It remains a remarkable fact that while debate continues to rage regarding whether globalisation is a good thing or not, we actually are living in a highly globalised world. That is a fact heavily underlined by the results from PPG, AkzoNobel, and Nippon Paint.

All these companies have suffered to some extent from changes to the Chinese economy, as that nation grapples both with an internal evolution brought about by increased prosperity, and increased external trade pressures.

It's tempting to regard those external pressures as being somewhat dominant, but most experts in the Chinese economy agree that internal forces far outweigh external forces when it comes to the current slowing in China's gross domestic product (GDP) growth.

Richard Dasher, director of the US-Asia Technology Management Center at Stanford University has pointed out that currently net exports are only 1% of the total Chinese GDP, and of that 1%, only 5% is reliant on the US, and thus affected by newly imposed sanctions.

Marshall W. Meyer, emeritus professor of management at the Wharton School of Business, sees three main factors in the Chinese slowdown: an ageing workforce (partially a legacy of the one-child policy); a normal slow-down in an economy after a period of rapid expansion; and an economy that had become very reliant on government investment in infrastructure as a main driver.

As important as those issues are, however, Prof. Meyer sees the country's lagging productivity as the key issue. Combined with growth funded by high levels of debt, the result of the need to improve productivity will be an economy that seeks to move up the value chain of production.

Global competition in the future, in other words, is going to be much more about innovation than it is cheap sources of labour. To borrow a pithy sentence from The Economist, "Supply chains are as disaggregated as they are likely to get".

Nippon Paint is already progressing on this path. It has been busy upgrading its coatings production process in its new Chinese plants. This includes introducing cutting-edge Industry 4.0 processes to the new plant it has built in Xianning, Hubei province. Reports state that as few as 50 workers can run the entire production facility. It's estimated this facility can produce over 180,000 tonnes per year.

In addition to the need for greater productivity, other factors are also changing the way paint is produced in China, especially when it comes to the environment. Aside from direct manufacturing pollution, the Chinese have also become more sensitive to the issue of volatile organic compounds (VOCs) in paint, which results in "off-gassing" after paint application.

In an article that appeared in Coatings World, Doug Bohn, a consultant with Orr and Boss, outlined this aspect of the Chinese market post-2018:

Within the Chinese coatings market, the biggest factor impacting it is the increase in environmental regulations. China has been enforcing stricter environmental standards on its paint makers for both VOC content of its paint, as well as the emissions generated at the paint plants. The large cities like Beijing and Shanghai often have stricter environmental standards than the national ones.

In terms of how the Chinese economy directly affects paint companies, it's important to note that these companies interact with China both as a source of production, and a rapidly growing market. It's also worth noting that in the ranking of the top 10 paint companies in the Asian Pacific region, two Chinese companies are now listed: Oriental Yuhong, with sales of USD669 million in 2018, and Xiangjiang Coatings with sales of USD608 million.

In that same list, Nippon Paint is number one, with revenue of USD5480 million, and Australia's DuluxGroup is ranked at number five, with sales slightly less than a quarter of Nippon. Of the top 10, four are Japanese companies, two Indian, two Chinese, one Australian, and one South Korean.

Chinese importance

Of the four top global paint companies - Sherwin-Williams, PPG, AkzoNobel and Nippon Paint - all but Sherwin-William are involved heavily enough in China that the recent decline in growth for that market has affected their results for FY2018 and FY2019 H1.

PPG summarised the risks it faces in its annual report for FY2018:

Recently, global economic uncertainty has increased due to a number of factors, including slowing global growth, global stock and commodity market volatility, disruption in existing trade agreements, the imposition of tariffs and the threat of additional tariffs, the United Kingdom's exit from the European Union, weaker demand in China and increasing interest rates in the United States.

The company has faced rising raw material costs, which have forced it to increase prices - and therefore margins - in the face of a slightly declining market, which has hit topline revenues, and therefore overall earnings.

Sales in the Asia-Pacific for PPG amounted to USD2618 million out of a total of $15.4 billion, around 17%. While that is already a considerable portion of revenue, the point is that the company is relying on that market as one of its main drivers of growth.

So was AkzoNobel, but for FY2019 it has shifted its strategy from increasing volume through lower prices, to maximising margins through higher prices, even if these drive reduced volume of sales.

In describing the change of strategy at the company during FY2019 H1, the company's CEO, Thierry Vanlancker, outlined how the Chinese market had changed over the preceding 12 months:

I think the price for price increases for us were - has been - for Dulux has been relatively modest. The biggest change in seasonal average price is that we exited that low-end business and which would have been at zero margin - or negative margin even by now if we hadn't moved prices on that. So, if you were buying a pot of Dulux paint 18 months ago, the price hasn't gone up that much, but the mix in our business has been significantly different.

(AkzoNobel's Dulux brand is not the same as DuluxGroup that operates in Australia.)

For Nippon Paint, the effect of a slower Chinese market has been more drastic. The company's CEO and representative director, Tetsushi Tado, outlined some of the challenges in the company's annual "Integrated Report" for FY2018:

In fiscal 2018, we were greatly affected by changes in the external environment that exceeded the initial estimates, such as stagnant economic growth due to trade issues between major countries, as well as rising prices of raw materials.

Particularly, our trade-use paint business, which accounts for the largest portion in our business, was significantly influenced by the slowdown of the housing market in China, which is our core region, as a result of the tightening of regulations on housing investment by the government from the previous year.

Our activities to procure raw materials were also affected by their continued high prices due to environmental regulations in China as well as increases in the prices of raw materials in Japan, the United States, and other regions.

Where AkzoNobel has sought to exit the low-cost paint business in China, that forms an important part of the market for Nippon Paint, and falling demand there has caused the company some problems.

Cement maker Adelaide Brighton is heavily exposed to domestic housing construction with around 32% of its revenue derived from this market, according to JP Morgan. This high exposure to home building, which is experiencing a major downturn, has led the company to issue a profit warning.

Adelaide Brighton said it expected its underlying profit for its financial year ending December 31, 2019, excluding property, to fall to between AUD120 million and AUD130 million - as much as 37% below 2018's figure of AUD190.1 million.

About 60% of the challenges faced by the company could be attributed to the state of the housing market, the remainder were internal issues, chief executive Nick Miller told The Age.

Increased competition from cement imports, higher costs of key raw materials compared to the prior year, and continued competitive pressures in Queensland and South Australia, were other factors hurting its bottom line, the company said.

Its shipping troubles in Victoria - it had to redeploy a ship filled with cement elsewhere - would cost it between AUD4 million to AUD6 million. It was also struggling to pass on a 10-15% increase in the cost of aggregates through its ready mix cement business.

The cement manufacturer also scrapped its interim dividend, citing the need to conserve capital. Mr Miller said:

We are operating in a fairly challenging market at the moment. Whilst the guidance is very concerning, the company remains well within its banking covenants.

In a statement to the ASX, Adelaide Brighton blamed "further softening of conditions in the residential and civil construction markets" as the main reason for its earnings downgrade.

The most recent Australian Bureau of Statistics Building Approvals figures show that the total number of dwellings receiving construction approval has fallen 25.6% since the previous year. Within that figure, approvals for houses were down 14.8% over the 12-month period.

However, the result for apartment approvals was far worse, plunging 39.3% since June 2018. In addition, trend approvals are now at 174,000 over the year, the lowest level in six years.

This places substantial pressure on the economy. Confidence among Australian home buyers has been showing recent signs of a recovery with prices bottoming out and auction clearance rates rising, but the improvement has not "come through to delivery on the ground," Mr Miller said.

Optimism and caution

Macroeconomics and industry forecaster, BIS Oxford Economics remains more upbeat about the prospects of a construction rebound. BIS managing director Robert Mellor said:

Australia's dwelling stock deficiency will grow once again as rising undersupplies in Victoria, Queensland and Tasmania develop by 2020/21.

We anticipate this pressure to facilitate growth in house prices and rents, helping create a renewed upswing in residential building starts through the early to mid-2020s.

The downturn has further to run with an additional 8% decline forecast for 2019/20, with the fall in residential building outweighing the growth expected in the non-residential sector.

According to a report in The Age, an analyst report from Morgan Stanley suggests the real impact of the housing downturn is yet to be felt. The report's lead writer Andrew Scott said:

Australian residential exposed building materials stocks have enjoyed a post-election bounce that we believe has come too early and ignores the pain yet to come in the group.

The worst of the downturn will hit this financial year and activity won't trough until late the following financial year in 2021, he said.

Considerations

Adelaide Brighton's downgrade underlines how support from government-driven infrastructure building has failed to offset sliding homebuilding activity, as a slump in building approvals catches up with work underway.

Tighter lending and a sharp drop in home values this year are expected to hold activity low for a while, with Australia's AIG Construction Index showing a tenth straight month of contracting activity in June.

The business model has been caught out by not being sufficiently vertically integrated in Queensland, sustaining a price squeeze in aggregates, according to Credit Suisse. This is also the case in Victoria, where it is vital to pick up infrastructure work. Meanwhile, cement prices have been pushed too far above import parity in South Australia, where the company is undermined by a competitor entering the cement import market, attracted by high prices and profitability.

Adelaide Brighton lacks a strong infrastructure-oriented business which is a real problem in the current market, as infrastructure would help soften the impact of a slowdown in residential construction, said Macquarie in a note to its clients.

Sources: ABC News, The Age and FNArena

Abrasive technology company, Klingspor continues to be focused on storeowners and their merchandising needs, and has released a number retail packs for the Australian market that consist of the following:

Klingspor Australia has developed a strong reputation for innovating display stands for retailers, which can really help lift the profile of the product and drive sales. Many of the displays are designed by Klingspor itself in Australia, and manufactured for them in Sydney.

The history of Klingspor's famous disks goes all the way back to 1950. That is when Klingspor produced its first high speed, fabric bonded grinding discs. This innovation led to a very large increase in productivity and profitability as well as to an effective change of abrasive cutting technology in the entire industry.

In May, Hardware & Builders Traders (HBT) awarded Klingspor its prestigious ITT Supplier of the Year 2019 award, recognising the significant contribution that

Klingspor made throughout 2018 to the growth of HBT.

Paul Hoye, managing director of Klingspor Australia, is very positive about the future, especially its relationship with HBT. He told HNN at the recent HBT show that sales are continuing to grow, and that members have embraced the new products Klingspor has brought to market. In particular, Klingspor continues to sell high volume of its very popular line of 1mm cutting discs.

Other innovations include its accessories designed for cordless tools. These are made specially for use on battery-powered angle grinders. The result is a particularly high level of aggressiveness and a long service life with no compromises on mobility.

Hardware Australia recently awarded Cement Australia as its Queensland Supplier of the Year for building products. It beat other major players including CSR Gyprock, Sunstate Cement and James Hardie.

The company said it is honoured to receive the award as recognition of its "customer service, product quality and supply to the hardware industry over the past year". It added:

This is a reward for achieving the goal of delighting customers and delivering results which required the alignment of all functional teams within the organisation.

This is the second time Cement Australia has won the award, in consecutive years.

Cement Australia has been associated with Hardware Australia for over 20 years in its various guises (formerly Hardware Association of Queensland). The company believes Hardware Australia provides insights into the industry that enables it to service their hardware customers as professionally as possible, and ensure that its offer is targeted towards them.

Officially established in 2003 following a merger between Australian Cement Holdings and Queensland Cement Ltd, Cement Australia has a much longer history that dates back to 1890.

During this time, its products have been involved in the construction of some of the country's major landmarks including the Sydney Harbour Bridge, the Opera House and Melbourne's Federation Square.

Australia's small to medium enterprise (SME) sector seems set for tough conditions through the rest of calendar 2019. That's the indication coming from the National Australia Bank's (NAB) quarterly survey of SMEs, which reported a current deterioration in current business conditions, and a likely indication of some deterioration in future business confidence for this sector. Click here for the report:

Confidence

The NAB survey indicates that in the short term business confidence increased, lifting by three points to a net score of +3, following two quarters of no growth. Across the states and territories, Western Australia shows both the largest decline in business conditions, and the highest increase in business confidence, both exceeding 10 points.

South Australia and Queensland show a similar trend, though more subdued. New South Wales shows the second highest decline in business conditions, and Victoria is the only state to show a positive increase in both business conditions and business confidence, though the boost in confidence is the smallest of all the regions.

However in its commentary, NAB warned that the Australia-wide increase in confidence might be short-lived, with June 2019 numbers pointing to a decline in optimism:

We think this effect is likely to be short-lived with the NAB monthly business survey for June having shown an unwind in confidence.

Conditions

In contrast to this confidence, business conditions as reported declined sharply, down by four points. This mainly had to do with smaller firms. Low-tier firms reported a decline of eight points and mid-tier firms were down by seven points. High-tier firms, in contrast, reported an increase of two points.

(For the NAB, low-tier firms have turnover between $2 million and $3 million, mid-tier have turnover between $3 million to $5 million, and high-tier turnover is $5 million to $10 million.)

Breaking down business conditions into trading conditions, and prospects for employment growth, there was a similar size effect. Low-tier firms reported a drop of seven points for trading conditions, mid-tier firms a drop of one point, and high-tier firms an increase of six points. For employment growth, low-tier firms indicated a decline of 13 points, mid-tier firms a fall of five points, and high-tier firms were done just one point.

The third component of business conditions, profitability, showed a different pattern. Mid-tier firms indicated a fall of 14 points, low-tier firms only four points, and high-tier firms were neutral at 0 points. All three components are now at levels not seen since the period 2013 to 2014.

This could be in part a reflection of forward orders, with high-tier firms experiencing a reported decline, mid-tier firms a significant increase, and low-tier firms generally flat growth. However, capacity utilisation for high-tier firms is close to 82, the highest it has been since 2011. Both low-tier and mid-tier firms are closer to 78, the range they last reached in 2016.

Tradies

Australia's national broadcaster, the ABC, in its online news content has appeared to interpret these numbers as having particular reference to tradies. The ABC managed to track down and actually hold conversations with one electrician and one plumber, both from Sydney.

According to this sample of two, electricians are not doing well due to a decline in multi-dwelling construction, while plumbers are benefitting from an increase in commercial work.

The ABC also reports that:

The NAB survey found tradies with four or five employees are among the hardest hit.

The ABC also quoted NAB chief economist Alan Oster as saying:

The things that worry us are, one, it [business conditions] has come down a lot, and two, it is particularly the small end of town that has come down a lot - and that makes us nervous.

It's the tradies, and they tend to lead the economy - and that's not a good sign.

Analysis

The increase in confidence for Q2, as suggested by Mr Oster and others, might have to do with the May 2019 election that concluded a period of political uncertainty which started in the final quarter of 2018. However, many believe this confidence to be misplaced, as economic stimulus remains a matter of interest rate cuts and decreases in middle-income taxation, rather than actual new government spending.

In a survey of economic conditions for FY2019/20, of 20 leading Australian economists brought together by "The Conversation" website, gross domestic product growth of 2.1% was forecast, with an unemployment rate of 5.3%, wage growth of 2.2%, inflation at well under 2.0%, and the risk of a recession was set at around 29%.

A further complication to the economic situation is that campaigning for the 2020 US Presidential election will shift into high gear in November 2019, which could contribute to the likelihood of globally unfavourable shifts in trade policy by the US and its trading partners.

The $187 million takeover bid by agribusiness Elders for Australian Independent Rural Retailers (AIRR) will give it an entry into the wholesale supply of farm products for the first time.

Elders managing director Mark Allison said wholesaling to independent retailers provided an attractive growth opportunity for the company. He told The Adelaide Advertiser:

We don't have any wholesale channel and AIRR is very strong in that area. About 100 of their members are in produce and hobby farming areas, so it's quite complementary to our business.

AIRR is also very strong in the pet supplies area. All the AIRR stores will continue to run independently, as they already are."

Lachlan Cox, owner of Cox Rural, said the acquisition would enhance his company's purchasing power when negotiating terms with key suppliers. He operates six AIRR member stores in South Australia, and told The Advertiser:

There's a great opportunity to leverage off both businesses, while still remaining independent.

Cox Rural has been running since 2002 and is a founding member of AIRR.

Mr Allison said the acquisition provided the opportunity for Elders to leverage AIRR's distribution and logistics coverage with benefits in improving the Elders supply chain. He told The Australian:

Helping us backward integrate through our supply chain can deliver a 10-15% margin gain.

The deal includes a purchase price of $157 million for the group and Elders will also pay out AIRR's existing $30 million in debt. While the Elders deal does not include ownership of the AIRR network of 340 independent rural supplies and pet produce outlets, it does provide a combined network of more than 550 stores.

Mr Allison said he hoped the deal would be completed by November. It is subject to approval by AIRR shareholders, the Australian Competition and Consumer Commission (ACCC) and the court.

Access to more independents

The acquisition should help position Elders to compete more strongly with Canadian fertiliser giant Nutrien as it moves to complete a $469 million takeover of Ruralco.

Mr Allison believes there is a significant opportunity to add independent retailers in the fallout from Nutrien acquiring Ruralco, which is a leading wholesaler to independents through its CRT (Combined Rural Traders) retail operations. He said:

Our view is there are another 300 independents out there who may decide to move across to an alternative wholesale network.

The Nutrien takeover of Ruralco, if it secures regulatory and shareholder approvals, could see a network of 654 Landmark and Ruralco stores across Australia. There would remain about 360 rural stores outside either network.

Elders, which turns 180 this year, already has more than 17% rural retail market share behind Landmark and Ruralco. Mr Allison said if both deals were approved, "it would make us clear one and two".

About AIRR

Established in 2006, AIRR was founded by long-time rural retailer Peter Law to support independent rural stores and pet and produce storeowners through group buying power but without franchise costs or obligations. The business supplies 240 independent stores and 100 Tuckers Pet & Produce stores with more than 6000 animal health, feed and general merchandise products. It is supported by a network of eight warehouses around Australia servicing over 1500 customers.

The group also owns and operates five retail locations in Victoria and is listed on the Primary Markets Exchange.

AIRR comes with some major intellectual property assets. It has 190 product registrations with the Australian Pesticides and Veterinary Medicines Authority under its own brands: a number of crop protection chemicals under the Apparent brand, along with other animal health and general merchandise products under the Independents Own label.

Elders' acquisition would give it much greater exposure to the higher margin pet and animal health market.

AIRR has annual revenue of about $500 million and forecast earnings of $22 million for the 12 months to September 30, according to a report in The Australian Financial Review.

As AIRR managing director, Mr Law will remain in his role and replace Mr Allison as Elders' biggest individual shareholder with about 1.8% of the company. Mr Allison will become AIRR chairman.

ACCC inquiries

The Elders takeover of rural wholesaler AIRR has attracted the attention of the competition watchdog as it holds a public inquiry into the consolidation of the rural services industry.

Nutrien's earlier bid for Ruralco in a $470m deal is also being investigated by the ACCC and due to be decided on August 15. Ruralco has about 73 wholly owned stores as well as a host of independents, who are the focus of both ACCC inquiries into the sector.

The Elders-AIRR deal is expected to be decided on September 12. But Mr Allison said it had been talking to the competition regulator about the AIRR deal and was confident it would have no objections.

More acquisitions?

Sources have told the DataRoom column in The Australian that Elders may still be looking at the PGG Wrightson farm supplies business in New Zealand as an acquisition target.

PGG Wrightson offers Elders another entry into the wholesale rural services market. However the company falls outside the tax umbrella for Elders, resulting in higher payments of tax for the company. This could be seen as an argument against the acquisition.

PGG Wrightson, which is listed in New Zealand, sold its seeds operations to Danish company DLF Seeds for NZD421 million (AUD401 million) and has a market value of about NZD415 million. Analysts say PGG Wrightson is a good business and would be the right fit for Elders.

However Mr Allison has publicly rejected suggestions Elders might be looking at another acquisition.

Sources: The Australian, The Australian Financial Review, Tasmanian Country, and The Adelaide Advertiser.

Tradies and weekend warriors have a new destination for their tools in Cairns now that TradeTools has opened a retail outlet on Mulgrave Road.

Managing director Jeremy Stewart said the business had been looking for a suitable site in Cairns since 2017 before settling on the old Cheeky Monkeys Play House site. He told The Cairns Post:

The showroom alone in our new store is over 1100sqm, so it's big enough to showcase our massive range of the best tools from the best brands. And we have about another 1000sqm of warehouse on top of that.

We've shipped tools to customers in Cairns for a long time and Cairns tradies, businesses and the public have been asking us for a TradeTools store.

The new store has opened with six staff including a qualified repair technician.

Retail competition

TradeTools has plans to expand its offering to other parts of Queensland and is facing fresh competition from New South Wales-based Sydney Tools which opened its first Queensland store in Archerfield last month. Sydney Tools wants to roll out 15 more stores across the state over the next three years. Director Jason Bey told The Courier Mail:

Sydney Tools has seen record breaking sales this year which is the rationale for our national expansion strategy.

While seeing the NSW company as a "direct competitor", TradeTools chairman Greg Ford is sceptical about his rival's plan for expansion in an already saturated market. He also told The Courier Mail:

I'll believe it when I see it. I don't think the market is big enough to warrant another 15 industrial tool stores. If I thought there was room for another 15 stores I would have opened another 15 stores.

Mr Ford has been working in the industrial tool trade sector since 1980 and said the new entrant has not "disrupted" sales and believes Sydney Tools is taking away customers from Bunnings. Founded in 1987, TradeTools has remained privately owned and Mr Ford said the business has "expanded when Queensland has expanded".

A sluggish retail environment and a cooling of the construction market has not caused TradeTools to put the brakes on its expansion plans. After Cairns, it will open stores in Rockhampton and Mackay. The industrial tool company will only acquire new locations when cash flows allow for the company to buy a site in full. Mr Ford said:

We only expand when we can afford the premise outright. Our aim in the next 10 years is to double our turnover.

After the company expands north, Mr Ford is looking to open his first NSW store in Lismore.

Sources: The Cairns Post and The Courier Mail

While Veronique Laury may be on her way out as CEO of UK-based European home improvement retailer Kingfisher, her legacy is likely to be a lasting one. The current stage of capitalism judges CEOs more by share performance than company building, and it's the latter where Ms Laury has excelled.

One part of Ms Laury's legacy is the GoodHome report. This is a comparatively brief document, based on a survey of 13,489 respondents across 10 European nations, backed up by a further 78 in-depth interviews. The report seeks to determine what role "home" plays in the lives of Europeans, and what elements of home are most important to families. Click here for the report:

To summarise some of the key results:

Policy suggestions

The GoodHome report ends with four suggestions for how local and national governments might formulate better policy to promote happy homes.

Stable tenure

Being in control of where you live is more important than simple home ownership. The report states in part:

This sense of control is harder to achieve in rental markets that are relatively unregulated, where tenancies tend to be shorter and tenants are less able to make improvements to the property. Encouraging longer, more stable rental tenures, such as those common in Germany, where a high proportion of renters also score highly for home happiness, could be one way forward.

Adaptability

Where most houses are built to a fixed form, the report suggests they should be build so that they can more easily be adapted to change circumstances.

Green access

Homes need some kind of private or shared green space in order to satisfy the needs of families.

Skills and training

Because being able to make a place your own is so important, the report suggests that more attention be paid to this process in schools. This might not mean "traditional" woodworking and metalworking skills, but it should include familiarity with the basics of maintenance and assembly.

Television shows and other sources have tended to buoy Australians' view of themselves as a nation of renovators. Yet as we look at the data provided by the Australian Bureau of Statistics (ABS), it is becoming clearer that, while renovations continue to play a key role in the housing/building economy, it is not as strong a source of growth as in the past.

Relying on the data for alterations and additions for the past 30 years, produced as part of the gross domestic product estimates, through household surveys, HNN believes that there is some evidence to suggest periods of related renovation activity.

These periods would be 1989 to 1996, 1997 to 2006, 2007 to 2012, and 2013 to 2019. The most pronounced break in spending trends on renovations, however, comes around 2004 to 2005. Prior to that period, renovation trends upwards in all states and territories. Afterwards, there is a pronounced lack of further growth, a trend that is, strong for New South Wales (NSW), much milder in Victoria (VIC), while the other states and territories are between the two, with most closer to NSW.

It has become fairly commonplace to directly relate renovation activity to house prices. The general rubric is that as house prices rise, renovation activity declines, and as house prices fall, renovation activity increases.

Looking at the charts and statistical analysis, however, it seems clear that relationship no longer strictly applies. Rather the relationship we see developing is this: a) When house prices rise, renovation activity falls; b) when house prices fall, renovation activity also falls; and c) when house prices are stable, or increase in a mildly positive range, renovation activity increases.

We've concluded that there are three main features of the overall housing industry that affect renovation activity: lifestyle aspiration (how a family sees itself living in a house); asset management; and forecast expectations for employment and wages.

The change in renovation patterns is, we believe, down to the second feature - asset management - becoming more dominant since 2015. This dominance is partly down to the third factor, lower expectations for promotion at employment and a continuing stagnation in wage growth. As economic prospects decline, asset management concerns increase as external earnings are forecast to range from stable to a slight fall.

In asset management terms, it's fairly evident that if house prices are increasing, there is an active market available where owners of high value properties in stabilising suburbs can sell these and purchase properties in undervalued suburbs with higher potential for asset value, so investment in renovation is likely to be subdued. In a declining market, however, it makes little sense to invest further in assets which are losing their value, thus - again - investment in renovations falls.

If, however, there is a relatively stable market in house prices, or firm prospects of a continual, gradual increase in house prices, investing in renovations makes good sense in terms of asset management. Simply adding one additional child's bedroom to a house, for example, can increase the house's value by more than the renovation costs, if it lifts the house into a new category of consideration.

While there were likely signs of this in the period from 2007 through to 2012, it became the main pattern from 2013 to 2019, as economic uncertainty increased. The wage price increase shows growth of under 2.5% for this period, and while the unemployment rate declined, the underemployment rate reached a new, sustained high.

The stats

Chart 1 shows the chain-value figures for alterations and additions from ABS 5206.0 - Australian National Accounts: National Income, Expenditure and Product, State final demand, detailed components. The quarterly figures have been converter to figures comprised of the June, September, December and March figures, giving a trailing 12-month number which eliminates seasonal variations. The blue curved line is the five-order polynomial trend line. The coloured backgrounds indicate apparent periods, and the yellow line shows the division that occurred in the market.

Chart 2 is taken from Core Logic's report for Aussie Home Loans "25 years of housing trends", which can be downloaded at:

This shows the median national house price for 25 years, dating back to 1993.

If you put these two graphs together, it is evident that some of the strongest growth in renovations occurred during a period when house prices were growing at a slow but steady rate. That growth did continue into the period when house prices began to accelerate, but declined after 2004.

What this means for retailers

The most important signal for retailers is to pay attention not to the level of house prices, but to their volatility. In volatile uncertain periods, expenditure on renovations is likely to fall. When prices stabilise, regardless of whether this is at the top or bottom of a curve, spending on renovations will likely increase, but only after that stability has been established for more than 18 months.

Renovation behaviour is likely not to disappear during period of house price decrease and increase, but rather to become somewhat reduced. Chart 3 is taken from a Roy Morgan survey for 2016, details of which can be downloaded from:

What this chart indicates is that renovations are, in fact, continuing, but they are at a very reduced level: less than 30% of those who did some renovations spent more than $5000 on a renovation project, while nearly 45% did some painting.

So, as prices go strongly up or down, retailers should consider pushing more for business that falls into the DIY category, and is relatively inexpensive, both in dollar terms and time required.

There is continued interest in Australia's agricultural merchandise sector with rural services provider, Delta Agribusiness possibly looking at acquiring Ruralco's assets according to a report in The Australian. This follows its recent purchase of North West Ag Services.

The proposed $469 million takeover bid of Ruralco by Canadian fertiliser giant Nutrien has been flagged by the Australian Competition and Consumer Commission (ACCC) about their combined market dominance in some areas.

Nutrien is already the biggest player in the Australian farm services sector through its wholly owned subsidiary, Landmark. Ruralco is the third biggest. Elders is the only other big national chain.

The ACCC is concerned about areas that include Broome (WA), Alice Springs (NT), Cooma (NSW) and Hughenden (QLD), where Landmark's rural merchandise stores compete with Ruralco stores and there would be few remaining competitors. The competition watchdog is considering whether delivery from outside these regions would provide sufficient competition to the Ruralco-Landmark retail stores.

ACCC deputy commissioner Mick Keogh said a key concern was that Landmark-Ruralco could arrange deals with suppliers on substantially better terms than others in the market and use that advantage to reduce competition or increase margins. It believes reduced wholesale competition could lead to discrimination against some independent rural retail stores.

The ACCC is currently seeking more information and public submissions. However the issues it has flagged are not expected to significantly affect the deal. Mr Keogh said it would make a final decision by mid-August and it was likely that, in the meantime, Nutrien would put forward remedies to the ACCC concerns. He said:

For example, they might offer a divestment of some stores or a non-discrimination undertaking in relation to the wholesale businesses, but that is up to the companies, not us.

A company spokesperson for Nutrien said the combination of Landmark and Ruralco would enhance service, expertise and product delivery to farmers.

Ruralco assets

According to the Data Room column in The Australian, Nutrien might be forced to divest some assets as one of the conditions for it to gain approval for its takeover of the Ruralco business.

The Landmark-Ruralco entity would supply about 650 rural merchandise stores, 45% of the national market. Not all of Ruralco's stores are wholly owned, with some controlled as joint-venture investments, which could create opportunities for Delta Ag. Now that Delta Ag has taken over North West Ag Services, it will operate at 44 locations across regional NSW, Victoria and Southern Queensland and is believed to be eager to gain additional products and market share in rural Australia.

Delta Ag, chaired by former Nufarm boss Doug Rathbone, will hire 300 people. It has a network of more than 9000 clients and already offers rural merchandise, agricultural chemicals, cotton and summer crop services, seed and fertiliser. It also offers services in grain marketing, livestock marketing, real estate, insurance, finance, horticulture, viticulture and packaging.

Australia-based Odyssey Private Equity has a 20% stake in the business which should help in any financial bid for Ruralco.

Nutrien-Ruralco support

Nutrien has received support from some of its biggest rivals in its takeover bid for Ruralco. Farm chemicals maker Nufarm said it saw nothing to fear in the takeover. Greg Hunt, managing director of Nufarm, said he didn't think the takeover would lessen competition overall. He told The Financial Review:

At the retail level, the industry will continue to have two corporate brands in Nutrien and Elders as well as a strong independent structure that will continue to service the market.

On a supplier level, Mr Hunt said he wasn't concerned about the impact on Nufarm.

Australia needs a strong and sustainable domestic manufacturing base to adequately support our farmers. Nufarm plays a very important role to ensure the market is supplied with quality products in an efficient manner. It would be difficult for our farmers to be supplied with products produced offshore, particularly in times of peak demand.

Elders managing director Mark Allison said it was up to Elders and independent retailers to rise to the challenge and continue to focus on service to clients. He also told The Financial Review:

I think it would be an extraordinary situation for Nutrien to use its power to the detriment of producers around Australia. And I can't imagine any circumstance where that would be the case.

Landmark and Ruralco both supply rural merchandise such as fertiliser, fencing and animal health products and other services through their branded retail store networks. Both companies also have wholesale businesses supplying rural merchandise to independent stores.

The origins of Ruralco date back 150 years but the listed­vehicle was formed in 2006 when CRT and Tasmanian agribusiness Roberts merged. The company, which employs about 2000 people, has four key operating divisions including water services, live exports, financial services and rural services.

The ACCC said it did not consider the proposed acquisition was likely to substantially lessen competition in the supply of wool broking, livestock agency, live export services, real estate agency, agricultural insurance broking or water broking services.

Sources: The Australian, The Financial Review and The Townsville Bulletin

Hardware Australia has awarded the Sunshine Mitre 10 store located in Gympie, QLD, the prize for Queensland's Store of the Year, in the category for independent stores over 2500sqm.

The prize was handed out at the 2019 Hardware Australia awards in Brisbane recently. According to a company spokesperson:

Sunshine Mitre 10 Gympie Superstore is the largest supplier of timber in the Sunshine & Cooloola Coasts, Darling Downs, South Burnett and Wide Bay regions. We take pride in the fact that we can provide all the building supplies our customers need, under the one roof, whether they are a builder, renovator or dedicated DIYer.

The Gympie store is no stranger to prizes - in 2016 it also was voted as having the best cafe in town via a Facebook survey of locals.

HNN is traveling to Queensland to visit a number of Sunshine Mitre 10 stores in July, and we'll be providing a full report in the near future.

Other awards

Aside from the top retailer awards, Hardware Australia also offered the following at its 2019 prize giving ceremony:

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.

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.

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.

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.

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.

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:

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:

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.

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:

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.

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.

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.

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.

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:

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:

Sources:

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."

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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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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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.

The immediate effects of such tariffs are these:

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.

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

Click and collect comes earlier

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

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

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

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

The basket size has been bigger, for average transactions, and that is what we have seen with our overseas peers.

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

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

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

Web traffic

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

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

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

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

Bricks and mortar show

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

Campbelltown

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

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

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

Coolum

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

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

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

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

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

The court will release its decision at a later date.

Tempe

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

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

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

Mt Isa

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

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

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

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

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

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

Virginia

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

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

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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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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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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.

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.

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

Homebase returns to design roots

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

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

The benefits of the changes we have made are starting to come through ... Clearly, we are only 10 months into a three-year turnaround plan.

Homebase remains one of the most recognisable retailers in the UK and Ireland, and the progress we have made in reinvigorating our customer experience means we are very optimistic about the future.

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

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

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

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

Home improvement made convenient

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

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

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

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

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

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

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

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

We started three years ago, and we have undertaken in-depth research to get knowledge on home improvement and customer needs. By doing this, we found that people are improving their homes with the same purpose - they want a home that is good to live in. However, this study also revealed that most improvement projects are abandoned either before they begin or before they are finished. It may be lack of inspiration, too much complexity, not enough skill, time or money. Whatever the problem is, there are often too many barriers to create a good home.

Our customers tell us 'home improvement can be a nightmare' and the heart of our purpose, everything that we have been doing for the last few years, and we continue to do, is about fixing the nightmare. The biggest change [in the home improvement market] has been the arrival of new players like Amazon and ManoMano. But so far, no market player is offering an end-to-end seamless home improvement experience. No one has solved the nightmare. And this is our potential.

GoodHome is our new international home improvement customer proposition, based on deep customer understanding. It stands for simple, sustainable, unique and innovative solutions that last and which are affordable. GoodHome is the name we put on everything we are doing to make home improvement accessible to the many, not the few: our new product offer, new services, new store concepts, our training centre and our new charitable foundation.

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

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