ownership.

    Beaumonts joins Bunnings - Tile Today, June 2021

    Related: Bunnings gets greenlight for Beaumonts.

    Big box update: ACCC does not oppose Bunnings' Beaumont Tiles acquisition - HNN Flash #65, October 2021
  • Sources: Eastern Courier Messenger, Bunnings Media and 9News
  • bigbox

    Supplier update

    BGC could be Wesfarmers' next target: report

    DuluxGroup confirms it has entered into a binding agreement to acquire Slovenian paint company, JUB

    There has been market speculation that Wesfarmers was looking to acquire West Australian building materials company, BGC (Buckeridge Group of Companies).

    Now there is discussion that Wesfarmers may be finalising a deal to purchase BGC, according to Data Room in The Australian. It believes it may be an ideal time to sell with a strong residential construction market in Western Australia as a result of the mining boom.

    BGC could make sense for Wesfarmers because it may create opportunities to attract more trade customers to its Bunnings hardware stores.

    Parts of the BGC business have already been offloaded, including its contracting arm, which was purchased by NRW for $310 million including debt.

    The business is now involved with producing construction and building materials and offering residential and commercial construction services, industrial maintenance and fabrication services, and property ownership and management. It owns quarries and a cement grinding plant.

    It is thought that the group's divisions are all interrelated and are largely reliant on each other for profitability.

    Related: BGC may be up for sale

    BGC Group potential sale - HI News, December 2018

    Related: BGC's building materials division could be of interest for an acquirer after its contracting business has been sold off

    BGC building materials draws interest - HNN #11, December 2019

    Related: BGC offers property assets for sale

    BGC offers property assets for sale - HNN Flash #14, June 2020

    DuluxGroup-Jub

    DuluxGroup's deal to buy Slovenia-based paint company JUB has been valued at EUR194.5 million. The company plans to turn JUB into a hub for Central and Eastern Europe, maintaining its existing brands, and make it part of Nippon Paint's R&D community. (DuluxGroup has been owned by Nippon Paint since 2019.) JUB said in a statement:

    Under the auspices of DuluxGroup, JUB will enjoy autonomy and independent growth, while at the same time leveraging the advantages of access to a global market, technologies, capabilities and abundant capital resources of Nippon Paint Group.

    Patrick Houlihan, chairman and CEO of DuluxGroup, said that with the support of the world's fourth largest paint producer, JUB would continue to build its leading position in the regional market, strengthening its innovation, portfolio and geographical reach. It could also play an important role in the group's expansion to Western Europe.

    In a separate release for investors, Nippon Paint said JUB commanded market leading positions in several paint segments in Slovenia, Croatia, Serbia and Bosnia-Herzegovina, and the acquisition will allow it to better use its distribution network.

    Nippon Paint said "the European paint market is the world's second-largest following the China market and has prospects for continuing steady growth".

    JUB is a manufacturer of decorative paints, ETICS (External Thermal Insulation Composite System) and other paint-related products. It is one of the market leaders in interior paints in Slovenia, Croatia, and Bosnia and Herzegovina and in façade paints in Slovenia, Serbia, and Bosnia-Herzegovina.

    It posted group sales of EUR111 million in 2020 and a profit of EUR4 million.

    Related: Nippon Paint plans to acquire French paint maker Cromology.

    Supplier update: Nippon Paint to buy France-based Cromology - HNN Flash #69, October 2021
  • Sources: The Australian and Independent Balkan News Agency
  • companies