New markets emerge post-pandemic

Will smaller retailers regain their mojo in DIY?

Pandemic lockdowns boosted DIY sales - through a new kind of captive market. As these sales slide, can hardware retailers work out how to retain the new customers? One solution may be seeing the new markets.

As we approach a time when the phrase "post-pandemic" seems something more than wishful thinking, it is possible to consider how markets for the hardware retail industry may evolve.

One of the surprising boosts from the COVID-19 pandemic has been a sharp increase in spending on DIY projects. It isn't, as some have suggested, the "supercharging" of one particular market. Rather, this surge has affected a wide range of homeowner demographics. This is an indication of the emergence of several new, potentially valuable markets.

In the midst of the pandemic, when retailers were coping with interrupted supply chains, and finding ways to get product to customers safely and quickly, it was too much to ask for them to pivot quickly to better cater to these new markets. As a result, as the peak of the pandemic demand has declined, there has been a fading participation from these new markets.

However, that doesn't mean these new markets are lost, or have permanently migrated elsewhere. A good question to consider is how local independent retailers, as well as the suppliers that support them, can re-engage with, and develop a better relationship to these emergent markets.

What's in a market?

There are really two difficulties that the hardware retail industry faces in these circumstances. One relates directly to the nature of these emergent markets, and how best to promote into them, and cater to their precise needs. But the bigger, encompassing problem is, how can the hardware retail industry adapt to just about any change at all?

Over the past 12 or 15 years there has been, at best, incremental change in the industry. We've seen most retailers stuck in the repetitive grind of trying to make things work with existing products marketed into existing markets using well-established distribution channels and familiar marketing approaches. While these have worked well as survival strategies, the truth is that this approach has led, for most, to a gradual but persistent erosion of either market share or profitability - and sometimes both.

It's not as though this is somehow entirely their fault. We all know that the independent hardware market has people who work very hard, are very experienced and savvy, and relatively adaptable to changing conditions - witness how quickly they stepped up to cope with the COVID-19 challenges. What has forced them into this defensive position has something more to do with external market conditions than internal business dynamics.

What are those external market conditions? In a simple form, we could summarise it with a single proper noun: Bunnings. That's simple because it doesn't really reflect what is going on. Bunnings itself did not create the current market conditions. Wesfarmers - specifically its current board chairman Michael Chaney - worked out in the late 1990s how the model pioneered by The Home Depot in the US could be adapted to Australian conditions. Then John Gillam essentially supercharged that model during the 2000s.

The difficulty is that, while the North American market is large enough to accommodate not just one major big-box hardware retailer, but really three or four, plus a dozen additional large businesses as well, the Australian market is not. Evidence for this is the effort made by then-CEO of Woolworths Grant O'Brien to launch Masters Home Improvement. It's notable that from the beginning Mr O'Brien saw Masters not as an attempt to add an additional retailer to the market, but rather to displace Bunnings. (And, indirectly, it was more about the competition between the Woolworths supermarkets and the then Wesfarmers-owned Coles supermarkets.)

Similarly, Metcash's integration of Mitre 10 and the Home Timber & Hardware (HTH) into the Independent Hardware Group (IHG), which was supposed to create a Bunnings competitor, did not generate the expected synergies. It was certainly a profitable move, but not, in the argot of acquisitions, "a game changer".

In this the third decade of the 21st Century, economists have come to realise that past measures used to identify monopoly power in markets no longer really apply. In particular, during the late 20th Century the key identifier of monopoly power was an increase in costs to consumers. Today, the view has shifted to considering that monopoly power is indicated by the ability to limit and control innovation in a market.

While economists such as Joseph Stieglitz do see temporary monopoly control as potentially being a good thing for innovation, as it incentivises initial investment in new developments, longer-term monopolies are generally seen as stifling innovation. That is because companies that have a majority share of a confined market see innovation as less an investment, and more as a necessary cost. It has the purpose of maintaining market share, rather than expanding it - essentially it serves the same function of advertising.

In simple terms, monopolies shape markets to a form that suits their business model, then make it difficult for differing business models to be sustainable. They optimise sales flow, and thus reduce costs to themselves and customers, but this is done at the cost of an increasingly narrow focus. Breaking that focus, and introducing new and valuable innovations, often takes extreme efforts.

Example industries

While it is a little difficult to identify these dynamics in the Australian hardware industry, it's more evidently on display in other industries. One industry that has been, in particular, caught up in monopolistic behaviour, and undergone something of a re-evaluation, is the North American automotive industry.

It's a rather amazing fact, but if we look back at cars as they were developed by, say, 1980, and cars today, there really has been very little in the way of true innovation. Some technologies have benefitted from computer chips and electronics, such as fuel injection, internal combustion engines (ICEs) have as a result improved incrementally in terms of reliability, longevity and power output - but overall, it's a market that has been almost unchanging.

That was, up until 2012, when Tesla, Inc. introduced its all-electric Model S family sedan. While Tesla experienced many teething problems, and needed to add both its crossover model Y and less expensive Model 3 to the range, by 2021 it became apparent the all-electric automaker was a major player in the automotive industry. Rather astonishingly, Tesla now has a market capitalisation of over USD730 billion. That compares to the General Motors (GM) market cap of USD75 billion, while Ford is at USD50 billion, and Fiat Chrysler Automobiles is around USD31 billion.

How did the established car companies completely miss out on such an important emerging trend? While car companies such as GM did experiment with electric cars (notably the EV1 in the late 1990s), these were discontinued when the company realised they did not create an adequate revenue stream. While GM portrayed this as a lack of consumer demand, this is not supported by many indicators. What seems more likely was that many car manufacturers saw that electric cars would disrupt the valuable car ecosystem, where vehicles become highly profitable in terms of parts sales after their fifth year of life. How big is that market? Business consultants McKinsey provided some estimates in a 2017 report:

McKinsey's proprietary modelling of the automotive aftermarket was developed to project growth of the global industry. The model represents values at the end-customer price level, including parts, labour, maintenance, and crash-relevant revenues, with a granular differentiation by region. It imputes a total global value for the market in 2015 of approximately USD760 billion. More granularly, three regions accounted for over 75% of this value: more than a third came from North America (35% or approximately USD267 billion), Europe was second with approximately USD237 billion (31%), and China's approximately USD72 billion market accounted for 10% of global value.

The Detroit News, which has long specialised in car company reporting, reported on estimates in 2017 as well:

The US market for replacement auto parts and service is growing and in 2017 will be a $277 billion industry, estimates the Auto Care Association, a trade group that represents manufacturers, distributors, parts stores and repair shops.

The McKinsey estimates takes in a broader scope of parts supplies, including aftermarket additions for new cars. The Auto Care Association estimate is more focused on vehicle repair. In either case, these are large numbers.

TechCrunch, a well-regarded publication which tracks tech industry investments, put some numbers on just how electric vehicles would impact the maintenance and repair business:

With one-fifth the number of powertrain parts and an almost total elimination of oil, the typical automotive dealer will suffer 35% declines in maintenance and service revenue, or roughly USD1,300, for an EV versus an internal combustion engine vehicle over a five-year period.
But this disruption is not even. Two of the top three maintenance items - oil changes and brake service (24% and 5%, respectively, of all maintenance transactions in the U.S. market) - are reduced or eliminated entirely by the move to EVs.
Why are brakes impacted? EVs often use a process called regenerative braking, which slows vehicles down while also saving energy. The reduced wear on pads and rotors is striking: some Toyota Priuses are still operating on their first set of brake pads after more than 100,000 miles [160,000km] of use, whereas you'd normally assume pads would be replaced after about 30,000 miles [48,000km].

That's only part of the story, however. Even in the US, consumers are keeping vehicles for longer (over 11 years), and that number has always been higher in the US and European markets. Most repair expense begins after the fifth year, with the seventh to tenth year seen as the "sweet-spot" from the point of view of parts suppliers.

(Some part expenses do increase for EVs, in particular tyres, as instant high torque results in more wear. However, this could be partially solved by, for example, tyres made specifically for EVs.)

Of course, electric cars still do have some maintenance costs - in particular one big cost, which is the eventual need to replace the Lithium-ion (Li-ion) batteries. Estimates currently are that Teslas lose 5% of battery capacity over the first 80,000km. However, they only lose another 5% over the ensuing 160,000km. This doesn't mean they stop working, but a vehicle that started with a range of 640km would be reduced to a 576km range after 240,000km. The current average driving distance for Australians is 13,300km a year, but EVs are driven more frequently, so at 15,000km a year that would mean it could be more than 15 years before a battery replacement was not needed but advised.

A Tesla is not a car

While these numbers are important as background, they don't really address what is really going on with Tesla vehicles. The clue to the success of Tesla, is that Teslas are no longer cars in the sense that we understood cars in, say, the late 1990s. The reality of the Tesla is that it is far less a mechanical contraption, and much more a complex mass of software with wheels attached.

To get what has happened, we need to return to that landmark essay by Theodore Levitt, which first appeared in the Harvard Business Review in 1975: "Marketing Myopia". This paragraph is perhaps the best indicator:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad-oriented instead of transportation-oriented; they were product-oriented instead of customer-oriented.

If you wanted to locate a popular antithesis from the past to the Teslas of today, one possibility would be the original Ford Mustang. Advertising from that time didn't focus so much on performance, as on experience. The Mustang was marketed as the key to a new, different, more exciting life - your own personal action/adventure movie.

There was, in fact, some justification for this hyperbole. Before we had the Information Superhighway we had, well, the actual, concrete highway - which was its own technological innovation, both in the US and Australia. Highways enabled the young adults of the 1960s and 1970s to explore places their parents had seen only through the window of a bus or train while passing through.

But the coming of the less-material Information Highway has changed the literal highway. Faced with a three-hour drive today, the average young adult confronts a situation that mixes tedium and boredom together with high risk and potential danger - not to mention, a lack of connectivity. (Take a long car trip with anyone under 25 years-old, and you'll find they schedule hourly breaks just to catch up on their texting.)

It's no accident that Tesla knew to combine EV technology with semi-autonomous driving, including "Navigate on Autopilot". This provides the capability to change lanes to get around slower drivers or to leave the highway when the vehicle reaches the desired exit. Those actions that "real" drivers once relished as a test of skill are now seen as inconvenient and difficult, a cause for tension. The Tesla promise isn't about action and adventure; it's to help you get from A to B in the most relaxed, stress-free way.

It's a difference that most standard car reviewers - and likely many car manufacturers - still struggle to understand. For example, when Tesla's most recent performance vehicle, the Model S Plaid, was launched, there was a great deal of commentary on flaws such as marks on the external paint finish. Certainly, the reviewers had a point - paying over $200,000 for a car that comes with paint speckles on the outside mirror is not good. On the other hand, the Plaid - which is a family five-seater sedan/hatchback - can do 0 to 100kmh in 2.1 seconds, faster than a Porsche 911 Turbo S.

Even more to the point, though, is that reviewers totally miss what is so wrong on just about every other car. Stepping from a Tesla, with a full-featured 17-inch landscape touchscreen display, to a dinky 12-inch display in, for instance, a Mercedes E-Class, can feel like having to re-experience Windows 95. The reviewers see the paint, but they don't see the really awful software, such as the lack of true driver-assist that Tesla has developed using over 10 years of careful real-time driving data collection. Yeah, the Mercedes has great paint - but how does that get me from A to B more safely and with less stress?

Teslas of the hardware industry

What does this have to do with hardware, and especially hardware retail? HNN sees the Australian hardware industry as being close to where the US auto industry was around 2008. In the DIY market, all the pieces are in place for transition from a singular market model, to a dual model that accommodates very different influences.

What stops that from happening, in part, is the same as for that auto market: monopoly participants in the market who are invested in keeping things the same, as that is the model that delivers them the highest sales and continuing profit growth.

The bad news is, it's unlikely the market will see the advent of a company like Tesla, which breaks things up enough that different competitors emerge (a number of EV companies have emerged in the wake of Tesla's success). The good news is, it is still possible for smaller companies, meaning both smaller suppliers and smaller retailers, to break open the market. That's because, unlike in the car market, smaller companies will have a slight marketing advantage.

The new market

What does the new DIY market look like? It is based on some of the same shifts we have seen in the auto and other markets. But to define it, we need to consider how the core DIY market that has been around for the past 20 years worked.

In the early 2000s there were some really complex things going on in DIY. The end of tariffs on many goods in the preceding decade, coupled with the rise of Chinese manufacturing for the rest of the world, meant that products such as power tools that were once quite expensive became obtainable. That coincided with a shift in house interior and exterior design, as patterns from the past were replaced with a more mix-and-match attitude. As the website Domain described it in a 2018 article entitled "Home-grown style: The elements of design that Australia is known for":

One concept repeatedly singled out by industry insiders is the Australian penchant for designing exemplary indoor-outdoor spaces.
With backyards becoming smaller, particularly in major cities, these spaces make the most of the often limited outdoor space while embracing their surrounding environment and encouraging added natural light and ventilation.

While for indoors:

"The quintessential Australian home celebrates open-plan living," [Aimee] Tarulli says. "We lead busy lifestyles so it's important that our homes complement our busy family life and attempt to make everyday living easy and relaxed.
The widespread adoption of open-plan floor plans in Australia is largely the product of mid-century designers such as Robin Boyd, Alistair Knox and Harry Seidler, whose homes essentially changed the way Australians live.
Mid-century architecture principles are similar to those of Scandinavian design - another style that has experienced a renaissance of sorts in recent years. Both styles prioritise craftsmanship and earthy materials, which is typically complemented in Scandi homes by a lighter and brighter overall colour scheme.
Home grown style - Domain

Combining those elements has given rise to a form of home that is, essentially, classless. The social drive behind much of DIY from the late 1990s to the early 2010s, HNN would argue, was to achieve a "look" and function to a house that elevated a family from its origins, and to a new place in a modern Australia.

There is little doubt that for many Australians Bunnings was the hero of that particular story. A deck might be beyond a reasonable budget, but with a cheap drop saw, an impact driver, framing timber, decking timber and a big bucket of screws, it was possible to create something over two or three weekends.

For the generation who grew up in those homes, however, there has been something of a different track - one that has been accelerated by the COVID-19 pandemic. From free-flowing space, the shift has been to a more intense use of space. The idea of adding a deck to a house might have some attraction, but what about adding a deck that incorporates a work/study nook, as well as a place to store and use an exercise bike or an elliptical trainer? Similarly, the "video room" which replaced the lounge/TV room now becomes much more exciting if it is also an exercise space, where the video screen can be used with a Peloton bike, or Apple Fitness session.

As importantly, the new generation of home is less about "joining in" to an established set of design ideals, and more about how personal a space can be made. With Amazon, Ebay, Aliexpress, Banggoood, Catch and Etsy all readily supplying "stuff", the real differentiation is about that personal engagement.

To shorthand what is going on, it's possible to see the umpteenth generation of Channel Nine's "The Block" TV show as at one end of a continuum, and Channel Ten's recently launched "Making It Australia". In this new DIY market, most consumers are at least mid-way between the two, with the distribution tending more towards the latter than the former.

One indication of how vibrant this new market may be worldwide is that that once-austere publication of Conde Nast in the US, Architectural Digest, has itself started a digital division called AD-DIY. This is a good resource if you want to become better acquainted with this part of the market.

A classic project represented there would be the deck build by writer Zoë Sessums. To extract some principal quotes from the four-part series:

Because lumber prices were so high this spring, I had to find other ways to keep things affordable (under USD1,000). Though my partner and I have a lot of enthusiasm and motivation, we agreed to keep the project in the realm of something we could accomplish in a weekend. It was important that the design be simple and require as few modifications and tricky calculations as possible.
I decided that the best option for my yard and skill level would be a simple, rectangular freestanding wood deck. The process of planning the build involved a combination of googling "simple deck" and doodling. I found a lot of amazing free resources that helped me figure out all the supplies and tools I would need to get the job done. Be sure to look into the local building codes in your area when you have your deck plans drawn up, but know that low, freestanding decks have less hassle involved as far as building permits are concerned.
A major goal of mine was to do as little cutting as possible, so my partner and I thought about what dimensions of lumber we could buy to minimise how much we would need to cut. As much as I can repeat "measure twice and cut once," I'm not the greatest with accuracy. This led us to decide on a 12-by-24-foot [3658mm x 7315mm] rectangular deck that would run along the south side of our house and be assembled with 12-foot planks of wood. It wouldn't be high enough to require a railing, but it would need a set of steps to the back door and a set of steps from the yard to the deck. In short: almost no need for a saw!
The deck series - Architectural Digest

There are very few experienced DIYers (and hardware store owners) who would not find fault with Ms Sessums' deck. Yet, that's really a bit like car reviewers focusing on the exterior paint finish of the Tesla S Plaid: it misses the point. Will the deck last for the next 10 years? No. But the core point here is that Ms Sessums - and her partner - are hardly interested at all in the process of building the deck. All they want is to have a deck (for a few years), and to get that done as simply as possible, and well within their available skillset. That's going from A to B with minimum stress.

Developing the market

You have to ask what would happen if someone like Ms Sessums wandered into an Australian hardware store, explained her project, and asked for advice. It is likely that in the majority of hardware stores she would have been told not to do it, to hire a tradie, and so forth. That would have resulted not only in the loss of this one sale, but probably any future sales as well.

The standard kinds of advice that are readily available to people building decks in Australia are actually not all that useful to someone like Ms Sessums. For example, many of us (including at HNN) would find this description of building a low-level deck which is supplied on Bunnings' Workshop social platform to be really helpful:

How to build a low-level deck - Bunnings Workshop

For a real beginner, however, who is not interested in DIY for itself, this would likely seem complicating and confusing. Just the idea of necessarily having to install noggings ("blocks" in US parlance) might be enough to crash the entire project.

The important thing to bear in mind is the objective. It is taken for granted in the experienced DIY community that any project should be built to last for 10 years or so. But there is no real reason why that has to be the case, and people who have a different objective, such as three or four years, are not, in any objective sense, "wrong".

Taking the general out of these specifics, what we could say is that there is an inbuilt sense in many hardware retailers that they represent a kind of standard which they expect their customers to meet. If they can't meet that standard in terms of knowledge and experience, then they expect their advice to be accepted and followed.

Conclusion

The real difficulty with change in all Australian markets is that it tends to present itself as something of "falling off the cliff" event. One moment everything is following a well-worn groove and a traditional pattern - then there is a sudden disruption, and everything changes, it seems, "overnight".

We've seen that happen most recently with the rush to initiate fully transaction ready websites for hardware and other retailers. Yet these changes really do not come out of nowhere, and it is frequently the case that industries have been warned long before their advent.

The real difficulty, when you examine these situations, is that most businesses still base their strategic planning on the past, rather than the future. They perceive change as threat and expense rather than opportunity and profit.

While the pandemic has been something of an extraordinary event, it's also true that since 2015 we've been seeing more extraordinary events occur. It may be that most strategies need to be revised, with the probability of change, in the future, considerably increased.

editorial

Metcash/IHG trading update

First 12 weeks of FY2021/22 show solid growth

While the IHG numbers for all of FY2020/21 were slightly behind overall growth in ABS retail stats numbers, IHG has apparently seen sales surge from 1 May to 15 August 2021.

Metcash has released details of its trading for the first 16 weeks of the company's FY2021/22 year, from 1 May 2021 to 15 August 2021. The top news about trading conditions indicates that total sales for its Independent Hardware Group (IHG) segment, excluding sales for the recently acquired Total Tools Holdings (TTH) grew by 3.6% compared to the previous corresponding period (pcp), which was 1 May 2020 to 15 August 2021. (The periods are broadly comparable as they both include 16 full weekends.)

This represents a good result for IHG, as the Australian Bureau of Statistics (ABS) hardware retail stats for May through July 2021 indicate a fall in retail revenue for hardware of 8.9%. (August numbers are not yet available.) It also represents a turnaround from IHG's sales for its FY2020/21, which came in at 17.9%, while the ABS stats indicated growth for that period of 18.3%. (It would also seem likely that the IHG sales figures may include some non-organic growth in retail sales through acquisitions.) For the entire hardware segment, including TTH, sales increased by 24.7% over the pcp.

The company reported further growth in trade sales, which it stated acted to offset a decline in DIY sales. Metcash also stated that stock availability was being pushed, especially as regards timber. It noted that various COVID-19 pandemic restrictions had affected sales across Australia, except in the states of Tasmania and Western Australia.

Commenting on IHG's trade business, the company stated in its Annual Report for FY2021 that:

[Metcash] Hardware's "Whole of House" initiative is expected to help further build on its leading position in the Trade segment. The business has now established national coverage from nine Frame and Truss sites and has alliances in place which ensures it is able to supply the key stages of a house build including Foundations, Frame and Truss, Lock Up, Fix and Fit Out. IHG's share of the supply component of a house build increased from ~30% to ~35% in FY21 and there is potential to grow this further.

The report also mentioned IHG's showroom concept, Design10.

We are developing a new showroom concept (Design 10) that displays the many category options that IHG can supply including kitchens, appliances and laundry products to ensure builders and their customers are provided with a "Whole of House" offer.

Total Tools

On TTH, Metcash had this to say in its Annual Report:

Like IHG, Total Tools has a store upgrade program to further enhance customer experience, with 64 stores completed to date. Average store growth post refurbishment has been on average >15%, and it expects to refurbish a further 24 stores over the next three years.
Total Tools has significant growth opportunities through the expansion of its store network and the acquisition of an ownership interest in a select number of stores. The store growth program was well underway at the time of our acquisition, with plans to open eight to 10 new stores each year with a target network size of 130 stores by 2025.
The acquisition by Metcash provides Total Tools with funds to support the store expansion program, as well as the expertise in running joint venture and company-owned stores. Total Tools acquired a majority interest in 12 joint venture stores in December 2020 and there are plans in place to convert more franchisee stores to joint venture stores over the next three years.

Risks

Perhaps the most noticeable lacuna appeared in the "Risks" section of the annual report, where Metcash detailed its sense of competitive risks as follows:

Any increase in competitive activity from new or existing competitors (including in the form of a new market entrant with a wholesaler model, where suppliers sell directly to the Group's customers, where customers form their own buying groups to collectively negotiate and purchase directly from suppliers or where indirect competitors change their business models to compete directly with the Group) may have a detrimental effect on the Group's operations, particularly if Metcash fails to respond effectively to that competitive activity or its response is delayed (for example, as a result of the time required to engage with the Group's independent retail network in order to implement an initiative). Increased competition may also adversely impact Metcash's long-term performance and profitability.

This would seem to be a fairly general purpose statement. While Metcash is under no legal obligation to list it as a risk, it would seem prudent to directly or indirectly identify the new Bunnings trade tool chain, formerly Adelaide Tools and now renamed "Tool Kit Depot" (TKD) as a risk. There is also likely to be increased competition during the current financial year resulting from the completion of Bunnings' acquisition of Beaumont Tiles.

Another risk that could have been identified is that, as Metcash moves more into direct retail, both through acquisitions and joint ventures in its IHG banner stores, and by entering into store ownership and joint ventures in TTH, it becomes more at risk from downturns in the market. As a wholesaler, the company was somewhat insulated from ongoing fixed costs for sales floorspace as well as staffing.

Analysis

Looking through the Metcash results, it often seems as though the numbers that are provided are not always fully described. A good example of this is the "sales uplift" ascribed to stores that undergo the Sapphire upgrade process. This has been held to be above 15% by Metcash in the past, and they have now increased that number to over 20%. The question that remains is whether this number is a comparison of all sales prior to the upgrade to all sales after the upgrade, or only those sales made through products sourced directly from the IHG warehouses. Those are two very different numbers, especially as part of the Sapphire deal is that stores will order more product directly from Metcash.

Similar to that are the numbers that are provided for IHG's digital operations. While we've grown used to seeing digital sales increase by over 100% through the years, without a statement that identifies the percentage of total sales that are digital, it's difficult to find significance in those high numbers.

The real concern that stems from this kind of external accounting presentation is over how clear the internal accounting presentations are. The reality around TTH is that Metcash might have bought what seems like a "bargain" for the next two years or so, but that bargain could collapse as more TKD outlets come online.

HNN has speculated in the past that Bunnings might locate some TKD outlets near Bunnings Warehouse stores, and while we have no further confirmation on that point, we still think it likely. That could deliver a considerable competitive advantage.

While Metcash repeatedly declares that the TTH business is a good fit with IHG, that seems both true and untrue. Certainly, there are business synergies. But IHG could only reasonably place new TTH outlets near Mitre 10 stores if those are corporate stores. Otherwise the TTH store would divert revenue away from independently owned banner stores. Even without that direct adjacency, there must be some concern for Mitre 10 owners that a more effective chain of TTH stores could see a decline in power tool accessories from Mitre 10 stores.

retailers

Big box update

Bunnings Jolimont store gains approval

Adelaide Tools to become Tool Kit Depot as the business expands into Western Australia

Bunnings' proposed store in Jolimont (WA) has gained approval from state planners, following a meeting by the Inner North Joint Development Assessment Panel (JDAP).

The West Australian reports that Metro Inner North JDAP members - including Subiaco councillors Matt Davis and Rick Powell - unanimously agreed that owner Bunnings Properties Pty Ltd could build a four-storey building with two basement levels of parking, a bulky goods showroom on the first floor and ground floor, along with a cafe or restaurant and shop. Third specialist member John Syme said:

This might end up being one of the best Bunnings stores in Australia ... there are no reasons why we shouldn't approve this.

The hardware retailer will move from its Salvado Road, Subaico location to 616 Hay Street in Jolimont.

However there was opposition to the store development including from residents at the neighbouring St Ives Centro retirement home. Many aired their concerns at the meeting, including St Ives Centro resident Michael De Leo, who said it would bring an "inevitable considerable increase in traffic and consequently pedestrian safety".

His view was Bunnings warehouses belonged in commercial areas, not in an area with "mainly residential with a mix of small and low activity businesses". He said Bunnings should stay at Salvado Road.

St Ives Centro resident John Carroll said planners made no allowance for the elderly yet "active" people living at the retirement home.

City of Subiaco acting manager of planning services Anthony Denholm told the panel that traffic had been "duly considered".

Related: Retirement home residents oppose the Jolimont store.

Big box update: Jolimont - HNN Flash #62, September 2021

Tool Kit Depot

Bunnings recently announced that Adelaide Tools will become Tool Kit Depot, positioning the professional tools business for expansion into Western Australia starting in October. The first Tool Kit Depot store will open in Belmont with a further three stores expected to open this calendar year in the Perth and Peel regions.

The Tool Kit Depot sites will average about 2000sqm in size and stock about 10,000 product lines across power tools, outdoor power equipment, construction and safety equipment.

The Tool Kit Depot name was chosen because it creates instant familiarity for trade customers, positioning the store as a destination for their needs, while a new logo, featuring a dog, conveys the qualities of partnership, loyalty and trust the business aspires to. Mike Schneider, Bunnings managing director, said in a statement:

We're really excited about our plans for the future of the business under the new name, Tool Kit Depot. Earlier this year we opened a new Adelaide Tools store in Parafield where we trialled new concepts and the response from customers was incredibly positive. It's given us confidence in the evolution of the format that we need to take the business into WA and beyond.
Our first four stores will launch before Christmas in WA creating over 150 team member roles, and we're really proud to be creating opportunities for locals to join our really experienced team.
These stores will build on the success of Adelaide Tools in South Australia and the full-service offer and genuine expert advice the team are renowned for.

The stores will sometimes be near Bunnings warehouses, but will be differentiated from the hardware giant, according to The West Australian. He told the newspaper:

We want to make sure it is a distinctly separate business from a trading point of view and a customer experience point of view because we are really conscious that the customers going there are going to be shopping at Bunnings for other products.

The WA openings will allow the group to test its plans over a bigger base. Mr Schneider said:

If there are things that need to be ironed out in WA, we're clearly going to need to address those. But we have a really good level of confidence. The rollout once we leave WA will be into the markets where we think we can have the greatest impact.

He has said there is potential for as many as 75 stores across Australia and New Zealand.

  • Sources: The West Australian, Bunnings Media and The Australian
  • bigbox

    Indie store update

    Gulgong Timber and Hardware under new ownership after 34 years

    The store remains with local owners after Pat and Gerald Rowles put it on the market

    The hardware store in the historic gold rush town of Gulgong, located in the Central Tablelands in NSW, remains in local hands after owners Pat and Gerald Rowles recently decided to sell the business and retire.

    According to the Mudgee Guardian and Gulgong Advertiser, Gerald originally moved to Gulgong with his family when he was a baby and moved away when he got older to work in various jobs. He returned to Gulgong as a builder and an opportunity came up to buy into what was then Loneragan's General Store which had a timber yard. It became Gulgong Timber and Hardware after that.

    Gerald had some business partners come and go through the years before buying out his existing partners three years ago. His youngest son had expressed interest in taking over before deciding to pursue another career, so he and Pat decided it was time to hang up their hats. He told the Mudgee Guardian and Gulgong Advertiser:

    We put it on the market, and it's been a good time to put it on the market and it sold very quickly.

    The business was purchased in a three-way agreement between locals Troy McKellar, David Woods and Tony Ruming. It is something both Gerald and Pat are very happy with, given they had hoped to sell it locally. Gerald said:

    David has worked in Gulgong in retail for 38 years ... and Tony is a local builder. So the mix of talent is quite good with those blokes, and Troy has business expertise and contacts and that sort of thing...

    Troy said a commitment to the town drove their decision to buy. He explains:

    It's a local business, it's been there for a long time. And after speaking to Pat and Gerald, they wanted to ensure that a local bought the business to continue on that loyalty and commitment to the town.

    Troy also said they are looking forward to bringing some new products to the store.

    All of the feedback has been really positive. Everyone's really excited. Especially when we start saying that we're going to bring in a few lines of dog food and some rural supplies and that sort of stuff.
    We'd just like to thank Pat and Gerald for building such a great business over the last three decades thank you to them for the opportunity.

    Changes

    For Pat and Gerald, the sale of Gulgong Timber and Hardware "pretty much" means retirement for the dual 65-year-olds, said Gerald. Although he will stick around the shop for a few months yet as the new owners learn the ropes.

    Thirty-four years in business is longer than most, and much has changed for the business that has become a staple of the Gulgong CBD. None bigger than the steady march of new technology. Gerald said:

    One of the big changes is technology, of course, in my time here we were pre faxes and now faxes don't exist anymore.
    When we bought the place we had hand-written docket books and a wooden cash drawer that was just under the bench and you'd drag it out and that's what you do. When the actual time for the changeover happened, it happened in a solicitor's office in Sydney somewhere as they do, and then you'd get to two o'clock they rang and said 'righto, the changeover has happened'. So they took the money out, took their docket books away, and we put our change in and put our docket books in and away we went.
    Now we've got our IT blokes crawling around the place running cables in changing computer systems. That's probably the biggest difference.

    To some, Gulgong seems steeped firmly in the past, but Gerald believes the timber and hardware business has adapted quite a bit over the last four decades, driven mostly by the coal mines and more recently, people doing home improvements during lockdown. He said:

    The coal mines ... were up and running pretty well by the time [we started]. So they started going in the late 70s I suppose when Ulan started hiring lots of people.
    Gulgong has just gotten bigger. The number of people in the area, not so much in the town, with all these 24 acre and 40 acre blocks has been a big difference to us to as far as selling stuff. We sell a lot to the DIY handyman.

    Gerald and Pat wanted to thank the community for all their support over the years and said the business wouldn't have stuck around if it weren't for its patronage. Gerald said:

    One thing people have said to us over the years is that the last thing Gulgong needs is to lose its hardware shop. You can go to Dubbo or Mudgee to buy the big things but if you want to buy 500 grams of nails or screws you don't want to quickly drive to Mudgee.

    Trading

    Gulgong Timber and Hardware has been operating regular hours during COVID lockdown and Troy said the store is as busy as ever.

    The figures since COVID has been exceptional, a lot of people are working from home now and have got that time to do a few little handyman jobs that they've been putting off. So business is very good at the minute.

    About Gulgong

    Gulgong has over 130 heritage buildings. It was established before surveyors could turn it into just another country town with a traditional street grid system. As a result, the main roads, originally tracks for horses and bullocks, wind and meander through a well-preserved settlement of single-storey weatherboard, iron, stone and brick buildings with old-fashioned iron-lace verandas, horse troughs and hitching rails.

  • Sources: Mudgee Guardian and Gulgong Advertiser and NSW Towns
  • retailers

    ACCC investigates shipping and port charges

    It is looking into alleged price gouging by shipping lines and port operators

    Retailers and the ACCC believe surging freight costs have pushed up the price of goods for shoppers

    The Australian Competition and Consumer Commission (ACCC) chairman, Rod Sims told the ABC's The Business program that the regulator is investigating if anti-competitive conduct has led to price rises in the container transport industry. He said:

    We have a narrowly focused investigation as to whether there is a breach of competition laws in relation to containers. Is there a breach? Is there not a breach? And we'll get to the bottom of that.

    Mr Sims said the wider issue of shipping and freight costs would be looked at in more detail in the ACCC's annual stevedoring monitoring report, which will be released in November. He told The Business:

    We're going to look at to what extent this is a structural problem - due to the fact that you've got concentration in shipping, which has occurred a lot - or to what extent is it a short-term issue, due to the spikes in demand as people consume more goods and less services as COVID-19 interrupts the supply chain.

    Importers and exporters have welcomed the regulator's inquiry into the dramatic price increases on the waterfront. However, Shipping Australia said high freight rates are caused by higher demand for products and port congestion.

    Shipping fees have jumped amid a global supply chain squeeze caused by a rebound in demand for products after COVID-19 shutdowns, and pandemic outbreaks that have crippled the world's ports.

    The cost of hiring a shipping container to transport imports and exports is now the highest on record. Recently the spot price for a 40-foot import container from Shanghai in China to Rotterdam in The Netherlands, the world's most expensive shipping route, soared to USD14,287 (AUD19,405) per container according to the Drewry World Container Index (a leading barometer of international shipping charges). That's a rise of 564% over the past year.

    However, the body representing the local shipping industry, Shipping Australia, denied there was price gouging by global shipping lines. Shipping Australia boss Melwyn Noronha said the ACCC's investigation was a good move. He said:

    We welcome the investigation as it will show that the current issues are caused by normal market mechanisms and by bottlenecks in the supply chain.

    Shipping Australia also disputes that ocean shipping is a concentrated industry, telling the ABC in a statement that '"there are many shipping services to and from Australia." It also disputes that market concentration has led to high freight rates and said that surging demand helped "induce" the current freight rates.

    Shipping Australia said that prior to COVID, freight rates were around USD1,200 to USD1,400 (AUD1,640 to AUD1,913) per container for a 40-foot shipping container.

    Retail industry

    Retailers and importers have told the ABC they have been forced to pass on price rises to customers. The Australian Retailers Association's chief executive, Paul Zahra, told the ABC the high cost of shipping products added to the challenges faced by retailers.

    Shipping costs have quadrupled in the last year, during the course of the pandemic, and most Australian retailers who are doing their best not to pass these costs on to consumers in the short term are seeing their margins heavily squeezed.
    This is happening at a time when most retailers have already been decimated by the lockdowns and additional COVID-safe cost imposts. This is clearly not sustainable and something needs to change.

    Anthony Scali, CEO of furniture chain Nick Scali, told The Australian:

    The problem is, there are two ways to buy freight: either you deal through a freight forwarder or you deal directly with shipping lines. We always deal with big forwarders and every time you dealt with shipping lines the price was higher than what I could get with a forwarder.
    We know the shipping lines are not always providing the shipping containers when they should, unless you pay a premium price. I have had agreements in place (with freight forwarders) that have just been ripped up because they can't get to the container - the shipping line won't give it to them.

    Mr Scali previously warned that the rocketing price of shipping would force him to ratchet up his prices, and he welcomed the ACCC investigation. He added:

    Everyone (retailers) is raising prices already. In furniture, lounges are a big volume user so there have been cases where the freight costs are more than the price of the lounge. That's crazy at the cheaper end, and you have to pass prices on.

    Wesfarmers CEO Rob Scott also recognised the explosive growth in shipping prices. He told The Australian:

    The pandemic has caused significant disruption in global container shipping markets and we have seen this translate to higher costs as well as delays. We have made changes to our ordering processes to adapt to these disruptions and we are continuing to work with our suppliers.

    Paul Zalai runs the Freight and Trade Alliance which represents importers and exporters. He also welcomed the ACCC investigations and said the Alliance had been working with the regulator on shipping competition reforms.

    He said stevedore charges had gone up by around one fifth over the past year on "already high fees" and fees charged by the shipping companies were triple what importers had traditionally paid.

    To watch the videos from ABC News, go to the following link:

    ACCC launches investigations into 'exorbitant' shipping and port charges - ABC News

    Related: US home improvement retailer Home Depot reserved its own ship to deal with its supply chain problems.

    Home Depot contracts its own container ship - HNN Flash #50, June 2021
  • Sources: ABC News (The Business) and The Australian
  • companies

    Supplier update

    Apex Tool Group may be sold off: report

    Boral is continuing its exit from the building products category as it sells its Australian roof tiles business and ASSA ABLOY buys lock brands

    China-based conglomerate Wanxiang Group Corp. is in talks to acquire hand tool manufacturer Apex Tool Group from global investment firm Bain Capital, according to a report in Bloomberg. Apex Tool brands include Gearwrench, Crescent, Wiss and Lufkin.

    A potential deal could value Apex at about USD2 billion to USD2.5 billion, sources told Bloomberg. Talks are still ongoing and other bidders remain interested in the asset, said people familiar with the matter.

    Wanxiang Group Corporation is mainly known for developing, producing, and distributing auto parts. Its website said the businesses ranges from auto parts manufacturing and clean energy to agriculture.

    Apex Tool Group was formed in July 2010 as a joint venture between Danaher Corp. and Cooper Industries. They created Apex to take advantage of overlap in their product lines, manufacturing and sales forces. The companies valued the joint venture at about USD960 million when it was created.

    Bain Capital acquired Apex in 2013 for about USD1.6 billion, and refinanced the company's debt in 2018.

    Boral

    Building materials company Boral has sold its Australian roof tiles business to private equity firm Lutum and three members of its former management, according to DataRoom in The Australian.

    It is understood that Boral will retain the Sydney real estate sites of the business while divesting the remaining operation. The company has been in talks about a potential sale of its roof tiles business since at least 2017 as part of an exit out of building products in Australia and confirmed at its recent results briefing that it planned to sell the business.

    There was an earlier expectation that the roof tiles business would be sold for tens of millions of dollars, and it is understood that the division was offloaded for less than $30 million.

    Boral is now 70% owned by Seven Group Holdings.

    Related stories:

    Boral sold its US-based Meridian brick operation last year.

    Boral exits from global brick operations - HNN Flash #28, January 2021

    Boral has agreed to a sale of its Australian timber unit.

    Boral sells timber business - HNN Flash #56, July 2021

    ASSA ABLOY

    The Sweden-based company has signed an agreement to acquire the Hardware and Home Improvement (HHI) division of Spectrum Brands for USD4.3 billion in cash. In a statement, Nico Delvaux, president and CEO of ASSA ABLOY, said:

    HHI is an excellent addition to the ASSA ABLOY Group and constitutes an important strategic step in developing our residential business in North America. This acquisition advances our strategy to strengthen our position by adding complementary products to the core business and it will further accelerate the transformation from mechanical to digital solutions.

    The acquisition will bring together four of the five top brands in smart door locks category, according to CE Pro. Spectrum's brands include Kwikset and Baldwin, while ASSA ABLOY's brands include Yale and August amongst others.

    ASSA ABLOY said it can bring technological innovation to consumers using HHI's access to retail channels, and HHI's large installed (professional end-user) base and strong consumer reputation provides an opportunity to grow its electromechanical and digital access solutions.

    HHI has established relationships with large home improvement centres, wholesale distributors, homebuilders, online retail channels, and home automation providers. It is headquartered in Lake Forest, California with some 7,500 employees worldwide and has manufacturing facilities in the US, Mexico, Taiwan, China, and the Philippines. David M. Maura, executive chairman and CEO of Spectrum Brands, said:

    After stewarding this asset for the past decade, the board of directors and I are confident that ASSA ABLOY is uniquely positioned to take our HHI business and team members to the next level of performance and achievement. I am personally excited to see the innovation and exciting new products that this transaction will unlock for future generations.

    The deal will also allow Spectrum to sharpen its focus on its pet care, home and garden and personal care businesses.

    The transaction is conditional upon regulatory approval and customary closing conditions and is expected to close during the fourth quarter of 2021. HHI will become part of ASSA ABLOY's Opening Solutions Americas Division.

  • Sources: Bloomberg, RTT News, The Australian, CE Pro and PR Newswire
  • companies

    Retail update

    National Tiles makes its mark in Tasmania

    Reece is converting its MORSCO branches in the US to the Reece retail brand

    After the successful launch of its mega store in Alexandria (NSW), National Tiles has launched a flagship showroom in Hobart (TAS).

    The opportunity to enter the Tasmanian market came about when the National Tiles team discovered a 3,500sqm site with ample parking space located in Cambridge, a suburb of Hobart. A former K&D hardware store was re-purposed and updated to become the group's flagship showroom and trade store in Tasmania.

    Prior to the store's opening, National Tiles had supported a number of local builders with tiles from Melbourne. CEO Campbell Stott said:

    Convenience is so important to our customers. We believe that our onsite stock availability will significantly alleviate the traditionally long lead time Tasmanian shoppers have faced in getting tiles and flooring...
    Our trade customers in particular love the convenience of being able to get all of their tiling materials and supplies from the one location, all from an [on-site] drive-through. Importantly, our customers are enjoying the stock availability on offer for all our ranges. Having a warehouse on site means that our customers can get their product the same day ... Traditionally Tasmanians have had to wait three or four months to get stock. Our ability to immediately assist our customers with their home renovations by having stock on hand has been critical and has worked incredibly well.

    Since opening, over 1200 customers are visiting the store every week, exceeding the group's expectations. The store is part of the Cambridge Centre which is anchored by Harvey Norman and about 15 minutes from the Hobart CBD. It is sign posted from the main road, and situated on the highly trafficked Tasman Highway.

    Within the store, the timber collection has been popular with local customers. Campbell said:

    We have created an amazing timber space within the store, wall to floor, and customers are really enjoying being able to see, feel and walk on the timber. Around 20% of our retail orders are timber and hybrid timber hard flooring which is reflective of the Tasmanian market.

    In addition to retail and trade specialists working at the store, there is a business development manager who is focused on partnerships with local builders, developers and interior designers. Campbell said:

    There's a really terrific vibe. It's been a great start and we're really excited about the opportunities in Hobart, and for all Tasmanians who can order online and have stock delivered to them no matter their location.

    To read more on this story, go to page 40 in the latest edition of Tile Today magazine here:

    National Tiles in Tile Today magazine #110

    Related: National Tiles enters the Sydney market.

    The retail group launches a major showroom and trade store in Sydney - Tile Today #109

    Reece

    Bathroom and plumbing supplies company Reece reported a record annual profit in August where its net profit rose 25% to a record $286 million in the year ended June 30 and sales revenue rose 4% to $6.27 billion. Following its results announcement, chief executive Peter Wilson told the Weekend Australian exclusively:

    COVID has created a short-term step-change in our markets. The million dollar question is, is it temporary or permanent? What is permanent is how people think about their home and how they live. The home now is more important than ever. It is where people eat, sleep, play and increasingly, work. That all plays into the Reece story.

    Reece's core Australian business reported a 12% increase in sales in the second half of 2021, up from 7% growth in the first half. While lockdowns have proven volatile, the pipeline of work remains robust for builders despite the expectation of slower housing starts in the months ahead.

    Reece bolstered its stock levels by about 20% in 2020 to prevent product shortages as a result of from supply chain delays caused by COVID-19 and closed Chinese ports. This saw a $170.6 million increase in inventory in the second half.

    But Mr Wilson believes the increase was essential to keep stock on the shelves and looks forward in the year ahead to stepping up investment in the Australian business, especially in technology and digital offerings.

    In February next year Reece will move into its new, hi-tech corporate head office in the inner-city suburb of Cremorne, known as Melbourne's latest tech hub. Mr Wilson said:

    That will be a workplace for the future. We are going to be bold. It is all about innovation, tech and digital. We need to keep renewing ourselves in Australia. You can't be a digital leader by standing still. And we want to reinvest back into our stores to ensure we have the customer experience of the future.

    US rollout

    Reece currently operates 642 branches in Australia and New Zealand, and 189 in the United States. It entered the US market in 2018 with the $1.9 billion acquisition of MORSCO, which operates in 16 states.

    HNN provided coverage of the acquisition here:

    Reece expands into US, after 10 year study - HI News, page 17

    According to The Australian, the main issue for Reece is the inflated expectations about MORSCO and the ability of its management to quickly - under Australian ownership - dominate the US plumbing and bathroom products market.

    MORSCO reported flat margins during the year and expansion of its US footprint was constrained by COVID-19. The business was hit by higher second-half costs as it established a profit share program with stores - as Reece has in Australia - and dealt with labour shortages, supply chain constraints and cost inflation.

    Mr Wilson said MORSCO is poised to roll out the Reece brand for the first time. Reece will replace the three current MORSCO brands, Todd Pipe, Express Pipe and Expressions Home Gallery.

    Its headquarters in Dallas, Texas has already been rebranded Reece. The store name change will begin in California. Mr Wilson said:

    I have been holding it back. You have to earn the right to use the Reece brand. But the time has come. We are in some ways where we expected the US business to be, even slightly ahead. We acquired this as a long-term opportunity for growth. It was always a 10-20 year story...
    We spent 12-18 months learning and getting a deeper understanding of the business and we took our time to work through what was going to be our strategy for the next three to five years.

    Mr Wilson stresses Reece has yet to prove itself in America. But he is confident the company has not repeated the mistakes of other Australian companies whose US expansion plans turned to disaster. He said:

    You have to do your due diligence. We knew what we were getting very well when we bought MORSCO. We held our nerve, were humble, listened and learned. We didn't make wholesale changes to staff and operations but then we got clear on how we wanted to run it going forward. Then you pivot, as we are doing now. But this is still a big mountain to climb.

    Reece also flagged a significant increase in both operating and capital expenditure in America and Australia in the year ahead. This will equate to between 10 and 20 new store openings, existing store refurbishments and continued investment in technology, staffing, and training.

  • Sources: Tile Today, Weekend Australian and The Australian Financial Review
  • retailers

    ABS stats: Alterations & additions in NSW

    Smaller geographic areas reveal more patchwork growth

    In the wake of the pandemic, NSW will be one of the states that changes the most. Not only is there a move to ex-urban areas, but the nature of housing in urban areas itself will likely change.

    Talking about Australia's future would seem, at the moment, to be something of a "big ask". While immediate outcomes are in doubt, and watched anxiously by us all, there are some things we can be quite certain of looking a year ahead. One of those is that one lasting effect of the pandemic will be a partial reshaping of Australia's property market, and hence also its building and construction industries.

    Tracking those changes will be an essential task, both for hardware retailers and suppliers. At HNN we've been working on developing more flexible and information ways to convey statistical information about the construction industry to our readers. While that's still under development, we are providing something of a preview of some of our latest data models.

    The main difference with these models is the use of what the Australian Bureau of Statistics refers to as its "Statistical Area 2" (SA2) geographic level of data. SA2 blocks are smaller than those for local government authority (LGA) areas, and are closely keyed to both demographics and economics. They are by far the most useful datasets for tracking industries such as renovation, building and construction.

    In this series we're providing a look at a single data point, which is the percentage change in spending on alterations and additions (A&A), comparing the most recent data for the month of July 2021 with data from July 2020.

    One factor that we have to deal with in this data, is what to do with those areas which recorded no expenditure for A&A during July 2020. We've identified three conditions worth noting: those areas that had no expenditure recorded in July 2021 as well, those that had expenditure under $100,000, and those that had more than $100,000 in expenditure. These areas are marked in shades of blue.

    Link to full-size graphics

    Chart 1 shows the expenditure growth pattern across New South Wales (NSW) as a whole. At this macro scale, perhaps the most interesting feature is the relative scarcity of areas that have had either mild declines or mild gains in expenditure. It is also clear that there has been ongoing growth for A&A in more inland areas.

    Chart 2 shows the same data for the Greater Sydney area. This demonstrates how finely gradated activity is in major metropolitan regions, and especially Sydney. Areas in the same LGA have quite different statistics for building approvals. While it would be widely expected for Sydney that there would be growing activity, generating an increase above 100% in many areas, it is also interesting how many low growth areas there are, and how many areas in light blue, indicating sharp growth off of a zero basis in July 2020.

    Analysis

    One of the bigger questions that needs to be asked in the aftermath of world-changing even such as the pandemic is whether the change is reactive, or something more structural. If it is more reactive, then it is likely we're seeing some expenditure from the coming years being "pulled forward" to 2021 - which could mean that growth would at least slow. If it is structural, then that means the hardware retail industry needs to revalue itself to some extent.

    As is often the case, it seems that in terms of NSW it is most likely a combination of these. Activity in more urban areas is likely to be something of a pull-forward, with A&A upgrades destined to last many families for a long time. In the less-urban areas, however, it is more likely to be at least partially structural.

    One aspect of that structural change will be the creation of some attractive areas, and other less attractive areas - something like neighbourhoods, but writ large over more expansive spaces. Those will be formed by everything from the randomness of micro-climates to the availability of transportation, and proximity to good schools and health care.

    Those patterns will progressively reveal themselves over the next few years, so in many ways these charts serve as a kind of baseline for change to come.

    statistics

    ABS stats: Alterations & additions in VIC

    Growth has moved from the inner suburbs to all of the suburbs

    Where in the past the Melbourne CBD was central to many businesses, the pandemic may have ended that trend. However, it remains unclear if the city will decentralise, or simply become more diffused.

    These statistics relate to the Australian Bureau of Statistics (ABS) building approvals for the month of July 2021. They contrast that month with the prior corresponding period, July 2020, and show the percentage of growth in expenditure on alterations and additions (A&A).

    The data maps that are provided make use the a smaller geographic unit provided by the ABS, the "Statistical Area 2" (SA2). This is smaller than, for example, a local government authority (LGA) area, and are based on both demographic and economic factors.

    In looking at these, there is a sharp contrast between Victoria (VIC) and New South Wales (NSW) in how demand for A&A has played out.

    Link to full-sized image

    Chart 1 shows this data for the entire state. One of the contrasts with NSW is the substantial areas that have recorded either mild growth or mild decline in expenditure. At the same time, there are areas that have recorded unusually high growth, and these range from coastal regions, to areas along the border with NSW.

    Chart 2 shows the same information with more detail for the Greater Melbourne area. What is quite surprising about this data map is the homogeneity of a sharp rise in expenditure for A&A activity.

    It is as though the usual segregation into suburbs with different housing values and demographic makeup has been swept away. Most noticeable is the increase in this activity both to the west of the city and to the north-east.

    Analysis

    The question that hovers over Melbourne is whether the city will evolve to become more decentralised, or if it will simply see the city CBD become less central, and its peripheral suburbs grow in importance.

    There is certainly some evidence in these statistics of a trend towards the latter, but Melbourne has always been somewhat socially - if not politically - conservative, and it is still possible that by 2023 many of the older patterns will have reasserted themselves.

    statistics

    Big box update

    Bunnings store build in Caboolture

    Objections to Jolimont development and legal exchange over potential names for Adelaide Tools business

    Construction plans for a Bunnings store in Caboolture (QLD); concerns over proposed Jolimont development in WA; family members with links to the Adelaide Tools acquisition are concerned about the potential future use of the family name; and a number of community clubs are recipients of Bunnings Rugby Assist in New Zealand.

    Caboolture

    Major construction is due to start soon on the Bunnings store that is part of the Big Fish Business Park located on Pumicestone Road, Caboolture (QLD). Moreton Bay Regional Council approved a plan for a $32 million Bunnings Warehouse in January 2021.

    Bunnings area manager Andy Stewart told the Caboolture Shire Herald the store is expected to open late 2022. It will include the main warehouse, outdoor nursery, timber trade sales area, cafe and playground on more than 13,000sqm with parking for 400 cars.

    The business park is on a 15ha site has a retail precinct that will be anchored by Coles and Chemist Warehouse. It will service not only the growing Caboolture region but also the future residents of Caboolture West, a new suburb-sized greenfield development project north of Brisbane.

    Related: Bunnings gains approval for a store in Caboolture (QLD).

    Caboolture (QLD) will get a Bunnings store - HNN Flash #31, February 2021

    Jolimont

    The four-storey Bunnings store proposed for 616 Hay Street in Jolimont (WA) is on a site next to a retirement home. The project has received more than 165 submissions, including 135 opposing the development, with many of the objections coming from the 300 elderly residents at the neighbouring St Ives Centre retirement home, according to The West Australian.

    Most complaints focus on noise and traffic, with claims speed humps in the area do little to deter hoons, putting those using walking frames and wheelchairs at risk when trying to cross Hay Street.

    The development plan includes two basement levels of parking for about 420 cars, a retail store, and a mezzanine level for offices. The ground floor would include a playground, a nursery, a bagged-goods area and two commercial tenancies.

    It was being considered by the Inner North Joint Development Assessment Panel on Friday, 10 September 2021.

    Related:

    Subiaco council recommends approval for Bunnings store - HNN Flash #61, September 2021

    Trademarks

    It has been reported that Bunnings is considering using the name of the Dontas family, well-known in Adelaide, as part of a major expansion of a new tool retail brand across Australia and New Zealand.

    However members of the Dontas family have objected to Bunnings' potential use of its name, according to The Australian. The family, which has interests in the hardware and racing industries, said plans by Bunnings to use its name "has serious implications for us, our children and future generations".

    The Dontas brothers - Mark, Troy and Supercars driver Craig - have historic links to the Adelaide Tools business, now part of Bunnings. The business runs deep in the family after their grandfather, Sam Dontas, founded Western Auto and Electrical Service in 1936, and the name was subsequently changed to Electric Power Tool Services.

    Following Sam's death in 1991, their aunt, Marissa Peach (nee Dontas), and husband Robert took control of the business in 1996, with the Adelaide Tools brand name launched in 2012.

    Bunnings completed its acquisition of Adelaide Tools from the Peach family in May 2020 for an undisclosed price. (Marissa and Rob's son Adam Peach remains involved with the business.) Bunnings announced that it will be rebranded and expanded to as many as 75 outlets across Australia and New Zealand.

    The new name has not been revealed but a search of the IP register by The Australian shows Bunnings' trademark applications for "Dontas", "Dontas Tools", "Dontas Workgear" and a Dontas logo, "Onya Tools", "Project Tools" and "Benchmark Tools".

    The use of the family name is the bone of contention for the family and lawyers' letters have been exchanged. Trademark lawyer Dave Stewart, of Bennett + Co, said in a statement to The Australian:

    This [use of the Dontas name] is contrary to the wishes of a significant part of the family who had a historical part in establishing the iconic South Australian business over 70 years ago.

    Troy Dontas told The Australian:

    Bunnings purchased the business named 'Adelaide Tools'. I don't feel they have the right to use our family name nor should it have been part of any transaction. We don't think Bunnings knew what they were buying.

    Bunnings' commercial chief operations officer, Ben Mcintosh, said new names were being considered to help the company's growth outside SA.

    One of the names is Dontas which recognises Adelaide Tools' founder Sam Dontas and the company's proud 70-year history.
    We're disappointed that some members of the family aren't supportive of this option. However, Dontas is just one of a number of names we're considering.

    In addition, Mark and Troy separately own three Stihl dealerships in SA, which they said is "perpetuating the association" of their family name with trade and retail customers. Mark, who appears in the national Stihl television campaign, said the situation was "unacceptable". He said:

    Bunnings don't sell Stihl products, but it will be perceived that we have a connection to our opposition by way of our family name. Our family name is rare, so it's only natural these perceptions will happen. Bunnings seem determined to profit from our family name.
    They really don't have right to use our family name, and I feel they don't understand the goodwill that our family name has in the South Australian tool industry connected to our businesses.

    Craig is very recognisable in the Supercars racing scene and has built a sports commercial business. He carries endorsements by conflicting brands such as Total Tools, Bosch Tools, and other tool trade-connected brands. He said:

    It doesn't help anyone for Bunnings to be selling under the 'Dontas' name while I am an ambassador for Total Tools. This will create a lot of confusion. It has already been flagged as a conflict, and I am set to lose hundreds of thousands of dollars in endorsements.

    In an exchange of lawyers' letters, the Dontas brothers learned Bunnings regarded the purchase of Adelaide Tools entitled them to use the "Dontas" name. Mr Stewart said:

    Bunnings' purchase of Adelaide Tools would have included Adelaide Tools' goodwill. But Adelaide Tools was never known as 'Dontas Tools'.
    Either the Peaches or Bunnings seem to have made a mistake in thinking that the purchase of the goodwill included acquiring the right to use the surname of the founder of the business.
    The Dontas brothers don't think Bunnings started down this path deliberately intending to profit from the industry-famous Dontas name, but they think Bunnings has taken things a step too far.

    Related: In June, Bunnings managing director Michael Schneider unveiled the growth plans for Adelaide Tools during his presentation at Wesfarmers' strategy day.

    Bunnings Strategy Day 2021 - HNN Flash #48, June 2021

    Bunnings Rugby Assist (NZ)

    Twenty community rugby clubs in New Zealand will receive a share of NZD300,000 worth of Bunnings Warehouse products and materials after being selected as the inaugural recipients of Bunnings Rugby Assist. They will be able to improve their facilities including repairs to flood damage, leaking roofs and upgraded bathrooms for women's players.

    Five clubs have been selected to receive support to the value of NZD30,000 and another 15 will receive support to the value of NZD10,000 as a result of Bunnings' partnership with New Zealand Rugby (NZR) as the naming rights sponsor for the National Provincial Championship, Farah Palmer Cup and Heartland Championship.

    New Zealand Rugby general manager - community rugby, Steve Lancaster, said the response to Bunnings Rugby Assist has been very positive with a third of New Zealand rugby clubs applying. He told Sun Live:

    Grassroots rugby plays a vital role in the game we love, it's fundamental to keeping the game strong. We're thrilled to have Bunnings Warehouse in our corner, providing some extra support to club rugby in the form of Bunnings Rugby Assist.

    Bunnings currently employs over 4,900 team members in New Zealand. In FY20, the big box retailer participated in more than 5,200 community activities, helping to raise and contribute more than NZD1.1 million dollars for local community groups. NZ Bunnings director Ben Camire said:

    The passion and dedication shown by the club volunteers and communities who applied for Bunnings Rugby Assist is really encouraging. They share our goal of helping to build grassroots rugby, which is at the heart of every community in this country.
    Bunnings has a longstanding commitment to making a meaningful contribution to the wider community, so we are really excited to be able to make a positive difference to grassroots rugby through Bunnings Rugby Assist.

    Bunnings Rugby Assist ambassador and All Blacks legend Stephen Donald said he is looking forward to seeing the positive impact of the program on local rugby clubs and their communities.

    The support I've experienced and witnessed from local club rugby is so important to the players and keeps the sport thriving. It's crucial for the next generation of rugby legends that we support grassroots rugby.

    Related: New Zealand Rugby and Bunnings Warehouse announced a three-year deal earlier this year.

    Bunnings sponsors New Zealand Rugby - HNN Flash #40, April 2021

    Related: In Australia, the Bunnings Helping Hand program has been giving community AFL clubs the opportunity to access grants worth AUD30,000

    Bunnings grants for women's football - HNN Flash #43, April 2021
  • Sources: Caboolture Shire Herald, The West Australian, The Australian and Sun Live (New Zealand)
  • bigbox

    Retail update

    Queensland Mitre 10 stores feel impact of Bunnings

    The town of Taminda in New South Wales may get a new hardware store located in the former Buttercup factory

    The owners of Goodwin and Storr Mitre 10 in Laidley (QLD) and Plainland's Mitre 10 have told The Queensland Times about how their stores have been directly affected by a recently opened Bunnings outlet.

    The $18 million Bunnings store in Plainland opened in June and is located just over 10 minutes from Goodwin and Storr Mitre 10 which has been in owner John Storr's family for 110 years. He said:

    We were down 60% to start off with [when Bunnings first opened]. Now it's at 40%. It's just terrible.
    I'm just basically going through the books every three months and seeing if it's worth keeping going. If it gets to a point where I'm wasting time, I'll be closing up. I'm only just starting to make wages. You can't go for too long like that if you're not making wages.

    Mr Storr said he expected the sale of big-ticket items like power tools to "grind to a halt" when Bunnings opened but it had been the opposite, with interest in smaller items like nuts and bolts drying up. He said:

    I just find it frustrating when you know your prices are alright for certain things and they don't even get a look in. My paint sales have just stopped.
    My big-ticket items have been ticking over but the margin is so small there's very little profit in it.

    Even though Bunnings owns a large site in Gatton and received council approval to build a warehouse there in December 2015, it eventually built a store in Plainland, just off the Warrego Highway. The 7.8 hectare block in Gatton is now on the market.

    Mr Storr said the threat of a Bunnings has been around for several years. He said the Laidley township was particularly quiet in recent months, which he put down to the impacts of COVID. He said:

    I would have been happier if it was [built] over in Gatton. To be honest I think they've made a dumb move. They've boxed themselves in and there isn't any room for expansion.
    It's lucky they didn't do a full Bunnings [offering] or they would have absolutely crushed us. There's not that free money going around [the town].

    Plainland Mitre 10 owner Stephen Rule took over the 30-year-old business in 2003 and employs 19 staff. He said:

    We got a kick from COVID but based on sales around the same time last year we're down 40 to 50%.
    We always suspected that [Bunnings would] come. It's disappointing that they didn't go to Gatton when Gatton doesn't have a hardware store and they came and specifically targeted this area.
    They have a habit of setting up new hardware stores next to existing hardware stores. Almost as they though intend to wipe it out...
    We can still make it work with ... a Bunnings ... at this stage. The disappointing thing will be trying to maintain staff numbers. We don't want to lose staff.

    Mr Rule said its rural range, including fencing, water tanks and stock feed, remained strong as Bunnings didn't stock these items.

    It's keeping us going. Our margin has really copped a whack. We've lost it on the smaller items.
    We should thank our customers that are supporting us. We've been through floods and fires.

    Bunnings area manager Debby Stevens told the Queensland Times:

    We compete with a huge range of retailers and believe that there is ample room for a wide variety of operators, speciality providers and online retailers.
    Bunnings is a strong employer of local residents in the Lockyer Valley, with over 100 team member jobs recently created at Bunnings Plainland and approximately 700 team members employed in surrounding stores. The new Bunnings at Plainland represents an investment of over $18 million in the local community.
    We are committed to engaging with the local communities where we operate and actively (contribute) to local causes and organisations through product donations, hands-on support as well as in-store fundraising.

    Related: A Bunnings store proposal for the Lockyer Valley.

    Bunnings plan places other stores on alert - HI News, page 32

    Related: The Goodwin & Storr Mitre 10 store has been acknowledged for its longevity.

    Goodwin & Storr's long term legacy - HI News, page 14

    Taminda development

    Plans submitted by applicant Armidale New England Building Design will see the old Buttercup bakery in Taminda, an industrial suburb of Tamworth (NSW), be partially demolished and converted into a hardware store.

    The manufacturing side of the iconic bakery was built in 1968 and closed in 2016. The site is still used for distribution of bread, with one section vacant. A new $875,000 plan calls for a major refurbishment and refit for the building.

    If approved by Tamworth Regional Council, the plan would convert part of the building into a "hardware and building supplies warehouse and retail sales facility".

    The new store would be subdivided from the rest of the building by a wall. A small section of office would also be demolished, and 55 new carparks would be constructed to service the new business.

    The site has a total floor area of over 3,730sqm, with a total site area of 12,168sqm and 16 car parks. The building would actually shrink to 2,924sqm as a result of the plan, with the new hardware business to occupy 2,200sqm.

    It is located around the corner from Bunnings in the area and a Total Tools outlet is nearby.

  • Sources: The Queensland Times and The Northern Daily Leader
  • retailers

    Supplier update

    Bathroomware brand admits to likely resale price maintenance: ACCC

    Weber Barbecues has signed on to become the official naming rights partner of the Women's Big Bash League

    The Australian Competition & Consumer Commission (ACCC) has made moves recently to increase its profile for Australian businesses in terms of competition compliance. This has included a move to acquire more power to prevent mergers that it deems anti-competitive.

    The primary shift that is occurring worldwide is for competition provisions to move away from the past standard. This standard essentially meant that even large corporations were free to influence markets, as long as there was no net detriment to consumers. Previously, "net detriment" was reflected in terms of price - almost to the exclusion of all other factors.

    More recently competition regulators - including the ACCC - have expanded the definition of net detriment to include market controls that effectively prevent or limit the development of new products and/or services. A good example of this type of behaviour is the acquisition by a large company of a small company, when this occurs to prevent the smaller company from developing as a competitive threat.

    One way of seeing this position is that competition regulators have extended the definition of net detriment to deal with far-future events, which involve the development of the overall market. Built into this oversight is seemingly a guarantee that corporations offering a "be acquired or we will ruin the value of your business" ultimatum to smaller businesses will find themselves subject to anti-competitive oversight. One company widely regarded as having engaged in this behaviour is global online retail company Amazon.

    A recent case involving Nero Bathrooms International Pty Ltd (trading as Nero Tapware), indicates that the ACCC may also be increasing its surveillance of, and reaction to practices it regards as approximating price fixing.

    Nero is a national supplier of Nero branded bathroom products, supplying over 1000 independent chain stores across Australia.

    It has admitted it was likely to have engaged in resale price maintenance by withholding supply of its products from a small independent building supplies retailer when that retailer failed to raise its advertised prices.

    According to the ACCC, Nero admitted that in March 2020, it made statements to a retailer that the retailer's prices were too low, that it should not advertise Nero products at a price lower than 15% off the recommended retail price (RRP), and that it should raise its online advertised prices so those prices were not lower than 15% below the RRP. When the retailer did not raise its prices, Nero is said to have stopped supplying the company.

    It is illegal for manufacturers and suppliers to attempt to stop retailers from discounting their prices below a specified price, such as the RRP. ACCC Deputy Chair Mick Keogh said:

    Nero has acknowledged that it was likely to have breached the law prohibiting resale price maintenance when it communicated a 'minimum price' to a retailer.
    Resale price maintenance conduct prevents retailers from competing on price, and this means consumers pay more than they should.
    In this case, the conduct was limited to a single retailer, and there was no direct consumer harm because that retailer did not comply with Nero's pricing directions.

    Nero has provided a court-enforceable undertaking to the ACCC, in which it has committed to advising all Nero retailers that they are free to set their own prices, and to ensure relevant Nero staff receive compliance training on their obligations under the Competition and Consumer Act, including the prohibition against resale price maintenance.

    The ACCC also said Nero has been co-operative throughout its investigation.

    Hardware retail industry

    While these competition provisions have been "on the books" for some time, this could also be a monitory action directed at other companies in the hardware sector. In particular, it would be a simple matter to name at least one power tool manufacturer which has established a de facto policy that limits retailers from advertising discounted prices for their tools online.

    It is readily apparent from the Nero case that this is not legal in the view of the ACCC. For example, simply denying a discount to a retailer that makes such product representations is likely to meet with the same disapproval as any other action which results in a form of price fixing.

    Related: In 2020, Stanley Black & Decker Australia approached the ACCC with a request to make a minimum pricing requirement, but with a twist: retailers could sell DeWalt power tools below the RRP, but they could not advertise them below that price.

    It's notable that DeWalt did this in a highly ethical manner, by submitting a request for a specific exception. The company was, in the end turned down. This kind of process, as expensive as it can be to suppliers, is very useful in determining the "rules" for the industry.

    Troubles in tool-land ahead? - HNN #16, July 2020

    About resale price maintenance

    Resale price maintenance is illegal and occurs where a supplier prevents, or attempts to prevent, independent retailers from advertising or selling products below a specified price.

    Resale price maintenance occurs when manufacturers or suppliers:

  • make it known they will not supply unless a distributor or retailer agrees to advertise or sell at a price not less than a specified minimum price;
  • induce or attempt to induce the retailer not to advertise or sell below a specified minimum price;
  • withhold supply of goods or services because the distributor or retailer has advertised or sold at a price below a specified minimum price.
  • Businesses proposing to engage in resale price maintenance must lodge a resale price notification with the ACCC. They can seek protection from action for resale price maintenance by the ACCC if the public benefit likely outweighs the public detriment.

    More information about resale price maintenance can be found at the following link:

    Imposing minimum resale prices.

    Weber sponsorship

    Weber Barbecues has agreed to a deal with Cricket Australia (CA) to become the new naming rights partner of the Women's Big Bash League (WBBL).

    Starting from the upcoming season, which gets underway in mid-October, the Twenty20 tournament will be known as the Weber WBBL.

    The barbecue brand takes over the title sponsorship of the tournament from sports apparel company Rebel, which has been the competition's naming rights partner since its inaugural 2015/16 edition. Weber AUNZ's managing director, Mike McDonald, said:

    Barbecuing and cricket have long been a part of the fabric of the Australian summer, so this partnership is a great, natural fit. We believe that getting involved in barbecuing, like playing cricket, should be inclusive of everyone and we are very proud to be able to support the growth of women's cricket in Australia.

    The deal will also see Weber become a supplier of the men's tournament, known as the KFC Big Bash League. Alistair Dobson, CA's general manager of Big Bash Leagues, said:

    Much like the league, Weber has harnessed an iconic element of Australian culture and applied its own touch. Now both occupy their own place in an Australian summer - the WBBL in its standalone October to November window, and a Weber in every backyard.
    We thank Weber for their support of the league and look forward to seeing their brand adorn the broadcast, venues and club playing uniforms throughout Weber WBBL|07.

    Weber is a long-term client of Publicis Groupe's Starcom Adelaide which enlisted Publicis Sport & Entertainment to broker the naming rights deal with the Women's Big Bash League. Publicis Groupe ANZ's executive director of Publicis Content and Publicis Sport & Entertainment, Bianca Wallis, said:

    It's critical that women's sport get the same support and marketing from brands to level the playing field, and I'm excited for us to take this journey with Weber.
  • Sources: Australian Competition & Consumer Commission, SportsPro Media and Mumbrella
  • companies

    ABS hardware retail revenue stats

    Growth is unevenly distributed

    Moving into FY2022, Australia is beginning to show wide differences in hardware retail revenue between the states and territories. While NSW and QLD continue to grow, VIC shows growth flattening. Looking at the July 2021 numbers, some states have tapered their negative growth, while others have plunged deeper.

    The Australian Bureau of Statistics (ABS) has released the retail revenue stats for July 2021. Chart 1 shows the trailing 12 months to July results for hardware retail sales.

    As the Australian economy shifts into a full 17-month period that has been affected by the COVID-19 pandemic, the stats show the gains made in hardware retail now show as spread out over the past two trailing 12-month periods.

    The performance numbers themselves show something of a split in the industry between the states - and it's not along the line of prosperous vs less-prosperous regions. For example, New South Wales (NSW) shows an increase of 12.7% over the previous corresponding period, which was the 12 months to July 2020. However, Victoria (VIC) shows an increase of just 1.5%.

    Besides NSW, the other two high-performing states were Queensland (QLD) which showed a 10.8% increase and the Australian Capital Territory (ACT), which lifted by 15.4%. South Australia (SA) was up 2.6% and Western Australia saw revenue increase by 7.8%.

    Overall, Australia reported a gain of 7.8% as well, with total revenue at $23.6 billion for the 12 months to July 2021.

    Chart 2 shows the shows how the percentage change in revenues has played out over the past 10 periods.

    It's interesting to note that there was some degree of consolidation in the trailing 12 months to July 2020, while in the most recent period there is a diversity of responses. It is evident both that in its second phase, the COVID-19 pandemic is affecting states differently, and that there are other forces at play as well.

    Chart 3 shows the month-on-corresponding-month comparison for the states over the past two years.

    This shows a high degree of synchronicity from July 2019 through to May 2020, followed by a period of variance up until January 2021, since when the relative growth positions of each state have been maintained. Since April 2021, that growth has been negative - though QLD was close to zero for July 2021, at -0.7%.

    Analysis

    It remains very likely that the high levels of revenues seen during FY2020/21 will fall off by the start of 2022. While the stimulus produced by low interest rates will persist through 2022, there will probably be an ongoing reduction in direct economic stimulus by the federal government. The Housing Institute of Australia (HIA) has flagged concerns about a falling house market in 2022, and it is likely to emerge there is also a finite amount of renovations that homeowners will want to consider.

    The question remains how far will revenues decline in the future, and what will be the distribution of that decline? Will the distribution favour larger operators such as Bunnings, or will smaller, local retailers be better off instead?

    Outside of those internal factors, it is unclear how the transition out of the pandemic, as vaccines finally become more readily available, is going to affect the overall economy and hardware retail in particular. Much of that will take place on the microeconomic level, but there will also be a broader influence from macroeconomics.

    While Australia is going to discover that it has successfully made its way through the muddle of the pandemic, other places in the world have done much better. The US, for example, has reported a surge in productivity, after 15 years of decline - likely due to the adoption of technologies that have been resisted in the past. Post-pandemic, Australia could find its position in the global economy has shifted, and not necessarily to its advantage.

    Whatever the outcome, though, for smaller hardware retailers, the past 18 months have at least provided a little relief from some tough years, and the potential to have more capital to invest in their businesses. It seems clear they are going to need that buffer in the years ahead, as the requirement to invest and develop their businesses becomes more urgent.

    statistics

    Surprises in renovation stats

    Victoria lags Queensland

    Accurate stats on alterations and additions are difficult to determine. However, the ABS does offer some series of stats that provide a good look at what is happening in this sector of the building industry.

    Tracking alterations and additions (A&A) - or renovations, as most retailers think of them - has never been simple. That's not through lack of trying, either. The Australian Bureau of Statistics (ABS) presents some quite brilliant numbers, and this is an aspect that they've been expanding over the past five years or so. The problem isn't so much getting a hold of the numbers, it's more working out what they really mean.

    Two interesting sets of numbers are those that register building work done, and those represented in the stats for the national accounts.

    National accounts

    These stats are contained in the ABS 5206.0 series, specifically the state-by-state breakdown of State Final Demand. According to a paper from the Australian Housing and Urban Research Institute - RMIT Research Centre:

    The method used to calculate residential alterations and additions starts with the BAS [Business Activity Statements]. Because a significant proportion of alterations and additions are not captured in the BAS, it is used as a benchmark, which is then extended by use of estimates of expenditure on alterations and additions drawn from the Household Expenditure Survey.
    Australian Housing and Urban Research Institute - RMIT paper

    So, these are interesting statistics, as they represent a genuine effort to get at the "real" expenditures on A&A, based on businesses reporting activity, as well as a survey of the consumers of those services.

    The most pertinent detail to look at from this set of stats is shown in Chart 1.

    This consolidates the four quarters of the financial year, and then compares the percentage change between them. Most noticeable is that, while every other state and territory has moved upwards in FY2021, Victoria (VIC) has not. In fact, VIC shows a certain stability during FY2019 and FY2020 as well.

    Chart 2 shows the raw numbers on which Chart 1 is based, but only for the three most recent years.

    It is notable both that NSW provides for much greater expenditure, and that Queensland (QLD) exceeds the expenditure of VIC in the most recent year. In fact, where both NSW and QLD show considerable stimulus is present for 2021, VIC indicates a slight decline. The only other region with a similar pattern is Western Australia (WA).

    Building work done

    The building work done stats are also largely based on survey information, and is limited to residential construction valued at over $10,000, and non-residential construction valued at over $50,000.

    Chart 3 shows the percentage change between financial years for A&A work done.

    Once again, we see similar patterns, with QLD growing in recent years, NSW suppressed for the years prior to FY2021, then growing strongly, while VIC is not suppressed as significantly as NSW, but displays much lower growth in FY2021.

    Analysis

    What these stats show is how different each area of Australia can be. The low number for VIC in FY2021 does actually correspond to some extent with the fall-off in hardware retail sales we see for that financial year. However, the flat-lined low growth in A&A for VIC in FY2020 does not correspond with the sharp increase in hardware retail sales for VIC in that year.

    It has to be presumed, then, that much of the activity in hardware retail for VIC does take place outside of the A&A category. Most likely, we would be looking for in FY2020 a sharp increase in sales for the construction of new dwellings, especially houses.

    This would be an indicator that we could see the VIC market become much more volatile during 2022, if the housing market does begin to cool, as many sources are indicating.

    The second surprise from these stats is just how strong the market in QLD has become. It is rapidly overtaking VIC in terms of A&A, and remains second only to NSW.

    statistics

    Big box update

    Subiaco council recommends approval for Bunnings store

    Vaccine hubs have opened in select Bunnings stores that are available to all staff and tradie customers

    After a long debate, councillors from the City of Subiaco in Western Australia have recommended the development application (DA) of a Bunnings store for approval to the Metro Inner North Joint Development Assessment Panel.

    POST Newspapers report that residents packed the public gallery and raised their concerns about the store development at the meeting of Subiaco council held recently.

    Last year, Bunnings lodged plans for a $28 million store after it purchased a site on Hay Street, Jolimont (WA) in 2017 for $13 million. The retailer withdrew plans for the Jolimont site after it received strong objections from the local council and community over traffic and design issues.

    At the time, regional operations manager Hayley Coulson said there had been extensive community consultation for the new store, which will replace the Bunnings at Homebase in Salvado Road, Subiaco. She told POST Newspapers:

    Bunnings has substantially modified the design from the original DA lodged in 2017 to address the feedback on our previous planning application. These modifications include the addition of a customer vehicle entry and exit point in Hay Street and the installation of gates at the rear laneway...
    The rear building facade is proposed to be heavily landscaped with greenery, and building levels have also been adjusted along Hay Street to allow direct pedestrian access to the front of the store.

    If approved, Ms Coulson said the store would represent an investment of more than $55 million, create 120 jobs during construction and employ 30 extra people when completed.

    All team members from the existing Homebase Subiaco store would transfer to the new store once complete.

    Related: Bunnings Subiaco could move location and into larger store.

    Big box update: Subiaco - HNN Flash #59, August 2021

    Vaccine hubs

    In an interview with ABC News, Wesfarmers CEO Rob Scott, provided an update on the vaccination hubs at Bunnings stores in Sydney. He said:

    ...So we have started off with some pilot programs at our Kings Grove store in Bunnings in Sydney, and we've opened that up to all Wesfarmers team members across all of our businesses in Sydney, but also to tradies. That is a really important segment of people that do travel around the community, and we really need to help them get vaccinated. So there's been good take up, but it's still early days. And we if there is good support there, then we'll look to roll that out more broadly.

    When asked whether it would be rolled out on a national basis, Mr Scott said:

    Well, at this stage just in Sydney...this is something that we're working on hand in hand with the state health departments. And it's really based on need. So if we look at Western Australia, for example, there are plenty of opportunities to get vaccinated. There's no real urgent need around having other sites available.
    But in places like Sydney, where the state health departments are trying to stop people travelling too far, and there is just such high demand for vaccination there at the moment. We're looking at any way that we can help.

    Wesfarmers will also keep paying workers who cannot work because of COVID-19 and said it will spend between $2 to $4 million a week, extending an earlier pledge to keep paying workers self-isolating or left with no meaningful work by COVID. The company will pay all staff until at least December. Currently there are 2000 employees in isolation, mostly in NSW.

    In terms of having to stand down staff and store closures in NSW and Victoria, Mr Scott told ABC News:

    ...[W]ith some of the stores that aren't able to be open, there isn't meaningful work available for some of our teams. But fortunately, we have had the opportunity to do click and collect which is creating jobs. So...we have made a commitment to all of our team members, if they're required to isolate or if there's no meaningful work available, then we will continue to pay them through to the end of this calendar year.
    And there's various reasons for that, but a big part of it is that it's our team that has helped us deliver such a phenomenal result over the last year. It is our team that we rely on to get through COVID and come out the other end in good shape. And we can just see firsthand the incredibly difficult toll that extended lockdowns are having on our team members and their families...

    Click here to watch the video:

    Bunnings launches drive-through vaccines as Wesfarmers warns of lockdown effect - ABC News

    Related: Earlier this year, Bunnings offered the use of its car parks as mass vaccination hubs.

    Bunnings car parks as vaccine hubs? - HNN Flash #42, April 2021
  • Sources: The Australian, POST Newspapers, ABC News (The Business) and Sydney Morning Herald
  • bigbox

    Mortar made for trade

    New product from Cement Australia

    It is suitable for all laying of bricks, masonry blocks, stonework and general-purpose mortar applications

    Cement Australia's Trade Mortar is an M4 rated bricklaying mortar mix made in Australia and conforms to Australian Standards - AS3700.

    Trade Mortar provides a strong and reliable mortar - bag to bag, batch to batch. It is a high quality drymix that offers reduced potential errors from on-site mortar preparation, eliminating rectification costs from out-of-spec mortar.

    The consistently proportioned blend of cement, sand and additives removes quality control concerns from contamination of sand on site and raw material variability. It delivers a reliable performance, in strength and colour as well as general mortar repairs. For users, it is quick and easy to use - just add water.

    This Australian made pre-blended mortar can help with faster project turnaround without compromising quality.

    The Trade Mortar product also received an endorsement from Jamie Gray at "What Tradies Want" magazine. In a video, he said, "In terms of quality and quantity, each 20kg bag will get through about 20 house bricks or if you work with masonry blocks a 20kg bag with a 10mm mortar joint will get you about 10 blocks laid."

    Bon Rich from BR Masonry added, "It's our 'go to' product when we need a pre-mix product. We usually use it for white or black bricks if we need a coloured mortar for consistency. It's easy to work with [especially] on hotter days."

    To watch the video, go to the following link:

    Cement Australia's Trade Mortar and "What Tradies Want"
    products

    USA update

    Ace Hardware expects to open 170 stores this year

    In 2021, Ace ranked "Highest in Customer Satisfaction with Home Improvement Retail Stores" according to consumer intelligence company J.D. Power, fourteen out of the last fifteen years

    Hardware retail co-operative Ace Hardware has already opened 110 new stores in 2021, and said it is planning to open at least an additional 60 stores by the end of the year.

    Globally, Ace has opened more than 900 stores in the past five years, while disbursing dividends of USD293 million in 2020 - a 46% return for Ace shareholders.

    Ace's business model offers entrepreneurs the ability to become owners of their local store operation, and the opportunity to be one of a limited number of shareholders of Ace Hardware Corporation. John Venhuizen, president and CEO, said:

    Our proposition for consumers is that Ace is the most helpful store on the planet; for prospective new store owners, our proposition is that Ace is the most financially and emotionally rewarding opportunity available.
    An essential business, rooted in people, that exists to serve others; we are blessed with local owners who genuinely serve the communities in which they reside.

    Q2 2021 results

    Ace also reported record second quarter 2021 revenues of USD2.5 billion, an increase of USD187.8 million, or 8.2%, from the second quarter of 2020. Net income was USD116.0 million for the second quarter of 2021, a decrease of USD22.9 million from the second quarter of 2020. The decrease in net income was due to write-downs of excess personal protective equipment (PPE), higher warehouse labour costs and a non-recurring USD6.9 million income tax benefit recorded in 2020 due to changes in tax laws.

    US retail same-store-sales reported by the approximately 3,400 Ace retailers who share daily retail sales data rose 1.2% during the second quarter of 2021. This was the result of a 7.1% increase in average ticket [transactions] partially offset by a 5.5% decrease in same-store transactions.

    Ace added 55 new domestic stores in the second quarter of 2021 and cancelled six stores. The company's total domestic store count was 4,729 at the end of the second quarter of 2021 which was an increase of 165 stores from the second quarter of 2020. On a worldwide basis, Ace added 61 stores in the second quarter of 2021 and cancelled nine, bringing the worldwide store count to 5,550 at the end of the second quarter of 2021.

    Ace Hardware earned other industry accolades this year, including being named one of the "Best of the Best Franchises" by Entrepreneur magazine, and ranking 5th among the top 200 largest franchise systems based in the US, according to Franchise Times.

    retailers

    Bunnings results FY2020/21

    Big-box retailer maintains pandemic gains

    While Bunnings maintained the high level of sales from the pandemic boost, the second of the year showed limited growth on the previous second half. Bunnings continues to grow its digital services and to expand its trade offer.

    Wesfarmers, the parent company of big-box home improvement retailer Bunnings, has released its results for FY2020/21. The company produced strong results, driven by a solid contribution from Bunnings, and a surprising performance by its low-cost department store division, Kmart.

    Overall Wesfarmers revenue was $33.9 billion for the year, up by 10% on the previous corresponding period (pcp), which was FY2019/20. Earnings before interest and taxation (EBIT) was $3.8 billion, an increase of 18.8% over the pcp. Net profit after tax (NPAT) came in at $2.4 billion, up by 16.2%.

    Kmart produced relatively modest growth in its revenue, which increased by 8.3% to $9,982 million. EBIT, however, came in at $787 million, up a considerable 53.7% on the pcp. As analyst David Errington of Bank of America Merrill Lynch commented, Kmart's performance was in some ways the "star" of these earnings results.

    Bunnings

    Bunnings produced performance that was strong, but within expectations for the year. Revenue was $16,871 million, up by 12.5% on the pcp. EBIT increased by a healthy 18.4% to $2301 million. Total store sales growth was 12.4% (a figure which excludes sales related to Trade Centres, Frame and Truss and Adelaide Tools), down from 14.7% in the pcp. For the year, online penetration - the percentage of revenue that originates in online purchases - is recorded as 2.3%, up from 0.9% in the pcp.

    Some of the highlights touched on in the prepared remarks of the managing director of Bunnings, Mike Schneider, include adding 10,000 additional employees, as demand increased during the year, launching a new version of the website in April 2021 in both Australia and New Zealand, which made over 100,000 products available for online purchase, the launch of a new trade desk format, and the success of the company's enhanced Power Pass app, which processed 2.1 million transactions during the year.

    A tale of two halves

    Exceptional events such as the COVID-19 pandemic tend to disorient expectations, so it's useful to quickly rehearse the expected pattern of performance from Bunnings. "Typical" years see the first half of the year - which includes both the strong demand for renovations and DIY running from (roughly) September to December, with Christmas and other holiday purchases - outperforming the second half of the financial year. For example in FY2017/18, the first half was responsible for 52.3% of the revenue, and 63.4% of the EBIT, while in FY2018/19, the first half produced 52.3% of revenue, and 57.3% of EBIT.

    For FY2019/20 this shifted around, with the first half producing only 48.5% of revenue and 51.2% of EBIT. That bulge in revenue and EBIT in the second half was caused, of course, by accelerated buying during the period from March 2020 through to June 2020, as the initial lockdowns in major cities sparked high levels of DIY purchases.

    In the reported year, FY2020/21, there is something of a return to the "typical" pattern - though it is a little more complex than just seasonality. The first half did produce 53.7% of the revenue and 57.9% of the EBIT, but this had more to do with complex interactions within a COVID-19 economy.

    In pure revenue terms, the first half saw sales increase by 24.44%, while EBIT grew by 33.87%. In the second half, revenue grew by 1.22% and EBIT grew by 2.22%. It is this kind of performance which gave rise to this fairly complex statement by Mr Schneider during his prepared remarks:

    In the second half total store sales increased 0.7% or 25.3% on a two-year basis. Store-on-store sales declined by 2.1%. Consumer sales moderated from mid-March as the business began to cycle the elevated growth in the prior year. We saw continued strong demand from commercial customers in the second half as our focus on our trade business continued to gain traction.

    The underlying suggestion here is that it's better to reference the results from two years prior, rather than the immediately prior year. There is some validity to that, as pandemic spending lifted revenue and EBIT to a higher overall level. On that measure, revenue in the second half increased by 24.93% and EBIT was up 39.63%.

    Mr Schneider also did go into more detail about the second half in answer to an analyst's question.

    I think it's fair to look at the second half of the year just ended first. You know, we certainly saw strong commercial performance throughout it, we did sort of call out the moderation in consumer sales. I think the second half of the FY2020 year was sort of growing mid 20%. And obviously, we were comping some pretty big numbers in the second half of FY2021. But commercials remain strong.
    We've got quite a significant sort of impact right across the Bunnings network at the moment in terms of stores that have got different trading restrictions. We've just got about 45% of our network currently trading on online only, which is it was 169 stores this morning, but five more in ACT have moved across to that, in the course of the morning. We've got all of our Victorian stores trading, for trade, open for trade, but closed for retail and online. About 45% of our New South Wales stores, 100% of their New Zealand stores.
    So you can sort of imagine that there are going to be some significant impacts. New Zealand is virtually closed, we've got probably, you know, maybe 100 lines that we can provide, which are only essential and emergency repair products for customers in our home [section].

    The reality, of course, rests somewhere between the two views. One way to effectively manage what are close to "windfall" gains is, of course, to invest the excess funds in acquisitions, to expand the business and hopefully come closer to matching future expectations. While Bunnings' proposed acquisition of Beaumont Tiles was more complex than that, it would certainly have fit somewhat in that mould.

    However, the Australian Competition & Consumer Commission (ACCC) has extended its review of the acquisition. It was originally scheduled for resolution by 5 August 2021, but has now been delayed - for the moment - indefinitely. HNN is aware that ACCC researchers are currently seeking more information from a range of sources in the tile industry.

    There is also, of course, Adelaide Tools (and we still don't know what it will eventually be called), but that will be developed slowly. Mr Schneider did reference this during his prepared remarks:

    Adelaide Tools helped us cater to more of the products specialist trade customers need. The team opened its first new format store in Parafield, South Australia, which has traded strongly. It's provided us with confidence in the evolution of the format that we'll be taking into Western Australia in the next few months.

    Forecasting

    While Wesfarmers has, in general, always been very cautious about forecasts, in this case the company has released a more comprehensive view. The formal accounting results document contains this statement:

    Bunnings' sales for the 2022 financial year to date declined 4.7 per cent on the prior corresponding period, with solid growth from commercial customers, offset by a decline in consumer sales as the business cycled elevated demand in the prior period. Sales growth remained strong on a two-year basis at 24.4 per cent.

    Mr Schneider expanded on that statement in his prepared remarks:

    Bunnings' trading performance in the 2022 financial year is expected to moderate following extraordinary growth recorded in 2021 financial year. The operating environment is challenging with state based lockdowns, supply chain constraints and price inflation on some materials or products, creating complexity and uncertainty.
    Recent and current government restrictions have impacted trading and sales declined 4.7% in the first seven weeks of the 2022 financial year. Pleasingly, sales growth remained strong on a two-year basis. In the long term, we remain confident in our strategy and the opportunities ahead for our team and business.
    We're focused on evolving our home and lifestyle offer in store and online, deepening relationships with commercial customers, delivering an even better service experience across every customer touchpoint, while maintaining strong cost discipline.
    We will continue to accelerate investment in our digital offer by providing retail customers with a more personalised digital experience, and introducing a new fully transactable website for commercial customers.

    Digital

    One of the most interesting aspects of the Wesfarmers results presentation was that analysts seemed to more fully engage with the digital plans of Wesfarmers. In part this was triggered by the managing director of Wesfarmers, Rob Scott, announcing an investment of $100 million in building a digital framework for the overall business. That effort is to be overseen by Nicole Sheffield, who will come onboard as a managing director in November 2021. According to a statement by Mr Scott:

    This is a new role for Wesfarmers, reflecting the strategic importance and growth potential of our data and digital strategies, and Nicole will work in close partnerships with the divisions.

    In response to an analyst's question, Mr Scott went into more detail about the digital transformation Wesfarmers has planned.

    So each of our retail businesses has had their own ecommerce systems and each have gone through a fairly significant investment, there have been some pretty significant replatformings. A business like Officeworks has been on this journey for a very long time. All the work that's going on in the supply chain side also has a view on how do we keep optimising outcomes for ecommerce as well as the store network.
    So all of that is progressing. And it's progressing really well from my perspective. The broader investment around ecosystem, particularly relates to the, you know, the customer data interfaces and flows. Some of the additional functionality and enhancements that we're thinking are going to be important for the future. But ultimately, the core ecommerce capabilities, are delivered within the divisions.

    One data point that Mr Schneider revealed in answering an analyst's question was this:

    We're processing something like about 40,000 to 45,000 online orders a day across Sydney and Melbourne, which is a real testament to the work that the team in store is doing and digital team have done and the success of the replatforming that I talked about in our notes.

    This is an indication of just how well Bunnings has done in transforming into an active provider of ecommerce services. It's not just a matter of whacking a payment system onto an existing website, but rather involved substantial repurposing and training across a large network of stores - in the middle of a pandemic.

    Analysis

    The difficulty with the current moment in retail is that there are a range of factors at work. Just as a start, the pandemic itself has created a field of great uncertainty. One of the major questions at the moment is how much of that uncertainty is due to the characteristics of SARS-CoV-2 and the disease it causes, COVID-19, and how much is it down to the governmental response to the pandemic, and the politicisation of that response?

    Primary pandemic effects

    In terms of the challenges of SARS-CoV-2 itself, these have been fairly accurately described in what has become known as the "Doherty Paper", more formerly named the "Doherty Modelling Report for National Cabinet" (DMRNC). The diagram below (which HNN previous published) represents a narrow slice of the modelling provided in the DMRNC, but makes, we believe, the central point of the report.

    Note that one of the pre-conditions for this particular modelling to apply is that it takes place against a background of low- to moderate-level Public Health and Social Measures (PHSM) - which is all the social distancing, mask-wearing and QR code check-ins practices.

    The important point made by this chart is that, in just about all things pandemic, while governments tend to think in binary terms, the reality of the pandemic is that it exists more in a continuum. There is a continuum of practices from 50% vaccination through to 80% vaccination. The only difference between the 60% mark and the 80% mark is the frequency and duration of lockdowns. There are no magic numbers. A community is not sitting at 69% vaccination, then goes to 70%, and everything changes.

    What should stand out in this diagram is that even with 70% of the populace vaccinated, if you have non-optimal test, trace, isolate and quarantine (TTIQ) levels, you would still need to spend at least 22% of the time in strict lockdown. That would mean two weeks of lockdown out of every nine-week period. So, in terms of general freedoms, effective TTIQ is very important.

    Further, if we look at the current situation in Sydney and, increasingly, all of New South Wales (NSW), arguably this chart really doesn't apply. That's because in at least the Greater Sydney region there is not "non-optimal" TTIQ - there is virtually non-existent TTIQ. Once caseloads go over 5000 a week, the exponential nature of contacts mean tracing coverage will be inadequate.

    That's because TTIQ doesn't reflect the transmission potential (TP) or the "R" number that track actual rates of spread, it reflects the number of contacts. With a conservative contact number of just two, 5000 cases leads to 10,000 first generation contacts, so 20,000 second generations contacts, and then 40,000 third generation contacts, for a total of 75,000. It's not possible to manage that many.

    While this situation may seem dire, there is a way out that does not involve simply giving up - which is close to what both the NSW state government and the federal government seem to be suggesting. Very simply there needs to be a drive to get all of Australia to at least a 50% vaccination rate, and move Victoria up to a 60% rate as quickly as possible, but to focus as many resources as possible on getting greater Sydney (at the very least) to a vaccination rate of between 85% and 90%.

    That means concentrating more federal government resources on NSW, to the apparent detriment of other states and territories. However, the fact is that NSW is a problem for all of Australia, as it is the main source of contagion for the entire nation.

    The difficulty with this commonsense approach to the problem is mostly political, at the moment. The federal government did not manage vaccine acquisition well, and suggesting such a plan highlights this failing. However, as we can expect adequate vaccine supplies by the end of September 2021 (they will not magically appear on 1 September, as seems to have been suggested), HNN is optimistic that something like this plan will be adopted by early October 2021, which means some resolution may be in place by January 2022.

    Doherty modelling rewards consideration - HNN Flash #58, August 2021

    In terms of Bunnings, this could mean that the coming "high" season for renovations will be more subdued than in past years, driven also by a degree of "pull forward" tasks such as house painting. In the past, lockdowns did help to drive DIY, but it seems this effect has diminished, and might even have reversed. It does seem to HNN that, on balance, at the very least a high level of restrictions on gatherings will be in place over Christmas 2021.

    There is also the possibility that there will be harsher restrictions on construction activity on both big and small builds.

    On the more positive side, families might also start to conserve funds for the possibility of going on holidays in 2023, rather than spending more on their homes.

    Secondary pandemic effects

    While the primary effects of the pandemic are very, very important over the short term of the next six months through to February 2022, it is the more medium- to long-term effects that will influence the hardware retail industry.

    These secondary effects are complex. Take, for example, what we can expect to happen to the housing industry - an important driver for sales, especially for independent retailers, but also Bunnings as well. The Housing Industry Association (HIA) has declared that there will likely be a slowdown at the start of the 2022/23 financial year. HNN expects that slowdown to being earlier than that, at around March 2021. It is driven by a range of factors, including increases in house prices, backlogs in construction creating lengthy completion delays, and the end of effects from government stimulus programs such as HomeBuilder.

    Another non-pandemic factor to take into account is that there will likely be a federal election sometime between March and May 2022, which tends to create a period of uncertainty.

    Where things get really complex, of course, is when we come to issues such as how much of the secondary pandemic effects really reflect something more of a structural change in markets. For example, we've seen a sharp rise in work from home (WFH) activity since mid-2020. Families spending more time at home, and using the home for a wider range of activities, including home schooling and entertainment has been one driver behind elevated spending on renovations.

    A big question remains, however, over how much of WFH will be retained through 2022. Studies would seem to suggest that WFH is popular with a majority - though certainly not all - of workers under 30 year old, but it is less popular with more traditional managers. Conservative forecasts estimate it will work out to around 20% of total work hours, of the equivalent of employees spending one day a week in WFH.

    That will have consequences not only for how much people depend to spend on their homes, but also the distribution of working families. With fewer days (or even no days) spent commuting, there could be a population shift of particularly higher-paid families to the outer suburbs and ex-urban regions. That could mean that Bunnings finds it has more stores in some areas than are needed, and new areas where it needs to establish coverage.

    Background changes

    With all this activity created by the pandemic, it is easy to forget about some of the ongoing societal changes in Australia, which will (hopefully) have more influence in 2022. The major change that HNN believes is becoming more pressing in home improvement is that the market is splitting. It's a situation where 85% to 90% of all revenue comes from the "traditional" hardware market, but over 80% of future growth comes from that other 10% to 15% of the market.

    This is beginning to create difficulties in the home improvement industry on a global basis. Most retailers, for the moment, are choosing to concentrate on the traditional market - understandably, though this means that some growth opportunities are missed. For example, it is arguable that hardware retailers were unable to retain more of the new DIY customers that came their way in the pandemic because they could not pivot to meet their needs.

    That said, the one retail-focused company in Australia that has grasped some aspects of this problem is actually Wesfarmers. What Mr Scott seems to have understood, and analysts are now coming alive to, is that digital commerce, including ecommerce, represents a way to accommodate this shift in the market.

    In dealing with purely traditional markets, ecommerce is hard to justify, as it essentially involves selling the same products to the same people at a lower rate of profit as you have to employ expensive delivery services at a discount to the customer. Or, to put that another way, companies have invested heavily in a specific delivery technology, the store itself, and ecommerce discounts the effectiveness of that investment.

    In reality, though, digital commerce is a way for retailers to access entirely new markets, as well as providing extra services to existing markets. One part of the emerging DIY market, for example, is heavily invested in things such as 3D printing, CNC routers, electronics and next-generation smarthomes (which rely on central processing more than the internet of things).

    Bunnings might not want to sell 3D printers in-store, but there would be a viable market for the retailer to sell these online. It's just that the relationship shifts with those customers from being a physical operation with a virtual addition, to being a virtual retailer with a really useful physical operation on the side.

    In HNN's view, Mr Scott's central insight is that this form of digital-enhanced retailing is set to deliver a significant advantage through the 2020s. We saw Wesfarmers take a big leap forward in retailing when it developed, under the guidance the company's current chairman of the board Michael Chaney, the Bunnings model. It seems likely Mr Scott will develop what amounts to the digital equivalent to that model - one which has a much wider and more significant place in Australian retail in the decade to come.

    bigbox

    Makita's strategy lifts FY2022 Q1 results

    Revenue increases by 46%

    Makita's results for the first quarter of its FY2021/22 show a solid boost in both revenues and profit. This is largely down to a sharp increase in sales to its Europe region. However, the company is forecasting an overall gain in profit for this financial year of just 7%.

    Japan-based power tool manufacturer Makita Corporation has released its results for the first quarter of its FY2021/22. The results show a substantial improvement over the previous corresponding period (pcp), which was the first quarter of FY2020/21.

    Revenue for the quarter came in at JPY185,297 million, an increase of 45.9% over the pcp. Operating profit was JPY28,382 million, an increase of 82.3%. Overall profit was JPY21,612 million, up by 87.6% on the pcp.

    In reporting these results, Makita outlined the main factors for each of its international markets. In the Oceania region (dominated by Australia), sales increased by 39.3% on the pcp to reach JPY12,056 million. The company stated that:

    While stay-home demand dissipated, tool demand was strong at construction sites and sales of cordless outdoor power equipment were strong.

    In Europe, which is the company's main market, sales increased by 51.7% to reach JPY91,397 million. Makita noted that while the DIY market had slowed, sales into the building and construction sector, as well as sales of outdoor power equipment, had surged. There were similar results in the North American market, with sales up by 44.1% to JPY28,618 million.

    Across Asia, markets were very mixed, the company reported, but there were strong sales in both China and Taiwan, so that the region posted an overall gain of 13.6% to reach JPY10,225 million.

    For Japan itself, sales continued to improve, but at a slower rate than for the company's main international markets, up by 18.7% to JPY30,053 million.

    Looking ahead to forecast results for the current financial year, Makita has retained a cautious approach, estimating an increase in overall revenue of just 6.8%, and an increase in overall profit of just 1.9%. The company stated that:

    The outlook for the future remains uncertain, however, due to a resurgence of new cases caused by COVID variants and the intensifying conflict between the US and China.

    New products

    Typical of the new products Makita has brought to market, helping to boost its sales, is the upcoming XGT line trimmer, the UR006G and UR007G. Both of these are based on Makita's new 40-volt (max) range of Lithium-ion (Li-ion) batteries.

    The line trimmers are designed as "drop-in" replacements for existing petrol-powered line trimmers. They feature a strong motor, capable of 1kW output, which the company says is comparable to output from a 30cc two-stroke petrol motor. The motor is placed at the rear of the tool, close to the operator, which retains the familiar balance of the petrol motor units.

    The UR006 comes with the U-shaped handles favoured for brush cutting and other heavy-duty jobs, while the UR007 has a more convenient loop handle. Both units also feature three-stage speed control, as well as automatic torque drive which increases torque under load, and active feedback, which will stop the motor when resistance increases beyond a set level, such as when the unit's cutting head jams.

    They are also IPX4 rated, making it safe to use them in wet conditions, and feature a reverse mode, for unsnarling the cutting head. They accept standard nylon trimming line, as well as metal and plastic blades.

    Analysis

    Some of the accelerations in the global construction industry that caused by the COVID-19 pandemic would have contributed to Makita's growth. However, there is more going on here than just that. While putting the company's success down entirely to its new 40-volt platform would also be overstatement, this new product range seems to have reinvigorated sales.

    The question for the industry is whether Makita has found a kind of "sweet spot" with this new range. DeWalt started the "voltage wars" with its FLEXvolt tools, which provided 54-volt/60-volt (max) in a platform which, by switching between serial and parallel battery cell configurations, could also work with existing 18-volt/20-volt (max) tools. Techtronic Industries' Milwaukee Tool brand maintained its existing 18-volt line, but then added the very heavy-duty MX line, which provides 72-volt/80-volt (max) power.

    In a sense the pioneer in this area was Kobalt, the power tool brand sold through US big-box retailer Lowe's Companies, which differentiated its products by offering 24-volt tools, though Hilti had moved to 22-volt tools previously.

    While increased voltage is typically thought to automatically provide more power, that's not necessarily the case. What it changes more than anything else are the design parameters involved in making an electric motor. For example, the "standard" voltage for motors in electric cars today is 400-volts, but more recent "performance" versions such as Porsche's Taycan run on 800-volts instead. That enables the motors to be smaller, and adds improvements to battery partial charge times as well.

    So while there is definitely a move towards more power with Makita's shift to a 40-volt system, it's really about shifting around other design parameters as well. According to some power tool designers, it's evident that producing a more powerful tool would be less expensive when it is 40-volt as compared to 20-volt.

    From that design perspective, as HNN has written previously, the advent of the 21700 battery cell, with its greater charge density and slightly large size, has made 40-volt more possible. But what is interesting to consider, is whether Makita sees a change in the market that has encouraged it to make these more powerful tools.

    Given that Europe is the company's largest single market - though it certainly hopes to grow its North America market as well - it is likely Makita would respond first to pressures in that market. Deloitte in its report entitled, "European Construction Monitor 2017-2018: A looming new construction crisis?" (published in July 2018, which would have been the design period for today's Makita tools) had this comment to make:

    When looking at the profit margins, we observe different trends throughout Europe. In the Northern European countries costs have increased, but due to high activity levels it is expected that overall profit margins will not be affected and will even increase in the coming years. In the western part of Europe, such as the UK, Belgium, the Netherlands and Ireland, operating margins are under pressure due to an increase in labor costs, which cannot be offset with higher activity levels or be passed down the supply chain.
    Deloitte European Construction Monitor 2017-18

    The European construction industry is facing increased costs in part due to growing constraints. There have been improvements to health and safety (such as dust filtration and elimination) that have added costs and imposed some productivity losses - for a very good cause - as well. There are also costs related to moves to "decarbonise" the industry as much as possible, which often translates to less concrete and more (expensive) wood.

    This is putting additional pressures on subcontractors and builders. They are being pushed to do more faster with less resources. One way out of that is to start using power tools that have more power, purely for the benefits of saved time and therefore higher efficiency.

    A recent study from Denmark entitled, "Determining the Relationship between Direct Work and Construction Labor Productivity in North America" investigated why productivity has declined since the 1970s. The study's conclusion was that too much time was wasted on non-productive activities. The biggest barrier to improvement was simply a resistance to change.

    Labor productivity in construction has fallen behind other industries. As reported widely, it has been declining continuously for decades, at least in most parts of the western world. To change this negative trend, the construction industry needs to know where to focus.
    It was found that craftsmen efficiency is a crucial factor in changing the trend of stagnation and decline in construction labor productivity. The importance of craftsmen efficiency was found by comparing four decades of published direct work rates measured on activity and project levels, with construction labor productivity data measured on a national level.
    The comparison showed that if all construction crafts in North America added just 36 seconds of additional direct work time to each working hour in 2010, 5.4 billion USD (2012 value) would be added to the yearly construction GDP.
    Danish journal article

    While Australia, currently, has fewer constraints on the industry, there is still a push to improve productivity, as build times stretch longer and the industry remains mired - for the most part - in the less productive practices of the past. So there is definitely something of a "fit" for this shift in Makita's market strategy, though it is not as tight a fit as that for Europe and North America.

    Related: The new 21700 battery cells - how will they influence the power tool market?

    Will the 21700 Li-ion battery cell change power tools? - HNN Flash #47, May 2021
    companies

    Retail update

    Loganholme Mitre 10 shutting its doors for good

    Cobram Bolt Supply in regional Victoria has been supporting the local community for 28 years

    The owners of family-owned Loganholme Mitre 10 located in the City of Logan (QLD) have announced the closure of their hardware store after 37 years, according to the Courier Mail. It has been serving its loyal customers since 1984 but could not survive after a Bunnings Warehouse opened across the road. Logan local, Ian Gill has owned it since 1998 and told the newspaper:

    After 37 years of business it's devastating to announce we'll be closing in about eight weeks' time. We've tried everything to sell this past month, but no one wants to buy a hardware store with a Bunnings in its carpark.

    In March 2017, when it was revealed Bunnings would be opening at the Hyperdome Home Centre later that year, Mr Gill predicted it would be the death of many small businesses. He said the Home Centre, owned by Queensland Investment Corporation, should support and protect longstanding tenants and small family-owned businesses.

    The Queensland Government obviously doesn't support small businesses. We've done our best but we're exhausted and have had enough.

    Mr Gill said in the past decade, 10 other small hardware stores had shut down within a 10km radius.

    It's just so sad there's no protection available for small businesses. It's the small businesses that are paying the higher tax rate to the government. Closing will be a very sad day. I'm going to miss it so much after 37 years.

    Mr Gill said he would never forget his time as a small-business owner in Logan.

    For me it's about the friendships you make with your customers. We have locals who have been coming here for years who rely on us and support us.

    Once Loganholme Mitre 10 officially closes in two months' time, Mr Gill and his wife plan to retire.

    We're hoping to do some travelling around Australia. [It] will depend on COID-19 of course.

    Related: Loganholme Mitre 10 prepares for battle.

    Indie store update: Loganholme Mitre 10 is battling Bunnings - HI News, page 17

    Cobram Bolt Supply

    In the town of Cobram (VIC), the Sneddon family have owned and operated Cobram Bolt Supply for almost three decades.

    Ian and Angela Sneddon originally bought Cobram Hire Sales and Service in 1993. Now their children Brad and Glenn, along with their wives Michelle and Kylie, are greeting customers and working in the business.

    After buying Cobram Bearings and Cobram Hydraulics in 2009, the business quickly doubled in size. Kylie Sneddon told the Cobram Courier:

    We started off with three quarters of the showroom filled up and we've expanded our power tools and hydraulic equipment to support the agricultural industry.

    Glenn Sneddon said providing support for farmers across the Moira Shire was the main goal.

    We aim to fill anything that's missing in town for farmers so they don't have to travel for what they need. Because of our broad range of services, it's almost like a one-stop shop, we actually have people come from Melbourne because everything they need is in the one place.

    As well as supporting farmers, the owners are passionate about giving back to local clubs and services. Kylie Sneddon said:

    A lot of the clubs provide important services for everyone like the SES, and the sporting clubs are very important and gives families a place to belong.

    There are three full-time employees at Cobram Bolt Supply, working alongside the family members. Glenn Sneddon said:

    As a family business, you have to be fairly accepting and stop trivial things from upsetting you. You still have disagreements but if you didn't have them, your business probably wouldn't function anyway.
    There's no use arguing about something, you may as well just fix the problem.

    Running a business means a lot of pressure rests on Mr Sneddon's shoulders. He said:

    You have control being your own boss but you have to also be very versatile. For us, it's nothing to get a call on a Sunday morning and have to come in and help a customer - that responsibility is always with you.

    Navigating the everchanging coronavirus restrictions has been a challenge for the family which has remained optimistic throughout the pandemic. Kylie Sneddon said:

    Last year was harder when we lost a couple of employees and we had to navigate home schooling at the same time. The lockdowns are the hardest because we can't get people in, and the border closures are hard on our customers on the NSW side.'

    Looking ahead 20 to 30 years, the outlook could be less certain for Cobram Bolt Supply as more farm owners decide to sell up. Glenn Sneddon said:

    The environment is changing drastically in the farming area and there won't be a place for a shop like this in one or two generations time. A fair percentage of farms won't be here for the long term.
    We don't know if the kids are interested in taking over the business or what will happen in the future.

    Mr Sneddon said young people often leave the area for university and never returned. But for now, Brad and Glenn's children work at the store during school holidays and will probably cherish the memories of growing up with a family business.

  • Sources: The Courier Mail (Albert & Logan News) and Cobram Courier
  • retailers

    Lowe's results of FY2021 first half

    Revenues increase even as DIY sales drop

    In Lowe's first half revenues rose by 11% while net profit grew by 28%. Transaction numbers fell, but average value rose, with an increase in higher-value tickets. Online penetration increased to 9% of revenues, with 60% of online orders picked up.

    US-based big-box retailer Lowe's Companies has released its results for the second quarter of FY2021, completing its first half results. Net sales came in at USD52.0 billion, up by 10.68% on sales for the previous corresponding period (pcp) which was the first half of FY2020. Operating income was USD7.5 billion up 25.34% on the pcp, while net earnings were USD5.3 billion up by 28.21%.

    Looking at results for the first quarter of FY2021, comparable transactions rose by 11.3%, with the average ticket (invoice) at USD93.81, a 13.1% increase. Transactions over USD500 rose by 47%, transactions between USD50 and USD500 were up 15%, and transactions under USD50 were up 9%.

    The same numbers in the second quarter showed a reduction. Comparable transactions fell by 12.5% (though Lowe's points out that compared to the second quarter of 2019, they rose by 8%). The average ticket increased by 10.3%, to reach USD93.68. Transactions over USD500 were up 17%, but those for the range USD50 to USD500 fell by 10%, and those under USD50 also fell, by 14%.

    Delivering his opening remarks for the second quarter results, the company's CEO, Marvin Ellison, stated:

    As anticipated during the quarter, we saw a decline in DIY demand versus last year, as many families transition back to pre-COVID purchase patterns and weekend mobility after Memorial Day. But because of the agility of our Total Home strategy, we were able to capitalise on Pro demand.

    One of the achievements that Mr Ellison chose to highlight for Lowe's was an improvement in the company's delivery model.

    In this new delivery model, product flows from the bulk distribution centres to cross-stock terminals directly to customers' homes, bypassing the stores altogether. This replaces a legacy store delivery model, where we hold appliances in stock rooms and storage containers behind our stores and then leverage store-based trucks and associates to deliver these products to customers' homes.
    To say this legacy process is inefficient would be an extreme understatement. The new market-based delivery model is already driving higher appliance sales, improved profitability, lower inventory, higher on-time delivery rates, and improved customer satisfaction.

    Joe McFarland, executive vice president - stores, outlined some of the progress Lowe's has made in online retail:

    Our online penetration for the quarter was 9%. And with approximately 60% of online orders picked up in the store, our dedicated in-store fulfilment teams are an integral part of Lowe's omnichannel customer experience.
    We are continuing to leverage technology to improve efficiency in the customer experience. Whether customers get their orders at the front desk or through curb-side or do their favourite option, our new pick-up lockers.

    Questions

    Analyst Michael Lasser from UBS asked how Lowe's would handle a forecast slowing of the DIY market, given that most analysts predicted the company could be disproportionately affected by that event. Mr Ellison responded:

    I'm not saying that is wrong. I think that also may consider that we're not going to improve our Pro business. As I mentioned in my prepared comments, we've been working diligently for 24 months to really have a solid Pro business. One of the reasons why we delivered a 32% two-year comp, is because 49% of our Pro comp drove that on that two year basis.
    So if you look at it in isolation, Michael, that probably is a true statement. But it's a dynamic business, dynamic in the nature that we're improving our Pro business. Reflected by the results, dynamic in the nature that we're going to continue to take market share with the DIY customer.
    With the things that we're launching in Decor, how we're enhancing the Allen + Roth brand. We just acquired Stainmaster as a brand that we're going to expand. I think that the dynamic nature of DIY and our growth in Pro, I think we'll put that synopsis into question.

    Mr Ellison's answer was backed-up by David Denton, the company's chief financial officer.

    Just don't forget that what has happened here over the last 18 months is a re-emphasis back on the home, and what you're seeing is, despite the fact that the market is open - or the US market is opening up - you're still seeing a large contingent of work-from-home, school-from-home, utilising the home for other activities other than a just dwelling.
    So I believe that over time, there is a secular trend and tailwind to this industry, both from a Pro and from a DIY perspective. I assume demand will mitigate a little bit, but it's not going to fall off the floor either.

    In response to a question by analyst Steven Zaccone of Citigroup about online sales, Mr Ellison affirmed a commitment to omnichannel.

    On the penetration question, we'll probably end the year around 10% and we are purposely not trying to set penetration targets. We're really trying to be more customer-centric and create an environment for customers to shop any way they choose.
    When we talk about omnichannel, that's an overused term lately, but in essence, we just want to give the customer choices to shop in-store, online, pick up in a locker, curb-side, in-store, ship from store, and just provide a multitude of options. And we'll let the penetration land where it lands.

    Analysis

    Every hardware retailer in the US (and most other developed markets) is today facing the problem of determining the nature of the changes that have been caused by the COVID-19 pandemic. While there has been (and continues to be) some wishful thinking that DIY purchases will maintain an elevated level as compared to 2019, there's little evidence to support that view.

    It is true that some homeowners have picked up the "DIY habit". The majority, however, used the pandemic lockdowns to perform tasks they had put off for some time, or to make transitions that they had already planned.

    One of the real difficulties - in Australia, the UK and the US - has been that retailers have not really changed much about their stores or retail methods to better suit the potential markets that are emerging. To cite one simple example of that, as people have moved to working from home (WFH) during the COVID-19 pandemic, they've found it necessary to upgrade their home technology resources.

    With many virtual meetings being conducted over services such as Zoom or Microsoft Teams, one important upgrade is the home network. You will find that the "instant upgrade" many people in the tech industry made was to move from WiFi links to their router to Ethernet cable - Cat5e or Cat6. That is a classic DIY project - just about no one is going to hire a professional cabling service to add a couple of 10m long links to a router. Yet there has been little if any push to enable projects of that kind at hardware stores in the US, the UK or Australia.

    What we're seeing here is much less a business problem, and much more of a cultural problem. The emerging reality is that the hardware retail market is dividing along lines which are difficult for traditional retailers to navigate. On one side of the divide is the "traditional" market, which is responsible for perhaps 85% to 90% of all sales volume. On the other side is the "non-traditional" market, often more associated with tech industries and skewing younger, which makes up the remainder.

    There are two factors which make this a difficult situation. The first is that the non-traditional market is responsible for 90% of the market growth potential, while the traditional market has been in slow decline since 2010 or so. The second factor is that the non-traditional market also represents a much higher level of profit margin associated with higher value products.

    One glimpse into what is being suggested here is represented in the two maps of the US in the image below. The top map is taken from a Houzz study in the US, looking into demand for architectural and interior design services for the third calendar quarter of 2021 based on its own surveys. The bottom map is provided by the Computing Technology Industry Association (CompTIA) and relies on US government statistics to represent the employment density of workers in technology industries.

    Houzz research CompTIA research

    There are some caveats to this comparison. The top, Houzz map is based on US Census regional divisions, not states, while the bottom map is based on states. There is not an exact correspondence in any sense. Yet it is evident that those places with higher level of tech employment tend to have a higher demand for design services in 2021. That feeds directly into demand for home improvement products, in both the DIY and Pro markets.

    What makes the effects of the COVID-19 pandemic so confusing is that they have intersected with both markets. The traditional market received a boost, and so did the non-traditional market. It is possible that more than the DIY versus Pro growth arguments, the key to the future is working out the balance between trad and non-trad markets.

    To take one category where this division can be seen clearly, let's look at office chairs. This is evidently an expansion market, as homeowners discover that spending 10 hours a day sitting in their old office study chair leads rapidly to various forms of discomfort. Both Lowe's and its main competitor, The Home Depot, offer a wide range of ergonomic office chairs, but none of these chairs has a truly recognisable brand name. Even worse, there seems to be almost no online reviews for these chairs - even though the ergonomic chair review is a popular topic on YouTube.

    This brings up a really wide range of factors that affect home improvement retail merchandise and sales. The one established chair company that has really "stepped up" to the home office market is Steelcase, with its Series 1 and Series 2 chairs. These offer a sturdy, durable and ergonomically refined task chair for between USD400 and USD600. There are multiple, highly positive reviews of these chairs online.

    But would Steelcase really want its chairs to be sold by Lowe's? And would Steelcase, under any circumstances, offer the kind of margins Lowe's might insist on?

    While we've seen a shift over the past eight years, and accelerating over the past three, to move to towards a better omnichannel experience, many of the questions about how to achieve that have been, to a large extent, answered. The next challenge to improving revenues and EBIT is likely to come from understanding how to integrate divided markets, from both the retailer to customer and retailer to supplier perspectives.

    bigbox

    Big box update

    Facebook's Workplace for employee engagement at Bunnings

    Munno Para West store sells for $48.8 million and Supercars will return to Victoria in late October for the Bunnings Trade Phillip Island SuperSprint

    Bunnings managing director - Australia and New Zealand, Michael Schneider, recently spoke at the Workplace Transform APAC 2021 Facebook live event, according to a report in Mumbrella. Some of his comments include the following:

    Coming into 2020, there was a really strong sense of positive momentum and great engagement with our customers, and with our team. We were really driving a medium to long-term strategic agenda of business evolution and improvement. During March to April 2020, the pandemic came to Australia and business was quickly turned on its head.
    In times like that, you really need to find the strength and the resilience to be able to support your team, care for the people around you who you love and really make sure that you're making good business decisions. As a company we've been able to pull together to support our team, with a focus of keeping our customers and teams safe, particularly in our retail stores. There's a need to be really resilient, really focussed, and stay very committed to that idea of caring for the people around you, because in doing that, they're caring for you as well.

    Mr Schneider also spoke about creating the 'Challenge Accepted' initiative and how it contributed to the workplace remaining "fun and safe" during unprecedented times, which sees Bunning's employees from across Australia and New Zealand compete in competitions and challenges for the chance to win prizes, and donate to communities in need.

    On one of the many live streams that Bunnings has done, one of our young managers in one of our stores actually asked a question on whether or not we were really live-to-air during the livestream, and the challenge he put to me was that presenting on camera, would I drop down and give him ten push-ups, and that really got us thinking about ways that we could create challenges within our business to engage our team, but also to use that as a way to reward and recognise a team through monetary prizes and other gift incentives.
    Some prizes you were able to donate to different community groups to support them through various challenges. It's given the team a great opportunity to be competitive with one another right around Australia and New Zealand, but also do a lot of good for their mental health by staying active, having fun and having a laugh, and also providing funds to much-needed community groups across Australia and New Zealand.

    Mr Schneider said it was Workplace from Facebook which has helped lead the internal teams at Bunnings to a more engaged and happier work environment.

    During 2020, we recruited close to 10,000 new team members, growing our workforce by 25%. Tools like the Workplace provide a really important role, because they allow us to connect and engage with all of our team members, share content that's relevant, share information that's really important for our team members to be hearing.
    Particularly changes with our operating model, when governments introduced different restrictions, to make sure our team members know we are on top of things. More importantly, it's an opportunity to listen to our team members and hear from them what's on their mind, ways that we can support them, and also to create that care and culture that's vital right now. We have managed to stay really connected and engaged by using tools like Workplace for Facebook.

    To read more about the event, go to:

    Workplace Transform APAC 2021 Facebook live event - Mumbrella

    Related: Bunnings uses social enterprise tool, Workplace from Facebook.

    Employee engagement gets social - HI News, page 19

    Munno Para West store

    Property fund manager, Charter Hall has paid $48.8 million for a Bunnings Warehouse facility located on a 4.11ha site on the corner of Frisby and Curtis Roads in Munno Para West, approximately 40 kilometres north of Adelaide (SA).

    It is fully leased on a 12-year lease expiring in August 2028, with options to extend to 2064, and generates annual net operating income of $2.075 million, according to a report in the Adelaide Advertiser.

    The property has been added to Charter Hall's Direct Industrial Fund No.4 (DIF4), which targets fully leased properties with long leases and structured rental increases. The deal was brokered by Colliers' James Wilson out of Sydney, Brisbane-based Chris Maher and Adelaide agent Alistair Mackie.

    Mr Mackie said the tight yield set a new benchmark for South Australian Bunnings warehouse investments.

    The market-leading Bunnings Warehouse covenant, combined with its strategic location within Adelaide's booming northern growth corridor, generated unprecedented purchaser engagement.
    The campaign highlighted the significant amount of unsatisfied local high net worth investor and fund capital looking to be placed into the local South Australian market.

    So far this year, 11 Bunnings warehouse sites have been sold, at an average yield of 4.55%.

    Related: The Bunnings Munno Para West store is located in a fast-growing commuter suburb.

    Big box update: The Munno Para West (SA) outlet is up for auction - HNN Flash #56, July 2021

    Bunnings Trade Supercars

    Phillip Island in Victoria will host the ninth round of the 2021 Repco Supercars Championship, with Bunnings Trade the naming rights partner of the three-race event in late October. It will mark the first Supercars round at Phillip Island since 2019.

    The two-day event will be the final hit-out before the Repco Bathurst 1000, which will be held across November 4-7.

    The Phillip Island round will also headline the Bass Coast Festival of Motorsport, which will be a three-day celebration of Phillip Island's rich history of racing on both two-wheels and four dating back to 1927.

    Supercars CEO Sean Seamer thanked the Australian Grand Prix Corporation (AGPC) and the Victorian Government for their support of the category's return to one of Australia's most historic circuits. He said:

    We are thrilled to be able to confirm today that we will be returning, with fans, to Phillip Island in October. Working with AGPC and the Victorian Government, the Bunnings Trade Phillip Island SuperSprint will feature something for all fans.
    ...We hope to see fans line the circuit in October for what promises to be two action-packed days of racing. We're very pleased one of our long-standing partners, Bunnings Trade will be our naming rights partner for the new event and we're grateful to have them on board for our trip to Phillip Island in October.

    The 2021 season will resume at Winton (VIC) in early October.

    Related: Bunnings Trade announced an expanded partnership with Supercars, taking on naming rights for key events.

    Bunnings Trade sponsors Perth SuperNight event - HNN Flash #35, March 2021
  • Sources: Mumbrella, The Adelaide Advertiser, Australian Financial Review and Supercars
  • bigbox

    Digital pathways continue in hardware and timber retail

    Bowens has an ecommerce plan

    UK-based online retailer CMO "disrupts" building materials category and Mitre 10 New Zealand undergoes digital transformation

    In an interview with CMO (Chief Marketing Officer), Andy Bowen from Bowens discussed how the hardware and building supplies retail group is implementing its e-commerce strategy. For Bowens, offering a "digital service delivery" is about winning over a younger generation of tradies and builders. Mr Bowen told CMO:

    We did not want to lose connection with the younger generation of trade. It's vital we maintain and engage with the younger generation and build a brand with that younger generation if we are going to survive long term. Then the question was, how do we do that?
    And certainly from a digital perspective, we were lacking. But then the entire industry was.

    Bowens focused on creating a digital experience for bulky items. The main challenge it faced was the complexity of moving large and often fragile products for the needs of builders on job sites.

    It concentrated on repurposing its 16 stores across Victoria and delivery options by creating a digital front end and making promises around tight delivery times. Mr Bowen said:

    We have stores that are set up in an industrial manner which works perfectly for distribution when it comes to an online offer.

    The ecommerce site was launched in December 2020, and has generated a sevenfold increase in website traffic [to July], according to Mr Bowen. The group has also been working with building industry influencers to create awareness, including Matt Menichelli, the builder for Tess and Luke, The Block 2019 winners; and Stefanie Apostolidis, who runs the women's building industry worker support group, Melbourne Chippy Chick.

    To execute on these digital-driven initiatives, Mr Bowen established a marketing and ecommerce team within the business, which now numbers 10 and is expected to grow further. He said:

    Prior to the pandemic, I would have said only 5% of our budget was digital comms. Now it is more like 55% or 60% of our marketing budget. It's been effective for us, and we'll continue to push harder on that.

    Working with Ms Apostolidis appears to have helped Bowens promote its offering to a new generation of building workers. He said that although only 5% of people that come into its bricks-and-mortar stores are women, they make up 22% of online traffic.

    The initial ecommerce offering was targeted at retail customers but the company has also created a log-in for trade customers. Mr Bowen explains:

    It is more about brand awareness than conversion ratios at this stage. That will start to change, but certainly in this first six months it has been all about awareness, and we will continue to push there, because trades aren't used to shopping online - the offer just hasn't been here in Australia.
    To be the only ones really offering bulky supply to market to builders and trade and DIY and general public is a great thing - we're loving it.

    Mr Bowen estimates there is around another year's worth of development work to be done on the website before Bowens completes its current scope of work. He likens the current work environment to that of startups he observed in his previous working life as an investment banker in New York. He said:

    It is exactly like running a startup, but we are sitting in a 127-year-old business. It is a lot of fun, and we have great capital support. We are creating something new and that is the attractive thing for a lot of the team members. This is an industry that hasn't been able to do it effectively, and an opportunity for us to make a name for ourselves and create a legacy.
    You've got this younger generation coming up that almost expects it, and if you're not there, you will lose market share. This is a long-term investment for us, we have done it to make sure there is a fifth and sixth generation for this business.

    Related: Chief customer and digital officer at Kingfisher Jean-Jacques Van Oosten has worked fast to make ecommerce work better on a store fulfillment basis.

    JJ Van Oosten at Retail Connected - HNN Flash #44, May 2021

    CMO Group

    In the UK, building and DIY e-commerce retailer CMO Group (formerly Construction Materials Online) recently raised more than GBP27 million from a share offer and another GBP17.7 million for selling shareholders. At a placing price of 132p per share the market capitalisation of the firm is now about GBP95 million.

    CMO saw sales soar in 2021 as it benefited from a lockdown boom in DIY. It operates seven specialist websites: Roofingsuperstore.co.uk, Drainagesuperstore.co.uk, Insulationsuperstore.co.uk, Doorsuperstore.co.uk, Tileandfloorsuperstore.co.uk, cmotrade.co.uk and Totaltiles.co.uk.

    Its sites list more than 75,000 products, and it boasts its "unique digital hybrid service model", developed over more than 10 years, combines specialist advice and expertise tailored to category and customer needs online, bridging the gap between traditional bricks-and-mortar retailers and digital retailing.

    At the time of its listing, Investors Chronicle wrote about CMO:

    Based out of Plymouth, CMO has been built up over the past decade by buying up suppliers of key products - it acquired Total Tiles in late 2020 for GBP14.7 million - and acting as a third-party agent between suppliers and consumers for others.

    Builders' merchants have made progress with online sales, but CMO claims that it has the largest product range available online and the market, overall, is about 10 years behind the rest of retail when it comes to online ordering.

    Overall, about 10% of all building materials [in the UK] are sold online by all retailers, out of total sales of GBP27 billion at 2019 prices - and management argues that this gives CMO huge potential for sales growth. CMO isn't the only company to supply building materials on an online-only basis, but the defining feature of most of its online competition is a lack of scale and vertical integration.
    The problem one can see with CMO is that while not having the warehouses and floor space that traditional builders' merchants must pay for ensures a higher return on capital employed, it still operates in an environment where margins are comparatively thin - only taking a sliver of profit between the supplier and the customer; CMO is essentially a sales agent with a front-end retail platform and a back office that organises the logistics.
    Encouragingly, it addresses these issues with its push into acquiring vertically integrated supply businesses, as this allows it to capture more of the value in the supply chain. Arguably, until it has achieved some sort of greater scale, which a listing will make easier with better access to capital, it probably makes more sense to use CMO's service rather than participate directly in an IPO - at least until the price starts to settle down.

    The company was admitted to the Alternative Investment Market (AIM) of the London Stock Exchange in July. On admission to AIM, private equity firm Key Capital Partners owns about 26.8% of the issued shares, CMO's founders own 10.4%, and senior management own about 6.4%.

    The proceeds attributable to the company from the share offer, together with its existing cash resources, are now intended to provide CMO with a long-term funding model; execute on strategic opportunities, both organically and through M&A; reduce debt and restructure the group's balance sheet thereby providing further flexibility to fund future growth.

    CMO also intends to attract, recruit and retain key employees with further incentivisation through equity ownership and long-term incentive schemes.

    Related: Kingfisher makes large investments in technology in the wake of COVID 19 pandemic.

    Kingfisher on change in COVID-19 times - HNN Flash #50, June 2021

    Mitre 10 New Zealand

    New Zealand's Mitre 10 retail chain has provided a progress report on its digital transformation, according to a report in CIO (Chief Information Officer). (Mitre 10 New Zealand has no affiliation to Metcash-owned Mitre 10 in Australia.)

    Asbjorn Aakjaer, programme director for the project at Mitre 10, said the business is two years into a business-wide transformation they've named Programme One. It includes a refresh of all the IT systems used to serve its 85 stores, owned by 64 people, and will result in an entirely new technology stack. He said:

    We've set about to change everything, from the foundation all the way up, including the way we work and the systems that support our work, with a focus on our customers and team members.

    The programme's six priorities are:

  • Future-proof the organisation's technology.
  • Exceed customer expectations.
  • Lower the cost of doing business.
  • Enable the teams to be better at what they do.
  • Ensure everyone understands how the business works end to end.
  • Maintain an entrepreneurial spirit.
  • Mr Aakjaer highlights the last goal as especially significant given the group's owner-operator model.

    The programme's design phase is almost complete, with Mr Aakjaer describing a process of first assembling a small group to scope the project, to reimagine what that business could look like, before embarking on an extensive consultation exercise that included surveying 3,500 customers. The working group looked at 80 functions to determine the multiple pain points that exist in the business, with a view to solving these as they planned for a "future business".

    Among the complexities that need to be addressed are that there are 114 stock files across the business, so there isn't a single view of stock. As a result, the company's support centre is sometimes less informed about what's in the stores than their customers and suppliers are.

    Mr Aakjaer points out that digital transformation isn't only about replacing the tools, it's also about changing the way people work so the organisation can become more customer-centric. So it is important to ensure Mitre 10's 6,000 staff understand and support Programme One.

    Mr Aakjaer created a video created for that purpose that included a discussion of "quick wins" with regards to new technology solutions that provide immediate payback to staff. Examples are bringing in text notifications to customers when the products they've ordered arrive, and a product lookup app that enables staff to search for products on their devices when they are with customers on the shop floor.

    The video also featured what Mr Aakjaer described as the organisation's take on a gender-reveal party, with staff gathered for an announcement on what technology partner had been chosen for the project. This was revealed by balloons that spelled out "SAP". Mr Aakjaer said that about 80 people throughout the business were involved in the vendor selection, so they wanted to reward them with a party for the announcement.

    We wanted to make it fun and humorous.

    Mr Aakjaer said it has ended up with a lot of SAP technology because it was the most suitable and "you can't nickel and dime a project".

    Mitre 10 NZ CEO Andrea Scown said that a large part of the successful delivery of the project is if the entire organisation can "deliver it together" in a way that leverages Mitre 10's size and scale, without losing sight of the unique approach that each store owner brings to the business.

    Related: Andrea Scown has been appointed the first female chief executive of Mitre 10 New Zealand.

    Retail update: Mitre 10 NZ CEO - HNN Flash #41, April 2021
  • Sources: CMO Media, Investors Chronicle and CIO Media.
  • retailers

    Supplier update

    Richgro has a new managing director

    The garden products supplier attribute part of their success to being a family-owned and operated business

    The family behind WA-based Richgro were featured in The West Australian and spoke to the newspaper about its recent changes and future plans.

    Tim Richards has taken over as managing director from his father, Geoff, who started in that role in 1990.

    The company dates back to Geoff's grandfather Arthur, who arrived in Fremantle in the early 1900s from the UK. He set up a store selling produce including oats, barley and chaff, after a brief time laying bricks at the Boans building in Perth. (Boans was a department store that operated in WA between 1895 and 1986.)

    It wasn't long after starting at the store in the mid-1960s that Geoff, who also trained as an accountant, realised change was needed. He told The West Australian:

    When I got into the company I decided not just to do what my dad did. The incoming things at the time were pet food and gardening products, which we sold in our produce store...
    In 1969, we won a tender to pack bags of fertiliser for the nursery industry. Within three years we represented most of the major east coast companies.
    We introduced bagged organics and potting mixes to WA. It grew quite quickly ... in 1979, we bought our first company in Adelaide, and then [added] outlets in every state. Mr Bunnings in 1984 came along and we piggybacked on that to get our products around.

    Both father and son ascribe their success and longevity to their nimbleness and ability to stay on top of global trends. Geoff explains:

    We were able to predict roughly what Bunnings would achieve by looking at Home Depot in the US and Homebase in the UK - that move really did not come as a surprise to us.

    For Tim, the company's strong sustainability focus set it apart some time ago. The head office has been off-grid since 2015, instead using generators fuelled by recycled food waste, diverted from landfill to become methane - the excess returned to the grid. He said:

    IIncreasingly we're turning to more electric machinery to use [generators] rather than burning diesel. Our wood grinder was previously diesel-powered, and is now fully electric. No emissions. Instead of using 1000 litres of diesel a day, we're running it off our own green power.
    We want to reduce our footprint and produce more sustainable products for our industry ... We've been composting and recycling products since the 1970s. It wasn't so much in vogue and the done and said thing, but we certainly learnt to focus on that area.

    The Richgro team - numbers around 100 people including casuals - is also well advanced with plans to open a new facility at North Bannister, about 90km south-east of Jandakot, which will be home what is believed to be the WA's largest licenced composting facility, with 200,000 tonnes expected per annum. Organic waste and feedstock will be recycled into products for agriculture and horticulture. Tim explains:

    Some people have been with us more than 35 years. We like to create that family environment, not just as a business but we treat staff like family. You tend to get that back in spades from staff because we create an enjoyable workplace ... that's half the battle. If people enjoy what they do, they'll keep coming back.
    We pride ourselves on being a family company without structure. We have the ability to react to market changes and market demands quickly.

    And staying as a family business has also been part of the success to date. Geoff added:

    We've always been able to outmanoeuvre corporates because they couldn't react as quickly as we could, but it's that ability to have the funds in your organisation to enable you to take on some reasonable- sized projects that set you apart.
    It's always a juggle but when you only have one person to answer to at the end of the day and that's yourself ... You can achieve things a lot quicker.
  • Source: The West Australian
  • companies

    TTI 2021 H1 results

    Techtronic Industries shows strong growth

    TTI boosted revenue by over 50% for the half. The company's CEO, Joe Galli, outlined future growth plans, including ongoing expansion of its Milwaukee Tool professional products and Ryobi DIY tools. In particular, the company sees growth in both automotive tools and outdoor power equipment.

    Hong Kong based Techtronic Industries Group (TTI) has released its results for the first half of its FY2021, which is the six months ending on 30 June 2021. TTI is best known for its power tool sub-brands, Milwaukee Tool and Ryobi.

    Overall results were revenue of USD6394 million, up by 52% on the previous corresponding period (pcp), which is the six months to 30 June 2020. Earnings before interest and taxation (EBIT) came in at USD572 million, up by 57.4% on the pcp. Overall profit was USD524 million, an increase of 57.9% on the pcp.

    The company stated that:

    Every one of our geographic regions and business units delivered impressive sales growth in the first half. North America grew 50.2%, Europe grew 62.3% and Rest-of-World (RoW) grew 50.0%.

    Sales for its Milwaukee Tool division increased by 64.1%. This included an increase of 59.8% in North America, over 90% in Europe, and 58% for RoW.

    Presentation

    The company's well-known CEO, Joe Galli, made an ebullient presentation setting out the company's future plans and prospects. With the presentation made as a virtual event, this included a video of Mr Galli presenting, against a background of Milwaukee and Ryobi tools.

    ESG

    One theme that ran throughout the presentation was the importance of environmental, social and corporate governance (ESG) values to TTI. Mr Galli introduced this theme by stating:

    As Teddy Roosevelt famously said, 'We must dare to be great'. And for TTI greatness means not only building a powerful company with outstanding financial results, but also a company that cares deeply about ESG. And you're going to see, in our highlights today, we are incredibly obsessed with and focused on doing the right things for our business, for our shareholders and for the planet.

    Later, Mr Galli went into some more detail about TTI and ESG:

    Okay, one of the things I mentioned up front is TTI is excited to embrace ESG as a corporate obsession, we you will see we are maniacally focused on being a global world class leader when it comes to ESG. We are we have many, many initiatives in the company that we've embarked on that will help us achieve and exceed world class standards in ESG.
    You will see many examples as I go through this update in terms of the products, the disruptive products we're introducing that will allow us to help save this planet and put the society in a better place. But let me give you a big example. So we are going to be the global leader in battery powered lithium mowers, whether it's riding mowers or push mowers. We decided to build our battery laminar factory in the United States, so that we wouldn't have the ocean freight issues that that are a very, very bad thing for sustainability.
    And, we also think just building our product close to market is the right thing to do. This is a real life ESG example. And we have dozens and dozens and dozens of examples that we'll share with you as time goes on here as we roll out our ESG initiatives.

    Competitive statements

    Another recurrent theme in the presentation was a degree of "push-back" against some claims that Mr Galli stated had been made by TTI's major competitor, which is widely regarded to be Stanley Black & Decker (SBD). In his initial introductory remarks, Mr Galli made this statement:

    There's been some misinformation that was introduced by our large competitor in the US. And it's now in the public domain. I intend to correct some of this misinformation today. For example, our largest competitor actually said that TTI is really good at North America and Australia. But the rest of the world, not so much.
    Just so our investors understand, our European Theatre of Operations is flourishing. In fact, I think Europe may be the biggest opportunity we have in this company, and Europe was up 71% when you compare versus 2019. 71%, of course, rest-of-world is also growing nicely. So you need to look at TTI not as a US or North American company, but as a global company that is growing like crazy, beyond the shores of the USA.

    Mr Galli's second reference to this competitor came in his introduction to recent developments at TTI's very popular DIY brand, Ryobi. He stated:

    Our largest competitor did suggest two weeks ago, they stated that they have a DIY brand, that's a better brand than Ryobi. This is of course absurd. Ryobi is three times the size of this brand that our competitors are referring to, and you know Ryobi is a global brand.

    It is widely believed that this is reference to the SBD brand Craftsman.

    On Milwaukee

    As he has in the past, Mr Galli outlined the core strategy at Milwaukee as being focused on helping workers in building, construction and maintenance trades to move to lithium battery cordless tools.

    Milwaukee is pursuing, aggressively pursuing a disruptive strategy of converting legacy power sources to clean lithium battery powered tools. And you know, the three areas of attack here are all areas that really were created in World War Two, these are World War Two era technologies that we are now attacking. And we intend to launch this global revolution away from these traditional power sources, which are not good for the environment and into battery powered lithium.

    One example he offered of the types of products Milwaukee is developing was a cordless "chop" saw, which is basically a high-powered drop saw for metal.

    Mr Galli described the potential for this type of market:

    So the first power source that we're going after is the corded tool. Yes, the corded plug in the wall AC tool is still, in the professional arena, is still a massive part of the market. In fact, this is an example, this chop saw, 99% of all these chop saws around the world are still corded - 99%. And there's so much opportunity in front of us to convert just the corded power tool to battery powered tools. And we are on the vanguard of this revolution. We intend to be very aggressive about it, liberating people from these dangerous cords where there's electrocution risk and all kinds of other factors that inhibit productivity on job sites and we intend to move people to clean lithium powered products.
    This chop saw is an amazing product. This will cut with the same power, speed, torque as a corded version, and the life is actually longer on our cordless, on our battery powered chop saw than the traditional [corded] unit. So this is yet another example of the many different corded products that exist on job sites today that we intend to make cordless.

    The second type of tool which he suggested was open to this type of conversion is the nail gun (or "nailer" in American parlance).

    In 1944, Howard Hughes actually hired an engineer to help him build his Spruce Goose wooden aircraft. And this engineer came up with the idea of a pneumatic nailer instead of a manual version. And so we're talking about technology, it's 75 years old, it's still present everywhere on job sites. And when you have a pneumatic nailer it's not ... you don't just have a nailer, you have to have a nailer that attaches to a hose, where you have the compressed air to fire the nail, the hose which is long unwieldy and heavy connects to a gas powered compressor.

    On outdoor power equipment

    Mr Galli was very optimistic about the prospects of Milwaukee - and TTI in general - in the outdoor power equipment (OPE) market. He highlighted one product in particular: a new lawnmower.

    Now we have in the Milwaukee family, we have a roadmap of a number of high performance, battery powered lithium battery products. Next year, in fact, we will launch a lawnmower, a Milwaukee branded lawnmower. It's battery powered. This lawnmower not only will blow away any of the battery mowers that are on the market today, but it will actually outperform the gas mowers. The best ones we've tested all over the planet, we will roll out this year. And I think we intend to see Milwaukee as a vanguard of this once in a generation revolution. It's a stampede away from the filthy gas polluting power sources to clean cordless.

    The automotive market

    One theme that Mr Galli pushed vigorously was the growing potential in the automotive market, both for the "pro" (tradie) user and the DIY user. He went into some detail to describe how this market has recently developed:

    We think the automotive aftermarket, the whole transportation arena is massive. Right now it's very difficult to buy a used car most any country, you can't rent cars, you can't buy used cars. Cars are scarce. And so people are repairing cars at record levels. This is a big opportunity for DIY and pro.

    In a very TTI move, Mr Galli then described a product, that instead of being all about power and drive, is just simple good design: a light for working on vehicles.

    One of the many products we have for this transportation arena is this really cool, underbody work light. So this device actually has two magnets. One magnet here is what you attach to the bottom of a car or truck or whatever the work surface is.
    The other magnet is on the side. And so as you remove a lug bat or a bolt, instead of it dropping on the floor into a greasy bucket, you just stick it right here with the magnet, and you can control this work activity. So as we showed users this sample, they didn't want to give it back. The auto mechanics just fell in love with the idea.

    Personal protective equipment

    Mr Galli also highlighted TTI's move deeper into the personal protective equipment (PPE) market. One of its main developments at Milwaukee has been to reconceive of the standard jobsite helmet as a platform for a range of accessories.

    So we have pioneered a unique range of hard hats that we actually make in the USA. These hard hats are loaded with features you can customise based on your application. And these hard hats will be the cornerstone of a full range of personal protective equipment that we will roll out under the Milwaukee brand. We have begun launching some of these products, and the reaction in the market has been incredible. And this will be yet a another multi-billion dollar platform in our company as time goes on.

    The helmets enable a range of lights to be attached, as well as hearing protection.

    Ryobi

    Mr Galli does not see the DIY market as being disappointing in 2021 or the future, unlike other power tool companies. As he describes it:

    Make no mistake Ryboi is the strongest DIY brand in our industry by far. Ryboi is a brand that has an overarching cordless platform between power tools and outdoor equipment and floor care and cleaning products and many, many other subsets. And we intend to build on that global strength with Ryboi.
    The other misinformation that came out a couple of weeks ago is that this this whole idea that the DIY market is now flattened out, while the pro market is the only market is growing. This is of course, highly inaccurate. The DIY market has massive opportunity in cordless. Of course the gas DIY market is shrinking, the AC market is down. And so is pneumatic but the cordless DIY market we think has all kinds of potential.

    Just as TTI sees the automotive area as a rich source of future growth, it also believes that there is a growing DIY market as well. Mr Galli highlighted tools such as a die grinder, an impact wrench, and an extended reach ratchet as typical tools for home mechanics.

    Analysis

    While the advent of successful vaccines has changed the way the world sees its post COVID-19 future (for those nations who have secured adequate supplies), there is little doubt that the world we will emerge into possibly some time in 2023 will be somewhat different from the one we left in early 2020.

    One of the unexpected - too many - "boons" of the pandemic period is that overall productivity in the US has increased sharply. According to an article in the New York Times:

    Since the second quarter of 2020, labor productivity - the amount of output per hour of work - has risen at a 3.8 percent annual rate, compared with 1.4 percent from 2005 to 2019. New data published Tuesday showed the trend persisted this spring, with a 2.3 annual rate of productivity growth in the second quarter.
    Will the Pandemic Productivity Boom Last?

    To those of us who work in the tech industry, there is little if any surprise to this at all. While the message taught from the late 1950s all the way to the early 2000s was that productivity paved the pathway to prosperity, businesses discovered around post 2003 that there was another route.

    Technology was acceptable when it took existing practices and then "automated" parts of them - a spreadsheet replaced a ledger, a word-processor replaced a typewriter. It was less acceptable when it created entire new paradigms - a word-processor, for example, that had no provision for printing, and relied on keeping source versions on GitHub. Individual workers in businesses, and businesses themselves, discovered they could simply say "no" to technological advances. That way they retained their apparent relevance, and by acting en bloc stopped disruptive change.

    The pandemic has reversed that to some extent, simply through necessity. Not only was the photocopier finally rendered utterly redundant, but so was the printer. The virtual world was no longer ruled by the analogue world, but instead referenced only itself.

    The one glaring exception to these productivity improvements, in the US and elsewhere in the world, is the building and construction industry. We've had a developed version of building information modelling (BIM), for example, for over 30 years. Yet its influence on the industry is minimal. Similarly, we've had distributed manufacturing through 3D printing in a very usable format for six or seven years, yet its impact on the industry is close to non-existent.

    There is a sense, though, that this is about to come to an end, in the current decade. Take, for example, the decades-old fad of using shipping containers as a kind of personal modular construction - even though, in the end, this seldom saves much in the way of expense, and creates its own problems. But what is attractive to people in shipping container construction is that those problems are different, changed, to something which many people find easier to relate to.

    In this context, there is much to be said about TTI's "mission" to lift power tools up out of the context of the third industrial revolution, and put it more in the fourth industrial revolution. TTI, of course, has investors, makes use of their capital, and must - to simply be ethical - strive to produce a return on that capital for them. It is trapped to some extent by its context.

    That said, there is probably no other power tool company currently - including, actually Bosch - that is better equipped to consider what power tools fully emerged into the fifth industrial revolution might look like.

    A good example, of course, are the tools in both the Milwaukee and the Ryobi ranges that are aimed at professional and amateur car mechanics. By 2030, the likelihood is that there will be more electric cars sold than those using an internal combustion engine. That means far less maintenance of any sort - but most likely maintenance that is even easier for the amateur to perform.

    What if we consider that it's quite possible that building and construction will evolve in a similar pattern over the next 20 years. What kind of power tool company will meet that new set of needs, as it emerges? One way of getting to an answer is to go beyond the typewriter to word-processor transformation of, for example, nail guns, and to think instead of what the end product should look like, and work backwards.

    In rather blunt terms, it seems likely that TTI is simply too good a company to limit its future as much as it has currently.

    companies

    TTI FY2021 H1 results transcript

    Joe Galli talks about TTI and the power tool industry

    Techtronic Industries CEO Joe Galli discusses the longer-term strategies at TTI, as well as some of the new products coming down the development pipeline. This includes expansions in the automotive repair market, as well as outdoor power equipment.

    Joe Galli, the CEO of Techtronic Industries Group (TTI) has had broad experience across industries. He began his career at Stanley Black & Decker, where he was critical in the launch of the DeWalt brand. Denied an adequate promotional path, he left and held a range of other positions, including a period at Amazon. He joined the TTI in 2006 as the head of Techtronic Appliances and was appointed as chief executive officer and executive director of TTI on February 1, 2008.

    As perhaps the power tool industry's best CEO, his biannual presentations of results are dynamic and far-reaching, dipping into everything from technical details, to the formation of new markets and longer-term strategies.

    The following is a transcript of his presentation for the first half results for TTI in its FY2021. It has been edited for clarity and conciseness.

    Introduction

    Hi, I'm Joe Galli. And I am beyond excited to share with you the results of TTI's first half 2021, along with some highlights that you can expect from us, in the months and years to come. People continue to ask us what we think is going to happen near term, long term based on the virus, other issues that we face in the world today. And, you know, our response is very simple here, we believe that the best way to predict the future is to control it, to create it. As Lincoln said, and this is exactly what we intend to do. We are building the company here that will flourish in good times, and bad, whatever the overall overarching circumstances are. And that's exactly what we have done in 2021. And we will continue to do.

    Now, greatness is an elusive quality among companies. And it takes a lot of courage to be great. As Teddy Roosevelt famously said, ‘We must dare to be great’. And for TTI, greatness means not only building a powerful company with outstanding financial results, but also a company that cares deeply about ESG. And you're going see, in our highlights today that we are we are incredibly obsessed with and focused on doing the right things for our business, for our shareholders and for the planet. And I'm excited to share that with you as we go.

    Results summary

    Okay, first half, can you imagine a power tool company growing 52%! We were up a cool 2.188 billion in sales in the first half of 2021. In the Milwaukee business, which is our flagship, high margin, professional business was up 64%. Now, what makes these numbers even more extraordinary is, when you look back at our performance versus 2019 you'll see even more incredible numbers. In fact, versus 2019, we grew the company 71%, and in Milwaukee 84%. This is meaningful because many of our competitors saw their sales collapse last year in the first half while we grew. So we think it's very important that you look at a two year track record here in terms of sales results. And I think up 71% for the company and up 84% from Milwaukee is pretty darn good.

    Unsubstantiated claims

    There's been some misinformation that was introduced by our large competitor in the US. And it's now in the public domain. And, and I intend to correct some of this misinformation today. For example, our largest competitor said that TTI is really good at North America and Australia. But the rest of the world, not so much. Just so our investors understand, our European Theatre of Operations is flourishing. In fact, I think Europe may be the biggest opportunity we have in this company, and Europe was up 71% when you compare versus 2019. Rest-of-world also grew nicely. So you need to look at TTI not as a US or North American company, but as a global company that is growing like crazy, beyond the shores of the USA.

    Floorcare results

    I am delighted to report that our floorcare business contributed nicely to our first half this year. Floorcare was up 25.3%. That's global floorcare. It's a direct result of a lot of hard work and a lot of new products we've launched in the fiercely competitive floorcare market. But you know, when you take floorcare out, you have to remember that power equipment, our tool business, grew even more impressively, actually up 55%.

    Further results

    All in all, it's pretty astounding to look at what this company was able to deliver in the first half of 2021. When you look at our P&L, you see not only sales exploded up 52%, but gross margin improved yet another 58 basis points. We invest in some of that gross margin as our strategy is, as we've stated consistently. We've invested some of that back in strategic SG&A (selling, general and administrative).

    Our profit grew at a faster rate than sales. On the EBIT line, we read 57.4% and net profit up a cool 57.9% in the first half of 2021. One of the things that we obsess over in this company is our gross margin improvement. We believe it's critical that we outgrow the market on the top line while we continue to improve gross margin at a pace of roughly 50 basis points a year. And we exceeded that target in the first half, growing gross margin 58 basis points while we grew.

    What this tells you is that the marketshare we're capturing – and believe me we're capturing a lot – is not a result of us cutting price and denigrating the quality of our brands or our products in the minds of the consumer. We are growing at premium prices and growing like crazy because our products are demonstrably superior to our competitors. We have technological advantages that that no one else has. And you can clearly see that in a company that's growing at this rate with gross margins consistently improving.

    And in fact, talk about consistently improving, we have now improved gross margin in the first half, for 13 consecutive years, we've gone up on average 50 basis points a year, in terms of gross margin. This is essential for our strategy, because we take some of that gross margin improvement and we invest it right back into what we call strategic SG&A. So make no mistake, we are ruthless about squeezing non-strategic SG&A, unnecessary overhead administrative overhead. And we did again, in the first half, where [the SG&A was] down eight basis points. But in the strategic SG&A area, we invest it into new products, new geographic expansion opportunities, more sales coverage, marketing, and user conversion.

    When we identify strategic areas of investment, we take some of that gross margin improvement and we invest it right back into our future. And this bodes well for TTI over the back half of this year, over the next five years, over the next decade, because these investments are going to pay off in the months and years to come.

    If you look at our working capital in the first half, you clearly see a very different strategy than many of our competitors. We actually have weaponised inventory, we believe strongly in our ability to grow this company as we go forward. And that's why we have built high levels of inventory so that we position TTI to grow, continue to outgrow the market in the back half of 2021, and on into 2022 and beyond. So yes, we added 34 days of inventory, we had 136 days of inventory finishing up in the half. And that's exactly what we planned so that we would be in a position to take more market share and serve our customers around the world.

    At the same time, our marketing and sales companies globally have been incredibly disciplined in managing receivables. That's why we have virtually no bad debt in this company. Our days [outstanding] for receivables actually went down from 65 last year in the first half down to 56 days this year. And one of the reasons is we just we don't go into countries where there's high risk, bad debt risk. We are very, very careful and disciplined about this. Because anybody can book a sale. But if you don't collect the money, it really is not a sale and it shows up later. So our team's doing a great job with this.

    And when you look at payables, our payables performance shows you that we were up from 109 to 125 days payable, so we're paying our suppliers in 125 days. And this shows you that our suppliers are working very closely with us to enable us to build the inventory we need to continue to capture market share and grow this company well above the market.

    And we're very grateful for our supplier partners, we work very closely with them. We've grown with our suppliers for years and years now, in a way that bodes well for both TTI and a supplier base. So working capital as a percent of sales still finished under our goal of 20%. And we did it the right way. We don't cut inventory off in the middle of June so that we can impress Wall Street and investors with a lower days of inventory. We are building this company to win in the market. And we still had 20% of working capital as a percent of sales.

    Environmental, social and corporate governance

    One of the things I mentioned up front is TTI is excited to embrace ESG [environmental, social and corporate governance] as a corporate obsession. You will see we are maniacally focused on being a global world class leader when it comes to ESG. We are we have many, many initiatives in the company that we've embarked on that will help us achieve and exceed world class standards in ESG.

    You will see many examples as I go through this update in terms of the products, the disruptive products we're introducing that will allow us to help save this planet and put the society in a better place. But let me give you a big example. We are going to be the global leader in battery powered lithium mowers, whether it's riding mowers or push mowers. We decided to build our battery laminar factory in the United States, so that we wouldn't have the ocean freight issues that that are a very, very bad thing for sustainability. And we also think building our product close to market is the right thing to do.

    This is it a real life ESG example. And we have dozens and dozens of examples that we'll share with you as time goes on here as we roll out our ESG initiative. But you should feel free to ask questions and follow up with us. Many of you want to discuss ESG and we would love to share with you why we are so far ahead of our competitors that this will be yet another advantage TTI has versus the market competitors that we go up against.

    Milwaukee Tool

    Let's shift gears to talk about Milwaukee. It's hard not to be impressed with our global Milwaukee team here at TTI. Milwaukee grew 64.1% in the first half. And contrary to what our largest competitor suggested, we're doing a great job in North America, that part our competitors got right. But Europe was up 90% in the first half this year in Milwaukee; 90%, which ought to dispel this notion that we're not strong outside the US and Canada. And of course, rest of the world was up 58%, which is not bad. We're very proud of the global build out our Milwaukee team has put in place, and we intend to aggressively take market share in the pro market around the world, not just in the back half, but for many, many years to come.

    Core strategy

    Milwaukee is pursuing, aggressively pursuing a disruptive strategy of converting legacy power sources to clean lithium battery powered tools. The three areas of attack here are all areas that were created in World War Two. These are World War Two era technologies that we are now attacking. And we intend to launch this global revolution away from these traditional power sources, which are not good for the environment and into battery powered lithium.

    The first power source that we're going after is the corded tool. Yes, the corded plug in the wall AC tool is still, in the professional arena, is still a massive part of the market. In fact, this is an example, this chop saw. Ninety-nine per cent of all these chop saws around the world are still corded – 99%. And there's so much opportunity in front of us to convert just the corded power tool to battery powered tools. We are on the vanguard of this revolution. And we intend to be very aggressive about it, liberating people from these dangerous cords where there's electrocution risk and all kinds of other factors that inhibit productivity on job sites and we intend to move people to clean lithium powered products.

    Examples

    This chop saw is an amazing product. This will cut with the same power, speed, torque as a corded version, and the life is actually longer on our cordless, battery powered chop saw than the traditional [corded] unit. So this is yet another example of the many different corded products that exist on job sites today that we intend to make cordless.

    This is a more striking example of how much opportunity there is in front of us. The residential construction arena globally has grown nicely and we believe that RESCON will continue to grow here over the next three to five years.

    So if you are a residential construction contractor, you need a device called a nailer. The nailers are used to fire a nail through two pieces of wood to attach them together to frame a house. The technology that's ubiquitous today on job sites all over the world is the pneumatic air nailer. And I want you to think about this. In 1944, Howard Hughes hired an engineer to help him build his Spruce Goose wooden aircraft. And this engineer came up with the idea of a pneumatic nailer instead of a manual version. So we're talking about technology that’s 75 years old, it's still present everywhere on job sites. And when you have a pneumatic nailer ... you don't just have a nailer, you have to have a nailer that attaches to a hose, where you have the compressed air to fire the nail, the hose which is long unwieldy and heavy connects to a gas powered compressor.

    So you have to pull the cord on a gas compressor, which generates electricity, which compresses air in with a pump device and a compressor and then fires the air through that nail. And you need your trusty gas can because those trips to the Exxon station are a requirement all throughout the day as you're framing houses. So can you imagine this technology is World War Two vintage, the noise level of this technology is deafening. We have literally noise ordinances that are trying to control this stuff. The fumes and the maintenance required, and just the sheer weight of driving these things around is madness.

    So we are leading this revolution to cordless nailers. Our latest introduction is a framing nailer, it's selling like crazy. And we intend to be the global leader in non-compressor powered, non-pneumatic nailers. These are lithium battery powered nailers, there's no gas cartridge. They're just ultra-quiet nailers that will revolutionise the way contractors build houses. So we're going after the AC market, we're going after their pneumatic market. And of course, we're going after the petrol or the gas market.

    Milwaukee outdoor power equipment

    Milwaukee will be our brand that targets the professional landscaper. And this is a massive opportunity because this market is largely gas and petrol. In Milwaukee, we won't make the mistake of having any gas products under this brand. Milwaukee will be pure lithium battery powered cordless.

    You have products here, like a chainsaw where historically, if you're using a chainsaw and you're doing any kind of trim work, you literally have the gas engine in your face, and you fire these things up. And you have the fumes coming at you along with all the other debris. So every time we develop a cordless version to eradicate this gas nightmare, it enhances productivity. It's great for sustainability. And it's really cool to use. This is a one handed chainsaw that will out cut a gas equivalent. And for the pro landscaper, this is a real breakthrough.

    In the Milwaukee family, we have a roadmap of a number of high performance, battery powered lithium battery products. Next year, we will launch a lawnmower, a Milwaukee branded lawnmower. It's battery powered. This lawnmower not only will blow away any of the battery mowers that are on the market today, but it will outperform the gas mowers. We will roll us out this year. We intend to see Milwaukee as a vanguard of this once in a generation revolution. It's a stampede away from the filthy gas polluting power sources to clean cordless.

    Milwaukee range

    Today, we are the global leader in full size, cordless, pro cordless, with Milwaukee M18, our full-size cordless system. In three years, you will see double the amount of cordless products. We will have to shrink the tools down to a smaller size. We have so many new products in the pipeline. The idea here is to get people away from the cord, the pneumatic hose, the petrol, the hydraulic products that are still in use and to liberate the professional user into something that makes sense for not only for their productivity, but for ESG, for sustainability.

    Milwaukee is already the global leader in subcompact cordless. Subcompact is critical, because in full-sized cordless, you have power and runtime concerns, but in many cases, because our technology and electronics is so advanced, we're able to miniaturise or to shrink up a product and make it much lighter and smaller and easier to use, less unwieldy. And this is creating a massive opportunity for us with the professional user.

    Let me give you the latest example in our brand new revolutionary subcompact blower. This little device is a super powerful blower for job site cleanup in tight places, in high places, etc. The end user reaction to this is unbelievable. People can't believe the power and the convenience of a blower that's literally one-handed and super compact. We think subcompact is a vast opportunity. And this is a complementary range to full size. So many end users, many pros will buy a whole fleet of full size cordless products, but they complement it with a subcompact line. And we have a lot these subcompact products that will end up in their fleets.

    Here's another really cool product. We think the automotive aftermarket, the whole transportation arena is massive. Right now it's very difficult to buy a used car most any country, you can't rent cars, you can't buy used cars. Cars are scarce. So people are repairing cars at record levels. This is a big opportunity for DIY and pro. One of the many products we have for this transportation arena is an underbody work light. This device actually has two magnets. One magnet is what you attach to the bottom of a car or truck or whatever the work surface is. And then the other magnet is on the side.

    As you remove a lug bat or a bolt, instead of it dropping on the floor into a greasy bucket, you just stick it right here with the magnet, and you can control this work activity. As we showed users this sample, they didn't want to give it back. The auto mechanics just fell in love with the idea. Remember, it's the same battery we have in all our other subcompact products.

    Let's just say we think the subcompact family of Milwaukee has vast opportunity for growth. By shrinking down traditional power tools into these smaller sizes, you make tools safer, you make them less unwieldy. You enhance productivity in many ways. And it expands the market because many users are saying now they want a full size product and a subcompact product for those applications where size and weight matter.

    Milwaukee MX

    Our MX cordless equipment series is flourishing around the world today. We are launching a brand new backpack vibrator. This is for the commercial contractor, the concrete masonry market so that you're able to pour super smooth concrete surfaces, whether it's for roads bridges, what have you. With the infrastructure boom that we're about to see globally, this product is just in time and it's exactly what the user is looking for. So this vibrator will give us an expanded fleet of MX equipment products.

    You have to remember most of these equipment products today are powered by gas, which is terrible for a job site and try to use gas indoors to do masonry work. It's madness because of the fumes and the noise. The noise is deafening so we have a more quiet, much cleaner range e of equipment. We expect this to be a multi-billion dollar platform for the company long term. And we're enormously excited about the reaction we're getting from the end users, as we share with them the MX field series.

    Milwaukee accessories

    Our Milwaukee accessory business is flourishing, we are rapidly expanding our Milwaukee accessory line with one new breakthrough product after another. This will be a billion dollar platform on its way to USD2 billion long term. We are incredibly excited about the management team we've assembled and the new product ideas and accessories. It's just another great way to enhance the performance of cordless products because if you design the right accessory, these accessories will allow the tool to actually have longer runtime and extended battery life.

    The obsession in our company is to try and make the cordless experience better every year and far better than AC or pneumatic or gas. We also find that the mechanics, hand tool market globally, is vast and full of vulnerable competitors. We intend to attack this market aggressively.

    Mechanic’s hand tools are used in two main areas. One is the transportation arena, whether you're repairing a submarine, a plane, a boat, a car, a motorcycle, a dump truck, a bulldozer. Or, in the construction side where you're assembling buildings and or factories. We can see hand tools are pervasive in these applications. We have a mechanic's tool line many professionals prefer over the incumbent lines today, and we're going to expand this range aggressively here as we go forward in the second half this year and on into the next three years.

    Milwaukee Packout

    Our Packout storage system has created a cult-like following. People today view Packout as a superior solution for mobile storage, also for stationary storage. And in terms of vehicular storage, in your van or your pickup truck. The Packout system is a perfect way to store your tools, accessories and fasteners and other things you would need on a job site.

    In order to propagate the system even further, we're launching a series of new Packout products this year. This rolling chest is a super cool way to store large, heavier cordless power tools. We have these deep organisers we're launching now. So whatever materials or tools you have that require more depth, this will provide that opportunity. And there are dozens of additional Packout storage solutions that we're adding to the system. All these Packout products interconnect, so an end user can configure his or her ideal storage solution, whether it's mobile, vehicular or stationary storage, and we expect Packout to be another billion dollar, long term opportunity for Milwaukee and for TTI.

    Milwaukee PPE

    Jobsite safety is growing in terms of popularity and government support and requirements. The Occupational Safety and Health Associations around the world that police jobsite safety are insisting on better Personal Protective Equipment (PPE) products, and this has nothing to do with the virus. This is a trend that will continue. This trend is growing in Europe in North America, and throughout Asia, you're seeing more focus on jobsite safety.

    So we have pioneered a unique range of hard hats that we actually make in the USA. These hard hats are loaded with features you can customise based on your application. And these hard hats will be the cornerstone of a full range of PPE that we will roll out under the Milwaukee brand. We have begun launching some of these products, and the reaction in the market has been incredible. We think there's so much room to improve jobsite safety, which is the right thing to do.

    Ryobi

    There are a couple of comments about Ryobi that I have to clear up. Our largest competitor stated that they have a DIY brand, that's a better brand than Ryboi. This is of course absurd. Ryobi is three times the size of this brand that our competitors are referring to, and you know Ryobi is a global brand, a competitive brand. And our people that run Ryobi around the world were quite upset about this misinformation.

    ...

    We are very fortunate. We have an outstanding team of Ryobi product managers, sales executives, logistics people, etc around the world. And make no mistake Ryobi is the strongest DIY brand in our industry by far. Ryobi is a brand that has an overarching cordless platform between power tools and outdoor equipment and floor care and cleaning products and many other subsets. And we intend to build on that global strength with Ryobi.

    DIY market

    The other misinformation that came out is this idea that the DIY market is now flattened out, while the pro market is the only market is growing. This is of course, highly inaccurate. The DIY market has massive opportunity in cordless. Of course the gas DIY market is shrinking, the AC market is down. And so is pneumatic but the cordless DIY market we think has all kinds of potential.

    One of the things that we work on at TTI is creating the newly minted DIYer. So many people are first time homeowners, they're finally graduating from university or they're moving into the workforce. And these newly minted homeowners can become newly minted DIYers if you show them the right opportunities and the right ideas and that's exactly what we're doing.

    Ryobi automotive

    As I mentioned earlier, the automotive aftermarket right now is growing like crazy because there's such a dearth of used cars, new cars, etc and people have rediscovered the notion of repairing a car. In the old days, we used to call these people shade tree mechanics. But make no mistake, the DIYer is spending a lot of time and money repairing cars trucks, etc. and Ryobi is uniquely positioned to serve this DIYer in the automotive aftermarket.

    For example, this is an extended reach ratchet, which these automotive enthusiasts love. Here's an impact wrench for high torque applications in the automotive aftermarket arena. Here's a die grinder which is ideally designed for many automotive applications. In fact, we have an incredibly exciting line of DIY automotive aftermarket products.

    One of my favourites is a super lightweight polisher if you want a wax or polish the car, the camper, the glamper, the motorcycle, boat, trailer, you name it, this is perfect. And of course, the battery pops out of this device and works in all the other DIY automotive products. So we see the automotive aftermarket alone as an enormous opportunity that we intend to capitalise on.

    But the DIY market is also flourishing when it comes to nailers. If you're a newly minted DIYer, if you're a homeowner and you want to do any kind of work around the house, in the old days, you would have to get that gas powered compressor and the hose. And all that noise comes from a gas-powered device versus buying a Ryboi. We call this the Airstrike cordless nailer, that's super quiet and super powerful. This is another example where we think we can drive more DIY adoption here in the months and years to come.

    We have now introduced 22 new high performance, Ryobi DIY brushless products, we call these HP high performance brushless. Why? Because we think this is a way for us to catalyze the activity. We could show a DIYer that instead of having to hire a contractor or instead of procrastinating not doing a project, you can go to Home Depot or Bunnings or one of our other global customers and you can buy the right product for the job and attack these DIY projects in your home. We do not think that the DIY market in any way is mature. In fact, there's an old saying that there's no such thing as mature markets, there are only mature managers, and we don't have those here so we expect to grow this space in the future.

    Ryobi outdoor power equipment

    Let's now turn to outdoor which is something we're very excited about. We think the outdoor arena around the world for the DIYer or a landscaper is a massive opportunity to really achieve greatness in sustainability, convenience and productivity and value. There's just there's so many advantages to battery powered outdoor power equipment versus gas and petrol. There's so much upside here. In first half of this year, we grew 57.8% in battery powered outdoor equipment.

    This is just the beginning. Let's remember what's going on around the world today. Take the US. In the US, California has already introduced legislation, proposing that all gas powered outdoor equipment be outlawed in 2024. Can you imagine? Yeah, it means gas lawnmowers, string trimmers, hedge trimmers, snow blowers, blower vacuums, chainsaws and all the other gas products that the gas, outdoor companies have propagated. They'll be outlawed in California. Once California goes, it is our view that many states will follow suit and try and do their part in this green movement in trying to save the planet. Illinois has legislation similar to what California proposed.

    One of the fastest growing trends we see with municipalities is that they are increasingly sick and tired of the hideous noise you get from a gas blower vac or a gas lawnmower. You get up in Saturday morning, and your neighbour starts firing away with that gas blower and you want to go nuts. So you have municipalities outlawing the use of gas blowers and other gas outdoor power equipment in the US.

    This is going on all over the world, this trend is going to be a stampede. And we are going to accelerate the pace in which this happens. We are going to be the disruptors in this in this space. So we have pioneered a concept called the "Whisper Series". These Whisper products led by a blower vacuum, these are super quiet. It's not just the fume pollution but noise pollution is an issue and these blowers, you turn them on you don't even know they're on.

    They're super powerful. Our acoustical engineers have really achieved breakthrough level advancements when it comes to controlling noise, not only the decibel level, but also the tonality of these things. The tone of some of these traditional devices is so bad, it hurts your ears, you want to buy earmuffs. So we are launching a whole line of Whisper series outdoor power equipment all powered by battery, lithium battery, no petrol, no gas. And we think this will contribute to the literally the once in a generation revolution that we want to ignite from polluting noisy gas products to clean lithium battery products. This is an incredibly exciting, unique development here at TTI.

    Ryobi lawnmowers

    Additionally, we have established our company as the global leader when it comes to battery powered lithium lawnmowers, whether the mowers are push mowers or riding mowers, we intend to continue to be on the vanguard here in this space, and we will lead the global charge away from gas and corded to lithium battery powered units. What's mind boggling to us is that our largest competitor is literally buying a company now that has over 150 different gas mowers. Our competitor is going to have 150 lawnmowers powered by a gas or petrol engine with all those fumes, all that noise. And we want to be the Tesla of this space, we are going after the battery powered versions of these things. The reaction with our end user and with our retail partners has been phenomenal. And for good reason. It's about time that we eradicate the pollution that comes from these gas lawnmowers all over the world. It's about time.

    Ryobi snowblowers

    So let me tell you another exciting area that that none of our competitors ever really admit and talk about. And this is the category of the snowblower. I grew up in Pittsburgh where it snows a lot and so I'm very familiar with how dreadfully bad and hideously smelling that snowblower products are today. They are largely gas powered. In fact, our largest competitor has over 40 yes snowblower products. Let me tell you what happens with the gas snowblower, with a gas unit because the mufflers are always located on the top of these products. The fumes come right out at eye level. The fumes mixed with the snow, that's why when you use a gas snowblower, the snow goes from white to black. That black is that is that is the emissions to pollution it comes out of a gas snowblower.

    And believe it or not, snow blowers are like the least regulated gas powered equipment product you can find. There are no regulations so the gas manufacturers have gotten away with murder here for a long time. And if you use one of these, you smell like you just left the coal mine. The pollution combined with the moisture in the air and the snow, you're blowing and the ice, it all mixes up and it's just a hideous, toxic mix. So you end up after you clean up the driveway, you go into the house, and your family kicks you back out because of the smell.

    So we have developed a range of battery powered lithium snowblowers This is our two stage unit. Our high end unit will throw snow over 50 feet as good as any gas unit. It's much more quiet, there's no cord to pull, and you don't have to keep filling that up with gas. And your neighbours will thank you because the noise level on these things is so much better.

    Ryobi' part in ESG

    This is all part of our ESG movement. We could sell gas snowblowers, we could sell them like all the other competitors do. But we're going to be Tesla here, we are going to pioneer the battery side of this market so we have six snow removal products we're rolling out this year. We will be on the vanguard of battery powered snowblowers on into the future. This is yet another example of our obsession with ESG and with moving people from gas to battery.

    Ryobi posthole digger

    Let me let me give you another example with a posthole digger. This is a giant auger that's used if you're installing a fence around your farm or garden, you use a posthole digger to dig large diameter holes in the ground so that you can install the fence. The problem is most posthole diggers that are sold virtually all of them today are gas and the engine is right at eye level. So when you turn these things on, the fumes would come right into your face.

    Can you imagine using one of these things all day? You need three levels of hazmat suits to protect you from the fumes. So we have a cordless series of these augers these posthole diggers and these things are super powerful. They're just as fast as gas. They last just as long as gas, they make one half the noise or less, there's no maintenance required. Would you really want those fumes in your face if you're a professional landscaper installing a fence or if you're a DIYer, and you're doing any work in the yard that requires posthole digging, then you would love to have this so there's a lot of opportunity for us to eradicate gas.

    Ryobi pressure washer

    Another example are pressure washers which are terrific products for cleaning in and around the house, car etc. They are powered either by gas engine or by a cord or AC. Both power sources of course, should be eliminated. The gas pressure washer especially, but even a corded pressure washer, you have all this water with an electric cord. It's unwieldy. It's hard to use. So we are pioneering pressurised power cleaners. We haven't got to the psi levels of a pressure washer yet, but we will get there. We are working on technology to get rid of the gas engine in the pressure washer or the cord. This 40-volt power cleaner is a great example. It works terrific and you will see us continue to push the envelope you're in technology when it comes to using lithium battery.

    Range expansion

    So just let's put this in perspective. For 2022, we will launch 73 new battery powered outdoor products. We are not out buying a gas lawnmower company. We are pioneering, organically developing lithium powered outdoor equipment that we think will help eradicate this dreadful, polluting issue of gas, outdoor power equipment. And let me assure you that this is just the start. Between Ryboi and Milwaukee, our attack on gas outdoor power equipment is just beginning. We intend to be global leaders in the pro landscaping arena and in the DIY side with these products that we're launching.

    Floorcare products

    Finally, I want to acknowledge our floorcare team for delivering an impressive first half of 2021. I know many of you have been frustrated with our inability to turn floorcare into a contributing business. Well, you can be assured that we now have an excellent team globally, we have a great product road in front of us. And we have results. In fact, 25% growth in the first half is excellent. And okay, the profit levels are still too low. But we did almost double the profit in the first half this year. And we are really excited about what we have in our future in floorcare.

    Our carpet washing and formula business is particularly exciting. We are taking market share here, we are developing products that outperform what's on the market today. And we're going to enhance this program with our brand new spot cleaner series. But this spot cleaner element of this carpet washing business is significant. We have participated poorly here at best over the years. So we now have a leadership product, we have more on the way. And this bodes well for our floorcare business because carpet washing is a significant part of the business. And the formula aftermarket here is a compelling financial contributor to the company.

    Cordless floorcare

    We also are continuing to push the envelope once again on lithium cordless powered cleaning and floor care products. Whether it's the Hoover brand, the Vax brand, or one of our other brands of floorcare, we really think that we can get people away from using a cord when it comes to a cleaning product and into cordless. And this is yet another example of that over overarching theme in the company where we just we really believe this whole this whole clean tech notion, this whole ESG notion should pervade every part of our company. And floorcare is no exception.

    Conclusion

    The important takeaway here is that our future has never been brighter at TTI. No matter what the economy does around the world, no matter how long it takes to eradicate this terrible virus that we've all have to deal with.

    No matter what the geopolitical issues are that we face, we feel like we as Lincoln said, the best way to predict the future is to create it. And that's exactly what we're doing. And you know, remember Teddy Roosevelt said, one must dare to be great. You have to have the courage to pursue greatness, because greatness is elusive. And if you see how hard our team is working around the world, if you saw the talent level of our engineers, our product development people, our logistics team that performed heroically in the first half and really over the last 18 months, you would see why I'm so enthusiastic about our future.

    We are going to have a good second half this year. We will outgrow the market, for sure we will outgrow the market in 2022. We will launch more new products than all of our competitors combined. And we will not fall into this trap of trying to dress up our financial results by adding gas power equipment that's got a short-term future and it really all it's doing is harming our planet. Like I said up front, we think greatness in TTI will be a function of outstanding, continually improving financial results, while we achieve greatness in ESG and try to help society and this planet, get to the right place. So thank you so much.

    companies

    The Home Depot FY2021 H1 results

    Home Depot sees sales up over 18%

    Home Depot saw DIY sales dip, but sales to the "pro" (tradie) market pick up as homeowners bought into larger projects, and high timber prices inflated invoices. The company is positive about future growth, though it expects a shift in successful categories.

    US-based big-box hardware retailer The Home Depot (HD) has released its results for the first half of its FY2021. Sales for the half were USD78,618 million, up by 18.6% on the previous corresponding period (pcp), which was the first half of FY2020. Operating income (EBIT) was USD12,420 million, up by 32.9% on the pcp. Net earnings for the period were USD8952 million, an increase of 36.1%.

    The average ticket (transaction cost) increased by 11.3%, while the number of transactions went down by 6%. One driver behind the increased transaction cost value was higher prices on items such as timber. There was also a shift during the second quarter towards bigger projects, with the number of transactions worth more than USD1000 increasing by 24%. This is seen as a sign of increased activity by "pro" (tradie) customers. In particular, these larger transactions featured products such as timber, vinyl plank flooring, gypsum and pipe and fittings.

    Prepared remarks

    During the conference call announcing the results, Craig Menear, the chairman and CEO of HD commented that there had been an ongoing shift in the sales pattern during the half:

    During the second quarter, we did observe some changing consumer patterns in the US as the US economy opened up. This has manifested itself in several ways.
    We have seen a shift in pattern of sales within the week as our weekday sales performance has actually strengthened relative to the weekend. We attributed this to consumers returning to travel and other recreational activities. And while the consumers return to pre-pandemic activities, we continue to see them engage in home improvement projects. We also see customers more comfortable taking on larger projects as evidenced by the continued strength with our pro customer, which outpaced the DIY customer for the second quarter in a row.

    Ted Decker, HD's chief operating officer, commented on the performance of some categories:

    During the second quarter, 10 of our 14 merchandising departments posted positive comps, led by kitchen and bath and timber. During the second quarter of this year, we saw single-digit negative comps in paint, hardware and indoor and outdoor garden. It is important to note that these were some of our strongest performing departments during the second quarter of last year. On a two-year stack basis, each of our departments posted healthy double-digit comps.

    Mr Decker commented that there was positive momentum when it came to professional purchases.

    We're encouraged by the momentum we are seeing with our pros. Growth with our larger pros continues to outpace that of our smaller pros, and they tell us that their backlogs are long and growing. In fact, the National Association of Home Builders remodelling index hit all-time highs during the second quarter. And during the quarter, we saw many of our customers turn to pros to help them with larger renovation projects.
    This can be seen in the strength of several of our kitchen and bath categories, like in-stock kitchens, tubs and showers and vanities, all of which posted one- and two-year comps above the company average.

    Richard McPhail, the company's chief financial officer, saw positive signs in the construction market and the overall economy, but admitted that uncertainty was still a key factor:

    Customer engagement and demand for home improvement is healthy. Housing remains strong, and we see a supportive environment for home improvement spending as we look out over the next several years. That said, there is still a significant amount of uncertainty in the broader environment as it relates to the evolution of the COVID-19 pandemic and the new and spreading variants. As we've previously shared, we do not believe we can accurately predict how the external environment will evolve and how it will ultimately impact consumer spending.

    Investment analysts

    Michael Lasser of UBS asked one of the most critical questions, which is how the medium-term market in DIY would likely develop. Mr Menear fielded that question, and replied:

    Michael, it's a great question. It's something we're watching carefully as the consumer gets back to more normal environment. What we did see is - the consumers in our research would suggest this as well - consumers are taking on more projects. They are larger projects and have a tendency to hire a pro to do them.
    And as a result, we've seen our pro business strengthen for several quarters in a row, with the last two quarters where the pro outperformed the DIY customers for the first time since the pandemic started. And so, we're very optimistic about where the pro business goes and the strength of that pro business, and we're focused on making sure that we can take care of those pros along with our DIY customers but feel like there's solid opportunity to continue to grow.
    Pros tell us their backlogs are bigger than ever. Consumers continue to tell us the home is more important than ever and that they have a longer list of projects.

    Kate McShane of Goldman Sachs asked if customers were tending to trade up in their purchases, replacing existing items with upgraded versions.

    Mr Decker replied that this was a trend he could see:

    I would say, yes, we continue to see the trading up. It's not as clear as I used to report on it just because of the inventory situation, and we're seeing lots of substitution of goods, depending on what's in stock on the shelf that particular day. But if you look at power tools, for example, outdoor power equipment, the appliance category, grill category, riding lawnmower and zero-turn category, just as a few examples, Kate, people are trading up to innovation in all those categories. So just more powerful, longer run time on batteries, that's moving over to outdoor power equipment.
    The design aesthetic and the features of modern appliances, people are happily trading up to quite strong price points in appliances. LED lighting that's going through, not just light bulbs but integrated in ceiling fans and fixtures, that trade-up is innovation and newness-driven, and we are seeing that as strong as ever.

    Laura Champine of Loop Capital Markets asked about categories that had seen demand diminish. Mr Decker replied that a lot of the falloff came in categories that were directly related to the COVID-19 pandemic.

    One of our single biggest drivers of the falloff is people coming in for masks and hand sanitisers. The four departments that we did see negative sales, hardware, outdoor and indoor garden and paint, those are - can tend to be more consumer-oriented, lots of units in mulch, in soil and things and paint is - that DIYer was home, not doing other activities on the weekend. So we're not alarmed by that falloff at all.
    We'll get through that. I'd say that - take a category like paint. I mean, paint had been a one- or two-unit grower for several years up until the pandemic. And painting is one of the initial home improvement projects that a customer engages in and starts to build confidence in home improvement.
    And while we saw a dip in Q2, the levels in unit volume that we're seeing in paint is well above 2019. And I've talked about the millennials before, and the millennials are engaged in housing. They're engaging in home improvement. They've done that first project, which is painting and some gardening work generally.

    Analysis

    The US hardware market has found itself in a unique position as the general economy emerges from the primary effects of the economy. While price appreciation continues apace across much of the US, levels are not as high as they are in Australian markets. Plus, the economy is receiving a base push both from increases in productivity, and increases in wages.

    That said, it is notable that the pandemic is still far from over. While some regions, such as Northern California, have attained high vaccination rates, others, such as Louisiana and Arkansas, continue to resist vaccination. There are also states such as Florida and Texas where state governments have rejected measures designed to limit the spread of COVID-19.

    However, while uncertainty is an ongoing drag on the economy, investment in housing remains at the very least a comfort to consumers, and is likely to continue even if there are dips in the overall economy.

    bigbox

    Big box update

    Greater Sydney Bunnings stores closing to retail customers

    Bunnings Subiaco could move location and into larger store and the outlet in Toombul Shopping Centre has permanently closed

    All Bunnings stores in Greater Sydney will be closed to retail shoppers and open only for trade customers. In a similar situation during Melbourne's major lockdown in 2020, retail customers can pick up online orders through click & collect.

    Until now, Bunnings has been able to trade in Greater Sydney despite being a non-food retailer because its products and services were deemed essential. According to the Australian Financial Review (AFR), the company's decision to close stores to retail shoppers came after NSW authorities extended the Greater Sydney lockdown until the end of September. There are much tighter restrictions for businesses and mobility, including compulsory mask wearing outside and curfews in the highest-risk areas.

    Bunnings managing director Mike Schneider said the retailer had decided to close all Greater Sydney stores, not just those in the local government areas (LGAs) of greatest concern, to help protect the safety and wellbeing of staff and customers. He told the AFR:

    ...With the new restrictions on retail spanning a large part of Sydney, Bunnings has made the decision to temporarily close all its stores across Greater Sydney to the general public.
    We know from experience that applying a consistent approach across a metropolitan area is easier for our team to manage and helps reduce travel by residents between LGAs.
    Our team are doing an amazing job adapting our business in line with government advice and we thank them for all their hard work in keeping customers supplied with the things they need.

    It is understood that Bunnings staff were becoming increasingly concerned about stores in Sydney remaining open and had launched a staff petition on social media. Many Bunnings staff are former tradespeople who have had to stop manual work because of age and health.

    Over recent months, Bunnings has stepped up its COVID-safe measures, introducing notifications on its Bunnings Product Finder?App to remind customers to get in?and out of stores as?quickly as?possible, upping security to promote COVID compliance and continuing to encourage customers to shop online wherever possible.

    In line with government guidance, Bunnings stores in regional NSW will remain open with strong COVID-safe measures in place.

    Subiaco

    The City of Subiaco in Western Australia will consider amended development plans from Bunnings Properties Pty Ltd to move its Subiaco store to Jolimont and build a larger store. The $28 million relocation would provide a "much wider range of home and lifestyle products, along with a larger nursery, and a full cafe and playground", according to Bunnings Properties.

    The development is expected to span four storeys, with basement parking, a bulky goods showroom proposed for the first floor and ground floor, along with two commercial tenancies yet to be determined.

    Changes were to the original submission made in August 2020. They include moving the customer vehicle entry and exit points, and there are plans for the rear building facade to be heavily landscaped with greenery. Bunnings regional operations manager Hayley Coulson told PerthNow the company made changes to the store's design to "better fit" with local surrounds and improve the streetscape. She said:

    These changes were made based on feedback received through consultation and include the use of various building materials such as brick, steel framing and glazing along with additional landscaping design features.

    Bunnings has leased the Salvado Road site, the current location of the Subiaco store, from Homebase Management for almost 30 years. The initial development plans indicated the new, proposed site in Hay Street, Jolimont would sprawl over a 10,000sqm space.

    Toombul

    Bunnings' small format store located in the Toombul Shopping Centre, Nundah (QLD) has officially closed its doors. Retail expert from Queensland University of Technology Professor Gary Mortimer, told 4BC Radio host, Scott Emerson:

    This is Bunnings' first attempt at a small format store ... it was in the Toombul complex ... [and] was in the site of an old Bi-Lo supermarket.
    They have decided to exit the lease or the lease has coming to an end, and they have got a big one up in Virginia, New Farm and Stafford as well.

    The store did not have large trade component but it was great for the area, providing local convenience, Prof. Mortimer added.

    Bunnings announced the Toombul closure earlier this year. It said:

    The final day of trading will be 15 August, which will give the team time to make sure the Toombul store is packed down and ready for exit at the end of the lease. All of the current Toombul team members will be offered transfers to nearby stores and Bunnings' focus is on working with them and supporting them throughout their transition to new sites.

    Nearby "destination" stores at Newstead, Virginia or Stafford will be able to service regular Bunnings customers.

    Related: Bunnings closed the Toombul store ahead of its lease expiring in October 2021.

    Small format store closure - HNN Flash #49, June 2021

    Pesticide displays

    Concerns expressed by 11-year old Lorelei Smith about potent pesticides being ingested by owls and other wildlife has led Bunnings to change the way rat poisons are displayed in its stores and provide better information on their use.

    According to a story in Southern Gazette in South Perth, Lorelei came across a sick boobook owl while walking in Copley Reserve with her younger sister, Phryne and father Damien. They took the animal to the Native Animal Rescue where a rescuer said it was likely the owl had ingested rat poison.

    A blood-thinning chemical used in second generation anticoagulant rodenticides (SGARs) is known to stay active for months and can pass through the food chain, causing secondary poisoning of animals that eat the dead and dying.

    After researching the issue, Lorelei said she wrote to Bunnings' CEO calling for the company to clearly separate first- and second-generation rat poisons on its shelves and provide better information to the public. She wrote in her letter:

    We went to Bunnings and found that on your shelves first generation rat poison boxes are mixed in with the second generation and you can't tell them apart. This is bad because people can't tell the difference and there is no information in your stores on how to use the poison so it doesn't harm owls.
    We think you should make it as hard to buy second generation rat poison as it is to buy a can of spray paint. We should protect our owls so future generations can see them in the wild.

    In response, Bunnings general manager of merchandise Adrian Pearce said the retailer is currently in the process of rolling the precautions out in all stores across Australia, and is due to be completed by the end of September. He told Southern Gazette:

    Bunnings will be implementing the separation of rodenticide varieties on our shelves, grouping relevant products including naturally-derived rodenticides.
    We'll also be working with our learning and development team and our suppliers over the coming months to develop further training for team members, as well as making more information available to customers on how to best use rodenticides and the different products available.
  • Sources: Australian Financial Review, PerthNow, 4BC Radio and Southern Gazette
  • bigbox

    Retail update

    Goulburn Produce has kept it local for 38 years

    Starting out as a small rural store, it has expanded to include the Goulburn Mitre 10 store as part of its offering

    Kathryn Pengilley from Goulburn Produce & Rural Supplies in regional New South Wales recently spoke to the Goulburn Post about the long-standing business. She said:

    From humble beginnings as a small rural store in Craig St ... We have continued to grow throughout these 38 years to offer our customers everything they need for life on the land, from our early days of selling stockfeed - making us the longest standing stockfeed store in Goulburn - we quickly needed to move to larger premises in Sloane St, to then branch out into animal health, fencing, pumps then timber, hardware and power equipment.

    This growth meant creating two more local businesses. Around eight years ago Goulpro Power was established after strong demand for its product lines when they were previously being sold from the Goulburn Produce site. Ms Pengilley said:

    Things were getting a bit cramped in here (Goulburn Produce) so Dad had the idea to establish Goulpro Power as a standalone store for outdoor power equipment .

    A suitable site was chosen, a purpose-designed building was constructed, and it now sells everything from lawncare machines for the backyard gardener through to the industrial size mowers for councils and showgrounds use, as well as tractors that farmers like to use. It is also the local authorised Polaris dealer, among other brands its supplies and services.

    The family also owns and runs Goulburn Mitre 10 (including the site where it is situated), the only locally-owned hardware store in the area. It started out inside the walls of Goulburn Produce to have its own store in 2019.

    Meanwhile Goulburn Produce itself has seen some other changes recently.

    When animal feed store Fifes Stockfeeds made the decision it would close, the owners approached Ms Pengilley and her team about taking on as much of their stock as possible to minimise the disruption to the customers it had been servicing for almost 30 years. As a result, the range of feed has nearly tripled.

    Goulburn Produce is a member of the CRT group to take advantage of its national buying power which helps to make its pricing competitive. Ms Pengilley states:

    We have grown so much in the last 38 years with our local community's support, and with our commitment to our rural community we will continue to grow and provide the essential rural services that our customers need for many years to come.

    Total Tools in Bathurst

    In an earlier report, Total Tools has taken over an old Harvey Norman complex on Sydney Road in Bathurst (NSW).

    The high-profile site beside the Great Western Highway has been vacant for about a year since Harvey Norman relocated to the former Masters building on Pat O'Leary Drive.

    David Nicoll from Elders Nicoll and Ireland leased the site to Total Tools and said the business was making a long-term commitment to Bathurst. In June, he told the Western Advocate:

    They've signed a long-term agreement to occupy the site. The Bathurst project is part of a national rollout, [and] Bathurst was specifically targeted as a place they want to be.

    Related: MAP of NSW/Sydney building approvals by LGA.

    ABS building approvals by LGA for NSW: The shift to regional areas is real - HNN Flash #57, August 2021
  • Sources: Goulburn Post and Western Advocate
  • retailers

    Supplier update

    Stanley Black & Decker to buy remaining stake in MTD

    In 2019, Stanley Black acquired a 20% stake in MTD Holdings for USD234 million in cash

    Stanley Black & Decker (SBD) recently announced it has agreed to purchase the remaining 80% ownership stake in MTD Holdings for USD1.6 billion.

    The acquisition is expected to close in 2021, and is subject to "regulatory approvals and customary closing conditions".

    SBD said its buyout of MTD Holdings will boost its opportunities in the outdoor products market. In a statement, Stanley Black & Decker's CEO James M. Loree, said:

    We have worked directly with MTD over the last three years and have been impressed with the quality of the management team, their talented employees and MTD's relentless dedication to innovation in the outdoor space. The combination of businesses will create a global leader in the USD25 billion and growing outdoor category, with strong brands and growth opportunities that align with two market trends driving our business - the consumer reconnection with the home and garden and electrification.
    We have clearly identified multiple levers to drive growth and margin expansion and are looking forward to welcoming MTD's 7,500 employees to our Stanley Black & Decker family.

    SBD anticipates MTD Holdings to boost its adjusted earnings by 50 cents per share in 2022. The contribution is expected to increase to USD1.00 per share by 2025. The company also expects the transaction to result in cumulative annual cost synergies of approximately USD100 million by 2025. Regarding charges, SBD predicts incurring non-cash charges of USD125-USD150 million and restructuring, integration and other costs of USD175-USD200 million upon the completion of the transaction and subsequent three years.

    MTD's trailing 12 months' revenues total USD2.5 billion and its products are sold under the WOLF-Garten, Cub Cadet, Robomow, Troy-Bilt and Rover brands. The privately held company is headquartered in Ohio (USA) and operates facilities in Europe and North America. MTD's chairman, CEO and president Robert T. Moll said:

    My grandfather founded MTD nearly 90 years ago, and I'm as proud of our history as I am excited about our future with Stanley Black & Decker. Both companies are proven leaders in our respective industries with iconic brands, world class capabilities and a passion for bringing new and innovative products to our consumers. I know we are partnering with an organisation that will continue to deliver on our purpose of inspiring people to care for and enjoy the outdoors.

    Together SBD and MTD believe they have a "compelling pathway to introduce new and innovative products for professional and residential outdoor equipment customers". Donald Allan Jr., SBD's president and CFO, commented in a statement:

    The acquisition of MTD creates a multi-year roadmap for organic revenue, profitability and cashflow growth. We expect to generate significant revenue synergies as we capitalise on the two companies' collective technology investments, strong brands and global customer relationships.
    We have significant balance sheet flexibility supported by strong free cash flow generation to fund the MTD acquisition and to consider other capital deployment opportunities...

    Related: The MTD acquisition was part of Stanley Black and Decker's 2020 results presentation.

    Stanley Black & Decker stumbles, recovers - HNN Flash #37, March 2021

    Related: Stanley Black & Decker's US-based CFO has spoken about partnerships.

    Stanley Black & Decker on strategic partnerships - HNN Flash #51, June 2021
  • Sources: Zacks Equity Research and PR Newswire (Stanley Black & Decker)
  • companies

    Doherty modelling rewards consideration

    Hidden inside the Doherty's model are some additional, helpful conclusions

    While state and federal governments are focused on 70% and 80% vaccination targets, there are lower targets that provide a better guidance to managing the pandemic.

    This is the time of year when many businesses are revisiting forecasts for this financial year originally developed in May. That is, if they have been developed very much at all, as it has become difficult, in this pandemic time, for any business to come up with a forecast that makes sense.

    That process has been helped along a little by what has become known as "the Doherty paper", which bears the somewhat modest title of the "Doherty Modelling Report for National Cabinet" (DMRNC). As is not uncommon for this kind of contribution, the reporting on it has been vigorous, but not really as helpful as it could have been.

    That's because the entire national discourse, at the moment, has become focused on two numbers: 70% and 80% - which are the rates of adult population full vaccination where it will be possible to change how the COVID-19 pandemic is managed.

    One thing we've learned in this pandemic is just how often both politicians and scientific opinion get things a bit wrong - curiously, this time, by generally being too optimistic. It seems to HNN that the forecasts of reaching 70% vaccination by October 2021 are part of that optimism. Some of that has to do with the exigencies of vaccine supply, and some of it is based on, we believe, an underestimation of how much resistance there is in the community.

    A better, calmer analysis of the DMRNC indicates that even the 70% goal is not as vital as has been made out. In fact, there are substantial benefits to be obtained if 60% is reached. However, those benefits are highly conditional on the policy being pursued by individual state governments.

    Approaches and consequences

    It is evident that there are two poles to the policies of state governments. On one hand there is the NSW approach, which is one of very moderate restrictions, targeted to specific areas as much as possible. On the other side, there is the VIC approach, of very tough restrictions and a high level of compliance enforcement, taking in very broad regions.

    Most states - Western Australia (WA), Tasmania (TAS) and South Australia (SA) - are much closer to the VIC model than the NSW one. Queensland (QLD) is somewhere in the middle, but it is leaning more towards VIC than NSW. In fact, NSW seems to be headed down a path of relative policy isolation in Australia.

    The three factors

    One of the core insights offered by the DMRNC is that there are three key elements that affect what it terms the "transmission potential" (TP) of the SARS-CoV-2 virus at any particular time, with a TP of 1.0 representing steady state (every infected person subsequently infects just one other person), below 1.0 a decline in infections, and above 1.0 an increase in infections.

    Those three elements are: the percentage of population effectively vaccinated against infection; the Public Health and Social Measures (PHSM) in place, which range from social distancing to lockdown restrictions on movement and contacts; and the "test, trace, isolate, quarantine" (TTIQ) regime in place.

    The paper suggests four different levels of PHSM:

  • Baseline PHSM - only minimal density/capacity restrictions, as in NSW March 2021 (baseline TP as used above)
  • Low PHSM - more stringent capacity restrictions, as in NSW 23 August 2020
  • Medium PHSM - stringent capacity restrictions, group size limits, stay-at-home orders (except work, study, essential purposes), as in NSW 1 July 2021
  • High PHSM - no household visitors, curfew, stay-at-home orders (except essential purposes and permitted work), as in VIC 23 August 2020
  • TTIQ is presented by the DMRNC as either being "optimally" or "partially effective", a factor that is based largely on the peak case-load created by other conditions.

    Putting all those options together gives rise to a set of graphs, which were also used by the prime minister in first introducing the conclusions of the DMRNC.

    To zoom out on these charts for a moment, there is a point being made in the DMRNC by presenting these together. What separates the charts is the level of TTIQ capability, and the point being made is that before any form of restriction easing can be put in place, it is necessary to first reduce the number of active emerging COVID-19 cases to a level where TTIQ can function.

    Though it is even more complex than that, as the quality of delivered TTIQ also depends on PHSM making the task easier. As the DMRNC states:

    Baseline TP will be influenced by spontaneous and imposed changes in physical distancing behaviours, the number of social contacts on average between individuals and the timeliness of test, trace, isolate, quarantine (TTIQ) measures. We use a starting TP of 3.6 for the Delta variant based on averaged observations from NSW in March 2021, a period with minimal social restrictions and no major outbreaks. TTIQ assumptions are based on the performance of the Victorian public health response at the height of the 'second wave' in 2020 as our best estimate of achievable effectiveness at high caseloads.

    The top chart, which shows the situation with only partial TTIQ effectiveness, indicates that even with 70% and 80% of all adults vaccinated, continuous PHSM restrictions will still be required. The bottom chart, with optimal TTIQ effectiveness, shows that at 80% vaccination there will be much less a requirement for PHSM restrictions.

    Or, in other words, vaccination is not a universal panacea. Without systems in place to keep the case incidence low, and TTIQ functioning at a high level, PHSM restrictions will always be necessary.

    This brings the DMRNC to considering the likely scenarios that will emerge in terms of periodic increases in PHSM - what Prime Minister Scott Morrison and others refer to as "short, sharp hard lockdowns". As the paper states:

    TP estimates with and without stringent PHSM can be used to calculate the approximate proportion of time those stringent measures would need to be in place to prevent exceedance of health sector capacity over a hypothetical long-term. This static analysis can indicate the plausible societal and economic impacts of the PHSM required to constrain transmission under each scenario and coverage over the long-term.

    Table 1 illustrates this situation more precisely. This table is a distillation of four tables presented in the DMRNC. Those tables provide estimates of how much time will be required in moderate or strict lockdowns given the quality of TTIQ available (which depends on the case load) and the extent of vaccination. The predicted outcomes in the table presume an ongoing, background PHSM at a low level.

    Again, the most important element is that low case numbers are vital to reduced restrictions. Even at 70% vaccination, with high case numbers more than half the time would need to be spent in moderate lockdowns, or more than one-fifth the time in strict lockdowns.

    With low case numbers, and consequentially optimal TTIQ available, with just a 60% vaccination rate as little as 6% of the time would need to be spent in strict lockdown (basically an eight-day lockdown every four months). At 70%, it would be possible to remain lockdown-free - but, again, with ongoing, low-level PHSM measures.

    Analysis

    It is understandable that at the moment there is something of a tidal pull towards hoping that things will return to "normal" in the future. However, looking at countries such as the US and Britain, it would appear that even in areas where 80% vaccination rates are reached, it will still be necessary to pursue containment measures. There is also the possibility that we will see versions of the SARS-CoV-2 virus emerge that will require new vaccines, or which have additional consequences for the infected.

    As such, HNN thinks that a prudent course in forecasting and planning for the future is to presume that we will likely be closer to the world envisaged by the 60% vaccination predictions. There will still be lockdowns, in other words, but they will be less severe, and last for a reduced period of time.

    statistics

    ABS building approvals: QLD by LGA

    Approvals for Queensland by LGA

    While Queensland is a unique market, it does display many of the characteristic responses to the COVID-19 pandemic that both Victoria and New South Wales did. While the coastal region dominates expenditure - like NSW - there is a migration of investment to ex-urban and more inland areas.

    The Australian Bureau of Statistics (ABS) has released its building approvals stats up to June 2021, completing the financial year. These have been recently updated with additional stats on a local government authority (LGA) basis.

    In these series of stats, we are looking at building approvals for Queensland (QLD), with a focus on the south-eastern corner of the state, which includes the state capital, Brisbane.

    Planned expenditure

    We start by looking at the pure planned expenditure for all residential construction, including alterations and additions, houses and multi-unit dwellings. Chart 1 shows these numbers for the entire state.

  • For a larger version of this map, please click on the link below:
  • Chart 1 large image

    These are similar to the map of expenditures developed for New South Wales, in that the high spending areas are spread along the coast. Five areas had expenditures of over a billion dollars for the year, which are:

  • Brisbane $4,095,328,000
  • Gold Coast $2,370,669,000
  • Sunshine Coast $1,630,481,000
  • Moreton Bay $1,272,367,000
  • Logan $1,129,273,000
  • Zooming in on the Brisbane area, Chart 2 offers an expanded view.

    While the expenditure is concentrated around the prime urban areas along the coast, the map also shows reasonable expenditure inland as well, with the Southern Downs Region recording close to $67 million.

    Growth in planned expenditure for renovations

    Moving from pure expenditure to measuring the growth in planned expenditure for alterations and additions (renovations), Chart 3 shows this for the entire state. This chart is based on the most recent year, FY2020/21, compared to an average of the three preceding financial years. (This helps to smooth out the down market experienced in 2019/20.)

  • For a larger version of this map, please click on the link below:
  • Chart 3 large image

    In terms of total expenditure, the list of the largest spenders is somewhat familiar:

  • Brisbane $881,281,000
  • Gold Coast $229,768,000
  • Sunshine Coast $215,353,000
  • Ipswich $203,218,000
  • Logan $109,796,000
  • The big surprise is that in sixth place there is Rockhampton, with $104,735,000 in expenditure.

    Chart 4 shows the situation for the areas around Brisbane.

    What is interesting about this map is that it shows a similar situation to that seen for both Melbourne and Sydney. The more urban/city regions (Brisbane, Moreton Bay, Sunshine Coast, Noosa) show, in general, an increase in activity, but it is the outer, ex-urban regions which have the highest level of growth. The top four areas are:

  • Ipswich 608.1%
  • Rockhampton 575.5%
  • Livingstone 392.6%
  • Somerset 292.3%
  • Ipswich, for example, went from an average of $28,699,000 to $203,218,000 for FY2020/21, while Rockhampton went from an average of $15,506,000 to $104,735,000.

    Number of houses approved

    Moving away from planned expenditure to the number of dwellings that are approved, Chart 5 shows the percentage growth in the number of private houses approved for QLD.

  • For a larger version of this map, please click on the link below:
  • Chart 5 large image

    Note that the mid-blue colour key indicates an area that had zero houses approved for FY2019/20.

    While the major urban areas continued to see the largest rise in the number of houses, the outstanding LGAs which combined a steep percentage rise with hundreds of additional approvals are:

  • Townsville 135.0% - 613 additional houses
  • Toowoomba 98.9% - 540 additional houses
  • Cairns 90.5% - 478 additional houses
  • Fraser Coast 63.4% - 444 additional houses
  • Bundaberg 136.3% - 394 additional houses
  • It's interesting that Rockhampton, which saw increased renovation activity, saw a decline in house approvals, going from 140 in FY2019/2020 to 135 in FY2020/21, a loss of 4%.

    Chart 6 shows the same data for the region around Brisbane.

    Again, the pattern we've seen before repeats, with the established urban coastal areas showing an increase in activity, while the more inland areas show a major boost in approved housing numbers. It is notable that both Noosa and the Gold Coast showed flat growth.

    Number of multi-unit dwellings percentage change

    QLD is, in general, somewhere mid-way between NSW's avid acceptance of multi-unit, and Victoria's less enthusiastic approach to anything that is not a house. Chart 7 shows growth in multi-unit building approvals across QLD.

  • For a larger version of this map, please click on the link below:
  • Chart 7 large image

    For much of regional QLD, percentage growth is not very revealing, as the numbers for multi-unit are quite low. Rockhampton, for example, shows high growth, but it's really only a gain from three units in FY2019/20 to seven units in FY2020/21.

    The real activity takes place in the urban areas around Brisbane, as shown in Chart 8.

    What is interesting here is that there is only mild growth in Brisbane, Sunshine Coast and Gold Coast, but enhanced growth in Logan, Ipswich, Redland and Noosa.

    Analysis

    QLD is, of course, a very unique market. Nonetheless, there do seem to be signs of the forces at work on NSW and Victoria are also exerting pressure here, during this time of the COVID-19 pandemic. There is a de-emphasis of the more urban areas, and a shift to ex-urban and semi-rural areas. Even though QLD has done a great job of managing the pandemic, it's likely that the anxiety produced by the potential for lockdowns and other restrictions has encouraged this behaviour.

    statistics

    Weber goes public

    Demand grows for Weber's products because of the pandemic

    US-based BBQ manufacturer Weber launched an IPO on the New York Stock Exchange, after a big jump in sales. However sustained growth may prove to be a challenge.

    Business for Weber has been significantly boosted in the wake of the coronavirus pandemic because of the enormous demand for products for personal home use. Seeking to tap into the stay-at-home trend that has dictated much of the stock market's performance in the past 15 months, the company launched an initial public offering (IPO).

    According to the Wall Street Journal, Weber shares rose on their first day of trading after it priced its IPO below expectations and slashed the number of shares being sold.

    The company's stock initially rose 18% above its IPO price to close at USD16.50. The previous night, it sold 18 million shares at USD14 apiece in its initial public offering, compared with the 47 million the company and its selling shareholders were planning to sell in a range of USD15 to USD17 each. (It currently sits at around USD15.71.)

    In its filing for an IPO, Weber said sales for the six-month period that ended March 31 rose about 60% from a year earlier to approximately USD960 million.

    However, the Asia News Monitor reports that the current huge demand could soon be coming to an end for grill manufacturers such as Weber. The market is saturated, and the industry is mature, according to the market research company Ibis World.

    And the industry could be slow for years. Ibis World analyst Nick Masters writes:

    This phase is characterised by slowing growth rates and low technological innovation.

    By 2025, sales are only expected to increase at an annual rate of 1.4%. Another reason why there are hardly any new entrants to the market.

    But driven by the pandemic-induced sales, other grill/BBQ manufacturers are going public this year. Traeger, a manufacturer that specialises in wood-pellet grills, was able to raise USD423 million with its stock market debut at the end of July. Since then, the shares are up 20%.

    Yet the lack of raw materials and faltering supply chains call into question how sustainable such growth is. Because Traeger now manufactures almost exclusively in China, and Weber is at least partially dependent on products from Asia, slow deliveries are hampering business. Weber's stock exchange prospectus notes:

    Furthermore, even if growth in demand continues, we may not be able to meet that demand due to production and capacity challenges.

    At the same time, when more people can go out to restaurants in the US and enjoy other leisure activities again, the need for barbecues is likely to decrease significantly.

    Meanwhile, Weber can hope to benefit from a strong brand name in the future. Years of growth at the top of the industry have given the company a loyal and wealthy clientele. The prospectus said:

    The Weber name and premium brand image are integral to the growth of our business.

    Weber's greatest strength may also be its greatest weakness. If its image suffers, the company will be in trouble. According to the prospectus:

    We have spent decades building brand affinity and awareness by teaching people how to grill the 'Weber Way'. Any harm to our brand could result in a significant reduction in such demand which could materially adversely affect our results of operations.

    The company generates 58% percent of its sales in the US and the brand is considered the undisputed industry leader. But Weber only has a market share of 23% in its home country, where competition is particularly strong, as noted in its stock market prospectus.

    In the US, companies such as Coleman, Char-Broil, Middleby and Broil King have recently taken increasing market share from the company.

    Today Weber is a multi-national company selling grills in 78 countries in Europe, Middle East and Africa (35%) and Asia-Pacific with 7%, a market with strong potential for the brand.

    The iconic Weber charcoal kettle grill was first introduced in 1952, after sheet-metal shop owner George Stephen invented the first closable, wind-resistant BBQ. Consistent innovations followed, including the introduction of a line of gas, electric, wood-pellet grills, smokers and in 2020 a technology-enabled smart grill. The company, then called Weber Stephen Products, was family-owned until 2010 when a majority stake was sold to BDT Capital Partners.

    Related: A new BBQ from Weber released earlier this year has similar specifications to a smartphone.

    Weber's latest gas BBQ is smart - HNN Flash #32, February 2021
  • Sources: Asia News Monitor, Wall Street Journal and Forbes
  • companies

    Retail update

    Sydney Tools plans Paget store in Queensland

    Mackay Regional Council has approved a development application to build a Sydney Tools

    A new Sydney Tools store will be built in Paget, a suburb in Mackay (QLD) after Mackay Regional Council approved an application submitted by Bayswater Holding.

    A house and some sheds will be removed to make way for the 2775sqm development that will be located just metres away from Bunnings at 157 Archibald Street, according to The Daily Mercury. It includes left-in and left-out entry and exit points with 51 customer carparks.

    The Sydney Tools store is expected to service the construction, mining, agriculture and automotive industries and stock brands such as Milwaukee, Makita, Dewalt, Hikoki, Festool, Paslode, Ramset, Husqvarna, Stanley, Fein, UniMig and Cigweld.

    The company said it holds 70 million products with a range available both online and instore including petrol, diesel, silent and three-phase generators, welders and accessories, scaffolds, jumping jacks, trash pumps, 1in. wrenches, laser levels, commercial vacuum cleaners, electric, diesel and water pressure washers, air compressors and petrol commercial and electrical steamers.

    Sydney Tools has eight other Queensland stores including seven in the southeast of the state and one in Townsville.

    Related: Sydney Tools recently opened a store in Lismore (NSW).

    Retail update: Sydney Tools' Lismore store opening - HNN Flash #45, May 2020
  • Source: The Daily Mercury
  • retailers

    Supplier update

    Reece has acquired Pipeline Supplies Australia

    James Hardie has lifted its full-year guidance by more than 10% after posting record earnings in the first quarter on the back of a building boom in North America

    Plumbing and bathroom company Reece has purchased Pipeline Supplies Australia (PSA), a mechanical services and fire protection products manufacturer and supplier.

    The Data Room column in The Australian reports that Reece is moving into a new market segment with this acquisition. PSA is based in Melbourne (VIC) and designs and distributes plumbing supplies across heating, ventilation and air conditioning (HVAC), fire and mechanical services. It is known as one of few providers of prefabricated HVAC modules in Australia.

    PSA supplies its products and services mostly to major companies in the building, construction and civil tunnelling sectors.

    It is believed that the business was sold for a price of less than $100 million. Reece has a market value of $15.6 billion.

    Related: Reece Group posted record net profit at the end of 2020.

    Online sales helped to boost half year results for Reece - HNN Flash #35, March 2021

    James Hardie

    Building materials supplier James Hardie recently revealed that a building boom and stronger markets across Europe and Australia has pushed the company to raise its fiscal 2022 net profit guidance range to USD550 million to USD590 million, up from initial guidance of USD 520 million to USD 570 million.

    A direct pitch to its customers through social media and influencer campaigns helped James Hardie deliver profitable organic growth, according to The Australian.

    The direct marketing to homeowners of its building products was a critical strategy for James Hardie and it believes it has helped it accelerate the creation of demand. It was able to achieve growth in existing and new segments.

    James Hardie said that it has delivered record quarterly net sales growth of 35% to USD843.3 million for the three months to June 30 as adjusted net profit rose 50% to USD134.2 million. Earnings before interest and tax rose 45% to USD180.5 million for the quarter. James Hardie chief executive Jack Truong said:

    We are making good progress on our stated global strategy. Globally, we continue to enable our customers to make more money by selling more James Hardie products. Our high value product mix provides homeowners with products that combine long-lasting beauty and endless design possibilities, with trusted protection and low maintenance.

    Dr Truong said he was pleased the first quarter marked its ninth consecutive quarter of delivering growth above market and strong returns.

    In our investor day at the end of May, we described our three critical initiatives for fiscal year 2022 through fiscal year 2024: market directly to homeowners to accelerate demand creation, penetrate and drive profitable growth in existing and new segments, and commercialise global innovations by expanding into new categories.

    Related: James Hardie Australian-based ambassador Neil Hipwell offers tips for builders on how to enhance their social media presence.

    Social media and builders: Customer insights for hardware retailers - HNN Flash #28, January 2021
  • Sources: The Australian and Mergers Alliance
  • companies