HBT: Market leading strategy

HBT CEO Greg Benstead helps HBT go pro

The competitive edge that HBT seeks to give its members combines low prices and high rebates from suppliers, combined with "just enough" services at a low administration fee

In early May 2019 the Australian hardware retail buying group, Hardware & Building Traders (HBT), hosted what turned out to be a complex (even ground-breaking) National Conference, echoing the complex situation not just in hardware retail, but in the Australian economy as well.

Melbourne contributed its usual decently-grey weather, and the Melbourne Convention and Exhibition Centre (MCEC) contributed its somewhat challenged aesthetics, and equally challenging logistical systems.

In the absence of HBT's much-beloved doyen of its administrative team, Ashlin Fisher (happily on maternity leave after giving birth to a gorgeous baby girl, Finn), the conference had to rely on the ministrations of a third-party organiser for its day-to-day functioning. The result was an efficient conference, but one which lacked a little when it came to conviviality - even if the HBT members and staff worked hard to overcome that.

Though, on reflection, the mood of the conference likely had less to do with its administration, and more to do with its own nature. This was by far the most serious conference HBT has hosted for the past five or six years. In fact, in HNN's opinion, this conference will come to be seen as marking the second major inflection in the group's history since its founding in 1997, with the first marked by Tim Starkey taking over as group manager back in the late 1990s.

If anything really proves that HBT's current CEO, Greg Benstead, has throughly and swiftly absorbed the group's culture since joining it in early 2018, it was the way in which he oversaw the release of what is effectively a new strategy for the group. While other large buying groups tend to release new strategies with a degree of flashiness, the HBT way is to more or less back your way into anything new.

That introductory dialogue goes something like:

We're going to do this new thing - except, of course, it's not really new, as it's a lot like this thing we used to do, some time ago, only, well, yes, I suppose it is also new, a bit. OK more than a bit. But it's a good idea.

In other circumstances, that might seem wishy-washy, or just indefinite, but in the context of HBT, it's a form of courtesy. It clearly acknowledges that the members of HBT really are independent, that change can be hard, and brings a mixture of gains and losses - though hopefully more gains. It is also represents a deserved trust in the HBT members, that they will consider such changes, and, once they have understood what is happening, often wholeheartedly embrace that change.

The change

So, what is the nature of the change in HBT? To begin with, it's a change that is responding to a range of forces. These are forces within HBT itself, as well as forces within the hardware supplier market created by all its participants: HBT, the Metcash-owned Independent Hardware Group (IHG), the National Building Suppliers Group (Natbuild), and a half-dozen smaller - but significant - niche hardware buying groups.

On top of that are significant changes underway at the overall "market maker", the Wesfarmers-owned Bunnings. And beyond all of this are strong macro-economic forces in the Australian - and even global - economy coming into play.

What is most extraordinary - and, indeed difficult to grasp - is how fortuitous the combination of these various forces will likely turn out to be for HBT as a buying group.

Partly by chance, partly by a form of determined, long-term evolution over the years, as well as some interesting choices made by its current management, HBT has placed itself in a very healthy position. It is not a position from which it will dominate the industry, but it is strong enough to resist efforts by other groups to have influence beyond their membership.

Most importantly, it's a position from which it will be able to deliver to its own membership its promised benefits: a chance to be competitive, to retain flexibility, and to deliver a measure of real security in one of Australia's toughest forms of retail.

But what really marks this change, more than anything else, is its simple maturity. In his opening remarks to the conference, and at other moments, Mr Benstead was at pains to declare that HBT is not becoming "corporate", nor does it have any intention to go down that path. HNN is sure this is quite sincere. However, what Mr Benstead and others have delivered is something that is actually close to the corporate (though different): sheer professionalism.

The mark of this professionalism is that HBT has singled out the activity it needs to pursue to deliver maximum value to its members for the next 10 years. This puts it in a place where it can maximise value creation, for all participants in the independent hardware market.

That specific activity is unlikely to be at the centre of the sustained future development in retail at large, and specifically hardware retail. What HBT has done, very wisely, is to chose a prime secondary function, one which it is uniquely suited to deliver.

To put that in terms of a musical analogy, HBT has realised that in the marketplace set to develop in the near future, its role is not to play the saxophone and trumpet solos, but rather to establish a core rhythm through the bass and drums.

Origins of the change

The first clue that HBT was about to go down a different path came when the buying group began to evolve its operations out of its long-time office in the outer Melbourne suburb of Rowville. That started with the hiring of ex-Coles, Foodworks and Philips Lighting buyer/sales executive Jody Vella as leader of the buying group in August 2018. That was followed a couple months later by Mr Vella's hiring of three additional members of the buying team, Mark Sampson, Kevin Marshall, and Pete Hurley. Their numbers were rounded out by Val Skyba in a support role. And, of course, there is the ever-reliable Gavin Keane, who has brought his experience and deep knowledge of both suppliers and members to this new team. Fundamental change, without the support of "the Gav" (as many of us call him), would probably not be possible.

What this buying group set out to do, led by Mr Vella, under the guidance of Mr Benstead, was to refine, redefine, and re-envision how HBT handles its relationships with suppliers. That has meant delving into the essentials of how a hardware buying group should go about creating value for its members, while also looking after suppliers that agree to closely align with it.

This means taking into account the competitive situation of members' stores, the competitive situation of the suppliers in their marketplace, and also HBT's position in relation to other buying groups. Once these factors are determined and understood, the various parties can work out how to maximise value under current market conditions and, finally, how to divide that value up, in a sustainable manner, between these participants.

In business strategy terms, what HBT is doing is taking the buying group function, its relationship to its customers (the members) and to its suppliers towards a position that is beyond what we sometimes refer to as "game theory".

Game theory is based on situations where there is incomplete information available, with each participant in a market manipulating what is known and what is concealed to develop some kind of advantage for their own side. The insight that Mr Benstead and others in HBT have had is that, due to size and scale constraints, if they follow the game theory path, HBT will nearly always lose.

To use an analogy, it's a bit like HBT is playing poker with IHG and Bunnings. HBT gets dealt five cards, but IHG is always dealt six, and Bunnings probably about nine. The others start out with better odds, and will win most hands.

The alternative is for HBT to go beyond the game by releasing more information, and forming bonds of trust with suppliers and others in the market. Stretching the above analogy, HBT and the suppliers can show each other their cards, and agree to split their winnings (at least to some extent).

This strategy will, from time to time, not succeed. However, HNN believes that what Mr Benstead and others on the HBT executive team have worked out is that the hardware market is, at the moment in a very unique situation, one where this strategy has a good chance of delivering strong benefits to HBT members most of the time.

In HNN's opinion, this is a very strong strategy, and unique not only to hardware retail, but to retail in general in Australia. It's not just professional: it's truly market-leading.

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retailers

Retailers shift investment to SG&A

With costs unlikely to decrease, more productivity is key to growth

Over the past three years, independent hardware retailers have price matched against Bunnings with increasing success. Now they need to invest in productivity -- as Bunnings is doing

Independent hardware retailers, aided by buying groups, have done a great job over the past three years in closing the price/margin gap with the market's major competitor, the Wesfarmers-owned Bunnings. They have managed to narrow the gap to the extent that price has become less relevant to customer choice. At the same time they have highlighted the advantages they offer, introducing a new competitiveness into the market.

However, in the wake of these developments, and just as most hardware retailers are feeling somewhat confident about price/margin, a new competitive challenge is developing. It's one that, while its effects may be delayed by a couple of years, will prove to be just as significant as the price/margin struggle that began 15 years ago.

Resetting strategy

It's understandable - given the drive and effort involved in answering the price/margin challenge - that much of independent hardware retail strategy has focused on what, in managerial accounting terms, we refer to as gross profit and gross profit margin (GPM).

Gross profit is gross revenue minus the cost of goods sold (COGS). GPM is that gross profit divided by gross revenue, usually shown as a percentage. For most hardware retailers, COGS is simply the cost of buying stock, plus in-shipping costs (delivery to the store) and, in a few cases, out-shipping costs (delivery to the customer) as well.

GPM for retailers is thus really about the effectiveness of the wholesale supply chain, and how that measures up to current market conditions. Most retailers have a good sense of what the minimum GPM they need is, and it's a convenient "score card" for tracking overall progress.

Given the current market situation, GPM has also been used as a measure of competitiveness. It helps retailers to determine what their baseline profitability is, given the current wholesale cost of goods, in the context of market price constraints. For most hardware retailers, "market price constraints" comes down to "what does Bunnings charge?".

Retailers will often determine their prices by thinking about the customer value chain (CVC) for a product in the context of the Bunnings price. That goes something like: "Bunnings is charging $X, but my store is less of a drive for them, we have better store amenity, plus knowledgeable, personalised service, are community involved, and offer payment terms on accounts, so I can charge $X plus Y%". Keeping an eye on GPM makes sure that $X plus Y% remains clearly profitable.

There are good reasons why this has become a dominant approach, but it does lead to strategies that are purely cost-focused. The difficulty with cost-focused strategies is that they typically do not promote much in the way of either growth or productivity improvements.

Bunnings and other large retailers are very aware of this limitation. They are also aware that, when it comes to squeezing more value out of the supplychain, future gains are likely to be small and incremental. That's especially the case as, with analysts expecting the RBA to cut Australia's baseline interest rates eventually down to 1.0%, we could be looking at an AUD that is worth around USD0.61 to USD0.64. That makes imports from China more expensive than they have been in the past. This is a condition likely to continue for the next two years, at least. Such currency depreciation will wipe out most supplychain efficiency and competitive gains.

This is of acute importance to Bunnings, because the company's pricing focus remains on consumers, not competition. That means that relative pricing advantage, while welcome, is not the endgame. As former Bunnings managing director John Gillam famously told analysts at one Strategy Day briefing, "the margin is the outcome". In cases where that margin begins to become thin, Bunnings usually responds by influencing the outcome, rather than simply raising prices.

The realisation that the supplychain will yield low levels of growth is what has led many major retailers to adopt the next wave of competitive strategies. These were initiated over two years ago, but reached peak development during the past year.

It's easy to get a little distracted by the specific technologies and techniques that are being used to implement these strategies (such as data analytics), but it's the core strategic intent that needs to be acknowledged. That strategic intent can be represented by saying Bunnings (and other retailers) are taking a closer look at performance measures outside of GPM.

In particular, they are placing more strategic focus in the area of operating profit, which is derived by subtracting operating expenses (OPEX) and COGS from the company's net sales. OPEX is made up mostly of sales, general and administrative (SG&A) costs, along with costs such as those for research and development (R&D). The performance number that gets derived from this is operating profit margin (OPM), which is the operating profit divided by the net sales, usually represented as a percentage.

Where does CAPEX get spent?

If we look a little deeper, however, the situation is just a bit more complex than this. Some analysts see most company strategies as coming down in the end to the interactions between three, fundamental core components of large businesses: COGS, OPEX and capital expenditure (CAPEX). In retail you can pretty much split companies up into those that use CAPEX to boost COGS and those that use CAPEX to boost OPEX. US big-box retailer Wal-Mart is a classic example of the first category, and The Home Depot exemplifies the second.

Wesfarmers as a whole - and Bunnings in particular - is a company that is switching from the first category to the second. This explains - at least in part - why the company de-merged Coles into a separate entity. The supermarket business, as it exists today, will remain all about COGS, which means, given the supplychain constraints, it will continue to be low-growth.

While this may be a large change for Wesfarmers and Bunnings, many independent hardware retailers may wonder why it should be of concern to them - how much worse, after all, could competition from Bunnings get? But in reality, whether it is intentional, or a matter of "collateral damage", this shift in strategy by Wesfarmers is likely going to have a great effect directly on independent hardware retailers.

That effect is going to be sharp because, at least as things currently stand, the independents don't have a mechanism which will help them to catch up with Bunnings, as they did during its COGS-oriented strategy, where they were ably assisted by buying groups.

One major reason why the OPEX strategy is harder to counter than the COGS strategy, is that every COGS strategy is, at heart, based on the utilisation of scale. Bunnings' pricing helped it establish and retain scale, and that scale further enabled pricing. Independent hardware retailers fought back through increased discipline in their buying groups, a narrowed focus onto a limited range of suppliers, which resulted in increased volumes in strategic products from those preferred suppliers. They created scale, in other words.

OPEX strategy is, by contrast, not based on scale in a business, but on its size instead. Though they seem to be almost the same thing, they really aren't. There are businesses with large scale, but small size, and large businesses with small scale. Wesfarmers, of course, has both.

One question that independent retailers often have is, what are the practical uses of something like data analytics? One answer that surfaced during The Home Depot's May 2019 investor presentation came from the company's head of merchandising, Ted Decker, when he described new processes for changing up product ranges as they aged.

Previously, we would wait for a category to degrade, then we would launch a comprehensive line review, which takes months to implement changes. We're now establishing the process and tools to continuously review our assortments, line structure and space requirements so our merchants can better sustain category performance.
Our aim is to ride the crest of the wave rather than degrade and have to reset. To accomplish this at scale, we're building out the technology to support an automated end-to-end process that incorporates our assortment, planogram, fulfilment, project planning and execution applications. Going forward, we'll be even more agile and will update our assortments or change space assignments more frequently and with better accuracy.

Instead of tracking falling results for a product over two or three months, then taking another two to three months to bring in a solution, The Home Depot will be able to compress all that into less than two months. The company can do that because it's relying on a wide dataset drawn from a number of stores in a specific region. The impact on customer relevancy and satisfaction, as well as profits, will be considerable.

The size of Wesfarmers - at this point fully cashed-up from the Coles de-merger - enables it to invest considerable sums (likely over $800 million for data analytics) in developing new technologies, new connectivities, and integrating these into its businesses. On the cost side, that expenditure is amortised over its market reach. On the gains side, given this market reach, even a fractional gain will enhance its position across those markets, and bring significant returns.

Size has always been an advantage, but there are strong indications that it has become more advantageous since the global financial crisis (GFC). There have been increasing concerns expressed by global economists over the past five years, as they have noticed a growing disparity between the ability of two types of firms to grow in terms of productivity at a much higher rate than the overall slow productivity growth at the majority of firms. Those two types of firms are large firms that have a dominant market position, and those that are on the "cutting edge" of technological development in a market - frequently new entrants.

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Trade winds slow power tool industry

TTI grows, others slow

Tariffs imposed by the US Government on trade with China, plus increases in raw material prices dented performance for most major power tools companies, except TTI

It is not possible to talk about the global business of power tools without also getting into the key economic enablement on which its considerable success has been built, which is globalisation itself. That's mainly because globalisation, and the associated world of mutual trade agreements, has come under unprecedented attack since 2015. This culminated in both the UK's Brexit vote to leave the European Union (EU), and later, the imposition by the current US administration of harsh - and threats of still harsher - tariffs on trade between the US and China.

Both of these moves have had, and will continue to have, difficult negative consequences for the power tool industry. While some companies, such as Techtronic Industries (TTI) have, as promised, been successful in working around these difficulties, others, most notably both Bosch and Stanley Black & Decker (SBD), admit that this has been a factor in their less than stellar results for FY2018.

There are multiple problems in entering into even a brief discussion of globalisation. That's largely because globalisation has become a common scapegoat for a range of perceived social and economic ills. In particular, the changes that are being brought about by a rapid acceleration in the development of technology (especially software) frequently get conflated with the enabling arrangements of globalisation.

This is, HNN believes, one of the issues that the president and CEO of SBD, James M. Loree, did a great job of describing in his opening statement in the company's annual report for 2018. In part, this is what Mr Loree had to say:

The inexorable forces of the accelerating pace of technological change have been wreaking havoc with the status quo across all aspects of society for some time now as the decreasing cost of data storage, increasing computing power/cost ratio, and communications technology advances combine to create once unthinkable capabilities and applications. As these synergistic forces have gained speed and momentum, the combination has begun to challenge the ability of individuals, institutions and society in general to absorb the massive changes that are impacting all walks of life.
What once seemed like a relatively orderly world is now characterised by chaotic new unforeseen threats, disruption, growing inequality and divisiveness. In addition, the well-documented impact from climate change is becoming increasingly apparent. The ever-increasing rate of change and the sheer complexity of it all can be overwhelming to individuals and institutions. However, amidst all the turbulence there is opportunity. We believe that a new form of leadership and corporate citizenship is necessary to successfully navigate through these times.

This is a good description of the current state of many markets, as well as an under-reported, real contribution by Mr Loree.

In particular, it's worth drawing attention to that final sentence. While Mr Loree is talking explicitly about SBD itself, he's also referring to the industry in general - and it really includes hardware retailers as well. Basically, faced with these tough times all we can really do is to become even better at business. It's a great reminder of basic principles.

Undoing the economic voodoo

Given this, it's still worthwhile briefly considering the arguments used to bolster the case for actions such as the imposition of tariffs on China.

The mechanism of such tariffs goes like this.

  • Businesses domiciled in high wages country Aaa have goods of category Xxx produced in the low labour cost country Bbb, and then import these into Aaa.
  • The government of Aaa imposes tariffs on those imports from Bbb.
  • The goal of these tariffs is to increase the cost of goods imported in Aaa after they are produced in Bbb to such an extent that, despite the difference in labour costs, it is cheaper to make those goods in Aaa.
  • The immediate effects of such tariffs are these:

  • The cost to the end user of all those goods in category Xxx increases. This is because whether the goods are imported with a tariff impost, or produced locally with higher labour costs, the businesses must increase prices to maintain profits.
  • The lower cost imported goods have worked to depress overall prices in category Xxx. Once that is removed, all goods in that category will increase in price, because price competition has radically declined.
  • Over time, if the categories affected by the tariffs are broad enough, the economy of Aaa will see increased inflation, which dilutes the value of future growth.
  • Increased prices, given fixed capex, will also see growth decline, as companies have high costs and less money to invest in research, or risk-taking on new developments.
  • Industries that might once have considered developing markets in Aaa will seek alternative domiciles.
  • Those are just the headline problems. The really deep problem is that tariffs are effectively taxes designed to subsidise the least productive parts of an economy. That means that an increasingly large part of a nation's gross domestic product (GDP) gets tied up in the area that grows the least, and produces the (economically) worst products. The truly productive parts of the economy, in fact, end up being weighed down by the need to pay subsidies to the least efficient parts of the economy.

    To quote from an article first published in 2016 on the IMF Blog, titled "Tariffs Do More Harm Than Good at Home", by Maurice Obstfeld:

    There is another big drawback of such tariffs: while they may give some relief to industries and workers that directly compete with the affected imports, they will be broadly contractionary, reducing output, investment, and employment in the whole economy. These negative effects follow even if trade partners do not retaliate, although if they did, the outcome would be even worse.
    Tariffs Do More Harm Than Good at Home

    HNN is not even going to get into additional problems, such as the obvious use of tit-for-tat retaliatory tariffs. Nor are we delving much into the fact that balance-of-trade between nations is not a scorecard, or about "winning". It is a very complex issue, but the best short-hand way to understand why most respected economists regard balance-of-trade as a null issue is to think of it a little in terms of CAPEX for businesses. Partially leveraging CAPEX expenditure to enter into a high-growth area is a commonly accepted corporate practice, and in a modern economy, running a negative trade balance has much the same origins - planned or unplanned.

    All of the above reflects a well-established understanding of global economics that has been commonly accepted since the early 1960s. There is just nothing new there.

    The counter-argument that has been raised over the past decade or so to support tariffs is that moving wages formerly "exported" to foreign economies back into the domestic economy has to do a lot of good. That is like arguing that it has to be better to get 1% profit on $10 million than 5% profit on $3 million, because $10 million is bigger than $3 million. Net productivity is the measure of economic health, not the number of people with jobs.

    The key to this is to understand that manufacturing labour markets are rapidly commodifying as automation is about to enter a period of near exponential growth. At the same time, service areas such as software development are actually entering a period of rapid decommodification. Expert knowledge is in high demand.

    What the attempted argument about retaining manufacturing wages truly reveals is that many people simply cannot comprehend the way the economy has developed. It's just difficult for them to grasp that a busy factory of 300 people working long, sweaty hours, with metal being cut and welded, paint sprayed, gears matched and set, does not produce anywhere near as much value as 50 software developers, designers and marketers sipping their morning lattes in air-conditioned work environments.

    Yet consider for just a moment the true global wealth - ongoing - that developments such as fully autonomous vehicles could bring. These new innovative products consist of around 90% software development.

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    companies

    Big box update

    Bunnings' digital initiative

    Managing director Michael Schneider said the hardware chain will continue to open more physical stores in a presentation to investors earlier this year

    After finding success during a trial in Tasmania, Bunnings will implement a click and collect service throughout its network; and store planning continues in New South Wales and Queensland.

    Click and collect comes earlier

    During a visit to the Bunnings store in Glenorchy (TAS), Bunnings chief executive Michael Schneider told The Australian that a click-and-collect service will be rolled out in the Melbourne metro area before including more country regions. The big box retailer is also examining the potential of an online home delivery service. He said:

    We anticipate the first (mainland) Australian regions will go live somewhere from the first half of fiscal 2020. It will be metro then followed by the regional market, but we would see that as a progressive rollout on a reasonably well-paced basis provided we didn't discover something we don't already know.

    According to the article, Bunnings is releasing its online click-and-collect service around Australia at a faster pace than investors and the market were anticipating. This follows a trial in a Tasmanian store that Bunnings said is delivering a strong uplift in sales as the size of orders placed online is on average larger than the typical basket size of purchases made by walk-in customers. And some categories are proving more popular than others. Mr Schneider told The Australian:

    ...It is varied but what is quite clear is that customers are buying project-based quantities, so they are quite solid basket sizes compared to normal. So a simple project on the weekend might be to update a bedroom, door knobs and handles. A customer might be looking for 20 or 30 door handles, and they will make that purchase online because they can do the whole project in one go, rather than come in on the weekend and top up a few items.
    The basket size has been bigger, for average transactions, and that is what we have seen with our overseas peers.

    The Glenorchy store is typical of the click-and-collect plans for the rest of Australia. It has about 70% of its total products available for online orders to be picked up by customers at a desk within the store. Orders made before 4pm can be picked up by 9am the next day.

    Bunnings' new director of digital and analytics, Leah Balter, has led the implementation of the service. Shelves near the Gelnorchy store entrance are used as the click-and-collect desk. Bunnings staff, no matter what area they work in, can link to a central booking system that allows them to pick up products from the shelf to fill online orders as they walk through the store and deal with customers.

    For now, plants and timber are not available to be ordered for click-and-collect. Hazardous materials - such as chemicals - are also not on the site yet.

    Web traffic

    The hardware chain seems to have a ready-made digital audience based on data from online savings platform Cuponation. It indicates that Bunnings has more online visitors than any other Australian bricks-and-mortar retailer and is the third most visited website after eBay and Amazon.

    Bunnings.com.au had 40 million visitors in the March quarter compared with 32 million for Woolworths, 29 million at JB Hi-Fi, 21 million at Coles, 21 million at Kmart and 20 million at Kogan.com.

    The data includes all visitors, not unique visitors, to the retailers' desktop and mobile sites and was collated using SimilarWeb and Alexa tools. It also showed that more Australians are shopping online via their mobile phones.

    At Bunnings, mobile penetration was well above average, with 65% or 26 million visitors using their mobile phones, reflecting demand from tradies and DIY customers checking specifications and prices on the road or in stores.

    Bricks and mortar show

    Stores are being planned in Campbelltown (NSW), Coolum (QLD), Tempe (NSW), Mt Isa (QLD) and Virginia (QLD).

    Campbelltown

    Bunnings will construct a new store on Blaxland Road after the Sydney Western City Planning Panel gave the green light to the development. This store will be constructed on council-owned land on the corner of Blaxland and Farrow roads, near Campbelltown station. It is expected to replace the existing Bunnings at nearby Kellicar Road.

    A report prepared by Campbelltown Council staff to the planning panel said the development will employ more people than the current store.

    The site of the existing Campbelltown Bunnings sits within land identified by the NSW Government for future high density development, as part of the Glenfield to Macarthur Growth Corridor Strategy.

    Coolum

    The long-running dispute between Bunnings and Sunshine Coast Council and ratepayers' associations was heard in the Queensland Court of Appeal recently.

    Bunnings first applied to build a store on Barns Lane in Coolum in 2006, but the then-Maroochydore Shire Council turned them down. The company applied again in 2012 and in 2016.

    Bunnings is appealing a previous court decision that sided with the council's decision to reject the warehouse's approval. Barrister for Bunnings, Daniel Gore said the judge made mistakes regarding the location of the proposed warehouse in regard to the planning scheme. He pointed to three occasions when the judgment referred to Coolum instead of Coolum Beach.

    Similarly, Mr Gore said the judge had failed to take into account arguments regarding the scheme's definition of a store compared to a showroom. Mr Gore said the planning scheme would not allow for a Bunnings to be built in the Coolum village area, but said the proposed site in Coolum's west met the planning schemes requirements for a warehouse store.

    Sunshine Coast Council's barrister Christopher Hughes said the previous court decision was not made in error and parts of Mr Gore's submissions were "inconsequential" to the planning scheme.

    The court will release its decision at a later date.

    Tempe

    The proposed Bunnings store at Tempe (NSW) has been delayed again after an independent traffic expert said it would have an "unacceptable" impact on local roads.

    The Sydney Eastern City Planning Panel deferred the $70 million proposal for a second time after residents opposed the use of a narrow street as the main entrance for the 20,000sqm store next to Ikea on Princes Highway. The panel has asked the expert, Rhys Hazell of GTA Consultants, to advise what impact the WestConnex M5 tunnels would have on the already congested highway.

    In its reasons for deferral, the panel stated the tunnels' impact "is likely to be of great importance and may make the difference between an acceptable and unacceptable traffic impact".

    Mt Isa

    Plans for a Bunnings Warehouse in Mount Isa are on hold due to the sewer and stormwater mains at the proposed site on the corner of West and Alma streets. The new site was announced in 2017 with Bunnings conducting a public review of plans.

    Mount Isa City Council told The North West Star newspaper that Bunnings was looking into the relocation of the West Street site's sewer and stormwater mains before proceeding with the construction work for the proposed new store. A council representative said:

    The site is currently under contract, and has been for about two years, and the Development Application for the new Bunnings store is approved.

    The new Bunnings store at the old council works depot and storage yard site, would replace the current Bunnings on Camooweal Street. Bunnings general manager - property Andrew Marks said:

    We are still reviewing our options for the new development in Mount Isa and will update the community as soon as we can.

    The development will have a total retail area of 5607.5sqm.

    Virginia

    Construction of Bunnings store in Virginia (QLD) began late last year at 1836-1840 Sandgate Road. It will be the second Bunnings Warehouse to open in north Brisbane this year, following the opening of a store at Newstead in March.

    Documents lodged with Brisbane City Council show the store will have a total floor area of 17,246.11sqm.

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    HI News 5.2: Big Box Update

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    Indie store update

    Warehouse for tradies

    Coventry Group has finalised its $36 million acquisition of hardware and industrial supplier Nubco

    Mitre 10 in Kilmore (VIC) has trade hub ambitions; and Nubco will continue to be operated as a stand-alone business with no store closures and a focus on procurement synergies, following its acquisition by Coventry.

    Kilmore gets Mitre 10 trade warehouse

    Kilmore Mitre 10 has opened a trade-focused warehouse that offers quick pickups or deliveries for tradies. Director Simon Meyer said he had gradually been building the business into a more trade-focused business over the past four years. He told The North Central Review:

    We've really focused on having the materials that builders need to have in stock and undercover so they're protected and ready to go.

    The warehouse runs as a pick and pack or dispatch-only site, which means customers can't shop there but can collect goods. Orders are placed in-store and stock can either be picked up or delivered. It measures 2500sqm, and is one and a half times the size of the store site nearby, and currently holds enough timber to build 100 houses. Mr Meyer said:

    We're really just reacting to what our customers demanded. We needed to have more available and to be able to react faster so that we're not constantly trying to get things in for people, we've got the majority of it available at all times.

    Planning for the warehouse began two years ago, but the site only became available in October 2018. After stock, racking and equipment was put in place, it became operational in April this year. Mr Meyer explains:

    The few builders who have been lucky enough to go down there to pick up stock, that we're been able to supply directly onto their vehicles, have been very impressed with what they've seen and the volume and stock quality we have on hand.
    We're expanding on what we have had but making sure we have the fast-moving lines in volume so we're never caught short. We really want to be able to give the public here in Kilmore more than what they think we can give them.
    We try to pack a lot in and try to make sure that our value is as close as we can get it to the biggest competitors in hardware...

    Coventry Group buys Nubco

    Coventry Group has completed its $36 million, 100% acquisition of Nubco, a hardware and industrial supplier with seven locations across Tasmania.

    Coventry delivers industrial solutions to the mining, construction and manufacturing sectors, supplying a range of fastening systems, cabinet hardware systems and hydraulics, lubrication, fire suppression, refuelling systems and related products. The company, led by executives Robert James Bulluss, Rod Jackson and Ken Lam, in recorded $168 million revenues in 2018.

    The Nubco acquisition offers synergies that will benefit Coventry's Australia-based business by delivering procurement cost savings and knowledge transfer. It is expected to also provide earnings and cash generation to Coventry.

    Law firm HWL Ebsworth advised Coventry Group on the deal.

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    retailers

    Supplier update

    DuluxGroup to have a new owner

    Queensland construction group Wagners is in a cement pricing dispute with building materials supplier Boral

    Australian paint maker DuluxGroup is on track to be taken over for $3.8 billion by Japanese company Nippon Paint Holdings; and Wagners warned its 2018-19 earnings could be hit by $10 million if its court battle with Boral is not resolved in its favour.

    Nippon Paint gains major foothold in Australia

    Japan-based Nippon Paint Holdings is set to own local paint maker DuluxGroup following the Japanese firm's cash offer that will take the Australian company's market value to about $3.8 billion.

    The Japanese company is prepared to pay a 27.8% premium, based on DuluxGroup's (Dulux) closing price of $7.67 on 16 April 2019. It said in a statement to the ASX:

    The proposed acquisition is an important step in Nippon's global growth ambitions. DuluxGroup will be run as a separate division and will retain the DuluxGroup name.

    As a result, no changes are expected to the DuluxGroup leadership, business portfolio, manufacturing and operations, and the company's name in Australia and New Zealand will remain the same. Chief executive Patrick Houlihan told the Sydney Morning Herald:

    I really see this as the next chapter [for the company].When they look at our business here, they want us to continue what we are doing. They are very focused on what we have.

    The deal would offer investors in Dulux an opportunity to cash out at the end of a long construction boom. Driven by population growth and rising home values, the building boom stoked demand for Dulux's paints, garage doors and garden supplies in Australia, doubling its share price in six years as its revenue climbed.

    However Nippon Paint's offer comes as the steady pace of DuluxGroup's growth slows, with annual revenue growth in 2018 lagging the prior year, even as Dulux acquired new businesses.

    Building approvals - a forward indicator of demand for home improvement products - have also hit their lowest since 2013 and home values are tumbling at their fastest pace in a generation.

    Despite the cooling national housing market, Dulux said it was more heavily focused towards home renovations and maintenance.

    DuluxGroup's board has unanimously recommended that shareholders vote in favour of the takeover by Nippon Paint. Shareholders of DuluxGroup are expected to vote on the offer at a meeting to be held in late-July, and the companies expect the deal to close in August.

    In addition to securing court and shareholder approval, the deal requires the approval of the Australian Foreign Investment Review Board and the New Zealand Overseas Investment Office.

    About Nippon Paint

    Nippon Paint is considered a global leader in the paints and coatings industry and generated approximately $7.8 billion in sales for the financial year ended 31 December 2018. It operates in Asia, Europe and the United States, but essentially has no presence in Australia or New Zealand.

    The company generates 60% of its sales from Asia outside Japan, mainly in China. But housing sales there are cooling off as the Chinese government clamps down on real estate investment. This has hurt Nippon Paint's sales in the country. In addition to China and other Asian markets, the purchase of DuluxGroup will help the Japanese company expand its sales channels in Oceania.

    The acquisition is the biggest yet by Nippon Paint, which has said it's looking to buy global rivals to keep pace with consolidation in a USD140 billion global industry where the top 10 suppliers account for more than half of sales worldwide, according to Bloomberg.

    It would catapult Nippon Paint, the world's fifth-largest paint maker, from a bit player to the biggest paint seller in the region. Although Dulux is Australia and New Zealand's top paint and coatings company, it ranks at 22nd in the world, based on data compiled by Bloomberg.

    H1 results

    Dulux also posted its first results since the Nippon takeover announcement. It said net profit after tax (NPAT) dipped 4.1% to $68.2 million for the six months to March 31.

    The company pointed out that the reported NPAT of $68.2 million was $2.9 million, or 4.1% below prior year's adjusted NPAT, which excluded a number of one-off items that favourably impacted the prior year by $8.1 million. That means the $68.2 million was $11 million or more than 14% lower than the interim in 2017-18.

    Sales revenue was $892.9 million. Dulux said that on a like for like basis, excluding the divested and exited paints businesses in China, sales revenue grew 0.2%.

    It recently committed to a 10-year lease on a $27 million purpose-built facility in Maddington (WA).

    Court next stop for cement supply dispute

    Building materials supplier, Wagners has filed a statement of claim in the Supreme Court of Queensland against Boral after the two parties failed to settle their cement supply pricing dispute.

    Wagners has a cement supply agreement with Boral, whereby the latter is required to purchase a minimum volume of cement from the company on an annual basis at a determined price.

    Boral is entitled to issue a notice to Wagners if it has a bona fide offer from a third-party supplier of cement which is supported by market pricing evidence showing that it will charge a price lower than the current agreement. In this event, Wagners can reduce the price of the cement products supplied to Boral to the price in the notice or suspend supply of cement products for a period of up to six months.

    In March, Boral issued a pricing notice to the company which "purports to refer to market pricing evidence in the form of an unsigned offer from a long-established supplier of cement within South East Queensland, offering a price significantly lower than that currently charged".

    Wagners commenced a formal process disputing the validity of the pricing notice "on the basis it has concerns regarding the bona fide nature of the market pricing evidence provided and therefore the contractual basis upon which the notice has been issued", according to its update to the ASX,

    As a result, it made a decision under the cement supply agreement to suspend the supply of cement products to Boral, pending resolution, or determination by the courts, of the dispute regarding the validity of the pricing notice.

    Wagners management has warned that the potential impact of the pricing notice to the company's revenue in the event of a six-month suspension is around $20 million. It decided it was in the best interest of shareholders to challenge the notice due to the potential long-term impact it will have on the company and the cement industry throughout Queensland and NSW.

    The company also warned that it now expected 2018-19 earnings before interest and taxation to drop to between $25-$28 million (from $35-$38 million previously) until the litigation was resolved.

    Wagners said the drop in guidance took into account the disruption faced by its cement business and the impact on the concrete market, conditions in the precast concrete market and delays in projects starting.

    The supply agreement requires Wagners to provide cement to Boral until December 2021, with Wagners having an option to extend the agreement another 10 years.

    The price paid for cement is adjusted in line with inflation, with a price review every three years. The most recent price review was in July 2017.

    Boral is Wagners' biggest cement customer, and accounts for one-third of Wagners' earnings and about 40% of its cement volumes.

    Background

    Boral competes with Wagners in making cement but after it bought the Queensland-based company's construction materials business in 2011, it agreed to keep buying cement from Wagners.

    As part of the acquisition, Boral purchased Wagner's network of large fixed concrete plants and five of its quarries, its 60% stake in a fly-ash joint venture and its concrete pumping and bulk transport operations.

    Wagners retained its cement grinding plant at Pinkenba in Brisbane. The long-term supply contract with Boral underpins this operation. Managing director Denis Wagner said at the time:

    The sale does not include the Wagner's name and brand and the family will continue to operate the business under the Wagner name.

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    companies

    New products

    Heavy duty axe

    CSR Gyprock has added Pro-Repair 10 and Imex cuts down the confusion on laser selection

    The latest product releases from hardware and rural supplier AgBoss, plaster products maker Gyprock, laser company Imex Lasers and paint manufacturer Wattyl.

    AgBoss back door splitter

    The splitter axe with a hickory handle from AgBoss has enough weight to split larger logs and is ideally balanced to help end-users work their way through kindling.

    The axe head is heat treated with polished ends. It is accredited by GS (German Standards) and has been TUV tested for safety, as well as Quality Assured by ISO accreditation.

    The handle is made from hickory imported from the United States and FSC Sustainable Forestry approved. It has a triple lacquer finish with a hang hole at the handle end. The bright orange colour means this tool will be difficult to lose.

    Small projects repair

    CSR Gyprock's Pro-Repair 10 compound is suited to small-scale jointing jobs, patching holes and defects in Gyprock plasterboard and Cemintel fibre cement. It is also tinted for easy identification on painted surfaces.

    Pro-Repair 10 is a setting compound with a defined working life of approximately ten minutes after mixing. This makes it ideal for repairing holes, nicks and cracks in new and existing plasterboard and fibre cement walls and ceilings. It also provides efficient coverage, with 8kg of Pro-Repair 10 providing approximately the same coverage as 10kg of a standard weight compound.

    Guide to lasers

    Specialist laser level manufacturer, Imex has introduced the Little Green Book to eliminate the confusion when choosing the appropriate laser level for different jobs. There is no longer one laser that suits all, and now that lasers have become more affordable many tradesman have more than one to fit their needs.

    The Green Book gives tradie and laser level stockists a quick reference with a maximum of four questions relating to the tasks and budget so the correct laser level can be purchased.

    Imex has also developed a free app available on Android Google Playstore or Apple App Store which provides instant access to the level selection guide.

    Safety in paint

    I.D Advanced, by Wattyl, has an ultra-low VOC formula at less than 1g per litre, which exceeds the Green Star requirements of the Green Building Council of Australia.

    The paint's Total Protection TechnologyTM delivers a new level of protection as the paint resists the growth of mould and fungus while offering advanced cleanability, washability and stain resistance, according to the company.

    Wattyl I.D Advanced interior paints are touch dry in just 30 minutes and ready for recoat in two hours. Coverage is up to 16m2 per litre.

    products

    Ikea's digital-first, small format store

    Located in a Sydney shopping centre

    The global home improvement retailer has plans to launch a spate of "mini" stores across Australia

    Ikea Australia has opened its first small-format at Warringah Mall on Sydney's Northern Beaches.

    Customers can purchase their kitchen or storage products online with the items delivered directly to their home. They can shop a digital wall of homewares, which they can add to their virtual bag and transfer to their mobile device for checkout.

    This digital-first, personalised shopping experience is geared towards a different type of customer than the typical Ikea shopper, according to Ikea Australia country manager, Jan Gardberg.

    The home improvement retailer refers to this 100sqm store as a "Home Planning Studio". Mr Gardberg said:

    With the Ikea Home Planning Studio we have reinvented the traditional Ikea experience for a different audience, with different shopping needs putting digital at the heart of the customer's journey. However, the digital experience is delivered in our most personalised approach yet.
    The customer's wants and needs for their kitchen or bedroom storage solution are the starting point, and the experience they will receive in the Home Planning Studio will be personalised from there.

    The studio includes a projector tool, which allows customers to envision what their ideal wardrobe will look like by projecting it onto a wardrobe front.

    Customers can also book a $99 one-on-one planning sessions with staff to design their dream kitchen or bedroom storage solution. The cost is refunded on the purchase of a kitchen within the session.

    These small-format stores are able to be rolled out because the company is finalising its new fulfilment and distribution network. Mr Gardberg told news.com.au:

    That was the key cornerstone we needed to get in place before we started to launch these different formats.

    Mr Gardberg sees scope for about eight planning studios in Sydney and Melbourne and a handful in Brisbane and Perth, if the new outlet in Westfield's Warringah mall is successful during its four month trial. He told the Financial Review:

    Ikea is also working on plans to open about 20 5000sqm stores carrying about 4500 products - half the range available in a full-size store. They will be in shopping malls and will be supported by its online store, which sells about 9000 products.

    bigbox

    Europe update

    Turnaround progress at Homebase

    Kingfisher-owned B&Q is testing a smaller-store format before committing to a wider roll out

    Homebase has revealed the extent of its restructure to date in its first earnings release since Wesfarmers sold it; and Kingfisher opens its GoodHome by B&Q store that it believes offers a simpler way of shopping for home improvement projects.

    Homebase returns to design roots

    DIY and garden centre retailer, Homebase said it has limited its losses in the second half of 2018 as a turnaround plan under new owners begins to show signs of progress.

    During the half-year, the retailer reintroduced popular ranges such as furniture, brought back in-store concessions and laid the foundations to rebuild its digital offer. It also plans to reintroduce kitchen showrooms to its portfolio, Chief executive, Damian McGloughlin, said:

    The benefits of the changes we have made are starting to come through ... Clearly, we are only 10 months into a three-year turnaround plan.
    Homebase remains one of the most recognisable retailers in the UK and Ireland, and the progress we have made in reinvigorating our customer experience means we are very optimistic about the future.

    Reporting financial results for the six months to end of December last year, with exceptional items, including the profit from the sale of a freehold store and other property-related provisions, losses narrowed by almost 96% to GBP8.2 million, while improved margins helped gross profit jump by a fifth during the period. However, sales slipped 3.5% to GBP497.8 million, from GBP515.6 million in the same period last year.

    The company also cut costs by GBP100 million. Homebase said closing 47 loss-making stores and two of its six distribution centres, reducing headcount from head office by almost 40%, and removing complexity from processes, has helped it to achieve strong financial and operational performance.

    A Company Voluntary Arrangement (CVA) allowed Homebase to close its loss-making stores and secure rent-reductions for another 70 sites. The firm credited the GBP95 million asset-based lending facility from Wells Fargo Capital Finance for supporting it with working capital.

    Hilco purchased the company in June 2018 for GBP1 from Australia's Wesfarmers that had bought the chain for GBP340 million in 2016. Prior to its Hilco takeover, Homebase had 250 stores at its peak and 12,000 staff.

    Home improvement made convenient

    At its recent Innovation Day, home improvement retail group Kingfisher revealed its GoodHome concept that will provide a simpler way of helping renovators and professionals with their projects.

    GoodHome is a way that Kingfisher's innovation becomes visible to customers for the first time, with a pilot store opening in the town of Wallington (UK). This store is an express format focusing on convenience and focusing on the most common DIY projects such as painting walls, fixing taps or installing new sockets.

    The company describes the store as modern and a local outlet that offers more than just home improvement products. It has a team of skilled staff offering expert help in-store; an effortless digital shopping experience designed to make improving homes easier; and inspiration and information to help plan projects. It will also have a dedicated counter for professional tradespeople. There are plans to have more express store trials in the UK and France later this year.

    GoodHome is part of the B&Q network and marks a departure from the DIY chain's larger sheds and its only other smaller shop, on London's Holloway Road. The 5,400sqft site has a sales area of just 1,615sqft and offers around 6,000 products. A typical B&Q store is around 100,000sqft and stocks 40,000 SKUs.

    This core range will be available for same day delivery, with an extended range of over 20,000 products for bigger projects, available for next day Click and Collect in-store or home delivery.

    Products in GoodHome are not stocked on the shop floor in the traditional way. Instead, customers either purchase items by using in-store digital screens, or by clicking and collecting through the B&Q app. Kingfisher chief trading officer, John Colley said:

    We know that customers are shopping differently. They want convenience and access to products and services, however and whenever they want. This trial store is about offering them just that - a new kind of home improvement store that is simple, modern and convenient. It's just one of the ways in which we are making home improvement accessible for everyone.

    As an international brand, Kingfisher said GoodHome aims to shake up the home improvement market by offering products and solutions that are design-led, high quality and affordably priced. Speaking at the Innovation Day launch, outgoing CEO Veronique Laury, said of GoodHome:

    We started three years ago, and we have undertaken in-depth research to get knowledge on home improvement and customer needs. By doing this, we found that people are improving their homes with the same purpose - they want a home that is good to live in. However, this study also revealed that most improvement projects are abandoned either before they begin or before they are finished. It may be lack of inspiration, too much complexity, not enough skill, time or money. Whatever the problem is, there are often too many barriers to create a good home.
    Our customers tell us 'home improvement can be a nightmare' and the heart of our purpose, everything that we have been doing for the last few years, and we continue to do, is about fixing the nightmare. The biggest change [in the home improvement market] has been the arrival of new players like Amazon and ManoMano. But so far, no market player is offering an end-to-end seamless home improvement experience. No one has solved the nightmare. And this is our potential.
    GoodHome is our new international home improvement customer proposition, based on deep customer understanding. It stands for simple, sustainable, unique and innovative solutions that last and which are affordable. GoodHome is the name we put on everything we are doing to make home improvement accessible to the many, not the few: our new product offer, new services, new store concepts, our training centre and our new charitable foundation.

    GoodHome products and services will be available online and in B&Q, Castorama and Brico Depot stores throughout the UK, France, Poland and Romania.

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    HI News 5.2: Europe Update
    retailers

    USA update

    Retail analytics platform at Lowe's

    True Value said it is "putting the power back into members' hands" in terms of being able to market locally

    Lowe's is strengthening its technology focus by taking on a retail analytics business; and True Value Company is moving into the next phase of hyper-local advertising.

    Lowe's gets into retail analytics

    Home improvement retailer Lowe's has acquired the retail analytics platform of e-commerce software company Boomerang Commerce.

    Lowe's will integrate the platform's technology into its retail business as it looks to bolster strategic and data-driven pricing and merchandise assortment decisions across the business. The platform processes product and pricing datasets and converts them to insights and actions.

    In addition to the technology and tools for the platform, some staff from Boomerang's retail analytics teams in Bangalore and the US will join Lowe's.

    The acquisition includes tools and technology for the retail analytics platform, which is proprietary, but doesn't include customer contracts or related confidential information.

    Following the transaction, Boomerang's Commerce IQ service will operate as an independent business under the CommerceIQ.ai name. In a statement, Lowe's chief information officer Seemantini Godbole said:

    ...Pricing and assortment planning have been identified as strategic areas in need of modernisation [at Lowe's]...Adding this team and technology to our existing capabilities helps us leverage the right data quickly, effectively and successfully.

    Profits in Q1

    Soon after it announced this acquisition, Lowe's reported a first quarter 2019 sales increase of 2.2% to USD17.7 billion from first quarter 2018 sales of USD17.4 billion.

    Comparable store sales for the company's US business rose 4.2% while overall comps rose 3.2%. Profits rose 13.6% to USD1 billion in the quarter.

    The company currently operates 2,002 home improvement and hardware stores in the US and Canada representing 208.8 million square feet of retail selling space.

    Hyper-local True Value campaigns

    To increase relevancy and reduce wastage hardware retailer True Value is working to redefine the concept of "location" in location-based advertising.

    After the retailer made the decision to shift ownership from its shareholders and sell a majority stake to a private equity firm, it paved the way for the new True Value to embrace a "marketing-as-a-service" model, offering hyper-local and highly targeted marketing to stores. Company president and CEO, John Hartmann, told Forbes magazine:

    Our goal is to drive profitable retail sales by offering these independent retailers the programs and campaigns that enable their stores to compete in an omnichannel world.

    To this end, True Value has invested in the capabilities to offer retailers á la carte marketing and advertising programs that help promote their business locally. Mr Hartmann explains:

    We stopped charging a national advertising fee so that our local store owners could optimize their approach to traditional and digital advertising. It all boils down into one word: customisable.

    For consumers, highly customised marketing that is geo-targeted and supported by opt-in relevant messaging on their mobile devices delivers a better advertising experience-on their terms. For store owners, access to a digital marketing program tailored to their needs ensures shoppers come in the door-and keep coming back.

    Dave Elliott, senior vice president Marketing, said in an interview with Hardware Retailing magazine:

    In 2019, each store will have its own individual marketing program, and they will be able to adjust it as the dollars go up and down, right on the screen. We're putting that power in their hands because True Value marketing is about customisation, so we are relevant locally.

    Rather than investing in advertising to reach consumers in the vicinity of a particular store, True Value is working with agencies and marketing tech partners to better understand and address audiences in the trade areas around physical shops. Sue Smolenski, divisional vice president, marketing strategy, told Forbes that it is part of a company-wide strategy to help retailers optimise their ad budgets, not waste them.

    Marketing programs are a big part of the package that has allowed True Value to welcome more than 400 new retailers in the last year, according to Mr Hartmann. Since the restructuring, he said, True Value has also made a USD150 million investment to "modernize supply chain capacity and ensure True Value continues to offer the most competitive product fill rates for our customers in the industry".

    At one level, Mr Hartmann said it's about serving and supporting independent retail. Store owners, equipped with marketing packages and services customised to their needs, are locally relevant and ultimately successful in driving in-store traffic and increasing sales.

    True Value data suggests digital marketing drives sales "34% higher for advertised items in stores that participate in the True Value Rewards loyalty program". It follows that successful retailers have to restock their shelves more often-and they rely on one of the 13 True Value distributions centres to replenish the supply.

    Boosting sales serves everyone in the ecosystem. But Mr Hartmann said the prize is understanding new and better ways to capitalise on the differentiating strengths of local retail.

    Physical stores are in business today because there's something unique about being independent and local. Our own observations indicate that millennial consumers, particularly first-time homeowners, prefer local to the web-based trader.

    It's a huge customer segment - 84 million millennials in the US alone - that will be the highest spending consumer segment in the home improvement market by 2020.

    Fortunately for True Value's independent retailers, it's also a segment new to DIY jobs and eager to go to local stores for advice and supplies. Mr Harmann said:

    Our retail stores provide a high level of expertise and highly personalised service that young consumers crave. That's something you can't get from a drone.

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    HI News 5.2: USA Update
    retailers

    ABS: Value construction work done to March quarter 2019

    Growth slows, but volumes remain high

    While the housing news for real estate investors is not great, for the construction industry it is closer to "business as usual"

    The latest data from the Australian Bureau of Statistics (ABS) indicates that, while house and apartment prices might have dropped, the industry itself has not really suffered.

    The ABS's 8755.0 - Construction Work Done, Australia, Preliminary, Mar 2019 figures, released on 22 May 2019, shows that current activity on building sites across Australia remains healthy.

    HNN has used the Value of Building Work Done, using chain volume measures, for Australia. The chain volume measure means that, while the data is in Australian dollars, it has been adjusted to provide a measure of the volume of orders by taking out any price changes.

    As hardware retailers operate further up the supply chain from building, it is the volume that really affects their bottom line, so these numbers are the best indicator of how current construction is contributing to their revenues.

    The numbers for this data are gathered by the ABS using its quarterly Building Activity Survey. The most recent of these numbers should be treated as preliminary, and the two previous quarters will have been revised as well. This is one of the great services that the ABS does for businesses in the building and hardware sector – it's not an easy task getting this data together just six weeks after the close of the data period.

    Value of Building Work Done relates to construction work which is underway, and has not been completed during the quarter. Completed work is represented in other ABS statistics.

    HNN has used the original data (which means it hasn't been adjusted for seasonality or other measures), and we have consolidated four quarters, ending with the March quarter, into 12-month numbers. The data is extremely seasonal, so this takes out some of the ups-and-downs, and gives a clearer vision of what is going on.

    Chart 1: ABS Work done

    In Chart 1, the blue line, which shows the value of new houses built, shows that while there was a slight decline in activity in the 12 months to March 2018, there has been higher activity in the 12 months to March 2019. It also shows there was a far stronger decline in the years post March 2011 through to the 12 months ended March 2014.

    In the same chart, the green line shows what has been happening with the "not house" category, which is dominated by apartment buildings. This chart shows a very healthy, developing multi-dwelling building market, which climbed strongly post March 2012, up until the 12 months ended March 2017. Since then it hasn't declined, but has continued very slow growth.

    The orange line shows construction activity related to alterations and additions, which are more commonly referred to as renovations. It's important to note that in these statistics these relate only to projects which require a building permit, which are generally those costing over $10,000. On this volume-based measure, this has not been a growth market, but has continued at a relatively good level over the past 10 years.

    Growth

    Chart 2: Percentage change, work done

    Chart 2 takes the numbers in Chart 1 and then derives the rate of growth for each 12-month period over the previous 12-month period. Again, it's worth noting that houses (the blue line) went into decline for the March-ended 12 month periods in 2012 and 2013. As we said above, apartments had a big spike in growth that has slowed, but remained positive. Alterations and additions have had positive growth for seven out of the past 10 years, which is an indication of stability.

    Big picture

    Chart 3: Work done, cumulative and percentage

    Chart 3 looks at the "big picture", combining both house and non-house numbers into a single bar, and showing the percentage of the total that is non-house. This chart shows that much of the boost in business for construction has come from non-house, multi-dwelling construction. While that growth has tailed off for the moment, the overall level remains high in comparison with five years ago.

    It's also worth noting that hardware retailers typically gain only around 5% to 10% of the sales in this sector (for smaller constructions), so reduction in growth is not going to effect them very much.

    Conclusion

    In terms of a "real estate panic", these are the numbers that are influencing many commentators on the market. As usual, their comments are not really about market size, but growth.

    For the hardware retail industry, these numbers show that the volume of work flowing through the construction industry remains at relatively high levels. If there is a falloff expect, it has yet to occur.

    statistics

    Hardware retail sales show small gains

    Growth is back, but muted

    While the numbers for April 2018 to March 2019 show only slight growth, they are an improvement on the preceding 12 month period, which showed growth slowing to below the rate of inflation.

    The Australian Bureau of Statistics has released its retail sales statistics for March 2019 (8501.0). Sales for hardware, building and garden supplies retailing for the trailing 12 months to March 2019 were $19,429 million, up by 2.69% for the 12 months prior to that period.

    This was still well below the average growth for the preceding five years, which was 5.78%, with a median of 6.48%. However, it was a marked improvement over the numbers for the 12 months to March 2018, which showed growth of just 0.8%, below the inflation rate of 1.9%.

    The state with the highest level of growth for the trailing 12 months was Victoria, which grew by 8.00%, followed by the Australian Capital Territory at 5.04%, and then South Australia at 4.99%. New South Wales grew at 2.26%, slightly below the national growth level.

    Western Australia led declines for the trailing 12 months, losing 9.99%. The only other state to show a decline was Tasmania at 1.58%.

    Looking at the graph for percentage change, we are seeing once again the highly compressed growth results which indicate that national level issues are dominating the market, rather than state issues -- the exception being Western Australia, which continues to adapt to fluctuations in mining activity.

    The graph of the percentage of national sales on a trailing 12 month basis shows that over the past nine years, Victoria has made considerable gains, ending up over 5% higher. New South Wales made gains of less than 1% by comparison, while Queensland drifted down by around 1%. Western Australia lost a little over 1%, and South Australia fell by around 2%. The top three states now account for 78.6% of total hardware retail revenue, up from 73.2% in 2010.

    news

    Home builders on Houzz forecast growth in 2019

    Houzz releases state of industry report for Australia

    The study by online platform Houzz finds that renovation professionals anticipate growth in 2019, and businesses met or exceeded 2018 revenue expectations

    Online platform for home renovation and design ideas, Houzz has released its 2019 AU State of the Industry report. It provides an outlook on 2019 as compared to 2018 performance for residential renovation and design businesses, including builders, architects and interior designers. The data is based on survey results reported for nearly 300 professionals in the Houzz Australia community.

    The study revealed that a majority of firms across the industry are optimistic about business growth in 2019, following positive 2018 results. Nearly three-quarters of the industry anticipates that gross revenue will increase in 2019 (74%). Over half of businesses expect that revenue will grow by more than 10% (58%). Interior designers have the most confident view of 2019, with 84% of firms anticipating an increase in gross revenue, followed by home builders (73%). Building designers have a slightly less positive view of gross revenue growth overall with just 47% expecting an increase.

    Nino Sitchinava, Houzz principal economist, said:

    Residential construction and design service professionals in Australia are gearing up for another robust year. Positive expectations follow overall revenue growth in 2018 despite headwinds in managing consumer concerns over cost and unreasonable expectations.

    Positive expectations for the year ahead follow a successful 2018 for firms across the industry, with more than two-thirds of businesses reporting that gross revenue met or exceeded expectations (69%). In fact, actual gross revenue increased by 10% or more for nearly half of businesses (45%). Interior designers saw the largest increase, with nearly half of businesses reporting that gross revenues grew by 15% or more from the year prior (45%).

    To support revenue growth, firms plan to increase marketing and sales efforts and bring in larger budget projects (60% and 46%, respectively). The biggest change, however from 2018 to 2019, is a heavier reliance on improving employee productivity. Some 29% saw this as a key strategy in 2018, but that has risen to 38% in 2019.

    Revenue growth was not without its challenges, led by increased cost of doing business (overhead, wages, etc.), managing consumer concerns over cost and managing consumer expectations (30%, 29% and 27%, respectively). That said, one-third of businesses were able to expand and hire new employees (32%). Home builders were the most likely to increase headcount (50%), followed by interior designers and building designers (24 and eight per cent, respectively).

    The full 2019 Houzz AU State of the Industry report can be found here:

    Houzz 2019 State of the Industry - Australia

    The Houzz AU State of the Industry Study was conducted among home renovation firms in the Houzz Australia community that offer services related primarily to residential renovation and/or design. The study was fielded in December 2018 and January 2019. Total participants equalled 273.

    Houzz says it connects millions of homeowners, home design enthusiasts and home improvement professionals across Australia and around the world. With the largest residential design database in the world and an active community empowered by technology, Houzz was created an easy way for consumers to find inspiration, get advice, buy products and hire the professionals they need to help turn their ideas into reality.

    To read more about Houzz in Australia, go to:

    Houzz talks marketing - HI News, page 83

    reports

    Getting together: consolidating indie retailers

    Start with strategy

    If Australia's indie hardware retailers are to consolidate, they need to start by forming workable strategies

    Australia's independent hardware retail sector continues to contract, even as overall hardware retail revenue numbers grow.

    The graph above illustrates the decline in the numbers of hardware retail businesses in Australia, categorised by revenue tranche.

    The second datapoint is just this: overall retail revenue for hardware, according to the ABS, increased from $12.3 billion in FY2007/08 to $19.1 billion in FY2017/18, growth of 55.6%. Allowing for inflation, the increase would be from $15.2 billion in today's dollars, to $19.1 billion, a market size increase of 26.0%.

    To summarise, despite strong growth in overall revenues, the number of stores is declining, except for those with revenues of over $2 million a year.

    For most independents, the reason why this has happened is easy to determine: Bunnings. While the independents have found themselves increasingly hemmed in by declining gross profit margins, Bunnings has continued to grow, expanding in terms of both revenue and earnings before interest and taxation (EBIT).

    The independent sector has had over 15 years now to develop a significant response to Bunnings. What it has developed, so far, is largely a series of survival strategies. Some of these have worked, but, as the stats show, they've worked better for larger stores.

    What we've seen recently is a growing trend for independents to consider viewing their entire sector as more of a unified group. There is certainly a lot of healthy competition between independents, and between competing buying groups, but there is a growing sense that there may be areas where increased cooperation could produce benefits for all participants.

    The only way for this kind of strategy to work at all is if it is strongly focused on growth. This could mean an increase in topline revenues, an increase in profit margin, or both.

    If the strategy is not about the overall growth of the independent sector, then all it would do is redistribute existing marketshare differently between participants.

    That growth could come from any of three areas: reclaiming marketshare in some areas; taking a larger share of new and emerging markets; and by increasing the role of service provision in areas currently dominated by products.

    Another important value is that any strategy of cooperation has to mean that all participants have at least a chance to benefit, and those benefits should be, as much as possible, distributed evenly between stores of all sizes, in all regions of Australia.

    A strategy

    It's not enough to say "let's all get together", and hope that some kind of coherent strategy will emerge from that. If leaders at the various buying groups, and key, influential retailers in the industry want to see broader cooperation, then these strategies need to be developed first.

    We can think about this as being achieved through something like a two-step process. The first step would be to find some common, agreed purpose that everyone in the independent sector would benefit from. Once that coherency is established, it can form a platform on which future, more developmental strategies are built.

    First stage

    In particular, HNN would caution against what might seem the "easiest" strategy to begin with, which is to use such consolidation to concentrate market power on fewer brands and suppliers, thus driving down wholesale supply prices to lower levels. While pursuing that strategy to some extent is necessary and good for the market, taking it beyond a certain point results in diminishing returns.

    From HNN's perspective, the best clue as to how consolidation could be started is something that was suggested to us by Andrew Graham when we were profiling the Traralgon H Hardware store. In discussing the difficulties of the power tool market, Mr Graham said that, beyond pricing problems, one of the major obstacles was that most purchasers began their research on the internet, which meant that their initial searches brought back results from retailers such as Bunnings and Sydney Tools. Smaller hardware retailers simply can't achieve a high ranking in Google searches.

    What is really needed by the independent sector is a well-designed, highly informative web presence that is all about hardware, home improvement and building. It needs to be a website that can become the foremost hub for all this type of information. Its purpose would be to draw in people starting down their path to purchase, and make it clear the independents represent a great alternative to the large and online-based retailers.

    One of the best things about this concept is that, if it received broad industry support from the main buying groups, it could be mostly self-funded, primarily through the sponsorship of selected brands which would receive support.

    In effect, such a project, while being very useful and making a real difference to all independent retailers, would also serve as both a "test" of industry resolve, and an opportunity to consider and further develop exactly how such a consolidation might work.

    Second stage

    Below we've listed three such possible second stage developments, which range from borrowing some techniques from Bunnings and others, through to radical new service offerings. These are really just examples, as HNN is certain retailers themselves would have very good ideas for future developments.

    Captive brands

    One of the big advantages that Bunnings has developed is its "captive brands", which are brands where it has exclusive rights of sale for Australia, including some in which it exerts a degree of input.

    Ryobi, for example, provides Bunnings with a big share of the intermediate to high end of the DIY market, as well as some of the light trade market. Ozito is a more complex brand, as Bunnings seems to have a degree of input into the products produced, with many of these custom-tailored to the needs of the Australian market.

    Even massed together, it's unlikely the independent sector could easily make these kinds of commercial arrangements. What it could do, however, is to find some brands that have become established overseas, particularly those for market sectors which need more of a boost, and bring them to Australia.

    A good case in point would be the 24-volt cordless power tools made for the US-based big box retailer Lowe's under the Kobalt brand. These have been out for around four years now, in a line of tools that includes a drill, impact driver, grinder, reciprocating saw, circular saw, and even a jigsaw.

    The general reviews of these tools are quite positive, reflecting high-quality. They are heavier than most 18-volt tools, but they do pack a punch when it comes to power. Most importantly, they sit at a very good price/performance point in the market.

    In particular, they are ideal for the builder market, which often needs that extra grunt, and whose trades are used to dealing with heavier machinery. As a cordless tool, much of the local certification process is relatively easy, with the exception, of course, of the battery charger, which would have to be re-engineered for Australian current (converting it from 110-120 volt US current).

    There would be many hurdles to overcome, of course, but such a tool would really hit the market in a place where Bunnings and online tool retailers are not well-protected.

    Weekend rentals

    Retailers such as Bunnings do make money through their volume of sales of DIY consumer power tools. So it makes sense that Bunnings might not want to consider expanding the rentals the company does offer, in everything from utes and trailers to floor sanding equipment, to more everyday tools such as drills and impact drivers.

    In general, though, most hardware retailers in the independent sector don't make very much from power tools sales to DIY consumers. So why would they not consider some form of "weekend rental"? According to statistics Roy Morgan developed in 2015, only something like 54% of household actually own power tools, so it is certainly a viable market.

    What has held retailers back is that developing this kind of rental business is far more complex than it might seem at first glance. You need some kind of software that tracks inventory, reserves tools, rents tools, and accounts for returns. You need a transactional website to arrange the rental itself. You probably need retrieval and return lockers, where renters can pickup and return rented goods. You'll have to track tool condition, ensure tools are safe for rental after return, and possibly provide some kind of basic safety information for tool operation.

    That's too much, and too expensive for a single retailer to put in action — but it is something the entire independent sector could get behind and make possible. Of course, the main goal behind this isn't just to earn extra revenue from rentals, it's also to enable many more people to do DIY work, and thus increase sales of goods and materials they need.

    3D printing of construction components

    While this might seem like something that won't mature for anther 10 years or so, it's a field that continues to advance, and will probably enter the mainstream in two to three years. When we think about house construction, we know that one of the limiting factors is often that there is a defined set of (for example) joist hangers, with set angles and configurations. Architects and often builders on the ground "making it work" can find themselves having to make expensive alterations to plans when an unusual situation is encountered, and they need to stay within the constraints of these components.

    The alternative, which many of us have seen on too many construction sites, is "altering" the joist hanger with a couple of whacks from a hammer. This creates a weaker joist hanger, and a potential hot spot for future failure.

    It's possible to 3D print in metal, and there is also a developing practice using ABS plastic combined with carbon fibre, which creates very strong elements. The metal used in many of these printers is maraging steel, which is a special, low-carbon steel with around four times the strength of standard construction steel. It is supplied to the printer in the form of a powder, then fused in 40-micron thick layers to form the desired shape.

    As with most of these developments in construction, there is an ongoing problem of adoption, as it requires acceptance by architects, builders, tradespeople, and regulators. That said, this kind of technology can solve so many problems for the actual builder, that we would expect it to get a substantial boost in acceptance once it clears the basic hurdles.

    This would be well-suited to a sector-wide introduction because it requires not only an expensive (leased) infrastructure, but also training of store staff and education of the intended market. As a service-heavy element of the business, it would be insulated as regards competition from retailers such as Bunnings.

    Analysis

    It's important to acknowledge that the current dispersed nature of the independent hardware retail sector is not an "accident" of any sort. There are powerful reasons why creating any kind of consolidation is going to be difficult.

    HNN also does not think, as some have suggested, that such a change is a direct response from anything like a "growing threat" from Bunnings. We do expect Bunnings to continue to grow over the next five years, but we also think much of that growth is going to come in areas that are outside of "traditional" hardware retail.

    A good example of that would be a move into the area adjacent to its current flat-pack kitchen range, and into semi-custom kitchens. This is — in a phrase popular at the moment — a "highly-fragmented" market, where consolidation could see major benefits emerge. Given the minor role that kitchens play for most independents, the impact would be limited, with the main effect on suppliers such as IKEA, Freedom and The Good Guys.

    We think, rather, that the change is in direct relation to the way the market itself is changing, driven in part by the wider acceptance of digital-based enterprise. We expect to see these kinds of affiliations growing in several retail sectors.

    retailers

    HI News V.5 No.1

    Traralgon H Hardware & IHG Expo 2019

    HNN talks to Andrew Graham at Traralgon, listens to Mark Laidlaw and Annette Welsh in Adelaide. Plus first half results for Bunnings and IHG.

    What we are beginning to see emerge is a new configuration in hardware groups. IHG is increasing its focus on trade, with its mix moving to 65/35, while simultaneously moving more stores into its Sapphire fitout. HNN thinks the company may be "cooling it" on DIY, but building the potential to snap-back into DIY in three years time.

    Bunnings meanwhile is doing what it does best when the market gets tough, and decreasing costs to increase profitability. Questions remain about its shift into online ecommerce, as it launches an expanded click-and-collect service.

    Meanwhile, in true HBT style, the retailers in the group continue to innovate, with Andrew Graham at Traralgon H Hardware showing how it is done.

    Simply click on the following link to download this edition:

    HI News Vol.5 No.1: Traralgon H Hardware

    In addition to major retailers, we also speak to Jason Ellis, marketing manager at outdoor power equipment company EGO. He is part of a team that is educating end-users to make the switch to cordless.

    Implementing digital strategies is also a recurring theme in this edition. Bunnings, IKEA Australia and UK-based Travis Perkins are in different stages of executing their digital plans that are expected to deliver growth.

    There have also been some major acquisitions with Sika taking over its rival Parex and on a smaller scale, US-based Klein Tools has purchased Melbourne tool brands, Wattmaster and Alco. Australia's Ruralco including its Combined Rural Traders store network may be owned by a Canadian agribusiness giant.

    Other companies mentioned in this edition include Stanley Black & Decker, Reece and Fletcher Building's Tradelink. There are also new product releases from Gerard Lighting, Gyprock, Victa and Imex Lasers.

    editorial

    Lowe's goes back to fundamentals

    Lowe's CEO Marvin Ellison pursues better performance

    Lowe's has pulled back from some of its previous innovations in an effort to better meet basic goals

    In a presentation at its 2018 analyst and investor conference, Lowe's CEO Marvin Ellison identified areas to improve and on which the home improvement retailer can base strong growth.

    As well as making fundamentals a priority, Lowe's is focusing on its pro customers and has a new marketing approach aimed at a wider audience which includes a new slogan: "Do it right for less. Start with Lowe's".

    Back to basics

    Mr Ellison said the home improvement chain had been geared towards the future, which isn't a bad thing, but channelling investment on things like smart home partnerships or opening branches globally that underperformed distracted from the core responsibility of having the right product, in the right place, and in stock.

    After failing to find a new owner for its Iris smart home business, Lowe's recently announced it is shutting down the platform but allowing customers to be reimbursed for certain devices.

    As he tries to scale back the vision of the company and previous efforts, which he believed was "broader than what it should be", Mr Ellison and his team are working on retail fundamentals. At an event hosted by the US-based National Retail Federation's (NRF) "Retail's Big Show" in New York City, Mr Ellison told a crowd:

    This may not be too sexy or too innovative, but if you're a retailer, you have to be in stock. You have to have an efficient supply chain. You have to have productive use of your space. You have to have online capabilities with easy navigation, search and checkout, and you have to be multichannel, where customers can shop online, in-store seamlessly, and you need great service and good training of your associate population. All of these things are areas where we have to improve upon.
    It starts with retail fundamentals first. … So as a management team, we're trying to be disciplined to focus on the fundamentals and not get distracted by all of the other things that we could be spending time on because we have to get this stuff first.

    Only after these are mastered, "then you can start to have sustainable growth, both at the top line and the bottom line," said Mr Ellison.

    Different customer needs

    How Lowe's caters to its diverse customer base is another way Mr Ellison believes the retailer can improve.

    Its customers vary from ambitious DIYers to customers who are not interested in the building process to professionals who know exactly what they want. According to Mr Ellison, the challenge is making sure staff know how to interact with each of these customers and can provide the level of service that makes sense for them. He told a panel at the NRF event:

    When you try to paint a broad brush and say we're going to serve these customers and train our associates the same way, you miss out on a huge opportunity to serve the unique needs of the customer.
    So we're going back and we're looking at those segments, we're understanding the needs of those customers, spending time with those customers and we're making sure we're addressing those things properly.

    The diversity of Lowe's customer base means that employees at different times need to be relied on for product information, for a project manager mentality and simply to answer questions on when supplies will arrive.

    The home improvement retailer will also step up its game with its pro customer, who spends more but has expectations for service and merchandising that Lowe's isn't adequately supplying. Mr Ellison said it had identified that professionals in construction and related trades spend five times more than the DIY customer. He said in a call with analysts:

    We want to improve our overall service and engage DIY customers, but we want to have a more intentional focus on pro (customers).

    Installation staff

    As part of a transformation for how it operates its stores, Lowe's announced a major restructuring of its workforce. In a statement, the retailer said it is discontinuing its project specialist interiors program, which employs workers responsible for overseeing every phase of complex home projects such as kitchen remodels.

    Eliminating the program is intended to help Lowe's "simplify our operations to better meet customer expectations," spokeswoman Jackie Pardini Hartzell told the Charlotte Observer. The employees in that program can apply for jobs elsewhere at the company.

    Lowe's will still have workers responsible for managing simpler interior installations, such as cabinets or floorings, and keep its project specialist exteriors program, which involves work such as roofing, siding and fencing.

    The retailer's overhaul will also involve hiring 10,000 permanent, full-time workers as part of a merchandising service team focused on inventory management. The team will have an average of eight employees per US store. In addition, it will be hiring 6,000 full-time assistant store manager and department supervisor roles at all of its US stores. Mr Ellison said in the statement:

    We are investing in key leadership positions across our stores to enhance customer service while also creating jobs that will improve the availability of our most popular products, transform our technology infrastructure and provide more access for customers to the home improvement expertise of our store associates.

    Omnichannel & IT

    Furthermore, the retailer is working on its omnichannel capabilities, and Mr Ellison said that's "where the transformation is going to play out," noting that 60% of online orders are picked up in store.

    It is planning to invest between USD500 and USD550 million in capital per year through 2021 on IT to address an "historical underinvestment" in technology. This will involve hiring roughly 2,000 software engineers over the next few years.

    Not much has changed in the actual home improvement sector aside from accessibility in terms of customer's digital and mobile preferences, according to Mr Ellison. He said:

    You want to serve the customer any way they choose to be served whether that's in-store, online, delivery, purchase or pick-up. However, the change in customer preferences is not in an abrupt or aggressive shift.

    The need for data and data analytics will help the retailer fit the experiences each type of customer needs, and the company is working on better leveraging the data it already possesses.

    In terms of deliveries, Lowe's is working with FedEx's same-day delivery services, the SameDay Bot.

    The autonomous robot is designed to provide same-day delivery service for smaller shipments, and is being tested in several US markets.

    To help FedEx and robot developers create the design and application, Lowe's is providing information about the unique delivery needs of its customers and business.

    Don Frieson, Lowe's executive vice president, supply chain, said in a statement:

    The convenience and capability of the FedEx Same Day Bot has the potential to greatly simplify and speed distribution for the full range of our customers. Consider pros who could save time and money by never leaving the job site for the critical tools and supplies they need from Lowe's…

    The technology is also designed to be safe, efficient and environmentally conscious. The bot will travel along sidewalks and roadsides using pedestrian-safe technology. It will be equipped with multiple cameras and machine-learning, allowing it to be aware of its surroundings, navigating obstacles, road and safety rules, various surfaces and even steps leading to a customer's door.

    Paint drives results

    Its fourth quarter earnings report showed comparable sales at Lowe's increased 5.8% in January, which Morgan Stanley says provided the narrowest gap in two years when compared to Home Depot.

    During the earnings call, Mr Ellison said the paint department in Lowe's stores was a bright spot for the quarter. After reporting comparable sales below the company average for the past 10 quarters, paint turned around in the fourth quarter.

    While paint is only one category, it is the first area of the business where we implemented our retail fundamentals of improved staffing and in-stocks while remediating issues with previous resets.

    Now, the retailer is expected take full advantage of its partnership with Sherwin Williams paint in the stores.

    The transformation happened in the paint departments because changes could be made quickly as most paints and related products are sourced domestically in the US. Change is slower in other departments because, in many cases, the products are imported for sales in Lowe's stores, Mr Ellison said.

    Lowe's delivered other mixed results for its fourth quarter. It reported a net loss of USD824 million for the period ending February 1, down from earnings of USD554 million during the same period a year prior.

    Quarterly results included pre-tax charges of USD1.6 billion. That figure included, among other charges, USD952 million of goodwill impairment associated with its Canadian operations, USD208 million in lease obligations related to the closure of all 99 of its Orchard Supply Hardware stores and USD150 million in charges related to the closure of nearly 50 under-performing stores across the US and Canada.

    Sales for the fourth quarter were USD15.6 billion, up from USD15.5 billion in the fourth quarter of 2017. Same-store sales or stores that have been open for at least a year, rose 1.7%. In the US, same-store sales rose 2.4%.

    At its annual investor day in late 2018, Lowe's also confirmed its commitment to return excess cash to stockholders and announced a new USD10 billion share buyback program. The company informed investors that it planned to repurchase shares worth of about USD3 billion in fiscal 2018 and between USD6-7.5 billion in fiscal 2019. Lowe's CFO David Denton said in a statement:

    We are committed to investing in the business while also returning excess cash to shareholders, and strongly believe we can deliver substantial value to all stakeholders.

    New slogan

    Among its transformational changes, Lowe's has adopted a new marketing tagline: "Do it right for less. Start at Lowe's". It marks a strategic shift by Lowe's to win over ambitious DIYers. Compared with most homeowners, that group spends more -- and as a result has long been targeted by Home Depot. Lowe's previous advertising attracted aspiring DIYers, but neglected those who take on the biggest home improvement projects, explains Lowe's chief marketing officer Jocelyn Wong.

    Mr Ellison has also said:

    Our new campaign is less whimsical than our past work and more authentic to what it feels like to do home improvement projects. It highlights real associates and provides a clear value message and call to action. This new creative should help us expand our core customer base to include the heavy DIY customer and create halo with the pro, a critical customer to us, as well.

    A Link to the latest Lowe's ad can be seen here:

    https://goo.gl/B8HVsm

    That pro customer is front and centre in the new marketing initiative, which appears in digital, social media, TV and radio – "where we can use data to identify and target the pro," said Mr Ellison. The traditional airwaves, he added, are a primary medium to reach pro customers, "both on the road and on the job site. We know that the pro doesn't engage with media in the same way as the DIY customer, so we're focused on delivering messages to the pro in the channels that fit them best."

    Mr Ellison has also outlined the company's multi-tier strategy to reach DIY consumers, since many of those "customers don't consume media in a linear way." He said:

    This customer is streaming an episode of his favourite sitcom on his Smart TV when he learns that Lowe's now carries Craftsman products through an online video ad. We targeted him with online video because we have data that tells us he has a propensity to buy tools. He knows he needs a new mechanics toolkit for his latest project, but he is not yet sure which brand to buy. So he does a quick search on Google and clicks on a Lowe's search ad. We know he is close to a Lowe's store and now know that he is most likely to purchase at Lowe's.

    https://goo.gl/XLpKXW

    https://goo.gl/Qa4nUK

    https://goo.gl/AUJqSV

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    bigbox

    IKEA Australia growing digital

    Online has expanded the home improvement store's regional reach

    Going digital has seen IKEA leverage its limited store network to reach more people around Australia

    Home improvement and furniture retailer, IKEA said it now reaches most of the country via its online shop, compared with 25% of the population a year ago through its big box stores.

    On a recent visit to Australia, IKEA Group global chief executive Jesper Brodin said the company is looking to use big data, smaller-format stores and next-day delivery to take more share of its customers' dollars.

    IKEA did not launch a full e-commerce offer in Australia until about eight months ago. Despite being late to going online, Mr Brodin said IKEA was undergoing a "digital revolution". He told The Australian Financial Review:

    We have given ourselves three years to roll this out – to push out digital across the world. We have been making massive investments in organisational structures in the past few months – the digital revolution is coming and that way, if you are in Sydney or Alice Springs, you have the same accessibility.

    Mr Brodin, who took on the global CEO role in September 2018, said his goal was to offer same-day or next-day delivery of products, similar to Amazon. In metro areas such as Sydney, Brisbane and Melbourne, IKEA customers often can already get next-day delivery.

    Mr Brodin said there has been a shift in thinking at IKEA, and it would use big data to gain consumer insights.

    We are now increasing the knowledge and looking at customer behaviour because of all the activity on the mobile phones, mobile websites and our own website.

    Australia country head Jan Gardberg said that while using big data was key, the shift is also about understanding what worked for families and different life situations.

    At the same time, there will be smaller format stores in Australia. IKEA plans to test stores between 3000 and 10,000sqm and open planning studios between 60 and 100sqm in Westfield centres, where consumers can plan kitchens or cupboards.

    However, many economic observers believe the Australian retail market is mixed at best, and it will not be easy to win consumers' dollars amid a tough backdrop with falling property prices, low wage growth and rising non-discretionary costs. According to Citi, Kmart and Bunnings, sales growth is slowing.

    However, Mr Brodin remains bullish despite a challenging retail environment. He said the higher cost of living in Australia and bigger houses, compared with Europe or Asia, works in IKEA's favour.

    We take market share in downturns. Of course we have concerns about the economy, but there is not much we can do about that but focus on bringing lovely solutions to the home. We have full-room sets for $1000 – you don't have to sacrifice your needs or dreams.

    The IKEA footprint has doubled in Australia in the past five years. IKEA now has three distribution centres to support online shopping, which comprises 12 to 13% of its total Australian sales of $1.39 billion in fiscal 2018.

    Broader kitchen offer

    IKEA's parent firm, Ingka Group, has purchased a 49% stake in US kitchen installation firm Traemand. The two companies have been working together for the last 13 years.

    Traemand partners with the retailer in the US and Canada and connects customers with subcontractors who can help them lay out and install IKEA kitchens. The company said in a statement:

    With the investment in Traemand, the customer experience will be more simple and seamless … It makes it possible to integrate the planning and the installation service in the purchase.

    The investment will also allow Traemand to expand its kitchen service concept beyond the US and Canada.

    The price that Ingka paid for the stake was not disclosed, and leaves the door open for a full acquisition down the road. It follows its acquisition of TaskRabbit a year ago.

    Both moves speak to changing market preferences, and consumers more used to being offered easy at-home delivery as well as installation services. The IKEA model – particularly its DIY home-build focus – has lost some of tis appeal with consumers in recent years. By offering more services associated with its goods –along with upgraded digital commerce portals – IKEA is moving to bring its offerings more in line with what today's customers might want.

    https://goo.gl/16j2Vn

    https://goo.gl/cHZMKv

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    bigbox

    Jason Ellis from EGO

    EGO electric OPE makes a mark in Australia

    As cordless becomes a real factor in OPE, EGO brings a unique heritage

    The big news at the end of 2018 was that, at long last, cordless outdoor power equipment (OPE) really began to take off, in both the consumer and the professional market. That's partly from a growing acceptance of electric power in general – driven in part by the success of premium vehicle makers such as Tesla. It's also all about the power, as well. Earlier versions of cordless OPE often either didn't really have the "grunt" to get the job done, or the batteries would run down too fast for professional and tradie users to take them seriously.

    In a world that is becoming increasingly environmentally conscious, the frantic grumble of a two-stroke leaf blower in the morning is just not acceptable anymore. The oil-and-petrol exhaust smells not at all like victory, but more a permanent defeat for the climate. In Europe and the US regulations have been steadily clamping down on all small petrol engines, making the switch to quiet, clean electric steadily more appealing.

    That said, it is still very much a question of balance. Professionals using cordless tools do have to stay conscious of charge levels, overall battery life, and that the top end of power in the tools might be below that of petrol tools. But the gains, on the other side, are really vast, especially when it comes to maintenance. Let's face it, "reliability" and "two-stroke" are concepts that simply don't go together, in the long run, while electric tools simply keeping going.

    EGO marketing manager in Australia, Jason Ellis, suggests areas users don't often think about, such as trigger time, play a big role in broader acceptance of cordless OPE. He said:

    When a person starts up a petrol mower, they've got it going constantly. When someone comes out and talks to you, the mower is still going, and you talk to them. With EGO cordless products, if someone comes to talk to you or you have to stop, it turns off completely. So you go from 'hero to zero' in less than a second. You're not using the juice so therefore your trigger time, or run time, is extended. You don't have constant noise or vibration. When you turn it off, it's off and that's the beauty of it.
    When you want to turn it on, you hit the trigger and you're ready to go. The downtime is minimised with EGO cordless products because you don't have to go and get petrol at the petrol station. You've just got to make sure that batteries are charged, but you can do that through in-car or mobile charging.

    Jason also mentions a new product the company has launched called the Backpack Link which can easily be attached to any of its handheld products. He said:

    You can put this backpack on and attach our largest capacity battery to give you extended run times. Then you just plug the backpack into all the different tools. So you don't need to take that backpack off. You can go from a line trimmer to a chainsaw to a hedge trimmer to a blower, and all you're doing is plugging in the backpack component.

    Jason can see quite clearly why there has been a reluctance to change over to cordless.

    Historically a lot of cordless products just haven't met the demands of users in terms of power performance, runtime and charge time. That's really been the main hurdle for people crossing over to cordless. It's okay for the standard DIYer using it for 10 minutes but if someone's got a bigger block or they are a commercial user, up to now cordless really hasn't provided them with what they need.

    EGO has been able to solve some of these problems for the end user by developing rapid chargers. Jason explains:

    It's really being able to charge it in a time period that is convenient when a user has two batteries. In a lot of cases, if we've got a battery that runs for 50 minutes and we've got a rapid charger that charges it in say 60 minutes, you've got infinite runtime. By the time they finish using one battery, the other battery will be charged. So that's one factor.
    On the runtime, it is working out the area that people need to cut and how long that takes. And then being able to have a machine with the right power battery that will cover that off for 80% of the cases. For instance, when we did research on lawn sizes, 80% are below 800sqm which means 80% of the population could be covered by our 7.5 Amp battery.

    Jason admits that it is difficult to make direct comparisons between a petrol motor and cordless in terms of torque because there are more factors between the battery and the wattage of the motor in, for example a mower or hedge trimmer. He said:

    It's the ability of the product to cut and perform, and get the outcome that users would normally get from a petrol unit. That's the feedback we are getting. People are saying it is cutting through branches, and logs with the chainsaw or it's cutting the grass as good, if not better, than a petrol unit.

    Pricing and positioning

    For hardware retailers and end-users to embrace a new product, it also has to be about selling it at the right price point. Jason explains that EGO is targeting the weekend warrior, the DIY enthusiast rather than beginners, as well as commercial users. He said:

    We have people buying our products, not so much moving from one cordless product to another, but coming from petrol to cordless. That's the biggest market growth for us. People do move from cordless but once you're in a platform, most people will persevere with that platform as they'll use that same battery across many products. So what we find from a price point of view, EGO sits below a Husqvarna and STIHL – who have been in the market a long time – but our performance is equal to theirs, if not better.

    Every single EGO product that is available globally is sold throughout Australia and New Zealand. This can be another argument for accessing the tool platform because once people get the batteries and the chargers then they can add other accessories as well. Jason said:

    People who have been in trade working with power tools understand one battery fitting all tools, but a lot of people in gardening who have never touched cordless actually don't understand or are unaware that one battery can power all tools. They may never have owned a drill or a circular saw or anything like that, in terms of a cordless product. So this is new.
    One of the things we constantly advertise is that our ARC Lithium 56-Volt battery powers all EGO tools. We have about 22 products in the range that is mixed among kits and skins. If you branched it out into all the kits, skins, attachments, battery chargers and accessories, we have 69 SKUs in the range. So we have a vast range covering the majority of outdoor power equipment requirements.

    Jason said the EGO team has identified that there is work to do in terms of informing potential customers about a unified battery platform. His background in power tools makes him very familiar with the concept and something he brings to his current role.

    Coming into OPE, it was obvious that people weren't understanding the benefits of getting a cordless platform that crosses many product categories … The battery is an expensive component because it is the fuel of the tool. Being able to utilise that one battery across many usages helps 1) manage costs and 2) get the most out of the product and the price you paid for it.

    OH&S application

    The recent changes to OH&S legislation has positioned EGO well in terms of targeting commercial users. Jason explains:

    We will continually launch and promote product for the home user and the DIYer but the future of EGO is to look at every facet of outdoor power equipment for the commercial user ... We know that in Europe and Canada, councils are banning all use of petrol so it's not long before that will start to filter down into Australia and New Zealand. So we understand that there is going to be increased demand for cordless products, regardless of brand.
    But we know that there are certain parameters through run time, charge time and power that is required by users to emulate petrol products and therefore EGO is challenging our development team, and our manufacturing team to create products that meet those requirements. So it's really important that everything we do at EGO is at its best before we launch it because we want to make sure that it will meet the requirements of commercial users.

    As the company moves towards more trade-focused tools, issues such as noise and vibration is something that EGO's cordless products can easily address. Jason relates the story of a local gardening service where the professional end-user tried out EGO's cordless backpack blower. This has given them more flexibility when it comes to doing their work, especially at places where limiting noise pollution is very important, such as schools. He said:

    What some of our commercial users are finding is that their day is more in control because they don't have to work very early mornings and late at night [when there is no-one around]. They can work throughout the day because they don't have noise restrictions placed upon them.
    A typical conversation is about 60 decibels. A lot of our units are around 70 decibels or below. We only have two above 70 which is a chainsaw and a backpack blower, but a common petrol mower can be up to 93 decibels. So it's really important. And we want to make sure the performance of our products is there but, equally, we are constantly looking at ways to reduce vibration, reduce noise, and make the products easier for people to use.

    The future of EGO products is also secure with millennials and Z-generation users because 19 or 20-year-olds aren't going to know how to re-point a spark plug or do similar mechanical maintenance. That's a lost knowledge. Mowers will have to be taken into a service centre to get that kind of maintenance done. With electric motors there's almost nothing that you'd need to do for their lifetime. Jason said:

    For that younger generation, the millennials, it's easy for them. They understand cordless as a concept. They understand that you push a button and it goes. To have to prime an engine or change the spark plug, and then pull cord a number of times and then get the speed right, is foreign to them. So cordless really plays into that next generation. And also they understand Lithium because it is part of their culture.
    Historically when we first had cordless, we were using the Lead acid, where you would use it for eight minutes, but have to charge it for 12 hours. And for a lot of the older generation, that's what they remember. So when you talk cordless to them, they can be quite negative about it, and put up barriers. That's their memory, and one of the reasons why they stay with petrol. When you get it in their hands, they can see all the benefits and how it performs. Then the barriers are broken down very quickly.

    Becoming a dealer

    There is a simple process for retailers to start stocking EGO. Jason explains:

    We have a couple of steps for a dealer to come on board. They have to carry a certain amount of the range. Once they do, they get better pricing. They also get added on to our website where our store locator has been very important in directing end-users to dealers. We track the data that goes through that and a lot of people do go through our website. Seventy per cent of them research the product through the website ... and then they go to the retailer. Plus they get availability to promotions, specials, point of sale, in-store, and training nights. Our guys will go in and do training, and we have an Australia-wide service warranty and service setup. So that's for any issues that they may have and we fully look after and service the product.

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    people

    Tradelink plans to expand store network

    As Tradelink moves into profit, it plans an expansion

    The 240-plus network of Tradelink plumbing stores will grow in the medium term

    Fletcher Building recently announced a net profit after tax of NZD89 million for the first half of 2018-19, compared with a loss of NZD273 million in the same period, a year earlier.

    Dual-listed in New Zealand and Australia, the company experienced a 38% decline in earnings before interest and tax to NZD33 million in the first half of 2018-19 in its Australian arm. Revenues from its Australian operations were up 1% to NZD1.55 billion. Australia is the company's biggest division in terms of revenue, but sixth in terms of profit.

    Fletcher Building chief executive Ross Taylor, who has been in the role for just over a year, said it was already part-way through a restructuring of its Australian operations, and the housing market downturn would allow it to prune even harder so it could set the operations up to extract maximum benefit when the overall market conditions improved.

    Fletcher's Australian operations make up 34% of its entire business and include Tradelink plumbing and bathroom outlets, Iplex pipes, Rocla concrete, Stramit steel products, Tasman Sinkware and Fletcher insulation.

    The 240-plus network of Tradelink plumbing stores would be enlarged over the medium term. Mr Taylor told Fairfax Media:

    There's probably another 60 or 70 locations we can go to.

    Tradelink is now focusing more on small-to-medium business customers and "tradies" after having drifted too far into chasing bigger projects.

    Formica sell-off

    In December 2018, the company signed an agreement to sell Formica Group to Netherlands-based Broadview Holding BV for NZD1.2 billion, which Mr Taylor said was expected to be finalised by the end of the 2019 financial year.

    The sale of Formica marks one of the biggest steps in Mr Taylor's remaking of the building products group into one focused on its core markets of Australasia. He has a five-year strategy of turning Fletcher into a pure-play building products group.

    Three-quarters of the company's Australian business is tied to the residential and commercial markets where approvals have dived 10% in recent months. Construction activity had come off faster than the company's expectation, particularly in larger projects around the Sydney area, Mr Taylor told reporters.

    Mr Taylor expected that to continue until 2020, triggering more fierce competition among suppliers and distributors of building materials. Its infrastructure business in Australia was stable.

    Looking ahead, Mr Taylor said he would be focussed hard on resetting the Australian arm "for its new market reality".

    https://goo.gl/XHCnVi

    https://goo.gl/ZoKTMQ

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    companies

    Reece profit dips

    Investments limit earnings

    Not known for its transparency, Reece's acquisition costs have impacted on its profit

    Plumbing and bathroom supplier, Reece Group's US and New Zealand acquisitions have led to a lift in sales but new costs kept a lid on net profit.

    For the six months to December 31, revenue doubled to $2.72 billion while integrating its $1.91 billion MORSCO purchase in the US, and bedding down the Edward Gibbons and Zip Plumbing assets in NZ.

    The company said $30 million in acquisition costs and a softening property market in Australia weighed net profit down 7.6% to $97.7 million for the half. Minus the new purchases, net profit rose 20% to $127 million. EBIT increased by 25% to $192.1 million.

    Total branch network in Australia and New Zealand was 635 outlets in the period, an increase of 20 outlets. This included establishing a HVAC presence in New Zealand and expanding the network in the South Island. In the US, MORSCO opened two new outlets.

    Reece's first half results followed news that Australian home loans rose at their slowest monthly pace in more than four years in January, with the annual rate the weakest on record, as credit tightening by banks and a sharp fall in housing prices turn off demand. CEO and managing director Peter Wilson said:

    Reece has had another strong result, including, for the first time, the performance of our newly acquired US business, MORSCO, which is performing in line with expectations.
    We are seeing more moderate growth in the residential building market in Australia, while non-residential commencements remain strong. Business momentum in the US continues, with construction and investment in infrastructure returning to long-term averages.

    https://goo.gl/EBWczo

    https://goo.gl/K87jrX

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    companies

    IHG FY2018/19 first half results

    EBIT surges, but revenue cools off

    IHG presented mixed results, with EBIT continuing to benefit from the HTH acquisition and revenue growth slowed

    Metcash released its results for the first half of its FY2018/19 in December 2018. The company reported group revenue of $6.2 billion, an increase of 2.2% on the previous corresponding period (pcp), which was the first half of FY2017/18. Group earnings before interest and taxation (EBIT), also increased, up by 1.2% to reach $158.1 million.

    For the company's hardware division, the Independent Hardware Group (IHG), EBIT and revenues also increased. EBIT grew by a reported 34.0% on the pcp to reach $37.8 million. This included organic growth, as well as an accounting for continued cost synergies from Metcash's acquisition of the Home Timber & Hardware Group (HTH). Revenue increased by 1.25% on the pcp, to reach $1.09 billion. Overall like-for-like (comp) sales increased by 3.3%, while comp sales for bannered stores went up by 4.2% on the pcp.

    The CEO of Metcash, Jeff Adams, put the small increase in revenues down to outperformance during the pcp. In his prepared remarks, he stated:

    Our IHG hardware business led by Mark [Laidlaw] and his team has performed well, but was comping against some very strong construction activity in the corresponding half.

    Mr Adams detailed the makeup of the EBIT earnings as well:

    Looking now at hardware's EBIT performance. Hardware has again delivered a very good earnings result. EBIT increased $9.6 million. And pre-AASB, the improvement was $10.2 million or 37.6%. The stronger result was due to additional synergies from the HTH acquisition of about $7.5 million and further cost efficiencies and earnings growth from the increased sales. This was partly offset by an increase in the weighting of trade sales in our mix. We expect total synergies for the year to be approximately $10 million, bringing the cumulative synergies from the HTH acquisition to be approximately $34 million.

    Trade-only

    Mr Adams also mentioned IHG's venture into trade-only stores, some of which are being brought to market under the IHG's higher-amenity Sapphire program.

    Our pilot trade store-focused stores are continuing to perform well. And we expect to have 12 low-cost, trade-only stores operating by the end of financial year 2019, growing to 40 by 2022.

    At a Strategy Update for investment analysts held in early March 2019, Mr Laidlaw went into further detail about this venture:

    We are also setting up a trade only concept. We've done 11 of them. They're in the cheaper rental areas, low rents. They're certainly to be set up for the tradies to get in get out. And you'll notice the branding has changed. So Mitre 10, it is there but it's not prominent ... Our aim is to roll out 40 of these stores and overlay a digital program across these stores. No one's done this properly yet. Screwfix have. We can't see anyone else that's actually done this properly and we see a great opportunity for us to deliver that.

    Hardware performance

    Perhaps the most unexpected part of the announcement was that IHG stated that its revenue split between trade and DIY/consumer had changed from the 40/60 split forecast at the time of its acquisition of HTH, to a higher trade weighting of 35/65.

    In response to an analyst's question regarding the negative impacts of a declining construction market, the CEO of IHG, Mark Laidlaw, played down the longer term effects:

    What does it all mean going forward? I don't know. I'm going for the correction rather than the crash theory. I talk to our big stores very often and they're saying, there's going to be a tightening in the next two years, but it's not panic for us. And we believe there's enough opportunities and initiatives to cover that.

    Mr Laidlaw expanded further on this outlook in response to another analyst's question.

    We now have company stores, so we can see the pipeline. So of our big company stores, strong pipelines for about middle of next year. And then it's going to get tougher. So what do we have to do? We have to start to get a bigger share of the wallet. We have to get the whole of the house. At the moment, we are big on timber and not a lot more. So there's great opportunities for us to extend the Hardings part of our business which is plumbing. There's other areas which we're looking to move into frame and truss. So I'd agree with you, it is coming off. I can't tell you what percentage is coming off, but it is coming off. But we believe there are great opportunities to offset that with other initiatives that we've got in place.

    In his prepared remarks, Mr Adams had also touched on the potential for growth through the company's Hardings plumbing business:

    Our Hardings business has very strong market position in Victoria. In addition to opening a new store there at Tauranga, we have started the rollout of Hardings in New South Wales and Tasmania as well as starting to sell the Hardings products through the balance of the IHG network. The Hardings business is a very successful one, and we are quite excited about leveraging its growth opportunities across the whole IHG network of stores.

    Mr Laidlaw also answered an analyst's question regarding the overall margins for the business, admitting that margins had not increased.

    So the margin is flat. And I think it's fair to say because our trade mix has moved up to that from, say, 60% to 65%, we're seeing some margins come off, which are flat because there's been other synergies that have offset it, but the mix has changed.

    Mitre 10/HTH mix

    While Metcash did not go into further details about the tension in IHG between long-term Mitre 10 stores and the more recently acquired HTH stores, Mr Laidlaw did speak to this matter at the Strategy Update. He said in part:

    The other big challenge through the integration has been the branding strategy that we talked about. So that has been a very emotional argument and we thought we would lose more stores than we actually have because they would think it's a takeover of Mitre 10 over the Home brand ... The two brands will stay. I mean it would have been very unwise even though we might have wanted to do it to move everything to Mitre 10, we would have lost stores.
    I think that's really settled down. We had a conference last week, week before, and it's coming together. The members are far more united. There's a few non-believers there still that's true, but we're getting a sense that the Home stores are really feeling part of the family and now focusing the effort on the true enemy for us which is the big box.

    Mr Laidlaw took up this theme later in the analyst briefing:

    Something you'll notice on this chart: Mitre 10 now has 22 stores in Tasmania. It used to be about 11 on both brands. We have made that a blue and white state. The four Home Timber & Hardware stores there are predominantly little Thrifty-Links.
    We have used this as an absolute test bed where we've made it a blue and white state. And think of the synergies we're going to get there because instead of running two catalogue programs, you now run one catalogue program, instead of running two television commercials, we'll be running one television commercial radio etc. So we really believe that's the test bed to see what other synergies we can drive out of the business.

    Analysis

    Metcash is a company that has become very adept at spin (some will recall its peculiar treatment of underlying profit after tax as an example), and one example of that skill has been its handling of the increased threat to its trade business from Bunnings.

    According to most of what IHG has to say about this, Bunnings is failing at expansion into trade, while IHG continues to expand. One reason, it seems likely, that IHG is expanding into trade, is that it has lost considerable marketshare in DIY/consumer to Bunnings. As is well known, DIY/consumer carries far higher margins, which means IHG's EBIT numbers will be negatively affected in the long term.

    There is a poor tendency in many commentators to dismiss the efforts of large businesses in new or expanding fields when these do not yield immediate results. A good case in point, and what HNN believes will eventually become an object lesson, is commentary on Amazon in Australia.

    Some of that is happening in regards to Bunnings and trade. As HNN has pointed out since the amalgamation of HTH with Mitre 10 into IHG, that move has removed some of the unstated restrictions placed on Bunnings in terms of expansion versus market control. We do believe that Bunnings will continue to develop its trade business, and this is likely to heavily impact on future earnings by IHG.

    Further, while IHG has done a good job of retaining HTH stores in its network, that has largely been due to a wise decision to hold back on pressuring more of these to switch to Mitre 10 branding. As cost pressures exert more pressure due to falling sales, we could see IHG effectively transplant its Tasmanian strategy to areas such as South Australia. The results in terms of store retention should be interesting.

    An additional pressure on group cohesion could be its continued rollout of its Trade centres, with, as Mr Laidlaw intimated, an "internet overlay". It's difficult to see how such an overlay would be anything other than corporate, which could see a scenario develop where a Screwfix-like digital offer begins to erode sales by independent store owners.

    Of course, IHG may escape many of the consequences of these actions as well – it's certainly proven itself adept at survival in its recent history. But these are very real risks, and they should not be underestimated. The IHG we see over the next two years in the down market could prove not to be a cyclical aberration, but instead the shape of the company's future.

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    retailers

    Bunnings expands PowerPass

    Part of the big box retailer's tradie acquisition moves

    The PowerPass app allows eligible members to search for products in-store, scan the item and use self-checkout

    At its most recent earnings presentation in February, Bunnings Australia & New Zealand (BANZ) managing director Michael Schneider revealed the big box retailer broadened the scope of its PowerPass app and store credit facility for its trade customers.

    Launched in September 2018, Mr Schneider explained the app allowed eligible members to search for products in-store, scan the item and use self-checkout.

    Already trialled on click-and-collect power tools, he estimated there were already 30,000 users of the app. Bunnings has added trade credit and cash pre-pay facilities to PowerPass that allow online account management for ABN holders.

    According to iTnews, this means that tradies can be steered away from more expensive payment instruments like credit cards and towards cheaper options like BPAY as services such as the New Payments Platform gradually get bigger.

    A PowerPass Credit account for up to $5000 has a rate of 8.9%, much lower than many other credit cards. A 30-day account can run a facility up to $10,000. Interest free periods of up to 60 days and lower rates would also appeal to tradies.

    Bunnings gets to harvest rich data off these customers. Digital receipting would also allow it to send data back to apps tradies use like Xero or MYOB. As payments migrate to digital wallets and phones, that could position Bunnings well in terms of using analytics and customer data.

    Data breach

    Bunnings recently confirmed it notified the Office of the Australian Information Commissioner of a data breach, after an individual staffer set up an employee performance monitoring database on his home computer and exposed it to the internet.

    The information in the database related to a single Bunnings store and was not hosted on internal systems, a company spokesperson told iTnews. It was accessible over the web, and contained staff and customer information.

    Lee Johnstone from security firm CTRLBox reported the data breach to Mr Schneider earlier this year. Within hours of the report, the database was taken down.

    A limited number of Bunnings staff member details such as names and internal identification numbers were in the database, along with comments on employee performance. Most of the comments were positive, Mr Johnstone noted. The database also contained log in credentials for staff and developers. Contact details of almost 1200 customers were exposed, including email and addresses, and phone numbers.

    The Bunnings spokesperson said the company was not aware of any malicious access to the database. Mr Schneider explained in a statement that the database was created by a Bunnings team member as an administration tool, and to assist in keeping local customers updated about activities and events.

    Doing so however was a breach of Bunnings' data policy guidelines, Mr Schneider said, and apologised for what has happened.

    Bunnings will reinforce its data and privacy policies with staff to prevent future data leaks. The retailer has contacted customers and employees affected by the data breach, Mr Schneider said.

    https://goo.gl/63iRAs

    https://goo.gl/r9qxiJ

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    bigbox

    Bretts Timber sees steel in its future

    Bretts' slogan is "Let's Talk Timber and Hardware"

    Bretts opened a steel fabrication facility at its Geebung (QLD) manufacturing plant in 2018

    Brisbane-based hardware and building products company, Bretts opened a steel frame and truss fabrication facility at its Geebung (QLD) manufacturing plant in 2018. It is looking beyond its long-standing timber reputation as rising timber costs and shortages mean builders are increasingly incorporating steel into new homes.

    Bretts manufacturing business development manager Darren Harris conceded the decision by a company that started operations in 1912 from a sawmill, raised a few eyebrows. Its slogan is "Let's Talk Timber and Hardware".

    However Mr Harris said the move was already paying dividends with 15% of the company's housing frames and trusses now made of steel.

    Each year, the company produces enough frames and trusses, both wood and steel, to make more than 1500 homes. While steel frame houses have been in Australia for half a century, a shortage of timber and price increases following a wave of mill closures has meant more builders are shifting into steel.

    Mr Harris said Bretts' largest customer for timber frames informed the company last year that it would be using steel in 50% of its projects in the future. Within three months, Bretts had started its steel fabrication business at its Geebung site, where it also manufactures aluminium windows and doors. He told the Courier Mail:

    We could have worn a $500,000 plus loss [by not switching to steel] but we simply focused on providing them with what they needed.
    Traditionalists in the industry might see us as traitors but to survive in a business you need to be aware of market shifts.

    Steel frames and trusses were easier to assemble in the factory and builders could generally put them up quicker. Mr Harris said:

    Steel maybe saves half a day on a job.

    The steel arrives at Bretts in large coils from supplier BlueScope where it is fed into machines that cut the flat sheets into the required lengths using a digital blueprint of the house. It is then assembled into wall frames and roof trusses before being shipped to the building site.

    Mr Harris now expects steel frames to make up more than a quarter of Bretts' business by 2024. He said:

    Commercial builders are leading the way in use of steel and we expect this to equate for 25-30% of our overall business within five years.

    The company has put on 10 extra staff to make the steel frames, with plans to expand production this year. Mr Harris said that despite the move into steel, timber will always be an important product for Bretts, which remains a family-owned business.

    Houses still look the same in that they have windows and doors but the technology and materials have changed. The old asbestos has gone and there are new types of cladding. But timber is still going to be around for flooring and timber posts.

    From The Brisbane Courier Mail

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    retailers

    IHG Expo 2019

    IHG held its annual Expo in mid-March at the Adelaide Convention Centre

    This year's IHG Expo included a review of the past year's performance, and a guide to its growth plans

    The Metcash-owned Independent Hardware Group (IHG) held its 2019 Expo in Adelaide on 19-20 March. HNN attended the plenery session at the start of the Expo. According to IHG, there were 852 delegates/staff attending, as well as 893 supplier personnel, for a total of 1745 in all.

    Perhaps the best way to begin our coverage is through the lens provided by two endings. The first marked the end of a heartfelt, warm and at times very funny presentation by one of Mitre 10’s founding members, John Clennett. In part this was in recognition of the group’s 60th anniversary.

    But, just before we get to that, let’s hear about Mitre 10’s founding moment, as Mr Clennett related the history, which took place in 1959 in the grand tradition of the founding of hardware groups (Hardware & Building Traders followed a similar path):

    The four of them got together in a small weatherboard home in Union Road which still stands in Surrey Hills in Victoria. It was the home of a chap called Reg Buchanan who ... was the main driver and there were the four players Reg, Tom Danaher, Jack Womersley and Ian Davey together with Ian Nisbet. They had quite a number of meetings and then ... they said look we’ve been buggering around with trying to do something together, let’s have a big luncheon, let’s get legless, and finalise some decisions.
    Reg was very keen to sell paint, so he said, “Bugger it!”, threw $5000 on the table, and said to the others, “Well, are you going to join me or not?”
    So, before you could say “Jack Robinson”, they had $20,000 and then went off to a paint company and they were able to buy the paint at really less than half the price that they ever one of them [had paid before].

    At the close of this interesting review of the earliest history of Mitre 10 (which began as “Mitre 8”), Mr Clennett offered these remarks, reflecting on Mitre 10’s history, and IHG’s present:

    A lot of us remember when we as members ran the business. That was a time when co-operatives were reasonably successful. Those times are gone, and you’ve heard ... how important it is for all of us as small retailers to be supported by, in our case, Metcash is a publicly listed company with a real commitment to people ... and your individual businesses. So whatever you do, understand that Metcash actually care for us all and you need to support them, and you need to demand from them what you want from them. Thank you very much.

    We can match that up with the closing remarks of IHG CEO Mark Laidlaw, at the very end of the Expo’s plenary session:

    So, guys, it is time to unite. We’ve been spending too much time fighting each other amongst the brands. It doesn’t matter whether you are Home, Mitre 10, Thrifty or True Value. The thing that unites us is that we’re all independents. And Metcash for its part and IHG can add enormous value, as you’ve heard today in those areas that it’s hard for independents to do. We will invest in the brand. We will invest in store development. We’ll invest in the digital. We’ll invest in the warehouses, and we’ll invest in people — probably the most important.
    We will also — now that we have started to get our model together — reach out to those other independent groups such as HBT and Natbuild. It is time that we all unite. They don’t have to come under our brands but we do need to get together.
    We have great respect for Bunnings. But in this time, when the consumer is changing so rapidly, will they be flexible and adaptable enough to change with that? Time will tell. For our part there is a great opportunity to unite and become a genuine opportunity for Australian shoppers. Thank you very much.

    These closing summaries suggest a similar basic rationale: the market has changed in such a way that independent retailers will likely be able to better survive and prosper when they are in some form of partnership with a corporate entity, such as Metcash.

    Mr Clennett based his statement on what is likely a very genuine “gut feeling”, and many years of experience. Mr Laidlaw’s closing statement was more definite. It listed a series of activities that IHG would undertake:

    • Brand investment, including advertising, etc
    • Store development, which is likely a reference to the Sapphire program, and IHG’s “paintbrush” store ratings system
    • Investment in the digital aspects of retail business
    • Investment in warehouses, for the distribution of goods
    • Investment in people, such as training and/or hiring IHG staff

    This has become a familiar argument over the past five years or so. Mitre 10 and then IHG has presented itself as a “safe haven” from the market dominance of Bunnings. Much of that “safety” has come from its belief that its warehouse-based consolidation of demand across limited brands, which provides better bargaining power and therefore lower prices from suppliers, was one way of diminishing Bunnings’ dominance in low pricing.

    The counter-argument from buying groups such as HBT and Natbuild has been that the costs associated with IHG’s model are high, while they have very low costs, a difference which diminishes the pricing efficiencies of IHG’s model. The buying groups also provide a less-hierarchical, flatter model, where individual members really can see suppliers they discover become part of the group.

    It is the need to make these points and demonstrate them that drove most of the plenary presentations that Mr Laidlaw and IHG’s general manager - merchandise and operations, Annette Welsh, delivered. Mr Laidlaw concentrated on achievements to date, and the development of the organisation, while Ms Welsh provided an insight into innovations, and the direction IHG is taking towards markets and customer engagement — what Mr Laidlaw labelled “the sexy future stuff”.

    Ms Welsh also outlined some possibilities that, if developed further, could really help change the independent hardware retail sector, across all buying groups.

    Past and present

    Mr Laidlaw’s delivery of the latest news to members is quite distinctive. It’s very far from, for example, an officer reporting HQ’s view of the battle to the troops. It’s more like a battle-hardened sergeant in a behind-the-lines bunker letting his comrades know what the last battle was like, and what he expects from the next one. He projects a sense of physicality, that at times leads you to expect he would, given half the chance, be willing to wrestle some of the more recalcitrant graphs and numbers to the ground.

    There is certainly no doubt about his passion, and, as with all the top staff at IHG, there’s a clear sense that he is preoccupied not with his own success, but rather with that of the enterprise. It’s a passion that, while very welcome, can also lead to some over-statements. Perhaps that’s because Mr Laidlaw is seeking a balance, somewhere, between the strategic value of a percentage point, and the awareness that these numbers mean something also to the welfare of a family, to the value of a life spent in hardware retail, out there in the crowd of members gathered in the half-dark of the amphitheatre of the Adelaide Convention Centre.

    So, what is it that Mr Laidlaw is so passionate about? In terms of IHG itself, two main, linked concerns he has are the cohesion of the group, and its potential for growth. A good place to start to pick this apart is with what is commonly accepted as the bellwether for the group’s health, the store numbers.

    Store numbers

    Not that Mr Laidlaw is terrifically keen on these numbers himself. As he commented:

    We’re a public company. Couple times a year we front the analysts, we front our shareholders, and the first question that the analysts always tend to ask as they roll it into their modelling is, oh your store numbers, you’re closing stores, store numbers are going down. And that is true. So what we’ve done here, we’ve measured store numbers since we took over the business in 2010 and in the independent sector they actually have declined 28 percent. It’s worth having a look at that change.

    At the actual results announcement in December 2018, Mr Laidlaw made this response to the query about store numbers:

    The other thing that’s important to note that there were a 170 stores called Thrifty-Link that we took out from Woolworths that are about 20% of the stores that represent 2% of the [wholesale sales] volume. Those stores will continue to close and [this] will have minimal impact on our EBIT and indeed on our sales. So I’m not hung up on those. The other ones are with the company stores. We had 41 company stores that we acquired from Woolworths. Today, we have 37. We have got out of four poor leases, which has actually added to our EBIT. We did lose one large customer. We lost a large customer in Queensland.

    Looking at these numbers for the past couple of years, in Metcash’s proposal for the acquisition of HTH, the number of bannered stores was set at circa 740. A slide to 690 indicates a decline of 6.8% (over two years). That’s inline with the background rate of the 28% over eight years provided by Mr Laidlaw.

    The other element to note (as mentioned elsewhere in this issue) is that figures from Australian Bureau of Statistics (ABS) show there was a net loss of over 1000 hardware retail businesses with annual revenues under $2 million during the same period. It’s also worth noting that the ABS figures show there were 6127 hardware retail businesses at the end of FY2007/08, and 5325 left at the end of FY2017/18. That’s a decline of 13%, though allowing for mergers and consolidations, the real decline is likely around 11%.

    This has taken place against a background of an increase in overall retail revenue for hardware, according to the ABS, from $12.3 billion in FY2007/08 to $19.1 billion in FY2017/18, growth of 55.6%. Allowing for inflation, the increase would be from $15.2 billion in today’s dollars, to $19.1 billion, a market size increase of 26.0%

    For Mr Laidlaw and IHG, the reason for that discrepancy, the increase in overall revenue and the decrease in the number of viable stores, can be explained by a single word of two syllables: Bunnings.

    Equally, other buying groups have seen membership numbers increase. In terms of general comments in the industry, however, several seasoned veterans have told HNN that they have been surprised at IHG’s retention number, and had privately predicted the group losing around 10 or more further stores. Mr Laidlaw’s very hard work has produced results.

    Yet those same observers see 2019 as being quite a testing year in this regard for IHG. These observers see IHG moving to increase pressure on HTH members to cross-brand to Mitre 10. There is some support for this notion in remarks made by Mr Laidlaw when addressing financial analysts at a Metcash Strategy Update in early March 2019:

    Mitre 10 now has 22 stores in Tasmania. It used to be about 11 on both brands. We have made that a blue and white state.... We have used this as an absolute test bed where we’ve made it a blue and white state. And think of the synergies we’re going to get there because instead of running two catalogue programs you now run one catalogue program, instead of running two television commercials, we’ll be running one television commercial radio etc. So we really believe that’s the test bed to see what other synergies we can drive out of the business.

    As HNN has stated in the past, and as Mr Laidlaw’s remarks make clear, this is a great move from a corporate perspective, as it will decrease costs and increase earnings. However, many observers are not confident that all HTH members will see these moves as an entirely positive development.

    Revenue performance

    Quite rightly, Mr Laidlaw mentioned he was proud of the financial performance of IHG (formerly Mitre 10):

    But our revenues — proud of this chart — only eight, nine years of being here we have grown our sales back... For full year 2011 financial year we were about a $750 million business. Very few of our stores were buying through us, our suppliers were going direct to the stores.
    We developed a strategy. We stuck to it and through those next five or six years we continued to grow at about 5 percent a year and then fantastically and amazingly we took the opportunity to acquire the HTH business, and we doubled our revenues to $2.1 billion on a wholesale basis. We would expect of course the next couple of years that will flatten but then we’re confident that we’ll get a second kick after that.

    The recovery of Mitre 10, and its transformation into IHG is indeed praiseworthy. The business of completing a merger between two separate organisations of near-equal size is complex, and many organisations fail.

    The reason why IHG has not really received the recognition it deserves for this feat, however, is because — from the perspective of financial analysts — it has so far been more of a sidestep than a step forward. While revenues have grown, so has capital investment. Return, and in particular growth on return, is how corporations are judged.

    Since the acquisition, IHG has returned considerable earnings before interest and taxation (EBIT) through additional efficiencies it has developed, but the company also announced that this kind of gain is almost over.

    It’s very understandable, given the venue and the message that IHG had to deliver, that Mr Laidlaw not mention a recent, salient datapoint. The results from the first half of Metcash’s 2018/19 financial year were released in December 2018, and they are not encouraging. EBIT return was good, but overall revenue grew by only 1.25% — though like-for-like sales in bannered stores rose by 4.2%.

    While performance in terms of savings are material and ongoing, the core question now is how the company can use its additional scale to create growth.

    Trade

    One of the slight surprises announced at the half year results in December was that IHG sees itself as having moved from around a 60/40 split between trade/DIY to a 65/35 split. In his session at the Expo, Mr Laidlaw did go some way to explaining that evolution, seeing it as an indirect consequence of the Woolworths/Masters business plan:

    So Woolworths bought Danks first, and then they certainly acquired some of those other businesses. Hudson’s, Belmont, Tait’s, and they bought them 100%. And then, as we know, that madness stopped in 2016, and it was sold — [all] the businesses — and we took the opportunity to bring them together. And that’s why you then see today that we’ve moved to about 65 percent split between trade, 65% trade, 35% DIY.

    Going back to the presentation for the acquisition from 2016, this shows that Mitre 10 had a 55/45 split trade/DIY, while HTH had a 62/38 split, and the projected outcome of the merger was 59/41. This new shift further towards trade indicates that, while the history is accurate, there is more than that going on.

    To speculate, what is happening is that IHG has recognised two things: the first is that, for the moment, Bunnings has an almost unassailable position in DIY, and wresting marketshare away would be very tough — especially in the reduced demand situation of falling house prices and subdued activity in real estate markets. The second element is that Bunnings really is going into a situation of change, and it is possible that two years from now, a part of that market will be easier to take on.

    Meanwhile, of course, IHG is working hard to experiment at expanding into new areas of the trade market. In introducing Metcash’s half-year results, the company’s CEO, Jeff Adams, said this in his prepared comments:

    Our pilot trade store-focused stores are continuing to perform well. And we expect to have 12 low-cost, trade-only stores operating by the end of financial year 2019, growing to 40 by 2022.

    That document also describes the “trade-only” store objectives:

    The new Trade Only store was designed as a low-cost model to meet the Trade customer’s needs and attract new customers to the Mitre 10 brand.

    Some more insight into the thinking behind trade-only was also provided by Mr Laidlaw in response to an analyst’s question at the half-year results presentation.

    The traditional Mitre 10 business is a segment in the renovations. They didn’t deal with the big tier one builders, Mitre 10. It was good. It was a nice, safe place, and you make better margins in that area. So we have a large share of that 65% trade in the renovations. And then we also do have new dwellings, which is what we picked up with the big company stores. But we’re not in the multi-dwelling market.

    Bunnings has recently commented that its trade market is confined to the trades renovator, and builders who do one to ten houses a year. The strategy with the Mitre 10 trade-only stores could be to capture more of the five to 15 houses a year builder market.

    Sapphire/Mitre 10 crossbrand

    At first glance, some of what we’ve said above about IHG “cooling” it on DIY for the next two to three years, while getting set for a later push, might seem to contradict the ongoing expansion of the Sapphire program. In Metcash’s annual report for 2018, it described the targets for Sapphire:

    The success of the program to date has led to it being accelerated to target the completion of approximately 200 stores by 2022.

    Mr Laidlaw commented on the program:

    We’ve now completed 56 Sapphire stores. They are in three formats. We are at 27 stores at the time when we presented last year, so nearly 30 stores have been added. Some 37 are in that mixed-type business, they have a perfect mix ... maybe 55 trade 45 DIY now it’s the perfect mix of business. We also completed eight that are smaller convenience DIY stores.

    This indicates that the company will pick up the pace of Sapphire conversions to around 42 a year, to meet its goal. This large investment in DIY (though trade also benefits from the program) might seem to not fit with the DIY strategy described above, but actually it complements it nicely. In terms of the strategy of a delayed push into DIY, IHG could be planning to make that push once it has a fleet of stores fitted to a higher standard.

    HNN would predict that around 2021 Sapphire could further develop in two ways. There could be a new, higher standard introduced, which would relate more to the “connected store”, and internal infrastructure, as well as a “Sapphire Lite” program, which will help to improve the standard of amenity of more stores, without all the current requirements.

    Mr Laidlaw also commented on the requirements for HTH stores which planned to switch over to the Mitre 10 brand.

    So we may have confused a lot of people here last year when we talked about the opportunity to move to Mitre 10. And I think we left you thinking that to become a Mitre 10 you had to do Sapphire, you had to invest and you had to put in the core range that’s required under Sapphire. We had a lot of good discussion and debate with our National Advisory Council. We were very good and we developed a road map for the brand and it’s recognised that you do not have to make Sapphire standards to be painted up to Mitre 10.

    He commented further that four stores had already been cross-branded, and that a further 30 would make the transition during 2019.

    Outlook

    At the end of his presentation, Mr Laidlaw provided a quick overview of the market as IHG sees it developing over the next two years. Along with most in the hardware and construction industry, he sees the current “crash” as being somewhat oversold, and suggests that housing levels will likely come back to 2015 levels, but not below that. He pointed out that the market structure of IHG, as it stands currently, should adapt well to the shift in the market.

    The other thing ... to talk about is that we believe our business is quite well balanced in the sectors of the segments that we operate in. So in other words, if we’re 35% DIY and we’re 30% in the renovations and alterations and we’re 30% in the detached housing [then] we are only 5% in the multi-dwelling, which is the area that will get smashed the most.

    While that identifies how IHG has moved to protect its marketshare, and limit the effects of the downturn, what this doesn’t account for is the big question: where will growth come from?

    That’s really the question that Ms Welsh set out to answer after Mr Laidlaw’s presentation, by outlining some of the ambitious plans that she, Mr Laidlaw and the management team at IHG have developed.

    Future and growth

    After a field report on IHG stores that were doing well against the competition, Ms Welsh began a discussion of the market as IHG sees it:

    We know how hard it is for marketshare movement in the DIY side of the market. But where there is opportunity is in the trade side of the business. This is a $17.6 billion market in Australia and we compete evenly for share at this moment in time with Bunnings, and there’s a big piece of the market under the expertise of plumbing. But the remaining 62 percent still sits in a very fragmented way, and that’s where the opportunity is.

    She emphasised the importance of this market, not only for stores that are already trade-focused, but also for those with an established DIY business:

    Even if you are purely, at this moment in time, DIY, I’m going to ask you to keep your thoughts open over the course of the next couple of minutes as I talk you through the trade part of our business. And, potentially, encourage you to think about the opportunities you may have within this market.

    In what followed, she emphasised a series of market insights and directions. These included: exploring market adjacencies in house construction (whole of house); prefabrication; alignment between suppliers through a hardware retailer to deliver a complete solution to a builder; expanding markets through digital techniques; and making use of what IHG considers to be data analytics.

    Though that list really does not do Ms Welsh’s message justice. It wasn’t a message about expanding current practices to new areas, but rather developing new practices that encompass additional market opportunities. To go back to the statement by Mr Laidlaw with which we began, he said IHG “have started to get our model together”. What Ms Welsh outlined was what that model could do, and the direction in which it is headed.

    Whole of house: five stages

    One of the major areas of expansion Ms Welsh highlighted was a move to supply builders with products for all five stages of construction, which she called the “whole of house” strategy. Those stages would be:

    • foundations
    • frame and truss
    • lock-up
    • fix
    • fitout

    She introduced this strategy like this:

    There are five stages to the build of a house. Most of you and everyone of you I’m sure in this room knows this better than I do. So, five stages to build a house. And historically, traditionally, as an independent group, what we’ve done is really focus our attention on the frame and lockup stages, with a particular focus on selling quality stick timber.

    As Ms Welsh pointed out, this is also a vulnerable market segment at the moment:

    It’s given us a fantastic business but as the building cycle comes off that’s going to come under pressure in terms of our ability to maintain sales.

    To explore further opportunities, Ms Welsh’s team took a look at the current business both company and joint-venture stores were doing:

    We segmented our company owned stores and joint venture builders over 9000 account customers, and what we discovered was what, as much [about] what they are buying from us, as what they’re not buying from us.

    What they discovered was that they did well in the frame, lock-up and stick timber business, but this consisted of only 34% of the total opportunity. Looking beyond that, there was a further 62% of construction materials that IHG was not servicing, and that existed in what Ms Welsh describes as “a highly fragmented market”.

    Where we think the biggest opportunity is, is in the fix and fit-out stages. The good news that comes with that is that fix and fit-out comes absolutely with a better margin, higher profit return than perhaps the earlier stages of the build.

    To enable this approach, Ms Welsh and her team set about enhancing supplier relationships.

    To ensure we can complete a whole of house we were clear as a merchandise team that we were probably missing a few key relationships [needed] to make sure that we can offer product across all five stages of the build. So we went about making sure that we were able to fill every gap in the need of your builder.

    One step was to build a better relationship with truss makers.

    We created through Brett Martin a wonderful alliance with Melbourne Truss that is enabling our Victorian teams to start our relationship with the builder at the frame and truss level.

    With timber supplies tight, the team extended this to steel frames as well.

    We didn’t have a relationship with any supplier to enable you to support a builder on steel. We now do, through Steel Frame Solutions.

    The end result of this is a comprehensive set of suppliers.

    We have this, right suppliers with the right products and the right relationships, to ensure we can fill every single gap — or at least 90 percent of them. I’m sure there’s a few that we need to work on.

    Sales alignment

    With this background, Ms Welsh sees an opportunity for the trade sales reps in IHG hardware retailers to better align with their reps in supplier firms.

    Within those stores what you all have is sales reps, sales managers that are the key to the relationship with the trade. It’s what makes us different to any corporate. Within our own companies we know we have 73, and if I was to add up all of the others around the country, there would be more than 200. What we’d like to do is really see how we can leverage that army alongside the similar army that exists within our supplier base and help build the value that we add to the trade every day.

    Later in her talk she was more specific about what would happen in these relationships:

    I’m creating and starting trials to ensure that the sales managers that are aligned to every member in the room can connect with an equivalent expert in the supplier base. [This is] to ensure that together we can go to a builder and align the best quality of information that the supplier has on the best product for the builder, with the best relationship and service proposition that comes from our sales managers and our teams, and put the two together. [Then you can] have a conversation with the builder, and get them to understand and recognise the increased value that bringing that business through the right group with the right source product from the right supply can [deliver].

    One of the trials that Ms Welsh delivered was through Richmond Mitre 10.

    We’re confident in that model ... because of the great work that’s been done by Ben Shaw and his team at Richmond Mitre 10 in Victoria. About six months ago ... we had segmented the builders of Richmond’s Mitre 10. We understood what they weren’t buying from us. There were a couple of key areas that Ben was clear that there was opportunity.
    One of them was frame through Melbourne Truss, the other one was cladding, they were buying it through James Hardie, plaster through Boral, etc. [Ben] brought in the local state-based sales representatives from those three suppliers, and said, “I think we have an opportunity. Here are my top 17 builders that represent 40% of my trade business and I think together if we do this right, we can actually convert them to bring their business across to Mitre 10 Richmond.
    Across those five suppliers that they engaged with, the sales growth for 17 builders in six months was 24 percent. That’s a whole of house strategy.

    Digital

    Ms Welsh also provided a quick update on how online sales are doing, and what IHG’s plans for its future are. Much of IHG’s online development has been about establishing click-and-collect ordering.

    A year ago we sold through the membership $1.5 million dollars on click and collect. This year that number will exceed $6 million. It’s a huge amount of work and a massive amount of growth but over 500 stores every month receive an order from click-and-collect, and that provides that opportunity to drive a consumer to store and the connection that we’ve got with the consumers. Our expectation is next year that will be $11 million and the year after $30 million.

    Digital enables collecting more data about customers, and Ms Welsh sees the profile of these customers as being very positive.

    The average basket size on click-and-collect is now $220 and through the work that the digital teams have done it is attracting a brand new customer to us. A customer that wants to pay in a different way than a normal credit card or cash, [using] Afterpay or Zip-pay. A female customer, and a younger customer. All of this is really clear and key to the strategy I’ve talked about right at the front: can we grow the basket size of the customers we have, or can we attract brand new ones? And digital is doing actually both of those.

    Data analytics

    Ms Welsh also provided some details about the use of what IHG considers to be data analytics.

    The key to getting digital right, the key to consumer driven is about making sure that we have data... It adds huge value in relation to ensuring shopper-led [and] that we have the planograms right. But what it also does is enable us to engage with each one of the consumers in a manner that means something to them.
    And the way in which this is only going to succeed is if you and your teams continue to ask that awkward question, the one that the teams must become more used to is, “can I have your e-mail address or your mobile phone number?” The reason for that is we can personalise the product offer to the customer. What we want to do is ensure that we don’t bombard any customer with information that’s not relevant, that we give them information that’s going to add value to them.

    Analysis

    The developments put forward by Ms Welsh certainly would seem to offer some opportunities for growth. However, it’s equally evident that this is going to be difficult, long-term work to bring off successfully.

    Importantly, most of these suggested developments rely on a more centralised, corporate approach to managing the business of IHG. The commercial deals with suppliers, for example, will rely on IHG/Metcash building a relationship with a fellow supplier corporation, which will enable individual members to benefit, through IHG. Along with the transition to more Mitre 10 branded stores mooted by IHG, this kind of deal will be able to unlock more value for all participants.

    There is absolutely nothing wrong with this, of course. What is good about it, is that it more clearly defines the buying groups in the independent sector. IHG can represent the consolidated, corporate approach. Groups such as Natbuild and HBT can represent an approach where the “capital” consists of the people and the businesses that make up the group. For them, the “return” is not an EBIT number or a share price, but simply the success of those members and their businesses, on their own terms.

    It’s a genuine choice.

    At the same time of course, there is also some drive behind the idea of a more united independent sector, which Mr Laidlaw went some way to suggesting as an agenda item for the future. For that to happen, though, the sector would have reach beyond the corporate/non-corporate divide, and find common ground.

    What would that common ground look like? HNN believes that there is a strong clue in the work presented by Ms Welsh at the IHG Expo. In very broad form, many of the plans she presented contain the possibility of a new, different model that the independent hardware sector could adopt. That model is based on changing from commerce that is based on selling products supported by services, to primarily selling services that are supported by products.

    It would be a sharp change to the industry. What would drive it forward, however, is that this is the one model which would help independent hardware retailers get out from under the constant erosion of profit margin through competition with Bunnings, and other price-driven hardware retailers.

    In what follows we lay out some broad outlines of what this might look like.

    The Bunnings model

    If we are talking about business models in the modern Australian hardware retail market, we really do need to begin with Bunnings. We can start by repeating Mr Laidlaw’s astute and accurate assessment of the state of Bunnings — and of the industry:

    We have great respect for Bunnings. But in this time, when the consumer is changing so rapidly, will they be flexible and adaptable enough to change with that?

    While Mr Laidlaw is applying this need for change to Bunnings, it is, of course, applicable everywhere in the hardware industry, and especially to IHG — as well as groups such as HBT and Natbuild.

    The Bunnings model really begins with a specific relationship between profit margin and risk. This was developed during the time John Gillam was managing director. His realisation was that any increase in profit margin also increases business risk in retail, as, in an informed market, higher margins decrease the propensity of consumers to buy a product.

    That risk is, of course, balanced by the countervailing risk that if profit margins are too low, the retail business will not generate sufficient returns to cover operating costs and return on capex.

    Most retailers balance these two risks through externalities. The risk of the higher profit margin is reduced through high levels of marketing, high store amenity and, where possible, some control over the supply of a product.

    The entire Bunnings business model is based on reducing any risk arising from profit margin to the lowest possible level. Once a business has that kind of low-risk ballast providing stability, it can then radically increase risk in other areas. That means it needs only minimal marketing, low store amenity, very lean logistics, and customer service that is adequate, but far from outstanding.

    Of course, the only way for such a business to increase profits (which it must, in a corporate environment) is for it to continuously expand. But, as it turns out, increasing risk in all those areas — low store amenity, minimally trained staff — reduces the cost of expansion. As it expands, associated operating costs decrease, so that profit margin can go lower — and a competitive cycle is formed.

    This model has proved to be a very difficult for other retailers to compete against. Lacking the scale and supply chain access of Bunnings, retailers find limited profit margins render some business lines unviable and also, at the very least, inhibit their ability to recapitalise and further develop their businesses.

    The independent business model

    The model for most independents is to charge slightly higher prices than the lowest in the market, but to compensate for this by value-adds such as advice, better store amenity, and being “local” businesses.

    Looking at the raw numbers, as pointed out above in the business failure statistics, that isn’t working as well as retailers would like. They face what is really almost the equivalent of a “profit drought”, with retailers making do with less and less in order to survive.

    But what if there were a different business model, which provided for higher profit margins, did not require a high level of scale, would appear first in trade/commercial, and then move to DIY/consumer, and would also fit with the existing infrastructure of today’s independent hardware retailers?

    Such a model is in many ways implicit in the market approaches that Ms Welsh outlined during her talk. It has the potential to take hold over the next two to three years, and bring with it substantial changes to independent hardware retail in Australia.

    The basics of this model are simple. Rather than, as they do at present, selling products, with those sales enabled by the provision of services, such as delivery and finance, instead retailers will sell the equivalent of services, and those sales will be enabled by products.

    This solves the profit margin difficulty, because profit in service delivery is based not on costs, but quality, and quality of services is the result of skill and training. It is also a model that relies heavily on the digital, both in its marketing and delivery.

    While this might seem far from today’s model and market, in fact the work of Ms Welsh comes surprisingly close to directly touching the new model. It’s a definite step in that direction.

    If we look at what’s involved in IHG’s whole of house strategy, it is evident that this is a move from seeing a house build as a succession of product orders to be fulfilled, to regarding it instead as a continuum of build activities. When Ms Welsh speaks of what facilitates this market opportunity, it’s not about finding the lowest priced products and throwing them on the back of a truck for delivery. It’s about establishing an interlocking connection between suppliers, sales reps at IHG, a store owner (who may have relevant local knowledge as well) and the needs of the builders themselves.

    This is based on knowledge sharing between participants, and it is the sharing of that knowledge that builds value. In fact, the single most brilliant thing that Ms Welsh had to say in her presentation was this:

    Already, today, you are seeing 49,000 of those house plans. And when you get a house plan in hand, it offers up and opens up the opportunity for the world around all five stages [of the house build].

    The architectural plan is the central document of a build, and lays out what products are needed, but also, suggests the order and cadence of the build. Retailers could provide a comprehensive quote or bid based on this information. This could be developed in association with the groups involved. It’s likely that in such a case, builders will not regard the quote in terms of the prices of individual components, but rather as an overall price for a sequence of service deliveries to the build site.

    We could say that the move from products to services could change the main business model from the retailer-centric notion of using low profit margin to reduce retailer risk, to the consumer-centric notion of using knowledge sharing (driven by digital capabilities) to reduce consumer risk. In the latter case, value is not a matter of reduction to the basics, but instead something created from skill, trust, and better relationships.

    Data analytics

    While data analytics are useful in selling products, they are vital through the entire marketing process for services. However, the data analytics that are needed are what we might term “tertiary stage” analytics, which are quite different from both primary and secondary stage analytics.

    Most of what IHG presented at the Expo as data analytics was very much secondary stage. That stage is dominated by processes of segmentation. At first glance, segmentation does look like it is consumer focused — because, after all, you are “looking” at consumers. Closer examination, however, shows that it is surprisingly retailer focused.

    For example, on one slide Ms Welsh showed the need to segment builders by size. What is that really about? Size is usually used by retailers as a means to prioritise potentially more profitable customers over less profitable customers — and the less profitable ones, through this process, will likely lose out a bit. Yes, small and large builders do have different needs, but from a service rather than product perspective, it’s actually not all that different.

    What’s the alternative? In tertiary data analytics there is a concept known as “behavioural identity” or BI. Rather that assuming identity based on characteristics such as size, BI tracks what the customer does, and determines from this what their current BI is.

    BI seeks to understand what stage of the project development process customers are currently occupying. To take a consumer example, think of someone considering buying a kitchen. Segmentation divides these customers up into kitchen size, planned expenditure, materials, and so forth. The customer is then exposed to suitable products, based on this.

    The advantage of BI is that it permits complex interactions from the retailer, that can help the consumer move through the different BIs necessary to complete the purchase. In a kitchen project, customers might have a diagram sketch of what they want, or just be trying to choose a style. If there is a diagram, perhaps the consumer can take a picture of it with a mobile phone, and the retailer can provide an interactive version. If it’s all about style, the retailer can help build mood boards. Over time, the data on mood boards could accumulate, and the BI system might be able to determine, just from a mood board selection, the type of kitchen the consumer might prefer.

    To take a commercial example, an important characteristic to determine about builders is what their current attitude towards risk is. Some builders have a generally high acceptance of risk, others seek to reduce risk at all costs, but most vary the risk they are willing to assume depending on the project.

    How do you work out a builder’s risk status? One way is to analyse building permits and plans to determine whether a build is in keeping with past builds in an area, whether it is like other builds the builder has done, and how successful the immediate past builds of the builder have been.

    That’s not easy, and you really need a highly qualified data scientist to work out how to quantify those elements, and how to derive a risk profile from them. But the processing power to do this, which 20 years ago would have required access to a supercomputer, and today be purchased from Amazon, Google or Microsoft for a reasonable hourly rate.

    Summary

    All the buying groups have strong, unique identities. At the Expo you could experience a strong sense of fealty and fun in a robust, vigorous package. HBT, of course, is unmatched in the pure larrikin, creative cleverness of its members. Natbuild excels at a kind of store-by-store strategic approach, one which has made it surprisingly influential in the market. All of these have a place, now and in the future.

    The IHG Expo 2019 indicated the possibility of a move towards a more mature independent hardware sector, across all the buying groups. While the competition for buying group membership is set to continue, there are other processes at work, which will most likely benefit everyone in the sector.

    But what remains to do, if this potential is to be realised, is further hard work for all buying groups over the next three or four years. All the groups have a crucial contribution to make, and all the groups, should this model be developed, stand to benefit, and regain overall marketshare.

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    retailers

    Bunnings results FY2018/19 H1

    Growth slows, but results remain consistent

    Bunnings saw store-on-store growth slows to 4.0%, while RoC expanded to over 50%

    The Wesfarmers-owned Bunnings announced its results for the first half of FY2018/19 on 21 February 2019. Revenue was $6909 million, an increase of $343 million or 5.3% on the previous corresponding period (pcp), which was the first half of FY2017/18. Earnings before interest and taxation (EBIT) grew ahead of sales, coming in at $932 million for the half, up by 7.9% on the pcp.

    Total store sales growth was 5.5%, and store-on-store (comp) growth was 4.0%. While these numbers were down on past performance (10.1% and 9.0% respectively for the previous half), they are basically inline with Bunnings' performance pre-2014, which was prior to house prices really spiking.

    The company also delivered an outstanding return on capital (RoC) of 50.2%, up from 47.0% in the pcp. For much of its history, this figure has been under 35% for the big-box home improvement retailer. (RoC effectively measures how well a company is managing the capital invested in it.)

    The overall view of Wesfarmers is somewhat complicated by a series of sales and divestments. This includes the demerger of Coles and the sale of Kmart Tyre & Auto. In terms of net profit after tax (NPAT), the company states that it generated $4.5 billion, which includes $3.1 million from discontinued operations and other non-operational sources. For its continuing operations, Wesfarmers is claiming NPAT of $1.1 billion, which it says represents an increase of 10% over the pcp, which was the first half of FY2017/18.

    Kmart operations excluding the Tyre & Auto division brought in EBIT of$383 million, down by 3.8% on the pcp. Officeworks increased EBIT by 11.8% to reach $76 million. WesCef increased EBIT by 2.2% on the pcp to reach $185 million. Industrial & Safety, affected by weak overseas markets, fell 19.2% over the pcp, to return EBIT of $42 million.

    Bunnings

    As Chart 1 indicates, while the growth in store-on-store revenue was not as good as some recent past results, it's not unusual for Bunnings. Chart 2 shows what the results really look like, which is a steady increase in both revenue and earnings, and outstanding growth in RoC, and even a slight increase in EBIT margin.

    Michael Schneider, the managing director of Bunnings, explained why some of the numbers were not quite as robust as in the past in his initial opening remarks:

    Our performance for the half was underpinned by continued growth in the consumer and commercial markets in all categories and across all major trading regions. This result was really pleasing given we were cycling high levels of sales growth [from] last year, and we experienced a wet and late start to spring early in the half ... as well as softening conditions in the residential housing market.

    Mr Schneider provided some forward-looking statements, which will not come as a surprise to anyone in the hardware retail industry:

    We expect moderating trading conditions to continue in the second half of the year on the back of continued uncertainty about the residential property market. Focused and disciplined execution of our strategy will ensure we continue to build on our recognised market strengths to drive growth and strengthen the core of our business. Bunnings is a good mix of discretionary and necessity spending, and this positions us well for the future.

    In terms of operational matters, the half-year results are usually delivered in a very low-key way, with the division preferring to save any major announcements for the Wesfarmers Strategy Day in June. It's helpful to look at Mr Schneider's comments in three different categories: comments about past and present operations; comments about upcoming operational changes; and comments on new innovations in progress.

    Present operations

    Mr Schneider indicated that Bunnings would be investing in kitchens and bathrooms, which he regards as an area where the retailer has a low marketshare. He also pointed to an expansion for ranges sold for the following categories:

    • home automation
    • independent living (ageing in place)
    • outdoor living
    • outdoor power equipment
    • storage

    Operationally, Mr Schneider pointed to the following areas as receiving additional focus:

    • events
    • workshops
    • in-store activities
    • installation services linked to product sales

    Mr Schneider also pointed to some newer categories the company would be pursuing, including:

    • cordless cleaning
    • outdoor structures
    • trend green life
    • advanced trees
    • turf

    Upcoming operational changes

    Mr Schneider commented that:

    We are increasingly using analytics to help us look at ways to drive productivity, inventory and range optimisation and improve performance. We will continue to evolve our thinking regarding the way we view the market, invest in our supplier and partner relationships so that, coupled with our developing digital and data analytics capabilities, we can continue to elevate our widest range and more value philosophy for the benefit of all customers.

    New innovations

    The innovations nominated by Mr Schneider for comment included: Bunnings' PowerPass app; a click-and-collect trial started at its Craigieburn store in Victoria; and the extension of that trial to Tasmania.

    Digital

    The overall narrative of exactly how Bunnings is setting about its expansion in digital, particularly converting its website to being transactional, is far from clear at the moment. That's largely because, it seems, the company would rather wait until the Wesfarmers Strategy Day in June 2019 to set out its plans. However, given the nature, size and timing of the changes, investment analysts need to know more now.

    So, while Mr Schneider said really very little in his prepared remarks, he did provide more details in response to questions. It's not possible to document these answers by just repeating parts of the Q&A session. HNN would like to acknowledge the really astute questions that were asked by Ben Gilbert, executive director and analyst from UBS Investment Bank, and Bryan Raymond, VP and analyst, Citigroup Inc.

    One of the core questions the analysts posed was whether this move to online sales was just for the sake of the thing, even though it might dilute profits, or if the case were the reverse, and by not moving earlier Bunnings had forgone a measure of sales and profits. Mr Schneider's thoughts regarding this included the following response:

    I think one of the advantages for Bunnings in arriving at this online point at this point in time is that there's a lot of innovative technology and technology that's available that I think will allow us to be very competitive in this space, certainly, relative to our peers but also very much, as I said, focused on what the customers are looking for with the online purchasing.

    This suggests that, in part, the decision was not only based on the internal situation of Bunnings, but also on the way the technology has evolved. The second part to this answer is Mr Schneider's suggestion that the needs of customers had also gradually evolved:

    What this is, is a logical evolution of the business. So there's a recognition that the market continues to evolve and changing customer needs continue to change. We've always had a very interactive website. We have millions of hits a month, customers downloading information on how to do a project or information about products and services. So the sort of natural rollover, it just makes sense at this point in time. It's been about 12 months now since we took the 20,000 or so products we have in our special orders range online. It's there for customers. Customers will use it when it's needed.

    So, changing technology, changing customer needs. Then the way Bunnings sees itself bringing this technology into the company is matching those needs to the technology through the process it calls "test and learn", which includes its pilot click-and-collect project at the Craigieburn Bunnings warehouse, and its later extension into Tasmania.

    So the test-and-learn environment at Craigieburn, the test-and-learn environment we'll create in Tasmania will allow us to understand the model, the costs and the desire. And let us build the offer up from there.
    ...
    But we want to do things in a way that is customer-led and customer-informed. So we haven't started with any predetermined notions around costs or model.

    The other important element analysts sought to clarify was how Bunnings intended to handle the build-out of its logistics capability to cope with home deliveries. Mr Schneider responded in part to this by saying:

    We haven't started with any predetermined notions around costs or model. But we have a big network, we have over 370 trading locations around Australia and New Zealand. So our proximity to our customers is pretty good. We continue to build out the physical network and invest in that as well. So it will give us a really strong all-market, all-channel type approach. But we'll obviously do it in the best Bunnings way we can, which will have a very keen focus on lowest cost so that we can continue to give customers the best offer.

    The last word on where Bunnings – and Wesfarmers – will go in terms of digital transformation ultimately rests with the Wesfarmers managing director, Rob Scott, and the board of the company. Asked about potential future acquisitions, and the direction of the company, Mr Scott had this to say:

    Well, as you know, we don't give too much away on the specifics, but the general commentary I'd provide, there's an enormous diversity of opportunities that we're looking at. Yes, there is a bit of an orientation to the industrial side across a range of areas. There are some areas that we're also looking at that are adjacencies to our retail businesses. And yes, a real combination of some small, really interesting bolt-on opportunities with a bit of a technology digital exposure towards bigger opportunities, some of which we've had on a watching brief for quite some time.
    ....
    And really what it's about, it's not just about relying on where market prices are, it's also leveraging unique capabilities or relationships or synergies that we have. So something we spend a lot of time thinking about is what is it that is going to make Wesfarmers a successful buyer.

    Analysis

    Bunnings faces a series of new challenges as we look ahead to a changed strategy for FY2019/20 and beyond. One of those challenges is that the company is, for the moment, the prime growth engine for the whole of Wesfarmers. Its role in the past was to produce a reliable stream of EBIT, which could be used to, for example, fund the expansion of Coles. Now that Coles is gone, Bunnings is expected to go to a different place on the risk/reward curve.

    Those changed expectations feed into increased pressure for the company to transform itself into more of a digital enterprise. The real question at the base of that transformation is how and where it will be achieved. One option is a "standard" Bunnings, that serves customers through its successful stores, with digital services somehow "bolted-on" – which is essentially what click-and-collect is. Or will everything become digital, in a sense, with its entire logistics strategy re-geared around this?

    For those who are not aware, one reason why digital transformation poses some challenges for Bunnings is due to the nature of its logistics. One of the company's early innovations was to construct a logistics network which did away with the need (mostly) for a centralised warehouse system. Distribution to the store was left in the hands of its suppliers, as part of the supply contract. The only exception to this are Bunnings' captive brands, such as Ozito, where product is shipped directly from China to its own system of warehouses, for on-delivery to stores.

    There are some areas where the company would easily benefit from online ordering and delivery. For example, in more remote areas of Australia, one could imagine Bunnings setting up delivery lockers in small towns, then running a regular, scheduled service that dropped orders off on a once-a-week basis for a nominal fee. For farmers and others who live 100km from the nearest Bunnings, that could save them a couple of hours out of their busy days. Not to mention that such facilities, which would expand the footprint of Bunnings, might play into its overall expansion plans as well.

    In other areas, however, Bunnings will run into the conundrum that most online retailers face: can you charge consumers for the extra work of picking, packing and delivery, or do you absorb some or all of that as essentially a marketing cost? Do you formalise that marketing cost in an arrangement such as Amazon's much-copied Prime service? This is complicated by the fact that, given its logistics structure, all of that process would have to be performed at the store level. It's arguable that these are specialised tasks, so would this fit into its model of using employees in a mixed role of both customer service and stocking?

    What seems likely, over the next year or so, is that we will see click-and-collect spread throughout the store network, and that this will be followed by very selective delivery services. For example, it's common that at certain seasonal points homeowners will buy large bags of fertiliser or mulch for their gardens. Bunnings could introduce something like an annual subscription service for those products, and then run single delivery runs, where trucks set out on a Saturday morning loaded down with bags of mulch, and follow the most effective delivery route through an area.

    In the end, the most we can say about Bunnings' digital plans is that we don't know. Going on past experience, we are likely to learn more at the upcoming Strategy Day, but it's likely even then many questions will remain.

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

    bigbox

    Traralgon H Hardware

    Andrew Graham takes his Dad's 30+ year-old store into the future

    Located in Victoria's Latrobe Valley, this H Hardware store has worked hard to expand its market through innovative products, great staff, plus new marketing initiatives online and to women

    When we imagine where –regionally – future developments will come from, most of us think of urban environments, or at the very least the suburbs and associated regions of major cities. Yet, in Australia at least, that's far from being the case. Rural and ex-urban areas have contributed more than their fair share of novel developments and inventions throughout the nation's history.

    Given that, it's probably not so much of a surprise to find that many of the innovations in hardware retailing originate in regional areas. In the case of Taralgon H Hardware and Andrew Graham, these innovations are about finding ways to expand market reach into new areas. In particular, and what first caught our attention about Andrew, is his work on reaching out to female customers and tradespeople.

    Traralgon is located 144km (or 160km by road) east and a little south of Melbourne, Victoria. It's in the Latrobe Valley, which is situated in the broader region of Gippsland. With a population of 25,500, Traralgon is Victoria's 11th largest town, just behind Mildura and Warrnambool, and ahead of Wangaratta at 18,600. The nearby towns of Moe and Morwell combine to add a further 28,000 to Latrobe's population, which recorded a total number of 75,000 in 2017. The entire Gippsland area has a population of 272,000.

    The Latrobe Valley is well-known for its production of electricity for the Melbourne market through the use of its brown coal reserves. Traralgon also has a papermill, first established in 1936, and then expanded post-World War II. It shares an active dairy industry with much of the surrounding district of Gippsland, the verdant green paddocks supporting a Lions dairy plant, among other commercial enterprises.

    Historically, Traralgon was sufficiently prominent in Victoria that 65 years ago it was one of the towns where Her Majesty, Queen Elizabeth II, stopped to greet the Australian people, on 3 March 1954.

    All that sounds good, but what is really unusual and interesting are some of the less likely activities the area has nurtured. It is also home to Australia's only aircraft manufacturer, and is currently set to provide strawberries to Melbourne, via Australia's largest hydroponic strawberry glasshouse, covering 12 hectares. The Latrobe Valley has been selected as the trial site for an electricity-generation "microgrid", which will enable farmers and others to directly share excess electricity generation, without going through a central provider –a bartering arrangement that will be managed through blockchain accounting.

    The store

    Given all that, it's perhaps not such a surprise that you would find someone who is building a real presence in the Australian independent hardware retail industry working in Traralgon.

    The Traralgon H Hardware is situated on Church Street, right near the town's centre, where it has been operating for several decades. It doesn't take long in a conversation with Andrew to realise you are talking to someone who takes hardware retailing very seriously. He has taken a new approach in areas such as marketing, product selection and staffing, but it's the fact that these ideas are built on an in-depth knowledge of hardware that really impresses. He's that rare combination of a second-generation hardware retailer who is able to retain the essence of long-term practice, while also integrating new business opportunities, and updating old practices.

    The store in Traralgon was originally opened by his father, Rob Graham, in 1988, and his mother, Charmaine Graham (a nurse by training), worked alongside him. This followed on from a previous hardware store the couple had opened in suburban Mordialloc, in 1983, meaning the family has been in the business for 36 years now. (Andrew's parents are originally from Moe.)

    Hardware retailing came after Rob's career in the Australian Navy, which he joined as a teenager. As Andrew tells the story:

    Dad left the navy because he was stationed in Sydney. So, he came back to to Frankston and then did the store in Mordialloc, sold that, came to Traralgon, and a year later, bought this store. Which from memory was a tiling and hardware store.
    We were a Homestead store for that period. Then I think it was 1996 or 1997 they had the merger and became Home Hardware. I think the population has grown like four times from what it was.

    It wasn't just the store and the business sense that Andrew gets from his father. It's evident in what Andrew says that Rob also had a strong passion for the business.

    Anyone who knew Dad, knew how passionate and vocal he was. I used that to go to the Home Hardware regional meetings, and pretty much pull him out of them!
    He was passionate about the businesses. He was on the selection committees for the catalogues, when they used to have those. It would have been in the late 1990s to the early 2000s. Dad was on the board, which was something like the members executive, like I am on the members' exec for HBT.
    He was very well-known and he would be very vocal about that because when they started setting catalogues nationally, he fought back against that. When something that works here, won't work in Queensland, for example. You are going to have that going either way, but it was really about having input and finding where it sort of does work nationally. That's what he was really asking for.

    With a history like that, it's no wonder that when Woolworths bought out Danks, and Home Timber & Hardware Group (HTH) along with it, after decades with HTH, Rob decided to leave that group and join HBT instead.

    When all that stuff happened with Woolworths – it was all too corporate for us. If I told the old man we were going to go to [Mitre 10] Sapphire today he would probably burn the shop down! And that's been the beauty of HBT. It's like every input you have is at least listened to and you get an answer back to it. Meanwhile, the corporate [stores] have got the blinkers on. They only feed the stores what they need to know.

    While Andrew has been happy with the transition to the HBT brand, it's the shift up in HBT to H Hardware branding that he sees as giving his store a real spark. He sees the brand as having a very bright future, combining the best of what the corporate independent groups receive with the responsiveness of non-corporate, cooperative groups.

    If I had of known about H Hardware when we left Home Hardware, I would have gone into it at 100% straight away. Trying to do your branding on your own is just hard. It costs a lot of money.
    The exclusive products with H have also been good. We had a family come from the Mooroopna H Hardware store when I was working on a Saturday, and the kid saw my [branded] car at the front and wanted to come into the store.
    His name is Mitch, from memory, and he does a lot of their Facebook posts. He's like a six or seven years old and he's like the mascot of the store and he wanted to stop in.
    It's cool that we are getting recognition, there's more popping up everywhere. And that's all it takes, once you get a bit more traction in the industry, we'll start to get more known. Once there's more of us in a similar area, we can start doing some sort of marketing together today. That's what we used to do when we were a Home store, we'd all put money together, do some TV, and then you can spread your costs a lot more.

    Today's hardware

    While issues about buying groups and the role of branding in helping hardware retailers grow are important, in today's environment there are a couple of things you have to do right out of a dozen that are equally important.

    To name some of those issues: there is hiring staff, firing staff, wage calculations, product selection that provides just the right price/quality/availability balance so that narrow margins can produce decent profits, store design, intrusive council regulations (notably about footpath displays and signage), planning regulations, technology –both for driving sales, as well as understanding new product technologies –sales reps that are overstretched by margin pressure on supplier companies, the exchange rate of the Australian dollar, as well as whole new ways of marketing.

    We haven't even mentioned Bunnings yet. And not just Mum and Dad's Bunnings, but the Bunnings Masters built, which seems to be almost everywhere, and "coming soon" to any likely market that crops up.

    For the next generation that will shape what hardware retail will be in the future, it must feel at times like reaching one of those unexpectedly hard levels in a video game (such as the tubular level of Nintendo's Super Mario World) where even though you've demonstrated good skills to come that far, you now have to develop a whole new set of skills if you want to continue.

    The answer seems to be to not only absorb the lessons of the previous leaders of independent hardware retail –the importance of personal relationships, personal service, closeness to the community, forging good commercial relationships, and extending a helping hand to tradespeople when possible –but to equip themselves also for a dynamic approach to the retail environment.

    The first step we see these leaders taking is to make an effort to step outside the hardware retail "bubble". For Andrew that meant working elsewhere in the hardware industry, and even stepping entirely outside of it for a time.

    When Bunnings opened [in Traralgon, in June 2012], I went to work for some other businesses. So I had the opportunity to do something different.
    I ran the Plumbtec in Frankston for about five years. I also worked for Beaconsfield Home Hardware for a couple of months, then sold cars for a couple of years. I really learnt heaps there, surprisingly, especially sales techniques.<
    Then I ran the Plumbtec in Warragul, which is part of Burdens Bathrooms, and I also learnt a lot there. I had 250 staff, it's an old business so it had a boys club and I don't believe in that stuff. I'm not a politics person and I actually came in and about three guys in the business had applied for the job and didn't get it. I got the job so I was already on the back foot with those people –and I didn't care!
    A big thing that businesses don't work on these days is culture. It's something I've been really pushing in the shop here for the last three years. That's what I learnt when I left Plumbtec, it had a poor culture, in my opinion.

    While that kind of informal education is key, Andrew also knows that formal education plays a part as well. That's why he's currently in a program to obtain his Masters in Business Administration. It's a program that not only provides a structure to business thinking and strategy, but also the tools to understand and express what is happening in a business. Culture, understanding what it really is and how it works, is one of those tools.

    Not that Andrew thinks that having a great business culture is an easy thing to pull off. As he points out, that is especially the case in hardware retail, where there are long work hours, and a range of stresses, from being polite, courteous and engaging with customers, dealing with the "big personalities" of some tradespeople, and, of course, more direct physical stress that comes from shifting heavy things, as well as dealing with hazardous substances daily.

    So culture is a big thing. The boys are working 7:00am until 5:30pm sometimes. And it's physical and draining, so if you don't have a [good] culture in the business they're just gonna burn out. Be spiteful, talk behind the boss's back, and it festers into your customers. Because they're on site, they are the face of the store, they're talking to customers. They are supposed to be salespeople –not just your delivery drivers.

    Andrew has some very clear ideas about what it takes to build a better culture in hardware retail:

    It's things like chatting to staff more than anything. I don't like saying that you want to be their friend. Because if you want to admonish them, or even possibly dismiss them, then you don't want to be their friend. But you have to make that relationship with them. So you've got to get to know about their home life and hobbies, and be aware of of their actual personalities, how that affects them, because everyone is different.

    But it's more than that, too, for Andrew. He's taken an active role in his community to employ people who have disabilities.

    I've been hiring a few staff from one of the local disability agencies lately. The lady who I work with from Wise Employment is just awesome. She's come from corporate human resources and recruitment.
    Most people think disability services is about hiring someone with autism or Down's [syndrome], or something like that –which is cool as well. My brother-in-law has Down's and he's completely hilarious. He works at Woolworths, so it's not like he can't work in this industry.
    That's what everyone thinks of. They don't think that people with depression and anxiety also have disabilities.
    So I'm a big advocate. My wife has been a respite carer for 12 years. Because her brother has Down's, she's always been involved with it.

    It's not, Andrew is quick to point out, just some entirely charitable thing to do –there are other advantages as well.

    Obviously it helps to get subsidies from the government, but also I'm finding the people I hire from Wise work harder. And not just work harder, but they really want the job so they are a lot more motivated.

    Accepting people as they are, and helping them to fit into an enabling store culture, while at the same time keeping the productivity up, is something Andrew also extends to younger hires.

    My Dad, for example, he really can't handle managing some of the younger staff. Attracting younger people to the industry and then managing them properly, that's a big thing when I talk to everyone at HBT.
    One of my [MBA] subjects was about managing the millennials and how it is 100% different. It's not that they don't work hard, they just work differently. Different work ethics, different lifestyle etc. So we work long hours, and you have to embrace it.
    We've got a guy who plays cricket, and we let him go home early on a Thursday so he can go to cricket training. That's worth more to him than any pay rise. Just so he can have a lifestyle.
    That's a hard thing with a lot of these older guys in the industry. They don't understand, they just think this younger generation is outstandingly lazy. It might look like that, but, really, it's not.

    One of the keys to getting HR matters sorted out, Andrew believes, is to make use of outside consultants for some of the important parts.

    I make use of the local Victorian Chamber of Commerce, and I've got a woman named Crystal who really helps me out. It cost about $1200 a year, and you can call her and she'll just get the right person to call you. On their website, you can download every template you can ever think of.

    Sometimes, however, Andrew has called in even more specialist help.

    I employed a woman last year, who was an HR specialist. She wrote all my workplace contracts. Once, I also got her to help dismiss a staff member whom I knew had sort of a jagged history with employment. He had already taken someone [through the complaints process] for unfair dismissal. He came into work one day and was moving one of his elbows like he's hurt it.
    And then I found out he had started recording conversations with my Dad, and with my sister who works here as well. So I thought, this is just going to become bad.
    I got her in and she was like this silent assassin. She is such a nice, quiet young lady. She just let him know he was going to be dismissed with the most monotone, polite voice.
    I learnt a lot on the spot watching her do it. One thing she did was to offer to provide him with support afterwards, like "if you want to sit down with me, I'm happy to go through everything with you". If I said, "do you want to sit down have a chat afterwards for some support?", it wouldn't work! But she was an independent person doing it. And that's something like $60 to take care of what could have been a big problem.

    While that is something of the less pleasant side of managing staff, Andrew is more drawn to the side where a business can directly improve the worklife of people, enhancing both their productivity and earning potential. What dominates that area is supplying good quality training, for the right staff.

    Something I went into the last couple of years is to find the best way to educate my staff. A lot of people in this business try to do everything themselves. Every self-help book you read tells you not to do this! Easy to say but hard to do!
    One of our new guys has been with me for about four months now. I hired him from the local race club, he used to manage the restaurant. I hired him because he had management experience, and he used to manage the pub in Warragul so he can talk to everyone, which includes those tradespeople who have "big personalities".
    But he turned out to be really good with our systems. I just unloaded everything on him. Like, information on every supplier I know, how to do everything on the computer. The growth in him was the quickest I'd ever seen in a staff member. He's just very good at absorbing stuff, which really helps.
    Doing that, I could instantly see why it was such a good idea. It's made my life much easier. So I've been trying to do that a lot more. But you can see with the older store owners, like Dad –he can't do that. And he doesn't even really want to unload most jobs. Because the way he had to run the business, you had to do everything yourself. And at that time, 20 years ago, you actually could.

    Marketing

    Many retailers struggle a little with marketing, while for others it's a natural part of the business –and Andrew is very much in the latter category. As with most "switched-on" marketers in hardware retail, Andrew's first point of reference is the rise of Facebook as a marketing platform.

    It's all marketing, and you want to gauge your return. That's why Facebook marketing is good, because you can see the actual return.
    I tested the local paper. We paid for a Christmas ad in it. The ad said that if you bring it in with you, you would get 20% off as well as going into the draw to win a $500 gift voucher.
    Only one response. It went out to 60,000 people in the area and only one came in.
    You've still got to wade through the crap on Facebook but at least you can see people talk about it, you can see there is interaction. It's time-consuming, but you've got to do it.
    I've been trying to work out how to get more people more interactive with the business this year like YouTube videos, so that's my next job to do.

    One problem Andrew and others have encountered, and a reason why this kind of marketing can be so time-consuming, is that most suppliers have not really geared up to help independent retailers with marketing their products.

    The problem is suppliers don't give us enough marketing material. The thing that really annoys me is a lot of suppliers do quite a bit of marketing for Bunnings, but don't contribute much to our marketing. Companies like Holman –they've got a great range and give a great deal to HBT members –but when it is advertised on TV, it's constantly Bunnings ads for Holman. I know Bunnings helps to fund that, but it's just frustrating that they don't give us videos or anything like that, that we would happily use. You go on to their YouTube page and there's Bunnings logos on some of the videos so you can't even use them. When they don't give you enough marketing you have to do your own which is very time consuming. For such good products, it's really frustrating.

    Women

    One of the areas where Andrew is far ahead of most hardware retailers is in understanding and getting better results from the women's market. We've seen a lot of efforts to engage better with this market which have come off as at best a little condescending. However, Andrew's approach has been very different, and very effective. It all starts with special events, a "Ladies' Night", but one with a very different focus.

    I'd been talking to the ladies on staff about doing a Ladies' Night, and so we had one –and it went crazy! It went really well.
    A lot of what my thoughts were that in the Latrobe Valley we have this situation. We have a lot of guys –because of what happened with the Hazelwood power plant shutting down in 2017 –who have gone into fly-in, fly-out [FIFO] work, so they're not home. Also, family separations are bigger these days, so a lot of ladies are trying to learn home maintenance on the fly.
    So, they really needed to know how to do the work. I did things like getting a local tradesman to come in and show them how to fit a door handle. We had Sheffield here, Bremick, Amgrow, PPG. Ladies were buying hand tools, drill bit sets and more. It was a really good vibe. They were asking the tradesmen questions and pulling things off the shelf.<
    The only criticism we had was that they wanted more crafty stuff. I didn't want to do that because one of our competitors do a lot of them and they do all the crafty stuff. I actually want to make this practical.

    What's evident in speaking with Andrew is that what makes his approach to the women's market so different from other hardware retailers is that it is holistic. Rather than just trying to "bolt on" sales to women, he's integrated women into his sales staff, and into the tradespeople he markets to as well.

    There are a lot more apprentices coming through who are women which is awesome. In the Valley, we've always had some of the best tradesmen in the area because of the power stations up here, and all that's being privatised now. It's all been changing, and it's good to see a lot more women coming through.
    We get a lot of ladies coming in here, because I've got a lot of women staff in the store –it's a 50/50 split. And sometimes you see people gravitate to the women more.
    I just hired the first lady to work in the timber yard. She's been here two months now, and she's picking it up pretty well. Her Dad was a plasterer and she also knows some of the builders. When I was at Plumbtec, I used to have a lady who worked with me on the trade desk. I find them more level headed, they don't get angry easily. However, you need to watch out, because they can hold grudges a lot longer than guys usually do!

    It's not only on the supply-side of tradespeople that there is a better gender split, there's also a specific demand for female trades as well.

    I am getting asked a lot more for lady tradespeople. I was speaking to a guy who does work for the Office Choice store, and he had to do a job for a law firm that specialises in domestic abuse and domestic violence. They asked specifically for lady trades, because they want to support that area, but it's also about being more comfortable.
    There still are not enough lady tradies down here at all. I'm trying to build up a network of lady tradies. In fact for the next ladies' night, I've got a lady plumber, a lady builder, and a woman landscaper. That will be great for the training on the ladies night.

    One reason why Andrew was keen to adopt the ladies' night approach is that he hasn't found "trade nights" to be very effective.

    Builders just don't appreciate them anymore because there are so many. Also there weren't many coming in because they were knackered at the end of the day. So I started doing breakfasts, and still only a few turn up.
    But what set me over the edge was we had a Christmas party for the builders not last Christmas but in 2017, and I bought a thousand dollars worth of grog and food. We had three people turn up. Then they complain that they don't get anything for free!

    To read these and other articles in our HI News PDF magazine, please download here: hnn.bz/pdfs/hinews-5-01.pdf

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    House prices fall, renos on the rise

    Panic is, as usual, oversold

    ABS stats for renovations show growth, and that alarm over house prices is misplaced

    Most of us in the home improvement and hardware industry will be familiar with the sometimes frantic predictions of falls in Australia's house prices. This starts with near-panic announcements of price declines, which tend to increase during the first six to 12 months, followed by uncertainty, with a mixture of dire warnings and more optimistic forecasts, followed by a price recovery.

    That was pretty much what we went through from March 2011 through to September 2012, and in a milder form from September 2015 through to June 2016. The current panicky state started around December 2017. While we are still in a state of price decline, this has moderated from predictions of a 20% plunge in values, to falls in the mid-single digits, with some oversold suburbs hitting double digits.

    For our industry, the real point of house price behaviour relates to how future sales of goods will be distributed. Overall sales for hardware retail tend to pretty much track growth in gross domestic product (GDP).

    When dwelling prices are high, and trending upwards, there is increased activity in home and apartment building. When those prices decline, according to a long-held belief in the industry, if GDP is growing at an acceptable rate, expenditure shifts to renovations.

    Graph 1 illustrates all these trends for Australia as a whole. While this is a very regional situation, we're using this graph because it does give a pretty good overall view of the situation.

    The orange line represents the Australian Bureau of Statistics (ABS) numbers for the weighted index for house prices in all eight capital cities. HNN sees the bubble in prices starting with the strong increase in house prices beginning with the December 2016 quarter. This followed a moderated market from September quarter 2015 through to June quarter 2016.

    The red vertical lines indicate reductions in interest on the cash rate by the Reserve Bank of Australia (RBA). There is an apparent relationship between these rate cuts, and the stimulus on the house price.

    In terms of what led to an imbalance in the housing market, the interest cuts in May and August 2016 seem a little dubious. However, what needs to be understood is that the year-ended non-farm GDP growth figure for March quarter 2017 was just 1.8%, and for June quarter 2017 it was just 1.9%. The stimulus the RBA was applying at that time was intended for the broader economy, but, of course, it affected everything, including the housing market which was already sufficiently stimulated. Hence, the bubble.

    In its statement regarding the first of those two rate decreases, the RBA said:

    At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. This follows information showing inflationary pressures are lower than expected.

    HNN's analysis of this, as we have written in the past, is that the Australian economy had been braked a little too hard as regards inflation, and actually entered a very brief period of deflationary activity — which the economy is still recovering from today.

    At the time of making the second of these rate cuts, the RBA commented:

    Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

    Unfortunately, that's not how it worked out — though the RBA was still definitely correct in cutting rates, given the state of the overall economy. The interest cuts contributed to five quarters of strong growth in house prices, with the ABS price index going up by nearly 11%.

    The current "housing price crisis" consists of this: from the peak in December quarter 2017 through to the recent figures for September quarter 2018, the price index fell by 2.85%.

    That would indicate that the price index would still have some way to fall before the RBA gets around to considering another cut in interest rates. If the index continues to fall, down below the level of December quarter 2016, cuts might come up for consideration. Even if that did happen, we would think the rate cut would be another 25 basis points, and happen in July/August 2019, after the Federal Election. It seems more likely, however, that prices will stabilise, and no rate cut will be required.

    The other interesting aspect of the graph, from the perspective of our industry, is the green line, which traces the ABS statistics on alterations and additions, which we would all call "renovations". These numbers are derived from household expenditure estimates, and so track most renovations, including those that don't show up on building permit applications.

    What we see here is a very sharp fluctuation, with spending dropping back to 2014 levels in the second half of 2017, before rebounding sharply to the highest level we've had in the September 2018 quarter.

    If we were to estimate why this happened, we would suggest it was a response to the increase in prudential oversight on lending. For example, a typical way of funding a renovation is through a line of credit loan, which is by its very nature interest only, but secured by the value of a property. With interest-only loans receiving increased scrutiny, these could have been more difficult for borrowers to obtain — at least initially.

    Probably what we are seeing in the graph for recent quarters is a combination of factors pushing up the spending on renovations. The first is that if regulations depressed lending for a time, there is a "catch-up" factor at work, as delayed projects get the go-ahead. Secondly, with the drop in house prices, more homeowners may be thinking of renovating rather than selling to trade up. Finally, with the drop of house prices, there has been a decline in building activity, making trades more available on the market, thus reducing the prices they might charge.

    What happens next?

    It's likely house prices for December quarter 2018 will show a further decline, while renovations will indicate a levelling-off, or slight decline for that quarter. The March quarter of 2019 will show similar trends, though house prices will further stabilise.

    The results for the June quarter of 2019 will be crucial to interest rate settings. Given strength in other measures of the economy, we could expect anything from a mild decline to a mild increase, which will be very much a function of the number of properties offered for sale. If that is the case, interest rates will remain stable.

    Renovation activity will be an interesting indicator to watch. HNN thinks this is likely to track numbers such as wage growth over the next year or two, as householders take a more conservative approach to credit. In general, 2019 is likely to be a more cautious year, as consumers — especially renovators — seek value for money, and more substance than flash in their home renovations.

    That should mean an uptick in some standard home maintenance categories, such as paint, as well as an increase in less expensive renovation items, such as lighting, plumbing fixtures, cabinetry hardware such as handles, and DIY storage projects.

    Other areas where we could see growth would include smarthome, both for controllers and appliances, as well as an increase in the sale of heat pumps for heating and cooling, spurred by the recent brutal summer we have endured.

    Percentage change quarter-on-quarter for alterations and additions, by state and territory =

    statistics

    Quick Fix: Bunnings FY2018-19 H1 results

    Lower sales growth, sustained profit growth

    Revenue was up 5.3%, EBIT up 7.9%, store sales growth up 5.5%. Bunnings plans to expand in kitchens, bathrooms and installation services.

    The Wesfarmers-owned Bunnings announced its results for the first half of FY2018/19 on 21 February 2019. To quickly run through the most interesting numbers: Revenue was $6909 million, an increase of $343 million or 5.3% on the previous corresponding period (pcp), which was the first half of FY2017/18. Earnings before interest and taxation (EBIT) grew ahead of sales, coming in at $932 million for the half, up by 7.9% on the pcp. Total store sales growth was 5.5%, and store-on-store (comp) growth was 4.0%. While these numbers were down on past performance (10.1% and 9.0% respectively for the previous half), they are basically in line with Bunnings' performance pre-2014, which was prior to house prices really spiking.

    The company also delivered an outstanding return on capital (RoC) of 50.2%, up from 47.0% in the pcp. For much of its history, this figure has been under 35% for the big box home improvement retailer. (RoC effectively measures how well a company is managing the capital invested in it. It's evident that Bunnings is doing what it does when markets grow at a slower pace: concentrating on delivering profit, through curbed spending, and entering new product areas that provide better opportunities. One analyst did suggest that falling comp store sales might reflect an increase in "cannibalisation" (intra-network store competition) as Bunnings continues to grow its store fleet. Bunnings managing director, Michael Schneider pointed out that some cannibalisation was actually planned, such as with the Bunnings warehouse opened in Robina, Queensland.

    A good example, is we opened a warehouse in Robina, in Queensland during the half, and it's a fantastic new warehouse, but it's actually taken some pressure off our Burleigh Waters warehouse, which overtrades.

    He also stated, in response to a direct question, that sales per-metre continued to increase — which is the key measure for determining whether expansion is working or not.

    HNN (Hardware News Network) would speculate that one reason for this boost in profitability has been a further increase in the company's share of DIY retail. The Metcash-owned Independent Hardware Group (IHG) in its results for the first half of FY2018/19 reported a shift in its revenue source to 65/35 on the trade/DIY split versus something more like 58/42 in the past. Given that IHG's sales were nearly static at around 1.25% growth in the half, it seems likely that Bunnings picked up the DIY business IHG lost. As is commonly known, margin in DIY is far higher than margin on trade sales.nUnusually, Mr Schneider, was very clear on areas in which the company is pushing harder, as well as some new initiatives. In his prepared remarks, Mr Schneider stated:

    We're investing in categories where we currently have low market share, such as kitchens and bathrooms where we know we can deliver a competitive and quality home improvement solution. Range expansion in categories such as home automation, independent living, outdoor living, power garden and storage have been really well received by our customers as has our growing range of services that connect customers with local experts, making installation easier and more affordable. Importantly, we continue to focus on delivering better customer experiences, whether that is online or in-store.

    Reading between the lines, what we see here is in part a response to demographic change, accommodating a higher percentage of elderly people, while also catering to the tech needs of the Millennial generation, and an increasing trend to combine purchases with do it for me (DIFM). In terms of the plans Bunnings has for the future, Mr Schneider had this to say:

    Looking to the second half of the year, we will remain focused on further investment in customer value and broadening our product ranges in categories such as smart home technology, home storage, cordless cleaning, outdoor structures and on trend green life, advanced trees and turf, just to name a few.

    One of the categories that stands out quite clearly is cordless cleaning. Bunnings has strong ties with Hong Kong based Techtronic Industries (makers of Ryboi, AEG and Milwaukee power tools). That company acquired a vacuum cleaning division five years ago, and has turned it into profitable line recently. This could provide the tools to make this a viable sector for Bunnings.

    Services also remain a key focus for Bunnings:

    We will continue to expand our services offering, creating meaningful and personalised customer experiences and meet their needs as behaviours evolve. Services will include facilitating installation and assembly offers, in-home design consultants to make projects even easier and partnerships with our suppliers to continue to innovate our offer.
    We are also excited about the opportunities in the commercial side of our business. We will continue to focus on building more substantial commercial categories across all channels so that we have — so that we offer relevant brands at an attractive price and increased convenience for our trade customers.

    It's no coincidence that services and commercial potential are mentioned together. The ability that Bunnings has — and which so far has not been matched by other home improvement groups — to provide fixed-price installation services to customers buying goods such as airconditioners will not only help it better secure some markets, but also help it to build stronger relations with tradespeople.

    Digital

    However, the biggest change has been Bunnings' move to focus more on the potential of digital and online retail. The company has already started testing click-and-collect, according to Mr Schneider:

    During the half, we've launched a click and collect trial for our leading range of power tools at our Craigieburn warehouse in Victoria. We have since expanded the trial and now offer more than 20,000 products for purchase online and collection in store. We expect to roll out a click and collect pilot across Tasmania in April with the learnings from this trial to inform rollouts across other states next financial year.

    Later, in response to an analyst's question, Mr Schneider said that company was around 18 months away from rolling out a fully-transactional website, with a broad range of products set for sale.

    Analysis

    HNN will be providing a more in-depth analysis of Bunnings and Wesfarmers in an upcoming issue of HI News. For the moment, it is worth noting that 2019 is probably one of the most significant years in the history of both Bunnings and Wesfarmers — more significant than 2014, when the former managing director of Bunnings, John Gillam, chose to take on Masters Home Improvement directly.

    HNN believes that the internal growth targets being set for Bunnings are something like 50% over its current size over the next five years. This would mean target EBIT of $3 billion. Much of that growth will not be in areas that directly compete with the markets currently engaged by independent hardware retailers — largely because those markets are not profitable enough.

    What we believe the managing director of Wesfarmers, Rob Scott, has spotted — along with Mr Schneider — is that technology, especially digital technology, can provide the way out of the particular box Wesfarmers has found itself in.

    That box is of Wesfarmers' own making, and was, for close to two decades, a particularly profitable box to be in. Wesfarmers identified the use of the everyday low price (EDLP) strategy as key to growing businesses in Australia's newly post-tariff retail markets. It pioneered that model at Bunnings, and then extended it to Coles and Kmart.

    However, once EDLP is adopted by the market at large, it becomes a trap. Businesses cease to deliver a high level of return on investments, and simply grind away at each other. This is what led Wesfarmers to demerge its Coles operations in 2018.

    Digital technology offers an alternative to the low-margin EDLP businesses. In business economics terms, digital enables companies to scale at only a relatively small additional cost. This opens up the possibility of better margins in some business areas.

    One slightly back-to-front way of looking at this kind of development is to ask what exactly Wesfarmers would do with its own data centre? Or, more to the point, what would Bunnings do?nData analytics has been the first answer to this question. Mr Schneider mentioned both bathrooms and kitchens as potential areas for expansion, and it is possible to see that analytics could play a key role in expanding these two lines of business.

    But what else might be in store for Bunnings? There are a wide number of possibilities, from a business model more based on lease/rental of higher priced items such as tools, through to consolidating the data from building information management (BIM) into a repository that could be data-mined.nLikely we will get our first clues of what is to come at the Wesfarmers Strategy Day in June 2019. Until then, we have only the hints that Mr Scott gave in response to an analyst's question about future acquisitions by Wesfarmers:

    Well, as you know, we don't give too much away on the specifics, but the general commentary I'd provide, there's an enormous diversity of opportunities that we're looking at. Yes, there is a bit of an orientation to the industrial side across a range of areas. There are some areas that we're also looking at that are adjacencies to our retail businesses. And yes, a real combination of some small, really interesting bolt-on opportunities with a bit of a technology digital exposure towards bigger opportunities, some of which we've had on a watching brief for quite some time.
    ....
    And really what it's about, it's not just about relying on where market prices are, it's also leveraging unique capabilities or relationships or synergies that we have. So something we spend a lot of time thinking about is what is it that is going to make Wesfarmers a successful buyer.
    bigbox

    HI News V.4 No.8: Diamond Valley Mitre 10

    Is The Block still relevant?

    Methven's Laura Keogh discusses career and the statistics that drive lower interest rates

    The Diamond Valley Mitre 10 store in Diamond Creek, Victoria is an old-school success that is being managed for the digital retailing age. There are not many entrepreneurs like the store's founder, Norm Hastings any more but the business is being well managed by its current team that includes his children, Paige and Brock Hastings.

    This issue features an in-depth profile of the store, and look at how it balances between being a member of a corporate group and maintaining its independence.

    Simply click on the following link to download this edition:

    HI News Vol.4 No.8: Diamaond Valley Mitre 10

    As the group head of brand for Methven, Laura Keogh spoke about the importance to her of post-grad education, and her experiences working for a wide range of companies in her native US and Australia. We also caught up with David Banfield, Methven' CEO, who let us in on some of the secrets behind the company's diverse and innovative culture.

    With the most recent season of "The Block" not managing to match the ratings for the previous season, the question mark over the "reality" renovation competition series is hovering once again. Is the franchise still really relevant to today's prospective renovators?

    We also speak to Houzz country manager for Australia, Tony Been about the site and how it can benefit hardware retailers and suppliers.

    Other companies featured in this edition include BGC, Stanley Black & Decker, CSR, SKIL and Portwest Workwear. There are also new product releases from Gerard Lighting, Kelso and Nylex.

    editorial

    Indie store update

    State awards for HTH stores

    A hardware and trade supplies store slated for an inner-city suburb of Toowoomba (QLD) has been approved

    The Independent Hardware Group 2018 Awards of Excellence were awarded to two Home Timber and Hardware (HTH) stores recently.

    The team at Peterborough Home Hardware in South Australia have taken out a win for the state's best store, two years in a row.

    The store were awarded for its cleanliness, outstanding customer service and large stock range. Store owners and managers, Nick and Konny Srour have been serving Peterborough and the surrounding towns of Terowie, Yongala and Orroroo for nearly 14 years. Nick Srour told The Flinders News:

    For a regional country town, many people comment about the amount of stock that we have in the shop and ... we have travelled around a fair bit to a lot of country towns and it is hard work stocking a store in a country town but we realised early on that if you don't have the stock people go elsewhere.

    Winning the award for the second time helped them realise that what they provide is award worthy. They strive for exceptional customer service and they believe this is what will keep their customers coming from far and wide, time and time again. Nick said:

    I came in here when I was a builder many years ago and you used to have to badger the staff to find out when your order was coming in and we didn't want that to happen. We have a process in place and we try to get the products that the customers want as soon as we can.

    There is also an added element to the store's customer service and that is their four legged friend Sandy, who wanders the store and greets the customers. Konny said:

    Everybody loves Sandy, you can't not love her she is so cute. She came to us when she was five weeks old and everyone loved her. One of our customers brought her into the store and we couldn't resist. From then on, she gets upset if we don't bring her, and the customers are upset if she is not here.

    The team want to thank Peterborough and surrounding towns for keeping them in business and supporting them as a local business choice. Both Nick and Konny pride themselves on being described as the "mini Bunnings of the Mid North" and "best store ever".

    Dipper's store

    In Moree (NSW), Dipper's Home Timber and Hardware won the Northern Region Store of the Year Over 1,000m2 and the Northern Region Garden Centre of the Year. The victory took owner, Rebecca Diprose, by surprise, according to the Moree Champion. She said:

    I think these awards are reflective of our great staff and the hard work everyone has put in over the past 12 months. We've embarked on substantial physical changes that customers will notice - visual merchandising that is clean and fresh, de-cluttering so visitors can see through the store, and really efficient labelling - the right product and the right price.

    Rebecca's vision for Dipper's is to encourage a retail outlet that "people can take their coffee and go for a wander in a genuine customer friendly shopping environment".

    Our interior decorating, shelving, merchandising is all about increasing our store standards, and we believe there's still room for improvement, which we'll be focusing on over the next 12 months.

    South Toowoomba

    Toowoomba Regional Council officers have approved a proposal to create a nearly 500sqm hardware store tenancy at 19 Pechey Street in South Toowoomba (QLD).

    The new development would be built in two stages, with the main store, 15 car parks, loading bar and landscaping down first before a warehouse tenancy and another loading bay were added later. Planning officer Peter Swan said in his report he was satisfied that the code-assessable application had met the planning scheme requirements. He told The Chronicle:

    The proposed development generally complies with the assessment benchmarks or it can be conditioned to comply. Where the applicant has not provided sufficient information, conditions have been imposed to ensure compliance.

    Those 81 conditions covered landscaping, waste management, fencing, stormwater and visual amenities.

    South Toowoomba doesn't currently have a hardware store, with the nearest one being a Mitre 10 in Darling Heights.

    Download

    To read more in Indie Store Update, download the latest issue by clicking on the following link:

    Indie Store Update - HI News Vol. 4 No.8
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