ABS hardware retail stats May 2019

Victoria jumps ahead

While most states and territories had average to poor increases in hardware retail sales for May 2019, Victoria returned a strong result

The Australian Bureau of Statistics (ABS) has released stats for retail sales in Australia for May 2019. Compared with May 2018, the figures show a rise of around 1.95% for Australia overall, reaching $1648 million. On a trailing 12-month basis, overall Australian sales to May 2019 increased by 2.24%.

On a state and territory basis, Victoria (VIC) showed the strongest lift in month-on-month figures, increasing by 9.34% over May 2018. This sharply contrasted with all the other regions, with the next highest figure just 1.33% for the Australian Capital Territory (ACT). New South Wales managed only a 0.48% lift, while Queensland increased by 2.26%, with only Tasmania performing worse, with a loss of 2.28%.

Looking at the states and territories on a 12-month trailing basis, the numbers look better for most regions - indicating that May 2019 had particularly poor results. VIC is still significant ahead, with growth of 8.32%, but the ACT shows growth of 4.97%, and South Australia (SA) lifted by 3.37%.

Chart 2, which shows the percentage change for trailing 12-month numbers, shows some interesting developments. Both VIC and Western Australia (WA) are breaking away from the rest of the pack, with VIC outperforming, and WA underperforming the average.

Analysis

At the moment, it's difficult to really work out exactly why VIC is outperforming the other states to such an extent. It is certainly the state with the largest population gains in recent times, which is a natural driver of construction spending.

Anecdotally, it does seem there has been an increase in spending on renovations, especially the upgrading of established housing in the inner suburbs of Melbourne which have higher-priced housing. However it will be another three or four months until enough supporting statistics have emerged to indicate where the growth is coming from.

statistics

Big business in pet care

Pet care and services is a growth market

Spending on pets is rising as the "humanisation" of dogs and cats increases, and hardware retailers can capitalise on it

Australia has one of the largest proportions of pet owners in the world, with dogs the number one four-legged friend, closely followed by cats. More than 60% of Australian households own pets, according to the Pet Industry Association, driving over $12 billion in annual spending on pet products and services in 2016. That figure increased by 42% between 2013 and 2016, according to Animal Medicines Australia, and has continued to grow since then.

Consumers are increasingly humanising their pets by regarding them as family members - and spending on them accordingly. University of Tasmania retail expert Louise Grimmer told SmartCompany the pet care and services industry is mirroring what's already available for humans. This includes everything from DOGTV to pet cremation services. She said:

The sky is the limit, but it's really using technology and applying it to the pet supplies industry ... just thinking about what we like as humans and applying it to our pets as well.

Ms Grimmer also said businesses targeting a higher price point are also finding success as owners increasingly look for better quality accessories, food and services for their animals.

Elyssia Nelson launched her pet accessory business Wolf & I Co. last year, expanding a selection of high-quality dog leashes and collars. She told SmartCompany:

People are willing to spend as much on pets as they would on themselves. They want them to be looking good and have the new treats.

The dogs of the previous generation was generally relegated to the backyard kennel. The latest breed of pooches are in the house and having much more money lavished on them, with better nutrition and a focus on wellbeing. This has translated into a trend towards higher-quality pet food that has been particularly disruptive for the major supermarkets, who are facing challenger brands selling homemade and organic dog and cat food options.

Corporate consolidation

When Petbarn and Greencross Vets merged in 2013, the deal was worth an estimated AUD338 million and created the largest integrated, consumer-facing pet care company in Australia and New Zealand.

More recently, US private equity firm TPG Capital gained shareholder support for the purchase of the combined group. Vet chain and retail network Greencross operates the City Farmers, Pet Barn, Animates (in New Zealand) and Greencross Vets brands. It has more than 230 retail outlets and 130 veterinary clinics, and was listed in June 2007.

However, it has had a bumpy ride in recent years, following the arrival of Amazon and other online retailers such as Chewy. Although sales are growing, margins are under pressure, limiting earnings.

Chairman Stuart James said in 2017 that 87% of sales in its Greencross stores were made by shoppers using loyalty cards. He said a lot had been made about the "potential impact of Amazon on the Australian retail landscape" but Greencross had unique aspects to differentiate it from both online and shopfront competitors. The army of on-site vets meant Greencross provided a genuine "one-stop shop" for pet owners seeking professional advice.

TPG closed its USD4.5 billion-plus (AUD6.4 billion) Greencross deal earlier this year, and has ambitious growth plans. Sources close the California-based private equity firm told The Australian Financial Review:

Pet consumers are very resilient and have shown to spend through all cycle. While some customers will be price driven and looking for commodity style products, others are looking for premium solutions.

Despite the discretionary spend of many consumers being affected by falling house prices and higher electricity costs, the pet category is considered resilient, with owners willing to spend on products like treats, special foods and preventive medicine.

Pet ownership is also growing in Australia, due in part, to more people choosing to live by themselves with their animals.

companies

Australia no longer really a renovation nation

Borrowing to renovate continues to decline

Australia may still see itself as a "renovation nation", but the truth is that renovation continues to play a diminishing role in expenditure on housing

It is unusual times for the housing construction industry in Australia. Even as house prices come off the highs they reached during the most recent bubble, the Reserve Bank of Australia (RBA) has cut interest rates to historic lows. Meanwhile, the overall Australian economy continues to struggle on.

While many economic indicators point towards at least a stable future, two key ones point to trouble ahead: business investment as a share of nominal gross domestic product is at a 25 year low; and wage increases remain about 1% under where they should be. That's helping to fuel declines in both consumer and business confidence.

The Australian Bureau of Statistics (ABS) figures for its capital city price index were released in June for the March 2019 quarter, shown in Chart 1 (see main image).

In mid-July 2019 the ABS released, ABS 5601.0 Lending to households and businesses, a new series developed for 2019. These stats include the details presented in Chart 2, for all lending to households for dwellings, and lending to households for renovations, which the ABS refers to as "alterations and additions".

Putting these stats together both confirms much of what most Australians know about the current housing market, but they also reveal just how much the household economy has changed over the past 15 years.

House prices

The capital city price index chart is unlikely to surprise many. It shows an ongoing fall in house prices for major Australian cities since the end of 2017, with those prices falling to 2016 levels by the March quarter of 2019. The decline of prices in Perth (Western Australia) has been slower but longer running than that, as the mining industry in that state started to wind down in 2012. Hobart (Tasmania) has, in contrast, continued to show increasing prices, though that growth has moderated since mid-2018.

Sydney (New South Wales) prices have grown and fallen the most, followed by Melbourne (Victoria), with the national weighted average closely following Melbourne.

Household lending

Looking at Chart 2, it's evident that lending to households for dwellings responded to those falls, but with something of an initial lag. As you might expect, once the fall in lending began in early 2018, however, it went into a steep decline.

Perhaps the most interesting statistic of all, however, is for lending to households for renovations. Over four years, from mid-2007 up until mid-2011 or so, there seems to be a clear, direct relationship between this and overall lending to households, the two declining and increasing at nearly the same time. From that point onwards, however, as general lending to households enters a stage of steep growth over the next few years, up until late-2014, borrowing for renovation actually goes into a slight decline. That's followed by about a year of growth for renovation lending, while overall household lending at first increases, then dips.

In the final phase, at the start of 2016, overall household lending increases, and reaches its all-time peak in March 2017, then drifts lower through to the start of 2018. Renovation lending also increases, reaching a seven-year peak in September 2017, after which it begins to drop sharply, and continued to do so until October 2018.

Analysis

Since September 2003, lending to households for renovations has been in a steady, persistent decline, even though there are a few upward trend periods along the way.

Chart 3 shows lending for renovations as a percentage of overall lending to households. At the end of 2008, lending for renovations was at close to 2.7% of lending to households. In 2019, that has come down to under 1.1%.

Combined with the record amounts being borrowed for housing outside of renovations, it is evident that the broad Australian market has increased its tendency to borrow to buy a new house rather than borrow to renovate an existing one.

At the same time, however, from the perspective of hardware retailers, the market for maintenance and minor renovations has continued to increase as housing stock has increased, and the number of older houses in need of repair has also grown.

What is most curious about all this, however, is that renovation remains popular in marketing terms for many hardware retailers. It's the subject of a number of apparently popular TV shows, and is somewhat ingrained into the DIY culture.

It will be interesting to see whether over the coming years alternate ways to market hardware retail are developed, and what those might turn out to be.

statistics

A career looking after locals

Co-owner Tim Kessler has competed a 30-year apprenticeship

After three decades at the store, he believes there are not too many other things he would rather be doing

As part owner of the Home Timber and Hardware in Biloela (QLD), Tim Kessler recently told the Central Telegraph newspaper that he understands the importance of looking after your customers, supporting the economy of his rural town, and gradually building a trusted rapport with his community.

Mr Kessler said he began working at the store in 1987, but left quite soon after in 1988. He started at the store as a glazier while the store was being constructed. Mr Kessler explains:

...After about 12 months I moved on but things didn't work out where I was, so I came back. The bloke that owned the business happened to be in here at the time and said, 'Do you want your job back?' So I started back and I have been here ever since. I guess I am lucky the owner at the time must have seen some potential in me.

He was soon offered the trade manager's position, and in 1996 became the general manager, before becoming a business partner in 1998. In 2016 he became part owner with a new business partner. He said:

So, now I've been here officially since February 1989. I've done my 30-year apprenticeship so I should be right!

During that time, Mr Kessler has witnessed the store undergo many major milestones. In a previous interview, he said:

Probably one of the biggest things that has changed was the expansion of the business in 2008. But even getting the electronic cash registers and the progression to completely computerised email invoices and statements has been a big change.

Getting to know customers is a major reason why he enjoys his job so much. He said:

...You get to know your customers because it's a small town. We get to see them down the street and people know my name. There's the regulars and then there's new people who come to town and you get to know them too.
We have fun with our trade customers and there's just that good rapport going. We have good staff here, and a regular comment we get is that the staff seem to be having fun.

He understands that a younger generation want to move away from small country towns but he believes it is a matter of "making your own fun". He has also said:

I think it is a really good career for those that want a challenge in this industry. As long as they are willing to have a go, they will go a long way in this business.

Mr Kessler, who has 15 staff at the store, said business was currently "a struggle" for many.

But I think that's a lot to do with the current dry weather conditions. We seem to be doing okay.

He said it was important for locals to support local, and newcomers were often surprised by the extent of his stock range.

A customer said recently, 'It's amazing how much stuff you keep here'.

Mr Kessler said it was easy to underestimate what was on offer in a rural town, and many new customers worried that if a town didn't have more than one option they might be getting "ripped off". With a second hardware shop in Biloela, he believes it is important to work together sometimes.

When we run short of something, we can easily ring up the other hardware shop and we help each other out. Or we can point the customer in that direction or to other businesses in town that we think could help. It's all about getting people to spend money in the town and helping people out.
retailers

Dust control on jobsites

USG Boral product restricts airborne dust

The company said it advocates for healthier work sites in the building and construction industry

Respirable dust is generated in on jobsites when jointed plasterboard walls and ceilings are sanded using hand or mechanical sanders. SHEETROCK(r) Dust Control from USG Boral is made to limit the pluming of sanded compound dust through air spaces. Technology contained in the product produces dust particles which fall directly to the wall or floor junction and react better to the vacuum of mechanical sanders. The result is far less airborne dust.

Tested to the USA-based National Institute of Occupational Health and Safety (NIOSH) Method 0600, SHEETROCK Dust Control produces respirable airborne dust at levels lower than the USA's current Occupational Safety and Health Administration (OHSA) Permissible Exposure Limits (PELs). These are lower than the current PELs set by Safe Work Australia.

Increase in silicosis

Growing concern over the rise in reported respirable crystalline silica (RCS) related cases, is putting pressure on the construction industry to crack down on health and safety practices, according to USG Boral.

While governments are targeting the stonemasonry industry, and specifically banning dry cutting techniques, the company believes the wording used in new legislation from the Victorian and Queensland governments implicates all processes and products which can generate RCS. This includes plasterboard and plaster-based products.

USG Boral said it is committed to helping create healthier work environments. As a manufacturer of plasterboards and jointing compounds, it believes it has a responsibility to support employee and contractor health and safety, and reviews the products and services it provides to ensure they contribute to a safer work place. This includes improvements in the development of water-resistant plasterboard and new jointing compounds.

The crystalline silica content of raw materials can vary considerably across industries. Exposure in the plasterboard industry comes from the use of gypsum and limestone. However, local sources of both are very pure, with low levels of crystalline silica content. Tim Harrington, USG Boral category manager - compounds, explains:

Plaster based products contain very small amounts of quartz (crystalline silica) with finished plasterboard and plasterboard jointing compounds typically containing less than 0.1% respirable crystalline silica.

The Safe Work Australia Permissible Exposure Limit for RCS is 100ug/m3 over an eight-hour work day. An employee's level of risk is a combination of the type of material being handled and the manner of the activity being undertaken. That is why high quartz content manufactured stone that is dry cut at high speed, producing respirable crystalline silica above the workplace exposure standard, is under the spotlight. Mr Harrington added:

The onsite preparation and installation of plasterboard does not exceed the permissible workplace exposure standard.

In the last few years, the construction industry has adopted numerous safety practices to minimise exposure to airborne hazards, including vacuum assisted sanding tools and more effective dust masks with higher protection against airborne particulates. Mr Harrington said:

Not only do USG Boral's wet area plasterboard and SHEETROCK Dust Control provide unrivalled finishes, there are also real-world benefits. The work place of old is no longer the norm. Working in a dusty air space, spending hours cleaning up, covered in dust is not something which has to go with the territory.
products

UNSW study helps GWA develop ageing-in-place products

Study disrupts assumptions about elderly

According to GWA, there is a $200 million market for ageing-in-place bathroom products that is radically under-serviced - something Caroma's Wellbeing range will address

Not so long ago, combining the phrases "aged care" and "bathroom design" would bring to mind durable, institution-style appliances, that would help to make "gran" or "grandpa" a little more independent.

Australia's GWA Group is one of the first domestic bathroom fittings designers to realise that most of the aged care bathroom products available are very outdated, obviously in style and functions, but also because they are not suited to the height and weight of older Australians today.

It's not just about pursuing good community values. The CEO of GWA, Tim Salt, estimates the ageing-in-place home-owner market for bathrooms is worth around $200 million, and remains under-serviced. To help answer this need, GWA has released a new range of age-suitable bathroom products under its high-end Caroma brand, with the range name of "Wellbeing".

Caroma is an appropriate brand because, as Mr Salt told the Australian Financial Review, design remains important throughout a person's life.

It's strange – in some ways, as a younger person, you are bombarded with different options and brands, and then you get to a certain age and you get one option, one kit. Just because you are older doesn't mean you don't want a great design and great look. But it needs to meet certain functional needs as well as look good.

Fit for purpose

To find out what older - and infirm - Australians might really need in the bathroom, GWA teamed up with the University of New South Wales (UNSW) in Sydney. They worked with the UNSW Faculty of Built Environment as part of its Liveable Bathrooms for Older People research project, with additional funding obtained from the Australian Research Council.

The research project has run for four years, and surveyed a total of over 4600 people in the 60 to 90 years-old range. Some of the results from the survey are surprising, and some are obvious, but totally ignored by the industry.

For example, many respondents indicated the main problem they had with bathrooms was that they were far too small for them - which is obvious, when you recognise that another result was that the majority of respondents had a body mass index that indicates they are obese.

Another fact to emerge is that many elderly people will go to the bathroom two or three times a night, yet the lighting of these spaces is seldom designed to improve their safety (for example, lights that automatically turn on when the door is opened, and remain on until switched off).

The lead researcher on the project, UNSW professor Catherine Bridge, points out that research in this area is badly needed. Speaking at the launch of the Caroma products, she said:

Current bathroom design is problematic because it is not based on the design preferences of older people and it's not made from relevant and current... data. Until now, research hasn't considered the diversity of the older population, their capabilities and the domestic environments they use and current bathroom design in aged care is hallmarked by uncertainty about the safety and aesthetic preferences of older people.

Dr Bridge is one of the authors of a paper entitled, "Downsizing amongst older Australians", which examines whether smaller homes are really want older Australians need and want - it's a very good introduction to this market.

You can download the research paper here:

Downsizing amongst older Australians

The new bathroom range includes an integrated nurse call toilet suite, grab rails, raised toilets, rail showers, single-lever mixer taps and cistern-wide back rests. GWA has a white paper on ageing-in-place available that you can find here:

Caroma: The Future of Aged-Care Bathroom Design
companies

Tool maker expands with Amazon Australia

Part of a global e-commerce initiative

ToughBuilt Industries is a California-based designer, manufacturer and distributor of tools and accessories

At the launch of its Amazon Australia storefront, ToughBuilt chief executive officer, Michael Panosian said:

...We are generating significant traction since the rollout of our Amazon storefront in the US. To build on this momentum, we recently launched in Canada and are now launching in Australia, with plans to launch our products on Amazon in other international markets, as well as a variety of additional e-commerce platforms around the world.

ToughBuilt has a market capitalisation of USD14 million following its November 2018 IPO so it is not a large company by global standards. It recently announced revenue of USD5 million for the first quarter of 2019, an increase of 27.9% from the first quarter of 2018. Mr Panosian said at the time:

During the first quarter, we launched our US Amazon storefront, which has become a significant driver of demand for our products. In fact, we achieved a USD2.5 million annualised run-rate and over USD200,000 worth of sales in the first month -with just our first 10 products. We plan to dramatically expand the number of SKUs and aggressively market our Amazon storefront.
We are also advancing our mobile strategy with the launch of a new subsidiary, ToughBuilt Technologies, Inc., which is focusing on the development of new technologies geared toward ruggedized mobile devices. We were recently awarded two new design patents from the United States Patent and Trademark Office to cover our ruggedized mobile devices.
In addition to mobile devices, we are launching a suite of mobile applications that will streamline workflow through trade specific solutions, thereby increasing workforce profitability by cutting time and labour costs across a wide array of industries, although our primary focus continues to be the construction and DIY industries.

Since launching in 2013, the company has marketed its product lines under the TOUGHBUILT(r) brand name. All its products are designed in-house.

In January 2019, it announced a deal to have its products stocked at privately-owned US home improvement chain Menards that has more than 300 retail locations. Soon after, it entered into a distribution agreement with Toolbank in Europe, a specialist distributor of hand and power tools.

The company also has a partnership with Bull Sales, a third-party logistics and wholesale services company in Canada supplying home improvement chains, independent retailers, as well as the construction, contractor, and automotive markets.

In Australia, the ToughBuilt range can be found at Bunnings and Sydney Tools among other resellers.

companies

Timberlink sawmill upgrade begins

Located in Tarpeena, South Australia

The company's investment program over the next three years is part of its plan to transform into a globally competitive radiata pine business

Timberlink has begun work on upgrading its Tarpeena (SA) sawmill, starting with a new electrical substation. The company said this is expected to improve the reliability of electricity supply for the township, with all new hardware, modern design features and more reliable components.

The sawmill upgrade is forecast to be finished in 2021, and should increase both the volume of renewable plantation pine logs that can be processed and the yield per log.

Timberlink announced a $100 million investment program to upgrade its sawmill facilities, in Tarpeena (SA) and Bell Bay (TAS), in the second half of 2018. This program is expected to increase its processing capacity by 15%, and will help provide an increase in the timber supply to help support the Australian housing and construction sector.

The main focus of the investment is in Tarpeena where a state-of-the-art saw line, stacker and edger will be installed, alongside additional contraflow and batch kilns for drying timber. A drying shed will be built as part of the project, and major site infrastructure changes including upgrades to roads and storage facilities will also be undertaken.

This will transform the mill into a workplace of the future, with high tech machinery improving accuracy, safety and job security. Timberlink will train and upskill staff to run the new machinery and said there will be no job losses as a result of the upgrade.

The Tarpeena mill supports 680 direct and indirect jobs in the area and contributes more than $180 million to the local economy. This investment will create 200 jobs in the construction phase and 210 permanent full-time jobs at the mill for the next generation in the Mt Gambier region, according to the company.

A new planer mill equipment and a contraflow kiln will be installed at its Bell Bay sawmill. At the time, Timberlink CEO Ian Tyson said the investment was a great day for Australian manufacturing. He said:

We are ensuring that all aspects of the business are internationally competitive to secure our long-term future, and this significant investment will secure Timberlink's position as one of Australasia's leading softwood sawmillers.

Approximately 20% of Australia's softwood timber is imported, so to ensure Timberlink remains competitive, the business is expanding and investing in new technologies to improve efficiency and create more structural timber for the domestic market.

Timberlink, which also operates a sawmill in Blenheim, New Zealand, is parented by New Forests, a Sydney-based multi-national institutional investment manager.

Sources:

Timberlink Tarpeena Sawmill gets 90m investment - Timberbiz Timber investment boosts confidence in South Australia forestry industry - The Lead SA
companies

Pacsoft acquired by cloud-based company

ECi Software Solutions is based in Forth Worth, Texas (USA)

The addition of Pacsoft's inventory management and point of sale software to ECi's LBM and Hardlines division will increase the company's footprint in Australia

US company, ECi Software Solutions has acquired Pacsoft, a long-time provider of inventory management and point of sale software for hardware retail and trade businesses in the Australian, New Zealand, and Pacific Islands markets.

The Pacsoft team and products will join ECi's LBM and Hardlines (LBMH) division led by John Maiuri.

In addition to maximising the collective market and software expertise of both teams, ECi said it will continue to innovate, sell and support the Pacsoft suite of solutions. Its customer base will join nearly 4,000 businesses that already use the vertical-specific solutions from ECi's LBMH division to run their businesses. Ron Books, CEO of ECi said:

Pacsoft's customers face many of the same challenges that ECi's core customer base does, so we understand what they are up against and need to effectively grow their businesses. By expanding the customer base, augmenting the product portfolio and extending our geographical footprint, we can bring additional value to all of the businesses we serve...

Pacsoft is well-known for its business management systems for hardware and trade retailers, after growing its reputation for over three decades. The company's in-store and mobile POS, accounting and inventory control, and purchasing optimisation software is used by more than 500 organisations in Australia and overseas.

According to Pacsoft, they deliver visibility into every aspect of business performance-in real time and from anywhere. This insight allows business executives to make critical decisions faster, aligning with ECi's commitment to help customers both manage their businesses day-to-day, and grow sustainably and profitably. Andrew Darbyshire AM, executive chairman and CTO of Pacsoft, said:

From the earliest days of Pacsoft, we didn't want to just provide the best software with the best support; we really wanted to redefine what it means to run a business by making it easier than ever.
We are constantly looking for ways to give our customers an edge, and joining the ECi family ensures they will have a competitive advantage. As part of ECi, Pacsoft will have the resources to continually deliver the most innovative business management solutions so our customers can continue to thrive.

For over 30 years, ECi has supplied industry-specific business software solutions and services, focusing on cloud-based technologies. Privately held, ECi is headquartered in Fort Worth, Texas (USA) with offices throughout the US, Canada, Mexico, England, the Netherlands, and Australia.

The acquisition closed on July 1, 2019 and terms were not disclosed.

companies

Bunnings at Strategy Day 2019

Growth into digital

At the Wesfarmers Strategy Day, Bunnings followed up on strategies outlined earlier in 2019

Bunnings participated in the Wesfarmers Strategy Day on 13 June 2019. For Bunnings, this followed on from a site visit and presentation for investment analysts provided in March 2019, but also contained some unique content.

HNN will be covering both events at some depth in our next issue of HI News (Vol. 5 No. 3) but in the interim we wanted to provide a brief rundown of the basic topics covered, and a quick analysis of what these could mean for the hardware industry in its busy fourth calendar quarter of 2019.

Setting the pace

The presentation was provided by the managing director of Bunnings, Michael Schneider. While Mr Schneider did introduce his remarks as being, essentially, "business as usual", they were, as you might expect, anything but that.

On the surface, one of the more exciting elements was Bunnings' ongoing push into digital, with click-and-collect set to be rolled out in the state of Victoria by the end of June 2019. Mr Schneider also remarked that he expected these digital services to be live throughout Australia before Christmas 2019.

In an interesting remark about this move, Mr Schneider said:

Digital and data is all about the opportunities for our customers and our team members and our suppliers alike. So it's simply not about selling more products online. That is really, in today's retailing world, very much a hygiene factor. But it's also about efficiencies within the business, efficiencies from a cost point of view, [delivering] a much richer experience for our customers in the way they interact with the brand, whether they're a consumer customer, or a trade customer.

In business-speak, referring to something as a "hygiene factor" means that, while the activity will not necessarily improve revenues or earnings, not taking care of it will negatively impact earnings in the future. So, to use another colloquialism, selling products online is close to just being table stakes in the current market.

(David Errington, a senior analyst with Bank of America Merrill Lynch, had some interesting questions around this - which we will take up in the upcoming edition of HI News.)

Matching customer needs

The real focus of most of what Mr Schneider had to say dealt with the second set of issues, firstly delivering efficiencies through productivity improvements, and secondly matching what the store provides with the new and developing needs of customers.

He went on to develop the second part of those points in his prepared remarks:

Bunnings has a very high brand recall, but we want this brand to be relevant to customers of today, not just a place that the next generation of customers see mum and dad going to shop and not connecting with the brand [themselves].
So redefining DIY is all about making DIY easier. "MIY" is this idea of "make-it-yourself". How do we actually participate in different projects, and demystify DIY in ways that make it an easy and attractive option for people to do?

One pathway to this, in particular demystifying DIY, is that Bunnings has plans to make its in-store DIY educational services more free-form than they have been in the past.

So, as our customers evolve, and as the need for more services presents itself, we think we're very very well positioned now to set ourselves up for deeper engagement with our customers. From a development of the DIY concept [perspective], we want to continue to bring that to life in our stores.
Shifting from a classroom-based environment to in-aisle demonstrations of DIY makes it a little bit less intimidating. We connect to more customers with more of our amazing team members and also have the opportunity to leverage our suppliers as well in bringing those projects to life, or [bringing] that learning to life in store.

Installation and assembly

Another area where Mr Schneider sees opportunities is in connecting the installation and assembly needs of retail customers with the skills and services of its trade customers.

Perhaps the most exciting aspect, from a pure retail point of view, is that Mr Schneider sketched out a plan to expand the products offered by the company's captive kitchen brand, Kaboodle. One possibility is that this will be achieved through a new kind of retail space:

What you can see here is a concept [slide 40]. It's a specialist studio around kitchen and bathroom and wardrobe design, studios and al-frescos, under the Kaboodle brand. Kaboodle are one of our suppliers, they provide our kitchens. They are a fantastic, long term supplier.
And it's the idea of whether or not we can establish in partnership with them a number of specialist studios, where customers can go to be inspired to work solely on the project that they're looking at, at a different price point proposition in terms of value, with different products and services available, including installation, to be able to meet the needs of customers where they've got very niche needs that go beyond what we think we can successfully execute within Bunnings Warehouse.

Smart homes

Mr Schneider also revisited the growth in the smart home market, and how he sees Bunnings responding to this:

You can see from the image on the slide [slide 32] just how many new products are now available in the smart home space... There really has been an explosion in the range, offer and assortment, [as well as] ease of use and choice in this space. We've talked about smart and connected and safer homes for a long period of time as an emerging megatrend. We see that here now and it's an enormous opportunity for Bunnings to establish itself with a strong leadership position.

The real strategic issue

While all that is of great interest, what stands out from Mr Schneider's prepared remarks is that there seems to be a big shift in strategy for Bunnings in terms of how it sees itself as a retailer. To some extent, the smarthome category gives some clues to this. We wouldn't expect to see Bunnings selling, for example, audio equipment, but this category runs into elements of that category. In fact, it's quite broad.

That breadth is something that seems to be part of a new, emerging strategy. We could say that the Bunnings approach of the past has been all about the intersection point between DIY and the home environment - with a few categories stretching beyond that. That is now becoming one point of focus in a broader approach, which is looking beyond where and how people live, and at their behaviours instead.

So the idea that the small hardware store evolved into a home centre, [servicing] the broader home improvement and outdoor living market, and the way that we've started to think and categorise the market. [That is] for our consumer customers, with the mindset of front fence to back fence for their home, the idea of home and lifestyle as Australians and New Zealanders live their lives in different ways as the next generation of consumer comes through.

It's a shift from Bunnings being only in the business of hardware and home improvement, to Bunnings working to facilitate the lifestyle of choice for its customers.

Analysis

This strong shift in Bunnings' strategy is brought about by a range of factors. One highlighted by Mr Schneider is the need to stay relevant to an emerging demographic that might not relate to Bunnings in the same way as their parents did.

Further than that, though, is the sense that driving supply and retail prices down further might become more difficult, at least over the next three years. That means there is a need to spend more on sales, general and administration (SG&A) areas to enhance productivity, and expand markets.

More than anything, though, this is really a realisation about what Bunnings has truly become: not just a niche retailer, but an organisation with broad capabilities, that can be applied to a wider market.

These are a few of the points that came out of the Strategy Day. The remarks made by the managing director of Wesfarmers, Rob Scott, were also very interesting, as were the questions asked by the investment analysts. HNN will be writing more in-depth about these in our upcoming issue of HI News.

bigbox

Metcash-IHG results flat for FY2019

Sales declined by 0.9%

Metcash has succeeded in merging HTH with Mitre 10 - now it has to make the merged company profitable

Australian retail conglomerate Metcash has released its results for its FY2018/19, ending 30 April 2019.

Results overall were positive, but mildly disappointing. The company recorded revenue of $12,669.3 million, which represented an increase of 1.8% over the previous corresponding period (pcp), which was FY2017/18.

Earnings before interest and taxation (EBIT) fell by 1.4% on the pcp, reaching $330.0 million. Excluding corporate EBIT, Metcash's food, liquor and hardware segments lifted EBIT by 2.2%.

Metcash's hardware division, which includes the Independent Hardware Group (IHG), recorded the only decline across the business's three segments. Revenues for IHG were $2102.0 million, falling by 0.9% on the pcp. EBIT was more robust, with the company reporting the number of $81.2 million, up by 17.1% on the pcp. However, that number does include around $10 million of merger synergies; absent that boost, EBIT rose by around 2.9%.

In notes to the release of the results, the company stated that:

Sales were negatively impacted by the slowdown in construction activity, the closure of unprofitable company-owned stores, and the loss of a large HTH wholesale customer in Queensland in 1H19. Excluding the loss of this customer, sales increased 0.3%.

The company stated that like-for-like (comp) sale across its wholesale business rose by 2.3% over the pcp. It also claimed that the retail comp number showed an increase of 3.0% over the pcp in its bannered stores.

The results announcement also included this statement as one source of the mildly disappointing numbers:

An increase in the proportion of Trade sales in the sales mix to ~65% (FY18: ~63%) had an adverse impact on wholesale margins.

In comments made the Metcash CEO Jeff Adams during the presentation, he stated:

We've accelerated our Sapphire upgrade program this year. This has led to a further 30 stores being upgraded, increasing the total stores through the program by the end of the year to 60. We continued to see strong sales growth from our Sapphire stores, and these stores have delivered an average sales improvement of over 15%. We've targeted a further 140 stores to go through the Sapphire program by 2022.
In trade focus we have added a further 7 stores; and now have 11 low-cost trade-only stores; and continue to target 40 stores by 2022. And we've also made good progress on our digital initiatives supporting our strong trade business such as truck tracker and Trade Plus.
On our Hardings' plumbing business, we are excited about the growth opportunities with the Hardings business and are making good progress with the rollout of Hardings in New South Wales and Tasmania. The new store-in-store Hardings at our Tooronga Mitre 10 store in Victoria is almost complete. And customer awareness and sales through the balance of the IHG network of the Hardings range are growing and in line with our expectations.
And then finally, we've again made good - we've had good success in rolling out our core ranging programs across all key categories.

Analysis

The results for IHG are somewhat mixed. In a historical sense, we could say that the company has come to the end of what has been a very positive and successful chapter, with the acquisition of the Home Timber & Hardware Group (HTH) completed.

Many companies have stumbled over such acquisitions, but IHG CEO Mark Laidlaw and his team have handled the transition well. Far fewer members of HTH have left the group than were initially expected, and IHG has managed to continue to drive forward its Sapphire program of store enhancement - which underpins its efforts to move more stores to stocking its "core range" of warehouse-stocked goods.

That said, IHG has also shown how vulnerable it can be to store losses, with the departure of Bretts Timber in Queensland. According to the financial results:

Excluding the loss of this customer, sales increased 0.3%.

Which means, effectively, that Bretts accounted for 1.2% of sales for IHG.

The next stage

IHG is now entering into the next stage of its development. The transition is over, and it is now facing questions as to how the company that has resulted will fare into the future.

The results from FY2018/19 are not encouraging. If we take ABS retail sales numbers, and weight sales growth for hardware retail according to IHG store locations, we get a baseline growth figure for the company's FY2018/19 compared to FY2017/18 of 3.3%.

Yet IHG is claiming only a 3.0% comp number at the retail level - and those numbers are taken, according to the results from "sales growth based on a sample of 171 network stores that provide scan data", which are likely to be the better stores in the network, including all the Sapphire stores.

In simple terms, IHG has not kept up with the market. As HNN has suggested elsewhere, we suspect that IHG had counted on gaining more sales not so much from competition with Bunnings - which was the substance of its "headline" statements at the time of the HTH acquisition. Rather, it expected to gain market share from the rest of the independent market.

As we've also suggested, that perhaps did not happen because far from establishing a clear price advantage with suppliers, IHG's market activities actually led to other buying groups also achieving advantageous deals with suppliers.

Conclusion

At this stage it seems likely that IHG really needs to reconsider some of the strategies it initially formulated in late 2016, during the acquisition of HTH. While it will obtain some advantage from its main strategy - low prices through volume supplier deals driven by warehouse capabilities - it is looking as though that will not prove quite the growth strategy it had hoped.

That and other issues will be taken up by HNN in the next edition of HI News, 5-03.

retailers

Nippon gets DuluxGroup

Paint industry continues mergers

The managing director of DuluxGroup, Patrick Houlihan, is well-known for deflecting concerns about overseas companies in Australia by citing the failure of Nippon's effort; it looks like Nippon has found a way to succeed.

While the very likely acquisition of Australia's DuluxGroup by Nippon Paint Holdings for JPY300.5 billion ($4.05 billion) has been covered from the perspective of DuluxGroup, little has been said about Nippon's perspective.

The company's stated intent is to "strengthen its number one position in the Asia and Pacific markets". The company also stated that:

By incorporating the Pacific region, Nippon optimises the balance between the fast-growing regions like China/Asia and the stable-growth regions like Japan, US and Europe, which ensures Nippon's further strong business structure.

Nippon also claims that the acquisition will be earnings per share accretive from the first year of the transaction (exclusive of acquisition costs). In fact it will boost revenues from JPY628 billion to JPY775 billion. Australia will equate to 16% of all sales, and New Zealand to 2%.

Nippon sees the Australian market as providing a "balance" between the rapidly growing markets of Asia, and the slower markets of Japan, North America and South America.

In terms of the specifics of DuluxGroup, Nippon lists its "high-calibre management team", and its "cutting-edge factory equipment". In terms of the Australian market, Nippon notes the steady and ongoing growth in expenditure on renovation, and the continued population expansion.

Australasian Lawyer said that Nippon's Australian legal team, Gilbert + Tobin made comment on the acquisition:

G+T said that there are no expected changes to DuluxGroup leadership, business portfolio, manufacturing, and operations. The deal will also enable DuluxGroup to better pursue growth by leveraging Nippon's global scale and resources.
companies

Big boxes no problem for HBT store

Slower growth for big box retailers?

Most big box retailers are seeing sales growth on a per-square-metre basis lag increases in operating costs. Smaller retailers emphasising service are performing better than larger players while online sales are leading to many big box retailers to cannibalise their sales, according to research from investment bank Morgan Stanley.

HBT member, Eastern Suburbs Hardware located in the suburb of Raceview (QLD) was featured recently in the Queensland Times. Owner Gerry Galligam said he has been in the industry since he was 16 years old, and has owned the business for the past 12 years. He told the newspaper:

I worked in sales. I managed Benchmark which later became BBC Hardware. I ended up working for myself as a concreter. I could see that many of the local businesses were losing out to the big-box stores.

Independent stores like Eastern Suburbs Hardware have found niches where consumers seek local products, services, advice and experience.

According to Mr Galligam, his store focuses on industry knowledge, customer service and quality products.

Eastern Suburbs Hardware was founded by Henry and Adele Christie in 1965. Mr Christie introduced the first hire service in the area for building and associated products. He sold almost anything from cement mixers to lawn mowers and tools.

Mr Christie sold the store when he became an SES co-ordinator and Arthur Kathage bought it and operated it from 1978 to 2007, before Mr Galligam took it over. He said:

We work hard at offering personalised and prompt service. We have a delivery truck so we can meet demands.
The concrete services are our growth area. We are doing a lot of steel reinforcement ...and have gone from two to three tonnes a month to now 90 tonnes a month.
Most people think we are not competitive on price. The reality is we don't have the overheads. We have lower overheads and belong to a buying group of independent hardware stores that is 700-strong.

As a result of his membership to HBT, Eastern Suburbs Hardware gains competitive prices for many of its products.

Mr Galligam said the store bases it success around service in addition to reasonable pricing, and being able to give customers what they need. He believes supermarket hardware stores can still be beaten on price and Eastern Suburbs Hardware holds its own in a tough retail environment.

Big box performance

Other independent stores can find themselves competing more effectively as sales growth at big box retailers are lagging behind rent and wage increases, according to analysis by Morgan Stanley.

In a research note to clients earlier this year, Morgan Stanley's retail analyst Thomas Kierath wrote that Australian big box retailers, in their current form, could be slowly becoming extinct, based on trends from the financial reporting season in February 2019. (This Morgan Stanley data is based on retail across all categories, not just hardware or home improvement.) He wrote:

We think that consumers are shifting away from big box retail formats as they increasingly prefer convenience and experiences that are better cultivated in a small box environment.

Based on Morgan Stanley's figures, only three of 22 big box retailers reported sales-per-square-metre growing faster than operational costs.

The Morgan Stanley analysis used sales-per-square-metre for benchmarking growth. Sales growth per square metre (sqm) was then lined up against retail's two biggest operating costs - rent and wages over the same six-month period.

Rental growth was calculated at 2.5% - a value derived from one of Australia's biggest retail landlords, the Scentre Group, owner of 43 shopping centres formerly housed in the Westfield empire.

Morgan Stanley chose wages growth of 3.5%, as per the Fair Work Commission's minimum wage determination for retail workers. Mr Kierath wrote:

Soft sales-per-sqm growth for large box retailers will likely bite soon given 70-90% of operating costs inflate at between 2.5% [rent] and 3.5% [labour]. We think very few retailers are delivering sales-per-sqm growth ahead of in-built cost growth at the moment.

The following graph shows big box retailers' sales-per-square-metre growth.

That operational inflation is in many ways unavoidable as there are inherent costs in cost-cutting. Mr Kierath wrote:

Should retailers cut back on staffing, opening hours or marketing we think that this likely accelerates the slowdown in sales-per-sqm growth.

Size does appear to matter in the big box world, with "small" outperforming "large", in the previous six months, prior to the February 2019 reporting season. Morgan Stanley puts the divergence in performance down to three key factors that continue to evolve.

The convenience shift: There is a structural trend of consumers becoming even more short on time, so they prefer to shop at stores that are convenient to them, rather than at retailers that operate stand-alone destination-type stores.

Online sales: It appears as consumers shift to online they are purchasing less from big box format retailers, perhaps because click-and-collect is so popular and consumers are preferring do to this at locations that are convenient to them.

Experience matters: Smaller retailers tend to pay higher rents compared with big box retailers, so are inherently more invested in providing an enriching experience. This means stores are presented in a more customer-friendly way.

That's a worry for the big box owners if their strategy continues to involve building ever-expanding boxes.

Digital dilemma

Online selling - with its vast range and wafer-thin margins - is already casting a large shadow over big box retailing. Morgan Stanley believes that "online is taking a disproportionate bite out of the big box retailers".

For the likes of Coles and Woolworths, investing in online sales is a form of corporate cannibalism.

The Morgan Stanley report found Coles and Woolworths generated 26% of sales growth from online. It noted:

Sales growth from existing stores ex-online is just 1.3% for the majors.
Interestingly, [the] Nielsen [retail survey] indicates that [greater than] 50% of online sales growth is cannibalised from stores and a further [greater than] 40% from competitor stores, which points to low sales incrementality.

The Morgan Stanley report on big box retailers first appeared on the ABC news site:

Big box retail struggling as shoppers shift to online sales - ABC News
retailers

BGC gets new CEO

Daniel Cooper takes on the role of chief executive

Chairman Neil Hamilton said BGC is looking forward to utilising Mr Cooper's leadership, following the Buckeridge family's decision not to sell off the business

BGC Group has appointed Daniel Cooper as its chief executive officer. He officially started in the role on June 24, and brings a wealth of experience to BGC's diversified operations, according to chairman Neil Hamilton. He said:

Danny will play a critical role in ensuring the group maintains its strong financial performance and achieves operating efficiencies across BGC's diverse, vertically-integrated business units...
The group continues to build a strong pipeline of long-term work, and is well placed to benefit from improving conditions in the resources, construction and property sectors.

Prior to taking on the leadership role at BGC, Mr Cooper was CEO of Hanson UK, a major building materials supplier to the construction industry. He joined Hanson UK after serving as northern regional general manager for Hanson Australia.

Mr Cooper joined Pioneer Concrete in Australia in 1993. When Hanson acquired Pioneer in 2000, he held several operational, commercial and customer service management roles in the company. Hanson is now part of the multinational, Germany-based HeidelbergCement Group which acquired the business in 2007.

Mr Cooper holds a Bachelor's degree in Commerce and Economics from Murdoch University.

Related:

BGC withdraws sale of construction unit - HI News, page 26

Sources:

Australian Mining Business News
companies

Rapidly setting mortar

A new product from Cement Australia

Pro-Strength Rapid Set Mortar is ideal for tasks such as setting the base of a toilet pan, plugging, grouting, and fixing brickwork

Cement Australia has launched a new product that is set to become a favourite with tradies: Pro-Strength Rapid Set Mortar.

The mortar is exceptionally quick-acting. It begins to stiffen in around 15 minutes, and will reach 20 mPA in three days, and a peak of 40 mPA after 28 days.

The product is sold in a convenient eight-kilo tub. It comes in a plastic bag in this tub, so tradies are free to use as much or as little as they want - and they score a free tub into the bargain. With a shelf life of a year, tradies can buy the product and carry it with them as a "fix all" when they need a way to do rapid repair work.

While Cement Australia has targeted the trade market, the product would suit DIYers as well. It does require a quick hand once it has been mixed with water, but it's great for work that is time-constrained, and where the tradie just wants to get rapidly on with job.

As Tom Prendergast, regional sales manager for Cement Australia told HNN, "We're pretty excited about it. I think it's got a great application for a variety of jobs around the home workplace or wherever you want."

products

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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retailers

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.

    To read more in Big Box Update, download the latest issue:

    HI News 5.2: Big Box Update

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    bigbox

    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.

    To read more in Big Box Update, download the latest issue:

    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.

    To read more in USA Update, download the latest issue:

    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

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    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

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    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.

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    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

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    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