The ACCC has advanced its enquiry into the acquisition of Adelaide Tools by the Wesfarmers' owned Bunnings to a second stage. On 14 February 2020, the ACCC released a "Statement of Issues" related to the acquisition. The main issue the ACCC has chosen to pursue is this:

6. The ACCC is concerned that the proposed acquisition may substantially lessen competition in the retail supply of tools, equipment and outdoor power equipment (collectively, T&E) in the Adelaide metropolitan region.

Later in this document, the ACCC clarifies that this is its primary focus:

54. The ACCC's preliminary view is that the proposed acquisition will increase concentration and may substantially lessen competition in relation to the retail supply of T&E to customers in the Adelaide metropolitan region.

One reason for this is that the ACCC sees Adelaide Tools as being an effective competitor to Bunnings:

57. The ACCC's preliminary view is that Adelaide Tools provides an important competitive constraint on Bunnings in the retail supply of T&E in Adelaide. Market inquiries indicate that Adelaide Tools has a strong reputation and competes aggressively on price, brand and product range, quality of service and a range of other factors, particularly for supply to trade customers.

Bunnings, however, has responded that its offer differs substantially from that of Adelaide Tools:

58. Bunnings submitted to the ACCC that it does not compete closely with Adelaide Tools due to the limitations of its big-box store format. In particular, Bunnings submitted that it cannot effectively compete for supply to trade customers because it has less floor space for T&E, it does not stock the highly specialised trade quality T&E, its sales team has less technical expertise and it does not offer the same level of after-sales service and support.

The ACCC is not persuaded by these arguments:

59. ... the ACCC considers that there is a significant proportion of trade customers who require less specialised (but still trade quality) T&E and do not require much advice as they are frequent and informed users of T&E. Therefore, these customers may be likely to readily substitute between Adelaide Tools and Bunnings for their trade quality T&E purchases. Bunnings' significant sales to trade customers reflect this.

It is perhaps worth noting that the way in which Bunnings has characterised itself here is somewhat at odds with the way the company self-describes in another recent submission to the ACCC. The other document is in response to a "Resale price maintenance notification", where Stanley Black & Decker (SBD) is seeking to prevent resellers from advertising prices below the non-discounted invoice price they are charged (representing the net price, but not the net net price). The Bunnings submission opposing this states in part:

Bunnings agrees with SBD's claim ... that Bunnings is not a 'low service' retailer, and provides a significantly higher level of service than many other retailers.

To be fair, Bunnings sees itself as a "mid service" retailer rather than a "high service" retailer, offering limited help on demand.

Market complexity

The ACCC has been very careful to explicitly state that in looking at this acquisition it is solely concerned with matters local to the Adelaide market. The Statement declares, in paragraph seven:

The ACCC's preliminary view is that the proposed acquisition is unlikely to result in a substantial lessening of competition in the wholesale supply of T&E in Australia.

Even with this more limited view of the issues to be considered, it is not clear that the ACCC has entirely grasped all the forces at play in considering the market for trade-oriented tools. What is important to realise is that not only has this market changed substantially over the past 10 years (even just the past five years, in fact), but also that there is ongoing change and development at work as well.

The move to cordless power tools has made power tool brands more important than ever. Tradies do not so much buy individual tools as "subscribe" to a brand's battery/charger system, then buy tools that match up with this. You need only look at the website home page for Adelaide Tools itself, which banners the brands Milwaukee, Makita and Festool, to see how important these have become.

In fact, HNN would suggest that it is difficult to understand the Bunnings/Adelaide Tools situation without knowing about the conflicts around one brand in particular: Milwaukee, which is manufactured by the Hong Kong-based Techtronic Industries (TTI).

Bunnings has a deal with TTI to be the exclusive distributor in Australia for two of its power tool brands, Ryobi and AEG. It has, however, been completely locked out of any distribution arrangement for the Milwaukee brand.

Ryobi is regarded as something of a "DIY" brand, but it is more complex than that. It's the only global brand that manages to crossover between DIY and "pro" brands. It is a favourite with the slightly more serious home handyman, but it is also popular in areas such as repair, maintenance and improvement (RMI), as a reliable, low-cost alternative with some fleet characteristics (such as six-battery chargers).

Similarly, AEG is a popular brand with tradies who use a limited range of power tools, but it also crosses over into the "prosumer" end of the DIY market. Its tools are often slightly unique (for example, AEG offered a heavy-duty oil-pulse impact driver before that became a more common product) and feature more attention to aesthetic/functional design than many trade tool brands.

Milwaukee, however, is without doubt TTI's leading brand when it comes to technical excellence. There are four major generalist trade brands: Bosch's "blue" tools, Stanley Black & Decker's DeWalt, Makita and Milwaukee – five if you include Hikoki/Metabo. Makita is the most unique of the three, following a pattern of innovative tools that rely on values of balance, sturdiness and a high degree of repairability. The others compete on the basis of providing the power of corded tools in a cordless package, ever-larger batteries, compact size, wide range of speciality tools, and, increasingly, data-sharing through Bluetooth connectivity with smartphones.

Milwaukee has been the major pioneer in that last category. In terms of the future of this part of the power tool industry, that advantage is likely to be crucial. The construction industry, especially for government-funded projects, is likely to see enhanced building information modelling (BIM) requirements come into force in the near future.

For example, Hilti has introduced a range of concrete anchors that are laser-etched with unique visual codes, similar to QR codes. These can be scanned at the time of installation to record details. In the near future we are likely to see record made of the tool used to install the fastener, the time, the day, the subcontractor, and the tool settings. This will significantly contribute to construction auditing, diagnosis of later problems, and eventually liability as well.

While in the past Bunnings has largely accepted being locked out from the Milwaukee brand, what has changed recently is that the Metcash-owned Independent Hardware Group (IHG) has gained access to Milwaukee for its Mitre 10 brand.

In that context, part of the significance of Adelaide Tools is that it represents a way for Bunnings to gain access to Milwaukee. This casts a different light over the market situation that the ACCC has outlined in Adelaide.

Breaking down the ACCC analysis, it basically states that, while the trade market Bunnings services is much wider than that serviced by stores such as Adelaide Tools, there is significant overlap. Another way to examine that situation is to look at the areas where retailers such as Adelaide Tools do not overlap with Bunnings and provide a unique offering. That is partially through offering tools from more specialised brands such as Festool, but a significant part of it is also through having had semi-exclusive access to the Milwaukee brand.

Where assessing the competitive situation gets complicated is that the argument could be made that this semi-exclusivity to Milwaukee enjoyed by many independent tool stores has been broken by TTI granting access to that brand by IHG's Mitre 10 retailers. In that case, the move by Bunnings into Adelaide Tools does not specifically target the independent tool stores, but is a competitive move in reaction to IHG.

From yet another viewpoint, independent tool stores are now coming under increased pressure from IHG. That could be one of the triggers that made Adelaide Tools more willing to sell its operations than it might have been in 2018, for example. The acquisition of Adelaide Tools by Bunnings, then, is a continuation of this change in the market, not its instigation, or even the most significant shift.

Margin quest

While the ACCC seems to have concentrated mainly on sales, it is also the case it might do well to consider margins as well. It has become something of an assumption that most independent hardware retailers do not manage to make all that much margin on the power tools that they do sell to tradie customers. The general feedback HNN receives is that low prices that Bunnings charges can keep margins down.

That is one reason why there has been steady growth in tool specialist retailers. The power tool companies do see them as key to market access, and they seem to have been able to negotiate better margins. It's also the case that their speciality lines fall outside of those offered by Bunnings, so that the resulting margin from the mix of sales is better.

The picture is very different, however, when it comes to power tool accessories. There is a far wider range of suppliers for these, and competition is intense enough that even those ordering smaller volumes can expect prices low enough to guarantee decent margins.

Thus many of what the ACCC terms "multi-category retailers" carry power tools both for completeness of range, and to help ensure sales of accessories. They certainly participate in the market, but they tend not to compete that much on either price or service.

Online

If there is one area where the ACCC's analysis of the trade tools sales does not seem to be well-considered, it is in its approach to online sales. This is a little puzzling. The Statement declares:

29. Market inquiries indicate that online sales act primarily as a complement to in-store sales. Customers use online stores to conduct research, compare prices and check stock availability. Information obtained by the ACCC indicates that online sales typically constitute less than 10 per cent of most retailers' total sales and growth of online sales has not been significant to date.

This is a statement that seems to discount the importance of online sales. There would be very few retailers that would see a sales channel that generates 10% of revenue as not being significant. It's also worth noting that Bunnings has only recently launched its online sales capability, and that there are other significant players in that market, such as Amazon. Not to mention a range of suppliers selling solely through their own web and eBay stores, such as Trade Tool Supplies.

There is a rather obvious bias problem if the ACCC is relying for its forecast of future online sales of trade tools on information from retailers operating physical stores with relatively inactive online stores. It might have done better to consult current online-only retailers to obtain a more balanced view.

The "Resale price maintenance notification" lodged by SBD with the ACCC mentioned earlier also plays into this. It has been something of an open secret for some time that other power tool companies have had both formal and informal processes in place to get the same result - control over prices advertised online. Some of these are of rather questionable legality. This situation speaks to the overall power of online in influencing sales in this area.

Finally, the ACCC has identified that Bunnings does service a range of tradies who are happy to buy a wide range of tools from that retailer without much in the way of customer service or advice. That is partly because, for those who care to do a bit of research, there is a wealth of information available online, from websites wholly devoted to tools, to reviews of tools by actual users on YouTube, not to mention social media, and so forth.

Analysis

HNN would suggest that this objection by the ACCC to the acquisition may go somewhat beyond what it appears to be on the surface. There are, after all, something like over 12 hardware stores, excluding Bunnings, in the greater Adelaide area, plus three Total Tools stores, a Hilti store, and few more tool stores.

Among those hardware stores are five of IHG's Mitre 10 stores. IHG was formed through the ACCC giving the go-ahead for Mitre 10 and the Home Timber & Hardware Group to merge - in large part justified by this creating an independent group that could compete more effectively with Bunnings. There is little doubt that IHG gained the rights to sell Milwaukee tools largely as a consequence of that amalgamation. We could say that this merger is working as expected by the ACCC when it comes to fostering effective competition with Bunnings.

Adelaide Tools is certainly a well-known and much respected retailer, with a large footprint. However, the most likely outcome of Bunnings acquiring the store is that there will be some additional investment into the region, and the store might expand its range and lower some of its prices.

So, from the immediate perspective of the trade tool consumer, it seems unlikely that there will be much harm done and some benefits may be delivered. That leaves us to consider, from the point of view of the ACCC's remit, how competition and the market itself will be affected.

In HNN's opinion, the ACCC is aware that in trade tools (and elsewhere in hardware as well) the market has actually become dysfunctional. As HNN has suggested before, historically what has happened to the market is that in the early 2000s Wesfarmers and Bunnings realised that the supply chain offered strong prospects for growth. Other firms, such as pre-Metcash Mitre 10 and Danks, saw strong prospects in improved retail outlets.

Both were, in a sense, right - but Bunnings was more right, with the growth that was delivered through the supply chain turning exponential, outpacing the growth that came through improving stores. Coupled with everyday low pricing (EDLP), the Bunnings model effectively reduced margins to the extent that its competitors were not able to fund the research and development needed to develop innovative approaches to the market.

Bunnings certainly has taken advantage of a central fragility in the trade and also DIY markets. That fragility is that it turns out pricing as a marketing signal can outweigh almost every other signal, including pre- and post-sales service, and even relationships. However, the company did not create that fragility.

The real surprise in these markets is that they have not been able to develop counter-strategies that could overcome the current market situation. One of the features of modern retail and other businesses as they have evolved in the 21st Century is that we see a move from products to services, with services proving more profitable.

We need to ask why these smaller trade tool businesses have not evolved a model of "tools as a service", where they effectively leased a fleet of tools to trade businesses, providing more flexibility, and eliminating problems for their customers such as a lack of tool availability during repair cycles.

The real question faced by the ACCC is actually a much larger one than just whether the oversized market presence of Bunnings needs to be braked and inhibited in some way. It is, rather, whether the market benefits from supporting businesses that are at risk because they have not been able to evolve their business models.

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Stanley Black & Decker Australia (SBD) has lodged a resale price maintenance (RPM) notification with the Australian Competition & Consumer Commission (ACCC) as of 17 October 2019, with specific regard to its DeWalt brand of products. RPMs allow the ACCC to relax regulations in consumer law which forbid suppliers from imposing pricing conditions on resellers, such as limiting their consumer prices to a set minimum.

SBD is not seeking to set limits on the extent of price discounts at which resellers can sell its DeWalt products. It is, however, in broad terms, seeking to establish a floor price for advertising for each and every DeWalt tool. Under that arrangement, SBD resellers could price DeWalt tools below that floor price for in-store sales, but they would be contractually prevented from advertising or otherwise communicating a price that was below the floor price.

We do want to go into some detail as regards this move by SBD. Many people would agree that the power tool market suffers from some unfortunate distortions, and this is a genuine effort by SBD to find a way to correct some of these. The difficulty, of course, is that it often seems to be the case that in making an effort to solve one problem, you create others.

However, HNN does believe we should start by mentioning that there really are grave doubts that this particular approach - limiting the communication of price discounts, but not the discounts themselves - really has much chance of working on a practical level in 2020.

The proposed restraints on true pricing information would be contractually declared between SBD and its resellers. This means that third-parties, who were not contractually bound to either SBD or the resellers, would be free to communicate the true discount prices of DeWalt products, in any way they chose.

The reason this point is so important, is that the reseller that would be most affected by restriction of advertising through floor prices would be Bunnings. The Bunnings website generates huge volumes of traffic. Should there be a restriction put in place that meant Bunnings could not communicate the true prices of DeWalt products on its website, it would be a very tempting proposition for a third party to set up a website that did provide the true pricing for DeWalt products at Bunnings – along with the true pricing at other retailers as well.

At a guess, within a couple months after such a restriction went into place, there would be fifty or so websites offering that information, and earning money from the traffic they attract (really siphoned off from the Bunnings website) via Google Ads.

It is also highly likely that it would not be possible to restrict Bunnings and other resellers providing that pricing information to these sites, as these would be journalist enquiries, and it seems unlikely that could be contractually restricted. Even if such a restriction were possible, it seems likely Bunnings and other resellers could effectively "leak" that information without fear of detection.

This is also a kind of activity that would attract a good deal of journalistic interest and publicity. It seems likely that in reporting on this situation by the business and consumer press, SBD would find itself portrayed in a negative light, which could have ongoing consequences.

These are, however, only speculations about implementation, and really do not play a part in SBD's more theoretical interactions with the ACCC.

Background

To understand what SBD is doing, it is necessary to first take a close look at the background to the changes the ACCC has made to RPM recently, and how the ACCC has acted so far.

The RPM process is one that is relatively new to the ACCC. It was first comprehensively described in November 2017, and has been successfully applied to the products distributed by one hardware company. This was Tooltechnic Systems (Aust), which is the main distributor of Festool and Fein power tool products in Australia.

Essentially, the RPM process enables companies that wish to impose price and price notification restrictions on resellers of their goods to obtain an exemption to the Competition and Consumer Act 2010, under which such activities are normally forbidden. As the ACCC describes the situation in its guidelines:

In broad terms, Resale Price Maintenance (RPM) occurs when a supplier of goods or services (e.g. a manufacturer or wholesaler) specifies a minimum price below which a reseller must not on-sell, or advertise for sale, those goods or services.

RPM is a per se breach of the Competition and Consumer Act 2010 (Act), which means it is prohibited outright, regardless of whether it has the purpose, effect or likely effect of substantially lessening competition.

Attempts by distributors to set prices for resellers is generally disallowed, because it tends to have detrimental effects. As described by the ACCC:

RPM can cause harm to the competitive process by reducing or eliminating price competition between resellers. This can result in resellers selling goods or services at prices higher than they would otherwise and consumers paying more for those goods or services without receiving any additional value. In some circumstances, RPM may also increase the risk of collusion between competitors.

However, the ACCC also admits to there being circumstances under which RPM may produce beneficial effects as well as detrimental effects. As such there may be times when the market and consumers will derive overall benefit from allowing RPM. As the ACCC describes this balance:

The ACCC recognises that, in certain circumstances, RPM can result in benefits, including by promoting competition. For example, producers of complex goods or services may seek to engage in RPM to create incentives for a reseller to invest in pre-sales services such as demonstrations and advice that are valued by consumers. Without RPM, other resellers could 'free ride' on these investments by setting lower prices.

Test case: Tooltechnic

The ACCC offers up its first ruling on the new approach to RPM as a test case. This was the case of Tooltechnic, which are the current sole distributors for the Fein and Festool products in Australia. The ACCC introduces the case:

Festool products were expensive and complex, and Tooltechnic encouraged its dealers to provide high levels of pre- and post-sale services to customers. Tooltechnic was concerned that there was a risk customers would access pre- and post-sale services from one retailer but purchase the product at a discount from another retailer who did not provide the services, thereby reducing the incentive to provide the services.

The ACCC agreed to grant the RPM request, noting that:

[A]s a result of the RPM conduct, retailers would be likely to invest in pre- and post-sale services, as the risk of free-riding would be addressed. Such an increase in service was likely to generate public benefits including that some customers would make more informed decisions in purchasing quality power tools and customers would continue to receive the choice of a premium trade quality power tool product which is accompanied by a high level of pre- and post-sales service.

An important element of that ruling was that the size of Tooltechnic meant that while there would be detrimental effects, these would be relatively minor. As the ACCC stated in its announcement:

Further, while there is clear detriment in this case, it is likely to be reduced by the fact that Festool and Fein have relatively low market shares and face numerous competitors.

That last point is quite significant. The ACCC is saying that it may be more willing to grant RPM for smaller companies as the total extent of disadvantage will be small.

This becomes something of a key point, as SBD does draw some parallels between its circumstances and those of Tooltechnic. It is worth pointing out that, globally, SBD is a company with a market cap of USD24.5 billion (approximately AUD37 billion). Techtronic Industries (TTI) has a market cap of USD16.5 billion (AUD25 billion) and Makita has a market cap of JPY1160 billion (AUD15.6 billion).

The DeWalt case

The SBD submission to the ACCC is 32 pages long, though some pages do have considerable redactions in the public version to protect commercial-in-confidence communications. The submission consists of a standard form from the ACCC, followed by an appendix, which SBD refers to as "Annexure A". There are additional documents as well, including SBD's response to submissions made by Bunnings and TTI among others.

The submission is quite discursive and, as is common in many such submissions, somewhat repetitive at times. As a consequence of that, the best way to present the information is to take the most representative extracts from different parts of the SBD notification and supporting documents.

What SBD wants

The notification document sets out what SBD is seeking in section 3.1:

Specifically, SBD proposes to amend its dealer agreements to impose a requirement that dealers do not advertise the DEWALT Products:

(i) below the "invoice price" for those products, being the standard SBD price charged by SBD to dealers for the products excluding any rebates or discounts offered by SBD off that price to individual dealers; or

(ii) where a reseller elects to participate in a special price promotion that is funded (in part or whole) by SBD, below the promotional price specified by SBD.

The proposed amendment to SBD's dealer agreements will only involve specifying a minimum advertised price (MAP) for the DEWALT Products. It will apply to all advertising, including online and in-print. It will not apply to in-store activity and will not restrict or prevent SBD dealers from selling the DEWALT Products at a price below the MAP to customers who negotiate a discount directly with the reseller.

To clarify what is going on here: a reseller might decide to sell one model of DeWalt drill at $200 in its store, but SBD might set – for all resellers – a limit of $250 for the minimum advertised price of that product. The reseller is free to sell the drill for $200, but will only be able to advertise that drill for the price of $250.

That $250 price (which SBD calls the "MAP" price) will be the standard invoice price for that model of drill across all dealers. MAP excludes rebates and any other discounts. If the final price that dealers pay is called the "net net price", the invoice price is basically the "net price".

In terms of the promotional price, SBD provides an example of the situation this is designed to remedy.

This issue is illustrated by a recent DEWALT promotion, where customers were given the opportunity to purchase a DEWALT FlexVolt drill and charger for $199, compared to the recommended resale price of $459. For SBD, this promotion, provided the opportunity to encourage customers to try the FlexVolt platform by offering them a 'kit' (i.e. product, battery and charger) at a heavily reduced price.

...

One reseller ... promoted the kit online at $189, $10 below the recommended promotional price. This resulted in two of SBD's largest resellers, who had made significant investment in the promotion, reducing their promotional prices to match this reseller and not earning an acceptable return on this promotion.

This type of incident means that dealers ... are much less likely to support promotions in the future as there is no guarantee that they will obtain an appropriate return for their investment and involvement.

Advertising, not price

It is worth noting at this point that the notification provided by SBD is unique in one point, in that it separates advertising from pricing. SBD claims that it is not inhibiting the actual act of discounting, to any amount, but seeks to prevent resellers from advertising a discounted price that goes below a level that SBD itself has set.

That splitting of concerns is not a possibility that is clearly mentioned by the ACCC. The relevant definition section in its guidelines states:

RPM may arise in several ways, including if the supplier makes it a condition of supply that the reseller must (or threatens to withdraw supply if the reseller does not):

-sell the goods or services at a certain price

-not sell below a certain price

-only discount to an extent that is 'agreed' or not discount at all

-comply with a recommended retail price (RRP) or not price a certain percentage below it.

The lack of a separate specification of advertising/publicity from actual price does not mean that it is not contemplated in the ACCC's interpretation of what is quite loosely written legislation. However, this split is likely to give rise to additional concerns.

SBD's motivation

The motivation for SBD seeking this remedy from the ACCC is most clearly laid out in sections 3.3 and 3.4 of Annexure A. Prior to this, SBD has established that it sees pre- and post-sale service as being a critical part of its product offering. Here it outlines the factors that it sees as inhibiting this in the market.

3.3 However, in a market with very aggressive pricing behaviour, dealers are often not prepared to invest in such service if they are not going to earn a sufficient return on their investment. Ever increasing price competition for trade quality power tools has meant that dealers have been continually undercutting each other on advertised prices. Margins on DEWALT products are considered by many dealers to be too low, particularly when compared to the margins that they earn on products from competitors such as Makita, Milwaulkee and Festool which margins are perceived by resellers to be protected (whether by reason of manufacturers' actual or understood policies on discounting, or ACCC notification).

3.4 The price competition and comparatively low margins on DEWALT products has been largely driven by two inter-connected factors: the significant growth in the online promotion and sale of power tools (including the growth and use of price comparison websites) and the price guarantee policies of various dealers whereby they promise to beat a competitor's lower price. These price guarantee policies mean that dealers with these policies will reduce their prices to match another reseller's online advertised price to so avoid having to offer additional discounts under their price guarantee policy.

Benefits

SBD describes the benefits it sees as flowing from introducing a floor advertising price in section 10 of the formal statement of notification. These include:

Detriments

On the other hand, listing what is detrimental, in the following section 11, SBD simply states that this will be minimal, and refers the reader to Annexure A, section 10 for further details.

Section 10 of Annexure A begins by stating in section 10.1:

SBD considers that any public detriment, particularly in relation to any impact on competition will be limited.

Sections 10.2 through to 10.6 list reasons why the MAP scheme would not have a deleterious effect, including: that as the MAP price would be below the RRP, dealers could still discount; that it does not restrict in-store competition by dealers; and that SBD would be happy to supply the ACCC with details of pricing and margins.

Section 10.7 then lists all the bad things that SBD says will happen if its request is refused by the ACCC. This includes limiting the distribution of some product, dealers de-ranging and decreasing their investment in DeWalt, and SBD ceasing to invest as much as it has in the brand. Section 10.7 ends on point (f), which states:

All of the above risks resulting in the DeWalt brand becoming weaker in the market and market concentration increasing, with the two major suppliers (Makita and Milwaukee) accounting for a greater share of professional power tool sales.

The Bunnings response

SBD has opted to not really provide a clear listing of the detrimental effects of the RPM it is seeking. However, we can turn to the submission provided by Bunnings to get some view on these.

The Bunnings submission is in the form of a letter to the ACCC from Phil Bishop, who is general manager - merchandising for Bunnings. His letter is a model of clarity. In it he clearly and simply lists what he sees as the potential detrimental effects of the ACCC granting SBD's RPM request.

As a national retailer of Dewalt Products, Bunnings does not consider that any purported public benefit associated with the Proposed Conduct outweighs the obvious public detriment that will arise as a result of the Proposed Conduct. This public detriment includes:

-the reduction of intra-brand price competition for Dewalt Products;

-the likely requirement for end-customers to pay higher retail prices for Dewalt Products than they otherwise would in the absence of the Proposed Conduct; and

-lower incentives for retailers of Dewalt Products to invest in cost-saving initiatives.

Mr Bishop goes into some detail in his letter to describe Bunnings' approach to both the supply and sale of DeWalt products. One part of this that is of general interest to the industry is section 5, where he describes some of the ways in which Bunnings works to cut supply costs of DeWalt products. These include:

The point to this, of course, is that these actions are directed towards being able to sell DeWalt products at the lowest possible price. If the ability to market these products at that low price is removed, then the incentive to pursue these efficiencies is reduced, and the Australian consumer loses out.

Mr Bishop is more explicit about these concerns in section 7 of his letter. Under the heading "No public benefit in higher prices", he clarifies what the detrimental effects of RPM would be:

Bunnings does not consider there to be any inherent public benefit in systemic prohibitions on advertising prices below a certain level. Bunnings considers that any such conduct of this nature deprives customers of price competition between retail channels. It also stands to prejudice customers who are unable to purchase Dewalt Products in-store (perhaps because they are geographically distant from a store or are time poor), as these customers will only be able to purchase Dewalt Products online or by ordering them at or above the MAP.

Further, Bunnings considers that the Proposed Conduct would deprive customers of the ability to self-select between paying a higher price in exchange for higher levels of pre-sales service or advice, or purchasing the same product online. In this regard, Bunnings notes that the public version of Dewalt's notification does not provide any evidence to suggest that so-called 'high-service' physical retailers do in fact offer Dewalt Products at higher prices than online competitors. In fact ... Bunnings considers that it has been able to offer both sustained low prices and a good degree of product expertise simultaneously.

The SBD response to these objections by Bunnings is provided in a supplementary submission. SBD begins by denying that the RPM would have the result of "chilling price competition" as Bunnings stated. It goes on to state, in part:

First, the scope of the Notification is limited. SBD's proposal will not eliminate advertised price competition for DEWALT products. Under the notification, the MAP will set an advertising floor price but this will be set at a price that is below SBD's RRP. Accordingly, the notified conduct will still allow dealers who wish to compete on advertised price by advertising below RRP to do so. As a result, DEWALT expects that there still will be competition on advertised prices for DEWALT products and that retailers like Bunnings will continue to monitor and respond to competitor's advertised price changes.

Further, the Notification also does not prevent in-store discounting.

Finding the balance

It is perhaps useful to look at two more quotes from the SBD Annexure A to gain some more insight into the reasoning that SBD is using.

This is statement 1:

4.3 While the MAP Conduct will prevent dealers from advertising DEWALT branded power tools, accessories and attachments below the MAP if they wish to receive additional discounts from SBD, as discussed further below, dealers will not be adversely impacted by this. The MAP is set at the SBD stockist price, which is below the RRP, and accordingly dealers will be able to continue to advertise discounts on the DEWALT Products below the RRP. Dealers will also be able to sell the DEWALT Products for prices below the MAP to customers who seek to negotiate a better price directly with the reseller.

The following is statement 2:

4.6 As discussed further below, end-user customers will not be adversely impacted by the MAP Conduct. SBD will continue to face strong price competition from competing brands which will prevent SBD setting the MAP at a non-competitive level. Further, as the MAP sets a floor on the advertised price that is below the RRP for the product, it will not eliminate intra-brand price competition on DEWALT branded products. In addition, end-customers will still be able to negotiate discounted prices below the MAP with dealers.

The part of statement 1 that stands out is the declaration that "dealers will not be adversely impacted by this", the "this" being the restriction on publicising prices discounted below the MAP set by SBD. Then, in statement 2, SBD declares "end-user customers will not be adversely impacted by the MAP Conduct".

It is very difficult to understand this. If dealers such as Bunnings have worked hard to make it possible to sell DeWalt products at a price discounted below the MAP, then not being to advertise those products at the true, discounted price would, common sense indicates, disadvantage them. Those dealers would miss out on sales that they would otherwise have attracted through offering such low prices.

Similarly, if consumers are unable to locate the lowest possible prices for products due to restrictions on advertising those prices, and they end up purchasing DeWalt products at a higher price, then it would seem fairly natural to see them as having been disadvantaged.

The best that we can do in trying to follow SBD's thinking here is the consider that the company does not consider the losses the dealers might suffer to be material, as balanced against the gains made by correcting a market that has, in SBD's view, focused too much on price at the expense of service delivery.

The same balance might be seen to be applied as well to the disadvantage the consumer suffers. SBD might regard the extra expense the consumer accrues as being balanced by encouraging higher levels of service by removing some of the advantages of higher levels of discounting.

Analysis

That balance, as is made clear in the ACCC guidelines, is what the ACCC must adjudicate on. Are the advantages real, and do they come at too great a cost for whatever the projected benefits are that they may produce?

This must be further balanced by the issues of practical implementation we mentioned at the beginning.

And there is an additional issue that arises from the structure of the RPM SBD seeks. Should the ACCC really be seen to promote retailers providing consumers with information about prices that is actually misleading? It is possible that in doing so something of an informal breach of trust occurs, between the retailer and the consumer, but actually also between the ACCC and the Australian public.

SBD is certainly correct in its view that the current market for tools suffers from some unfortunate distortions. In particular, the practice of high levels of discounts coupled with adequate but not outstanding service in hardware retailers has, in HNN's opinion, had a severe impact on the introduction of innovative products.

To take an example outside of SBD, Bosch's nanoblade technology in its EasyCut saw range never really stood much of a chance in Australian hardware stores. While it is a fantastic product, and a real solution for casual DIYers and craft people, it is also the kind of product that needs to be properly understood and sold. The same could be said for much of the new and innovative Bosch DIY range.

That said, however, the reality is that the market continues to tell companies – including SBD – that the services model they have been pursuing is not the one a large percentage of end-users want to invest in. In HNN's view, this is because the services offered are simply not enough. If Bunnings represents the optimal low-end of service, providing just enough to keep customers happy along with low prices, then the rest of the industry has yet to find the equivalent position when it comes to high-end service. Services have to produce value, and they have to work to eliminate ongoing concerns that trade and DIY customers may have.

The industry just isn't there yet, and the pressing concern is that there are so many forces at work to make innovation difficult for smaller businesses, that it may never get there. We all must work harder to ensure that the independent hardware store survives

It does seem to HNN, however, that the answer to the industry's problems is more likely to be found in innovation by individual businesses, rather than in exceptions granted by the ACCC to consumer legislation.

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Even though Bunnings has been synonymous with the slogan, "Lowest prices are just the beginning", the hardware retailer recently confirmed it has been phasing it out since 2018.

The 25-year-old slogan no longer appears on the company's website and is not being used in new advertising campaigns or on its warehouse stores, and it will be removed from the green aprons worn by staff. Bunnings managing director Mike Schneider said in The West Australian:

After 25 years, customers understand our lowest prices policy and price guarantee, so we thought it was timely to update and refresh our branding.

We are incredibly and genuinely committed to our policy of lowest prices. We invest over $5 million a year in a very robust system to constantly check competitor's prices online and in store - nationally and regionally.

In stores, we have pricing integrity team members who check the local market.

Marketforce Group chief executive Adam Marshall said seeing the iconic slogan disappear would change consumers perceptions of what that brand stands for. He told The West Australian:

This is a big deal. In the past when major brands have changed things like taglines, it often comes with a huge amount of advertising and PR support. This one is a bit of a stealth change that they're trying to sneak through on people.

Mr Marshall said Bunnings expanding its online presence could complicate its trademark use of the slogan.

The risk is if you're going to stick with it, then you've got to be able to back it up. And that means you're going to have to constantly price check, you're having to constantly lower prices. So your profit margin is constantly going to be under threat.

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The ongoing copper recovery project at Kapunda Mine in South Australia has delivered economic benefits valued at around $25,000 to regional businesses including the Kapunda Hardware & Garden Centre, a Thrifty-Link store.

Works at the historic mine site, headed by Environmental Copper Recovery (ECR) Pty Ltd, were done to validate research performed by CSIRO and Adelaide University.

Kapunda Thrifty-Link Hardware was able to order in materials crucial to the work carried out by ECR. Store manager Peter Duregon said there was "no doubt" money was spent in the region. He told The Barossa Herald:

They've (ECR) certainly been supportive as just one transaction alone for a bore casing was about $1000. Mining is not a cheap game, so it was nice to know they called on us when they could have gone elsewhere.

Peter's knowledge and resourcefulness to quickly access the necessary hardware was referred to ECR by Drillsmith which is also involved in the project. DrillSmith is another Kapunda-based company that specialises in geotechnical investigation, drilling of earth stakes, environmental drilling and project management.

ECR managing director Leon Faulkner said it was always the company's intention to rely on regional businesses. The financial benefits were further spread to Kapunda's hotels, accommodation and food outlets.

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Bunnings has not yet confirmed an agreement is in place for a store in the rural town of Emerald (QLD) despite a tender description suggesting one may be built, reports Central Queensland News (CQN).

In January 2020, Hutchinson Builders were calling for tenders to deliver a site near the Central Highlands Marketplace to include a 8011sqm Bunnings store, a 270sqm United petrol station, along with large and small retail tenancies.

The site is located on the corner of Capricorn Highway and Chalcedony Road, which a Bunnings spokeswoman said was owned by Spotlight. The project has a budget of $5-10 million and tender applications closed on January 14.

Bunnings director, property, Andrew Marks, said Emerald was an area of interest for the hardware chain to expand into, but nothing had been set in stone. He told CQN:

We can confirm Emerald is a possible location of interest. However, no agreement is in place for a Bunnings in Emerald.

In other store development news, an application has been lodged for a new Bunnings store in Ulladulla (NSW), according to the Milton Ulladulla Times.

Rockhampton complex sold

Real estate fund manager MPG has purchased the Bunnings complex in Norman Gardens near Rockhampton (QLD) for $43.5 million. The 18,319sqm site also includes speciality retailers Autobarn, Petstock and Freddy's Fishing and Outdoors, and 1060sqm of vacant space is supported by a three-year rental guarantee. The Bunnings store itself is 13,242sqm.

MPG chairman Trevor Gorman said in The Mornington Bulletin that the MPG Bunnings Warehouse Rockhampton Trust closed two times oversubscribed. In a letter to investors, Mr Gorman wrote.

With the Australian sharemarket at record highs and with RBA cash rates at historical lows, the income characteristics of property with cash returns in the vicinity of 6 to 8% are looking very attractive to investors compared to most cash and fixed interest investments.

The Bunnings complex is 94% leased with an 8.5 year weighted average lease expiry. It is expected to meet its 6.5% distribution yield for the 2020 financial year.

The site was originally tenanted by Masters, which closed its doors for the last time in December 2016. The site sold in 2009 for $11.2 million and again in 2017 for $37.5 million. It has a land valuation of $5.2 million, zoned as a retail warehouse.

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The Screenview app developed by Cowdroy showcases its latest innovative offering in a virtual setting that helps make selection easy for end-users.

Now live in the app store for download on iOS and Android devices, Screenview illustrates Cowdroy's nine advanced mesh screen products as well as over 20 accessories. The app is designed to help customers find the most suitable product by enabling them to preview the entire range and their options.

Screenview provides the user with additional information on each specialty screen before they buy. It allows them to make informed comparisons by visualising products both in static and live formats, giving them a clearer picture of how the screen will look in reality.

The Cowdroy insect range suits a wide variety of window and door screening needs, offers simple installation, superior airflow, pet friendliness, smaller insect protection, rust proof stainless steel and temporary screening. With the broad choice of screening options that is also supported by accessories available via the app, the assembling of new screens or the refurbishing of existing screens including aluminium frame, spline, frame buttons, corners and spline rollers are made easier. Peter Doyle, business development manager for Cowdroy Retail, said:

Our extensive insect screen range is designed to offer a solution to meet any combinations of construction needs and building regulations, regardless of the type of opening, climate or usage.

The new app brings our products to life and provides detailed information to help DIY-ers and tradespeople with the information to choose the right screen for them.

One of the biggest considerations when designing the app was ensuring the right product was used in the right location to meet building requirements and help ensure consumer safety.

The Screenview app and website includes product and accessory images, descriptions for each type, pricings, stockists and nearest retailer.

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Stewart's Hardware in Nowra (NSW) will close at the end of February 2020. Owner James Stewart has spent 25 years in the local hardware industry, starting with North Nowra Hardware as a teenager. He worked for Walsh's Mitre 10 prior to taking over the business and re-launching it as Stewart's Hardware in March 2016.

Mr Stewart cited online spending and high rental rates in Nowra's CBD as the main reasons for the store's closure, as well as the South Nowra Bunnings store doubling its size. He told the South Coast Register:

Many of these factors are forcing a variety of different types of stores to close, or many are moving out of the area, largely to South Nowra.

I felt obligated to take on and take over this business to continue the Walsh's family hardware business with good old-fashioned hardware knowledge and service that has been provided to this area since 1877. I couldn't just let it close. I wanted to take it on to continue to provide service to the community, conveniently located in town as an alternative to Bunnings.

A lot of our customers are elderly and rely on public transport. I feel for them. We survived as long as we did, due to their support.

After a short break following the store's closure, Mr Stewat plans to start Stewart's Handyman Business.

West Ryde store for sale

Taffa's Hardware, considered an iconic store after 64 years in the Sydney suburb of West Ryde, closed at the end of last year. Its 403sqm site, located in the heart of the suburb's CBD, is set to be auctioned in March 2020 through Ray White Commercial.

Anthony Taffa worked alongside his dad and founder of the store, Ron, and has been managing the store that became Taffa's Mitre 10 with his sister Julianne. He told the District Northern Times:

It was very difficult for us and took us a long time to come to that decision - it is in the long term the right one.

Taffa's Hardware first opened its doors back in 1955. In the mid-1970s the store's floorspace was expanded and a second level was added.

The business, which had operated independently, became part of Hardex Hardware, a co-operative of similar businesses created by Ron Taffa. In 1980, he left the group and joined the Mitre 10 group and remained part of it for the next 40 years. Anthony Taffa said:

It was important to keep evolving and refreshing the business - we have four different logo sets for Mitre 10.

Changes within the local area, increasing costs and decreasing margins led to the decision to stop trading. Ron Taffa passed away aged 90 in December 2018. In Commercial Real Estate, Anthony said:

It was amazing when we closed down. We had so many people come through and say their grandparents used to do their shopping there, and then their parents after them, and now they did. It was incredible. They were thanking us for being such a great community service, and for everything we had done, and a couple of customers were in tears.

The Taffa family have always been community-minded, and sponsored local football and cricket teams, and donated merchandise to local schools and groups to help them raise money for various charities and organisations. Anthony said:

It's been a wonderful 64 years, but times have now changed and local community desires have changed too.

It's very much part of our family history so closing the business and selling it are difficult things, but we have to move with the times. It's amazing how many people built their homes with what my father sold them, and their response when they heard we were going was very touching.

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The team at Bisley Workwear led by managing director David Gazal, is launching a workwear range designed for women from the ground up, not just tweaking of men's traditional styles.

According to Ragtrader magazine, the new range comes after Bisley's Workwear Tradies Report 2020 found that almost half of the female tradies surveyed have worn casual or non-safety clothing to work because of a lack of options available to them.

The research also discovered that 40% of female tradies feel less safe at work wearing ill-fitting garments, with three in five admitting they have worn workwear designed for men.

The ill-fitting garments are impacting their ability to work hard, with 33% indicating they can't work as hard as they want to in incorrect clothing, while 45% feel more self-conscious and 20% feel like they don't belong.

In response to these findings, Bisley consulted five Australian female tradies to uncover the real needs for women's workwear to design a range specifically for them. Mr Gazal said in Ragtrader:

When our research revealed that tradeswomen were feeling unsafe and uncomfortable on the worksite, we realised the need for a new industry-wide approach to women's workwear.

For our new range, we developed a three-dimensional fit model with our consulting tradies based on how tradeswomen move and work, variations in fit and size, and the best silhouettes for functional, professional, and safe workwear.

And unlike some industries where the woman's version of the same item or service costs more than that for a man's (ie. haircuts), the Bisley female workwear range is priced the same as that for the men's range. Mr Gazal exclusively told The Weekend Australian:

When we put this range together, we put it together knowing that the garment needs a completely different silhouette, and completely different fabric.

Fabric needs stretch, it needs wearability, and functionality in the workplace. It needs to be durable and not be restrictive.

Bisley has already road-tested its first workwear range with five female tradies - a paver, landscaper, chippie, plumber and sparky - and the feedback was supportive. It said it has received large orders from companies involved in construction, mining and infrastructure.

Scott Cam, host of the Nine Network's The Block and a brand ambassador for Bisley for the past 20 years, told The Weekend Australian that feeling comfortable in work gear on a site was crucial, and for too long women tradies had been forced to wear men's gear.

If you are climbing on the roof, in roofs, under floors etc, if you haven't got a stretchy and comfortable material then it is unsafe. I was a carpenter for 40 years and I spent half my life on my knees.

The fact is female tradies are getting so many more roles, which is outstanding, and still have nothing to wear. It is imperative that someone has done something about it, which Bisley has.

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Established in Tasmania in 1870, Blundstone remains 100 per cent family-owned, and continues to be shaped by the vision and values of its founders and owners.

John Blundstone started making fit-for-purpose footwear that could withstand the cobbled city streets, rugged farmland and factory floors of Hobart, Tasmania in the late-1800s.

The company said this philosophy has allowed Blundstone to adapt to an ever-changing environment and 150 years later, its commitment to durability, quality and innovation has not wavered. CEO Steve Gunn said:

There are only a handful of brands that have been in existence for 150 years and an even smaller number that remain family-owned. The success of the Blundstone brand is that we have always remained true to our heritage.

Blundstone boots were born tough to weather the untamed terrain of Tasmania, they have marched in armies and dug deep on Everest. Today, our boots continue to work hard, exploring the world while simultaneously pounding the pavements of fashion capitals globally. We're really excited to mark our 150th milestone with new partners, campaigns and products.

Known for its popular elastic-sided Chelsea boots, Blundstone footwear is instantly recognisable for its tough, no-nonsense style that can be dressed up or dressed down. And these boots have endured the Great Depression, both World Wars, and a continuously evolving fashion landscape, from the swinging '60s to '90s grunge.

The brand's history is a constant inspiration, but its ethos and focus remain the same - to produce boots that can take people anywhere. Blundstone believes its products have stood the test of time, garnering cult status among creatives, adventurers, and tastemakers around the world.

Throughout 2020, Blundstone will reveal a yearlong series of activations and a creative campaign celebrating those who have worn the boots in the past and those who wear them today, encouraging the next generation of Blundstone wearers. A new microsite showcases the brand's history and the campaign creative and will as serve as a platform for a UGC (User Generated Content) competition taking place early in the year.

The digital cornerstone of the campaign can be seen at the following link:
Bundstone 150 website

In honour of its 150th anniversary, Blundstone will release a limited-edition #9150 safety boot and a limited-edition #150 casual boot in 2020.

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Delko Tools has extended its product range and is looking to broaden its reach into the DIY market.

The business was founded on owner Daniel Owens' worldwide patented design for a taping applicator that makes drywall plastering easier and more efficient for professional plasterers. After its initial release in 2009, the concept was further improved and packaged into a larger kit with a complementary tool.

Mr Owens told the Geelong Advertiser that Delko Tools have been sold in more than 1000 stores across 20 countries, with sales reaching 20,000 units a year for the past couple of years. The original product served a niche professional plastering market but he said the brand was starting to be stocked in larger stores, which opened up the DIY market. The extended range includes a mixer paddle and a dual-purpose knife, both protected by patent.

He said about 50% of Delko Tools products were sold in Europe, 30% in North America and the other 20% around the rest of the world, with Australia accounting for just 1% in sales.

Mr Owens said the first shipment of new products heralded an exciting time. He told the Geelong Advertiser:

It's when the tools are actually on the shelf, and people are using them, that is when we see the spike.

The early years of the business were difficult and took their toll with he and wife Kirsten deeply invested until the original product started to pay its way, creating the opportunity for Mr Owens to go full-time as the business started to turn the corner about five years ago. He said in the Geelong Advertiser:

It was dark times before it got good. All the money was going out with the R&D, tooling and prototypes, the marketing and the patent fees.

But he said the patent protection, and persistence, were the keys to putting a successful product in the market.

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This edition was not originally what HNN planned to release for the first issue of 2020. We decided we could not ignore what was happening around the country: the bushfires. Thank you to Andrew from H Hardware Traralgon and Peter Hunt from Corryong Building Supplies, as well as senior executives from HBT and Bunnings for making it happen. Independent Hardware Group declined to participate.

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Merlin Software and one of its very satisfied retail customers, Michael Kubank from Merino Engineering Supplies is profiled as part of the POS and data analytics feature.

In our sought-after statistics section, we forecast hardware retail sales in 2020.

We also take a closer look at the approval for a Bunnings store in the inner Sydney suburb of Rozelle (NSW) and speak to Grant Crowle form The Hardware Store. It's a classic story of an independent hardware store versus a big box home improvement retailer.

Plus, Metcash is reportedly no longer interested in buying Total Tools; The Home Depot launches a flat bed distribution centre; and Screwfix opens stores in Ireland.

Other companies featured in this edition include Reece Group, Blundstone and Linkware International, to name a few.

There has been a worse bushfire season in Australia, in 1974, but while that fire burnt 15% of the land mass (117 million hectares), in terms of economic and social impact, the 2019/2020 season is the worst ever. For the financial year to date, it is estimated that over 17 million hectares have been burnt.

This includes nearly seven million hectares in the Northern Territory, which is regarded as a fairly average annual burn. The additional 10 million hectares in the other states combined is, however, a significant increase, with nearly half of that burn taking place in New South Wales.

Some 2779 homes have been burnt down, along with over 3000 other buildings, it is estimated. Very sadly, around 34 people are thought to have perished as a result of the fires.

In terms of pure dollars, the 2009 Black Saturday fires of 2009 are estimated to have cost $4.4 billion. The 2019/2020 fires will likely end up costing the Australian economy over $6 billion. The worst part of that cost is that the brunt of the disaster will be borne by regional and rural areas that were already doing it tough, strongly affected by an ongoing drought, and the shift in the economy towards growth in Australian cities rather than in less-densely populated areas.

While all that seems to be pretty bad, there is an even greater danger lurking in the future. Australia's history is peppered with recurrent natural disasters, from which it has successfully recovered, learnt some lessons about how to limit future damage, and moved on. The real risk is that these bushfires are not a one-off event, but instead signal a trend that could see future fires put lives, buildings and the overall economy in greater peril than in the past.

Directly, if we see a similar fire season during the summer of 2020 or 2021, there is a strong potential that the need for a reset in terms of spending, housing, support services and investment risk could see the Australian economy lurch into recession.

Economist for Moody's Analytics, Katrina Elli, was quoted in The Guardian newspaper as stating:

But the risk of there being broader macroeconomic spillovers this season are high given the scale of the fires, as well as the fact that it is still early in the bushfire season and the existing fires are yet to be contained.

Ms Elli cites a range of adverse effects, including health problems from smoke decreasing worker productivity, high insurance claims increasing overall premiums, declining consumer confidence, lower crop yields, and an overall reduction in revenues from domestic and international tourism.

A survey by Australian consumer statistics company Roy Morgan found that overall 24% of businesses had been affected by the bushfire, with the percentage rising to 35% in New South Wales. Some 11% of businesses in New South Wales self-identified as being affected by "a great deal".

In a separate survey, Roy Morgan reports that only 12% of Australians believe 2020 will be better than the previous year, meaning the country now shares 43rd place out of 47 countries who participated in the survey on optimism, splitting that ranking with South Korea.

The hardware industry

One of the myths that we sometimes encounter is the notion that natural disasters are somehow "good" for hardware retailers, in terms of increased sales. While there is a little justification for this belief, it really only applies to limited events that affect prosperous urban and suburban areas.

In contrast, bushfires in particular are one of the worst possible events for hardware retailers (indeed all retailers) in rural and remote regional areas. The effect of fires on these regions is just staggering. An entire slice of the economy simply goes missing, not just for a year or two after the event, but for around three to five years. Government spending and charitable donations can help ease recovery but the financial (and personal) costs remain very high.

Hardware retailers, for example, may see increased sales of some products during and immediately after bushfires, but very few would regard this as a great time to ramp up margins - if anything, most will be doing the reverse. Once those emergency products - in particular fencing - are sold, there follows a long period of reduced economic activity, slowing growth, and a lack of capital for further investment. After essential repairs are completed, building activity can slow dramatically, as some homeowners do not even move to replace houses, and the fire risks cause prospective builders to at the very least delay construction, if not cancel it altogether.

A good example of that kind of loss of sales is presented by Corryong Building Supplies (CBS). Corryong is a small Victorian town, with a population under 1400, close to the New South Wales border, about 120km east of Albury. It was at the epicentre of where fires in Victoria joined up with fires from New South Wales, creating a wide area of devastation. The store has been owned and operated by Peter Hunt for around 25 years. While the store and Peter's own house were spared from the fire - which swept over the 300 acres of land he owns - trading volume in the aftermath took a steep dive.

Everyone's been fighting fires, everyone's fixing fences, no one's building. I haven't sold insulation, plaster, rainwater products, Gyprock, Hardieflex. We haven't sold any. Traditionally we sell a lot of paint Christmas to New Year. People decide that relations come up, or their brother-in-law or son-in-law, and they just decide they are going to paint the bathroom or the kitchen or the verandah. We usually sell about $22,000 worth of paint and painting accessories, rollers, brushes, etc. Well, we haven't sold any. That stock is still sitting there.

One reason this is so important is that businesses like Peter's need to be there to provide support in the longer term. While the area has quite a few rural supply outlets, CBS is the only local store to supply crucial goods needed for recovery, with even the nearest Bunnings more than 120km away.

Other places might just shut, but I can't afford to shut. I'm the only one up here that supplies all the building sort of stuff, whether it be screws, bolts, nuts, and any other building things. You want a new shovel, there's other people that sell shovels, picks and that sort of thing. There's other people that sell rural stuff, but your building stuff, that's really our stuff.

The reliance on CBS as the main supplier of building materials meant that Peter needed to reopen the store even when the electricity was cut off - which meant having to do without a working point of sale (POS) system. To cope with that situation, the staff tore off the labels on goods sold, and made a note of to whom they had been sold. Later on, the staff went through these "records", and entered the amount owed for each account into the POS.

Peter was lucky to escape with his properties intact, but many hardware retailers will have suffered direct property loss and damage. If they themselves are not directly affected, then their staff may be, as well as local and regional suppliers of goods, the local logistics networks, and the local business community in which they operate.

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Point of sale (POS) software has spent much of the past 20 years in an environment where its development has progressed, but not at the same pace as much of the rest of the software industry. In part that has been because it is a type of software that benefits somewhat, but not significantly, from internet connectedness. As HNN has described in the past, cloud-based POS can offer some real benefits, but given the parlous state of internet connectivity in Australia, those benefits come with considerable risks attached.

That said, this situation could easily change. It turns out that the real future gain in benefits for POS is likely to be very connected. POS data from independent retailers could be some of the most valuable data available to Australian businesses, but in order to be truly useful, it needs to be consolidated in bulk, where it can have data analytics applied to it.

History

While during the 1980s and 1990s much of the rest of the business world was more affected by the development and spread of systems such as spreadsheets and inexpensive database software, for smaller retailers POS came as a real boon. Combined with barcodes and scanners, it helped revolutionise the industry, to such an extent that retailers today would not cope easily with the way stores were managed prior to the introduction of these systems.

In fact, the availability of POS systems radically altered the way familiar business processes could be managed in small and medium sized retailers throughout the world. This helped to fuel a surge in smaller retailers. It seems difficult to recall now, but during the 1980s small businesses in general were seen as some of the most dynamic and innovative, while larger businesses were slower to react to a changed environment.

For retail, this was only halted and reversed in the late 1990s and early 2000s, as both advanced logistics and the global supply chain shifted the advantage back to larger retailers. Writing about this situation in the UK in their 2010 paper, "The Role of Small and Medium Enterprise Retailing in Britain", Ogenyi Ejye Omar and Peter Fraser had this to say:

The UK economy is characterised by many unique relations between retailers and their suppliers. The "balance of power" in this relationship has changed significantly in the past four decades in favour of the largest retailers, and this trend has been highlighted particularly in the grocery supermarket field.

In a realistic sense, SME retailers have not benefited much from such a shift in power relationship. The largest supermarket operators have been able to take advantage of their structural market power, the use of information technology, and generally increasingly sophisticated management to achieve considerable cost savings, not just in traditional merchandise purchases, but also in newer areas such as fresh produce and petrol, as well as in the area of retailer-dominated physical distribution management. It is, however, debatable whether the development of such retailer-supplier relations is beneficial for consumers.

More recently in Australia, smaller retailers in hardware have managed to regain ground, largely through a great deal of self-discipline which brought them together into successful buying groups, such as Hardware & Building Traders (HBT) and the Independent Hardware Group (IHG).

But today data analytics is posing a new threat, which could grow to be as significant as the one previously created by logistics and global sourcing. To date, the rising field of data analytics has favoured big companies more than small ones. Larger retailers have the scale to deliver significant amounts of data, and the capital necessary to really get into data analytics. Wesfarmers is the prime example of this, but companies such as Woolworths and Coles are also active.

However, small retailers can fight back in this area, just as they fought back against the logistics revolution and global supply, and in much the same way. By putting aside some of the competitive opportunities, and instead pursuing the advantages of the community of retailers, they can stay "in touch" with the larger leading companies, and make better use of their natural advantages in the Australian market.

That said, there are two key factors which are holding back retailers from making this kind of change when it comes to data. The first is one purely of conception: when we think "data analytics", we think in terms of those analytics which are most suited to larger retailers. The kind of analytics that will help smaller retailers are really very different.

The second factor is that if small retailers are limited in their access only to the data that they themselves produce, analytics is of very little real use. In order to succeed, small retailers in similar and adjacent sectors will need to find ways to consolidate and share data.

That is going to prove to be quite difficult. Even if smaller retailers are ready and willing to share data, there are a number of key questions that first need to be answered. Who will be responsible for consolidating the data? How will data privacy be protected, both for customers, and for the stores which provide the data? Given that the data could be on-sold to third parties, how will that be controlled sensitively, how will those data products be developed? How will the resulting profits be distributed?

The companies in the best position to answer most of those questions and the ones best suited to set up implementation are actually the POS developers. But while they are the best implementors, the basic organisation of such a movement would have to originate with retailers.

The difference between big and small

The field of data analytics has itself been dominated by companies and organisations large enough to offer very wide and deep sets of data - which is only natural. However that has meant that much less attention has been paid to the kinds of analytics that will be more useful to smaller retailers, and to the ways in which those smaller retailers might make the best use of that data.

For example, when it comes to larger retailers, one of the terms we've seen cropping up more often over the past couple of years is "unified" retail. The best way to think about this is as something like "omnichannel+". In addition to making products available across a wide range of channels, providing an ideal "path to product" for the customers, unified retail also seeks to merge the data streams created by all customer interactions. This includes physical and online stores, email and social media.

The end goal of these efforts is to create the most accurate picture of each customer, and the customer's interactions with the retailer. This will then enable the retailer to target that customer with the best possible marketing messages, as well as providing, in aggregate, a view of the markets the retailer is reaching.

In fact, when we refer to "omnichannel+", the + part is really data analytics. Omnichannel is seen as a customer-facing strategy. Data analytics is its internally-oriented complement. It is, in fact, establishing a universal "path to data".

Key to these unified commerce efforts is customer identification. That identification is easily achieved online, through the use of user logins and tracking cookies. In the physical store, however, it is more difficult to achieve, and has been a major driver behind rewards programs such as Flybuys.

For smaller retailers - especially in hardware - this particular analytics approach does not make all that much sense. Grocery stores and clothing stores, for example, may benefit from understanding individual customers, as their purchase patterns tend to be repetitive and predictable. In hardware, it would be a big mistake to note someone is purchasing bathroom fittings or a power drill, then try to sell them the same products three or six months later.

What would be of far more use would be the ability to spot aggregate trends rapidly and effectively, as they develop and spread. Detecting these trends is less about individual purchases, and more about what is being purchased in a single transaction, and in what sequences those purchases occur. While the data from individual customers would be helpful, linking that data to the identity of a specific customer is not really necessary.

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The long-running saga of efforts by Bunnings to open a kind of mini-warehouse store in the inner-Sydney suburb of Rozelle has finally concluded its first phase. After several years, a refusal to grant a building application, and a successful appeal to the New South Wales Land Court, Bunnings now has a go-ahead to build the store.

The judgement in the case Artazan Property Group Pty Ltd v Inner West Council [2019] NSWLEC 1555 is available online at: bit.ly/2Uq9it3 . Artazan pushed forward the case for the Wesfarmers-owned Bunnings. The development company has honed its skills at helping some less popular projects past council objections, most notably with the expansion of the Stiletto brothel in Camperdown, which one Sydney councillor dubbed "the Westfield of brothels".

There are a number of features that make this case compelling. On the town planning, and local independent store versus corporate giant angle, the town council has had its hand forced to permit the construction of a large retail premise is an area that is basically industrial in nature. One question that gets raised by this is exactly how fair other planning decisions will now look in retrospect. Will the council need to slacken some restrictions, so that smaller retailers can compete at the same level as Bunnings?

From the perspective of Bunnings, this kind of development has the potential to serve as a model store for a new strand of development, as it seeks to reach deeper into highly active areas of inner-cities with smaller format stores that are almost tailor-made of click-and-collect/home delivery operations.

Objections

In the end, the objections came down mainly to issues related to traffic and congestion. Additional matters considered included trading hours, secondary effects of traffic congestion, issues related to flooding and to pollution.

The traffic issue was examined from a number of perspectives. According to Section 20 of the ruling:

Council's traffic-related concerns can be summarised as follows: (1) negative impacts on local traffic system (here I also consider traffic-related amenity concerns), (2) inadequate parking and (3) inadequate loading and unloading arrangements.

The first point came down to these three concerns:

(1) expected traffic generation of the development, (2) capacities of existing network to accommodate expected new traffic; with the ultimate point of attention the capacity of the Parsons/Mullins Street intersection to accommodate the additional traffic, and (3) residential amenity implications of additional traffic.

Expected traffic generation

This portion of the discussion was further divided into three parts:

(1) supply side predictors of traffic (in particular considering gross floor area (GFA) of the outlet, and product/service offerings (in particular the attraction to professional tradespersons), (2) demand side predictors (eg considering geographic sales catchments and relevant competition), and (3) proposed or induced constraints (eg specific conditions imposed by regulators or adopted by proponents).

In terms of supply side, this largely came down to trying to find comparable Bunnings stores which could be used to infer the traffic load the store would attract, which was expressed as the "peak traffic generation rate", given in vehicle trips per hour, per 100 square metres of floor space. Four locations were used: Fairfield, Victoria; Lilydale, Victoria; Artarmon, New South Wales; and Kent Town, South Australia.

Artarmon had a higher level of traffic generation than the other sites, but the Bunnings side countered this by suggesting this was because it had a larger catchment area.

The point was also made by the Bunnings side that the store did not feature a tradie loading area for utes, which would reduce vehicular traffic.

In terms of the demand side, Bunnings represented that the measure it used to determine catchment was the number of households within a 10 minute drive from the store, and suggested that stores such as Kent Town actually had a higher number of households than the store at Rozelle would have.

In terms of constraints, the Bunnings side agreed to a number of constraints in terms of its delivery vehicles. These would be limited to 15 vehicles per weekday, except in the month of December, when this would be increased to 20 per day.

The size of these vehicles was also restricted. There would be limited to medium rigid vehicles, up to 8.8 metres in length, excluding the 12.5 metre trucks previously proposed.

The representatives for the Inner West Council did suggest that, while there were restrictions on the use of the loading dock for tradies, continued market demand might see this change. However, this concern was not agreed to.

Capacities of existing network to accommodate expected new traffic

This discussion largely devolved to the matter of whether the Mullins/Parsons Street intersection immediately in front of the proposed store location would be adversely affected to a critical extent. Expert opinion, modelling and video-based evidence was submitted by both sides.

The critical factor considered was whether traffic at the intersection would back up so far as to block the actual exit and entrance to the proposed store. That entrance is set back just 30 metres from the intersection.

It was found that in the end, the added traffic level would be acceptable.

Local traffic impacts

Here the Court chose to rely heavily on evidence tendered by the Bunnings side using traffic modelling through SIDRA (Signalized Intersection Design and Research Aid). This is a software package developed by the Australian Road Research Board as an aid for capacity planning.

Modelling through SIDRA showed that the effect on local traffic of building the Bunnings store would be minimal. As a secondary point, the Court also noted that as the area was zoned light industrial, it did not have the same expectations and restrictions as a pure residential area might have had.

Parking

As regards parking, the decision followed the same pattern as that for traffic generation. The Council suggested a higher rate of parking per 100 square metres, the Bunnings side suggested a lower one, and the Court agreed more with the Bunnings modelling than the Council's. This was largely because the Council modelling was derived from parking at larger Bunnings warehouse store, and the Court accepted Bunnings' argument that customers parked for shorter periods at smaller stores.

Summary

One way of looking at the case for the Bunnings store in Rozelle is that it is a unique store being built in a somewhat unique location. While many locals do not think that the modelling presented by the Bunnings side will reflect the real traffic situations in the long term, the Court really had no choice but to accept the data tendered and regard it as reasonable.

This does mean, however, that this development will be closely monitored into the future. If the Bunnings modelling proves correct, then the Rozelle Bunnings could serve as the basis for the construction of similar projects in other inner-urban areas. If it instead turns out that the modelling is quite wrong, Rozelle will form a strong basis for Councils elsewhere in Australia to reject similar planning permissions.

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February is the traditional season of calendar year forecasting. This is the month when we get just enough stats about the previous year to work up a picture of what has happened, so that we can consider more clearly what might happen next. One of the main activities is, a little paradoxically, looking at everyone else's forecasts, in large part because those forecasts indicate what type of action the government and other entities might be taking.

Many people who keep watch on the economy have been puzzled about the direction the current federal government is moving Australia in. The centrepiece of this has been the apparent "need" to balance the budget. There have been increasing calls for more stimulus spending to be delivered by the federal government. These have largely been ignored, as increased spending would "unbalance" the budget. Instead it has largely fallen to the states, with Victoria being the most successful, to use infrastructure spending to help trigger more growth in the local economy - though the picture is more complex than that, as we will see.

One clue to the government's reluctance on stimulus has emerged from recent forecast statements made by Reserve Bank of Australia (RBA) governor, Philip Lowe. The first was Mr Lowe's Statement on Monetary Policy Decision, which explained why interest rates were kept unchanged, published on 4 February 2020. The second was his speech to the National Press Club on 5 February 2020, entitled "The Year Ahead".

In the first, this slightly curious statement appears:

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

These themes were picked up and to some extent amplified in the second speech:

As I have been saying for some time, we are passing through a gentle turning point for the better.

There are a number of factors contributing to this outlook. The expected pick-up in world growth should help us, the resources sector is in expansion mode again and we are expecting consumer spending to pick up. The outlook is also being supported by ongoing high levels of investment in infrastructure and the likelihood that the downswing in residential construction will come to an end later this year. Further increases in resource exports and continuing solid growth in public demand will also help.

Later in this same speech he delves deeper into consumer spending.

Looking back at last year, economic growth was weaker than we had expected. The global slowdown is part of the story, but the most important factor is a domestic one, and that is subdued consumer spending as households adjusted to slow wages growth and falling housing prices. The downswing in residential construction was also a factor.

Over 2019, household consumption looks to have increased by only around 1 per cent. Given that Australia's population is growing at 1.5 per cent a year, this represents a decline in per capita terms. This is a highly unusual outcome in an economy that has recorded the type of strong jobs growth that we have experienced in Australia.

It is very difficult to share even the mild optimism that Mr Lowe expresses in these statements. We can say that one of the things that have made him a very good RBA governor is that he has been careful to not set the RBA needlessly at odds with the policies of the government of the day. In that sense, what these statements may give us a read on the government's thinking, as well as an analysis of the potential for 2020 by the RBA.

Downsides

To start with, there are quite a number of negative signs in the business statistics. Elsewhere in the second statement Mr Lowe mentions the importance of businesses investing in productivity improvements, and yet business investment as a share of nominal gross domestic product (GDP) is down to levels not seen since 1994 (Chart 1). Business confidence, as measured by the National Australia Bank, is in negative territory (Chart 2). GDP growth has not met forecasts or targets, languishing below 2% (Chart 3). And the tax cut delivered during 2019 did not stimulate the economy by much, being used mainly to pay down household debt.

Probably the most curious idea to emerge from these statements is that the problem with low wage growth has not been low wage growth, but rather the expectation that higher wage growth is the norm. Wage growth has been below 2.6% for around six years (Chart 4), while for most of the preceding 20 years it was above 3.5%. Any acclimation should have happened before now.

If this approach is one which has been somewhat foisted on the RBA by the government, and if it matches up with the insistence on a balanced budget, what is the real, perhaps unstated, economic policy of the government?

In brief, it is likely that current economic policy is to accept what has been dubbed "the new normal" by economists. This is about accepting that growth in GDP is unlikely to exceed 3% for the foreseeable future. The cause of that limit is a global decline in productivity that has been around since about 2005.

That is a complex topic, but perhaps it is enough to say that it seems likely the current Australian government has simply accepted slow productivity growth. In that context, balancing the budget does make sense, as the alternative is stimulating the economy so as to help investments that improve productivity.

Risks

If we forecast this as the approach to the economy we will see through 2020, it seems unlikely Australia will reach even the modest goals the RBA has suggested. GDP growth is more likely to remain under 2.2%. Figuring into that is that the RBA sees the Coronavirus as being the equivalent of SARS. It is far more severe, and is affecting China at a time when that nation is more central to the global economy. Analysts JP Morgan, for example, have predicted the virus will take 0.7% off of forecast Chinese GDP growth, bringing it down to 5.0%. That will have a global flow-on effect.

The RBA also sees the net effect of the bushfires as being minimal, which dismisses the possibility that December 2020 could be as bad as December 2019. In addition to the negative business statistics we've cited, we would also note that a Roy Morgan poll has determined that Australians are among the most pessimistic nations globally at the moment.

Residential housing recovery

The element of the RBA forecast that is of specific interest to the hardware industry is, of course, the state of the residential dwelling market. In the first RBA statement, reference is made to a "recovery". In the second statement, this is moderated to 2020 seeing the end of a "downswing", which arrives late in the year.

The RBA has published an interesting paper entitled "A Model of the Australian Housing Market", by Trent Saunders and Peter Tulip. One of the most interesting aspects of this paper is that it makes use of building approvals as its major metric. As the paper states, among other factors, approvals provide a better basis for early forecasting.

One of the paper's conclusions is that the construction market is highly influenced by direct changes, rather than a sustained positive level of crucial factors, such as interest rates or house prices.

It is changes in interest rates and in existing housing prices that drive construction, not their level. So the direct effects of these variables are temporary. Although discussions of dwelling investment often emphasise levels, our attempts to include these in the model did not fit the data. For example, the ratio of approvals to income has been below average over the past decade, even though the level of real interest rates has been unusually low and the relative price of established housing has been unusually high.

The irony to this situation is that what creates a bubble in the residential dwelling market is not a growing economy, but one that is in a state of steady decline. The RBA responds by dropping interest rates, this increases house prices, and if that increase is sufficient, it becomes self-sustaining for a time.

If the RBA's forecast is for a very gradual improvement in the economy, then it is likely that the housing market will remain very subdued. Hence the central bank's very mild suggestion that the decline evident during 2019 might diminish by the end of 2020.

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The Australian Competition and Consumer Commission (ACCC) has delayed its decision on Bunnings' acquisition of Adelaide Tools to 14 February, from 7 February. The competition watchdog said it needs more time to consider the matter. It also said the provisional decision date may be a final decision or release of a statement of issues.

The ACCC's investigation is focused on the impact of the proposed acquisition on competition in South Australia and nationally. In particular, it has sought views on:

As HNN has reported previously, the Adelaide Tools acquisition sees Bunnings set to sell Milwaukee brand tools. At the time of the acquisition, Bunnings managing director, Michael Schneider said in a statement:

The acquisition ... will allow us to improve the way we connect, serve and engage with trade customers and is aligned with our strategy to accelerate the growth of the trade business.

Other key points about the acquisition are:

Bunnings' deal to buy the Adelaide-based business is worth an estimated $30 million. It is expected to be approved. But Bunnings' size in the industry means the ACCC looks at any of its acquisitions to assess any potential breach of its provisions.

Related:

Sourced from the Herald Sun and Inside Retail

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The Street Talk column in the Australian Financial Review (AFR) has reported that Metcash, owner of the Independent Hardware Group (IHG), is no longer in the running to acquire the Total Tools business.

Sources told the AFR that Metcash had decided the tool retail group was not for them - or perhaps did not meet the price expectations of the group's owner.

According to the AFR, Total Tools is said to be more focused on holding discussions with private equity companies in the hope of having a deal confirmed by February 2020. Sources speculate it could be Quadrant Private Equity which was involved in the sale of Burson Auto Parts (now Bapcor) and taps and water systems company Zip Industries.

The tradie-focused tools retailer said its stores have 7,000 products on hand with access to over 60,000 SKUs on its online store.

Analysis

With IHG recording negative sales growth for its most recent half, and Annette Welsh set to take over from Mark Laidlaw in May 2020, it's likely the Total Tools acquisition proved to be too uncertain a risk. Ms Welsh will be only the third CEO for Metcash's hardware business, and she will inherit a retailer highly attuned to Mr Laidlaw's aggressive style of doing business in what is largely a cooperative enterprise.

Mr Laidlaw had personal ties with the leadership team at Total Tools, but Ms Welsh likely would prefer not to add a tricky acquisition to the set of tasks she faces moving into 2021.

Related:

Sourced from Australian Financial Review

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A proprietary deck post support system made from recycled plastic, manufactured in Brisbane (QLD), is expected to be sold through US home improvement chain, Lowe's. BuildTuff, the company behind the product, has a deal to supply the retailer.

The product was developed by Brisbane-based industrial designer Mayer Jung as an ultra-lightweight alternative to concrete. It was already being sold in Bunnings, Mitre 10 and other Australian hardware stores. But BuildTuff general manager Alan Brady said the US deal would take the company to a whole new level.

Mr Brady said the product, known as TuffBlocks, are designed to support the weight of decks and does away with the need for concrete pylons that could crack or move. The system can support decks up to 1.5 metres in height, adopting a building method called a floating foundation. He told the Courier Mail:

Floating foundations where the supports are laid directly on the ground were first developed in the US in areas where weather or ground movement would crack concrete foundations.

The original floating foundations used concrete blocks placed on a level surface whereas TuffBlocks are made of a plastic material that is stronger and longer lasting. He said:

TuffBlocks have been break-tested to five tonnes.

Mr Brady also said that using recycled material was an important part of the manufacturing process given the increasing focus on environmental protection.

Every shipping container of TuffBlocks contains the equivalent of 3.2 million plastic bottle caps. Mr Brady explains:

The clear focus in manufacturing is on recycling because companies don't want to be contributing to plastic waste. We certainly don't.

We are taking something like a bottle cap that is thrown away after one use and turning it into something that is going to last for years.

Mr Brady said he hoped 100 shipping containers worth of TuffBlocks would be exported to the new US client in the coming 12 months, requiring an upgrade of the Crestmead factory where the products are made.

TuffBlocks won a product design ward from Good Design Australia in 2015. Its main features and benefits include:

Sourced from The Courier Mail

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Stockland has brought the world of online shopping into the heart of its bricks-and-mortar retail centres by installing Amazon delivery lockers at malls in NSW and Victoria.

The self-service kiosks for parcel pick-ups are located at Stockland's Piccadilly Centre in Sydney's CBD, Green Hills in the Hunter Valley's Maitland and The Pines in Melbourne's Doncaster East. Stockland chief executive of commercial property Louise Mason said:

Offering Amazon Locker in Stockland retail town centres provides greater convenience for our customers who are not home for the delivery of their purchase and ensures they can pick up.

It provides another option for those living in high-rise apartment blocks where packages can't be easily left at the door, or for those who don't want expensive items left on their doorstep during the day, tempting so-called parcel pirates. It's all about providing consumers with "more flexibility and control over their deliveries," Patrick Supanc, director of delivery technology at Amazon told Yahoo News Australia.

When choosing a locker at the Amazon checkout, users will get a code used to open the locker. When it arrives, they will be notified in an e-mail and will have three days to collect their item.

If shoppers decide to pick up from a staffed storefront which has partnered with Amazon, they will have 14 days to collect it. These stores will have signage denoting them as part of Amazon Hub.

As well as providing another option for customers, it should help boost overall delivery times. Mr Supanc said:

We also think about how can we make the experience easy for drivers who are delivering items.

There are two options, a locker system as well as storefronts such as newsagents where customers can choose to pick up their items. Amazon has also partnered with Commonwealth Bank and Victorian Authorised Newsagents Associations for its automated locker rollout.

Sourced from Urban Developer and Yahoo News Australia.

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The US home improvement retailer is developing more ways to better serve its professional customers, and has created a flatbed distribution centre (DC) where large semi-trucks and rail cars roll through the building.

The new 800,000-square-foot facility opened in Dallas, one of its largest markets. It plans to open similar ones in other cities as part of a USD1.2 billion, five-year investment in its supply chain. (See One Home Depot article.)

While only 4% of the company's customers are professionals in the remodelling and maintaining the residential market, they represent 45% of Home Depot's annual sales. Stephanie Smith, Home Depot's senior vice president of supply chain told The Dallas Morning News:

Customer expectations are definitely rising, and pros want speed and reliable service.

In the DC, flatbed trucks can roll through the middle of the massive building as heavy products such as timber, ladders, pipes and roofing materials can be added from either side.

Flatbeds can hold multiple deliveries, and the facility can handle up to 65 to 75 trucks going out per day. That's thousands of deliveries per week to customers within a 75-mile radius of Dallas, Ms Smith said.

That compares with smaller trucks loading a couple of orders from each store and then returning and doing it again and again. Stores try to make next-day deliveries, she said, "but now we can guarantee it."

Home Depot has discovered that as the largest purchaser of timber in the US, it can leverage its position to manage the rail and truck inbound deliveries to DCs.

The flatbed fulfillment centre in Dallas is on a rail line that's been extended into the building and can hold 10 railcars. An outside yard can handle 20 more railcars. The system allows Home Depot to take control of that entire supply chain, from the timber mill all the way to the customer, according to Ms Smith.

Bill Lennie, executive vice president of outside sales and service for Home Depot, said the pro customer in the old days operated with a tape measure on his belt, but today's pro is shopping online and looking for reliable deliveries. He said:

The younger pro in the market is coming in with their touch screen devices. And with a shortage of people in the trades such as plumbing, everyone is trying to make their crews more efficient.

The retailer is also building a 1.6 million-square-foot fulfillment centre for online shopping next to the Dallas flatbed facility. When completed, Home Depot will have 4.5 million square feet of distribution space in Dallas, Ms Smith said.

Kiosk trial

In another initiative, Home Depot is piloting four "part-finder" kiosks at a store in Philadelphia that will scan, identify and illustrate exactly where in the store to find a certain product.

Customers seeking a replacement screw, hinge or bolt, for instance, can place the part in the kiosk to find out which aisle and where in that aisle to find the part.

It is working with Slyce, a company that makes visual search software for retail, that developed the kiosk machine.

Slyce CEO Ted Mann said while its retail-focused technology is cloud based, the kiosk is programmed to know the specific store's inventory of products. That means someone has to take a bunch of photos of every one of the about 5,000 screws, bolts and nuts in Home Depot's fasteners section, which the kiosk is servicing at the moment.

At first, Home Depot shipped Slyce a bunch of products to photograph. But that was not the most scalable way to do this, Mr Mann said.

So Slyce built a training mode into the kiosk that will allow someone in the store to scan a product and upload it to the cloud along with its barcode and location in the store.

The company has also pushed these "learned" products to the machine's cloud, so all four kiosks currently being piloted have knowledge of the department's full inventory.

Sourced from The Dallas Morning News and Technical.ly

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After launching three new stores in Ireland, trade specialist Screwfix wants to maximise the opportunities in the building and renovation boom with a plan to expand to 40 branches.

The brand is already familiar to tradespeople and home renovators through its online operation, Screwfix.ie.

Each of the new stores will stock about 10,000 products including power tools, workwear and heating and electrical parts. Customers can also place orders online or through phone for items from a catalogue of 24,000 products. Screwfix CEO John Mewett said in a statement:

We're extremely excited to be launching Screwfix stores in Ireland to help tradespeople get their jobs done quickly, affordably and on time.

The creation of bricks and mortar stores in Ireland is a major milestone for us and a direct result of the increasing demand from Irish tradespeople ... Our Irish customers are already committed to our Screwfix.ie website, but we know the convenience a Screwfix store provides their local town.

The three new stores are located in Sandyford and Swords in Dublin and Waterford. Another store will open in Ennis, Co Clare.

Screwfix is part of home improvement group Kingfisher which also owns B&Q and Castorama and Brico Depot.

Sourced from Irish Times and Retail Insight Network.

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Blundstone's Women's Safety Series boots provide an extra level of support and cushioning with the company's SPS Max Comfort system, featuring XRD(r) technology.

XRD(r) Technology offers repeated impact protection by absorbing up to 90% of energy with every step taken. This changes the level of performance, comfort and confidence for the wearer and reduces fatigue and orthopaedic issues.

The boots are designed with moulded TPU bump caps to avoid abrasions, built-in steel shank for maximum torsional stability, impact-resistant steel toe caps, and rubber outsoles specifically designed to increase slip resistance in varied environments.

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Australian-based Metcash, the owner of the Independent Hardware Group (IHG), has released results for the first half of FY2019/20. Prior to the release of results, Metcash announced a $237.4 million writedown against its major food division just days after revealing 7-Eleven would not be renewing its $800 million supply contract. According to the ASX announcement:

This impairment follows the company's review of the carrying value of its assets undertaken as part of its process for preparation of the 1H20 financial statements. The review has taken into account the information contained in Metcash's ASX release dated 22 November 2019 concerning 7-Eleven's advice that it will not be renewing the current supply agreement with Metcash following its conclusion on 12 August 2020. This advice is expected to result in the loss of ~$15 million EBIT (annualised) in the Food pillar, after adjusting for mitigating costs savings.

Total impairments for Metcash since June 2018 have now exceeded $500 million. Unfortunately, the results from Metcash for the half did little to allay the sombre outlook conveyed by the ASX announcement. Post the results presentation, the share price for the company fell precipitously. It ended far below its mid-year high of $3.17 at $2.70, a drop of close to 15%.

Overall Metcash sales revenue was $6289.8 million, up from $6189.2 million in the previous corresponding period (pcp), which was the first half of FY2018/19, an increase of 1.6%. Earnings before interest and taxation (EBIT) was down by $8.4 million to $149.7 million, a drop of 5.3%. Underlying profit was down 4.6% on the pcp to $95.7 million, and net profit fell substantially due to the write off.

Hardware sales (including charge-throughs) fell by 4.2% over the pcp to $1040 million. EBIT fell by 1.3% to $37.3 million. Like-for-like (comp) sales were down 2.6%, while retailer sales through the IHG banner stores were down 3.2%.

IHG expansion

The media release which accompanied the financial report stated that the losses would have been worse, had the sales balance not lifted from 35% DIY/consumer sales, to 36%. The Sapphire program is seen as playing a role in this, along with growth in sales through IHG's digital platform.

In his opening remarks during the presentation to analysts, Metcash CEO Jeffery (Jeff) Adams emphasised many of the ways in which IHG has continued to expand. He began by mentioning Sapphire, the store enhancement program that originated with Mitre 10, and now includes stores operating under the Home Timber & Hardware (HTH) brand.

Total stores through the program and in progress has increased to 75. So we are still targeting 200 stores to be upgraded by 2022. And we still continue to see strong retail sales growth in those stores that we've refreshed of greater than 15%.

IHG has also moved to acquire more frame and truss businesses, he noted.

In build trade, we've acquired two frame and trust plants through the acquisition of Keith Timber in [South Australia]. Frame and truss offers are now available in all of our states.

The company has also continued to build closer ties with construction services.

We've increased the number of supply and install alliances to 15, and those alliances are now in place with key players across all of the stages of a house build.

The Hardings plumbing business also continues to be a bright spot for the company, as IHG rolls this out through the network.

Another initiative that continues to grow is the move towards better use of technology. According to Mr Adams, online sales increased by 50% over the pcp, and the number of stock-keeping units (SKUs) increased from 3000 to 11,300 listed online. Meanwhile the use of technologies such as Truck Tracker continues to grow.

IHG has also continued its move towards more direct ownership of the stores that make up its network.

[In] our retail network, our retail and joint venture company-owned stores has now increased to 102. So in the first half of last year, that was 92. And we've got 37 company-owned stores and 65 JV stores ... And our company-owned and JV stores now represent about 15% of our total stores, about 40% of our total IHG sales, so quite significant for the network.

Losses and efficiencies

Mr Adams stated that the losses in hardware were "mainly reflecting the impact of the slowdown in construction on trade sales". He also pointed out that without the loss of hardware and timber business Bretts, the decrease in sales would have been on the order of 2.5%, which he said was "a pretty good result in a tough market". He went on to praise the work of IHG CEO Mark Laidlaw in managing to limit the decline in EBIT, saying:

EBIT decreased by $0.5 million to $37.3 million, impacted by the decline in trade sales, and that's been partially offset by Mark and the team by improved DIY sales. Very good work, I would say, from the team on cost efficiencies and full - and some synergy benefits still flowing through on the HTH acquisition.

Later in the presentation, Metcash's CFO, Brad Soller, in response to an analyst's question, quantified the contribution from the HTH acquisition:

So there was some roll forward in terms of the HTH synergies that have actually come through from last year. We would have carried forward - benefit was about $2.5 million to $3 million actually coming through. So that actually has flown through into this rate - into our results this period.

Mr Soller, in the same response, went into the negative factors that affected hardware sales in more detail:

We have a big presence, as you saw, in terms of the corporate stores, so we actually got quite impacted on that. And that was the key delta in terms of our numbers. So [with] the offset from the lower sales and lower margin, I think Mark and his team have done a fantastic job in taking costs out, to actually limit the decline to where we've actually got to.

What Mr Soller is pointing to, is that as IHG increases its direct control of more stores in its network, it stands to benefit from the "complete stack" of margins, including wholesale, retail and service. However, when the market goes negative, as it has during 2019, this also increases the direct impact on the business.

Mr Laidlaw added to Mr Soller's statement by pointing out that the continuing benefits from the HTH acquisition had mostly come from new efficiencies in the supply chain. This included reducing the total of seven warehouses that HTH combined with Mitre 10 previously had, down to just four, with one further warehouse (in Western Australia) due to close during 2020.

Closing out his introductory remarks, Mr Adams painted a less than positive picture for the remainder of the financial year:

In Hardware now, trade sales over the remainder of financial year '20 are expected to continue to be impacted by the slowdown in construction activity. Our non-trade sales are expected to be less impacted than trade sales due to the level of DIY activity and acceleration of the Sapphire store upgrade program. The business continues to have a strong focus on costs to help offset the impact of the slowdown in construction activity.

Like most in the hardware industry, however, Mr Adams points to the fundamentals of the Australian market as underpinning opportunities for future growth:

The medium to long-term market fundamentals remain positive, with construction activity expected to be underpinned by population growth and an undersupply of housing.

Total Tools

The Australian Financial Review has reported strong rumours that Metcash is in takeover discussions with trade power tool franchise retailer Total Tools, though this has not been confirmed by Metcash. Bryan Raymond of Citigroup asked a question that seemed to touch on this matter:

Just in terms of the trade market within Hardware, obviously, it's a bit of a tough spot at the moment. Just wondering about your appetite for further acquisitions there. There's obviously some mention about it this week in the press with you connected to it. Just wanted to hear - see if that's something you would entertain, or if other acquisitions would be on the radar that are a bit more sizable than what you've done today within that business, excluding HTH, of course?

Mr Adams responded:

Well, look, I think, as we said, we're very positive about the long term, even the medium- and long-term aspects in that business. And it is still a relatively fragmented market, particularly on the trade side, which is where our strengths are.

We don't comment on rumours. But obviously, we're willing to talk. And if we can find a deal out there that helps us accelerate on our strategy and it's done at the right valuations to add value for our shareholders, then we'd certainly be interested in doing it.

Bunnings competition

With Bunnings continuing to ramp up its competition in trade, Johannes Faul of Morningstar asked the question as to whether that might have had an effect on IHG's results:

I understand that the trade sales account for a bit less sales than they have last year and also cyclical factors are at play there. But also the leading hardware retailer has said it's trying to pivot or pivoting to the trade side as well. Have you seen more competition on the trade side? Or put differently, are you losing share in trade? Has that impacted that as well?

Mr Laidlaw was emphatic that IHG had not lost market share in trade.

We're clearly not losing share in trade. It's a lot of market-related factors. I think we all know this. October last year, we're very concerned, and we saw new housing approvals go from 230,000 down to 190,000. So there was a 20% drop in new housing approvals. And some of our competitors have actually reported in that trade space that they are down 20%. So we are very encouraged, I must say, by the result that we've reported at the half.

I must say, we don't see - we see there will continue to be headwinds ahead for the next 12 to 18 months, so all we can do at this stage - we've got a good business here. All we can do is continue to tighten the belt and wait for the market to go on that cyclical upswing, and we'll be ready to take full advantage of that when it happens.

Analysis

Metcash has portrayed the results from IHG as being a good result in a down market. IHG has denied that market share has been lost to Bunnings, despite the major investment that company has made in acquiring more of the trade market.

Does this portrayal really stand up? How tough has the hardware retail market really been during the period May 2019 to October 2019? HNN's own calculations point to a different situation than that outlined by Mr Adams and Mr Laidlaw.

To start, Mr Laidlaw is roughly correct in pointing to a 20% drop in building permits (it's actually around 19% when comparing FY2017/18 to FY2018/19, but a 22% drop when comparing the numbers for Metcash's current half to the pcp).

However, building permit statistics register intent to build rather than actual work. We need to look at a different set of statistics to see what is really happening in the construction industry.

Chart 1 shows the numbers from the Australian Bureau of Statistics (ABS) 8755: Value of construction work done. It is evident from this that the area most hit by the slowdown has been dwellings other than houses, which is mostly multi-dwelling construction, particularly apartments.

Mr Laidlaw and others have often commented that IHG is much less affected by changes in construction on multi-dwelling than on standard single dwellings. So the most important numbers relate to houses. In terms of houses, work done has fallen for all three quarters of the current calendar year when compared to the previous year, down by 13.2%, 5.4% and 5.2% for March, June and September quarters respectively.

However, if we compare the current year to two years ago, specifically the first three quarters of 2017, the results are interesting. The percentage change for the three quarters are positive for the first two, at 3.8% and 2.8%, and only negative for the September quarter, down 1.5%.

Chart 2 illustrates this point. If you look at the pattern of the blue line representing work on houses, you can clearly see that the pattern in 2017 is nearly identical to that for 2019.

In more normal times, we might think of 2018 as something of a "bubble" year. The picture is a little more complex than that, but it does seem clear there is a degree of overstatement in many analyses of how dire current conditions are.

Chart 3 shows the value of construction work commenced. Again, there is a steep fall in multi-dwelling builds, which began in mid 2018, but a far more moderate fall in new house builds.

Chart 4 shows the percentage change in the numbers from Chart 3. This illustrates more clearly the sharp decline in multi-unit, and the slower decline in building work on house commencements.

Chart 5 illustrates what many see behind this behaviour, house prices in Australia's capital cities. This chart shows the percentage change in the price index compared to the preceding quarter (not the corresponding quarter in the prior year). Sydney entered negative territory in mid-2017, and Melbourne two quarters later, but both have had only three quarters of fairly steep falls in prices. Both have recovered in the second and third quarters of 2019.

Chart 6 shows the price index numbers themselves. In terms of homeowners expecting a reasonable return from their investment over a reasonable period of time (such as eight to ten years), the market that has existed over the past eight years has certainly treated them better than at any prior period in Australian history.

To sum up all of the above stats: 2019 is the third year of a housing market that has trended down, with subsequent major reductions in construction activity related to multi-unit dwellings, and comparatively mild reductions in construction related to new houses. 2017 saw the beginning of falls in construction activity. While 2018 reversed some of these falls, they were still present in the early part of 2019, with some signs of a late increase in activity.

What the ABS terms "alterations & additions" (A&A) is an added revenue stream for retailers outside of new constructions. In the past, retailers have indicated that when house prices declined, A&A activity has increased. What we are seeing across the three major states is a split in this behaviour. Arguably, as Chart 7 indicates, Queensland has followed this pattern to some extent, Victoria has followed it to a reduced extent, and New South Wales has seen declined in both building activity and A&A activity.

In fact, if we compare Chart 7 with Chart 6 we can see that the most recent peak in A&A activity coincided with a peak in capital city house prices. That is made more clear by Chart 8, which traces the extent of change between comparable quarters.

What this suggests is that there is a second connection between house prices and A&A: when house prices reach a point where they are excessive, renovation activity picks up. That could be a signal both of homeowners' reluctance to enter an inflated market, and of the potential for increased value being applied to renovation activity itself.

Finally we come to Chart 9, which shows the change in retail sales over the second and third quarters, backgrounded by the total retail sales for these combined quarters across Australia. The two quarters do not quite match up with the Metcash/IHG first half, but this is close enough to give a good indication.

We see here the same story repeated from the building activity numbers. 2018 was a better year than either 2017 or 2019, but, importantly, 2019 still shows growth, with Queensland being the slightly surprising exception, and Victoria providing a strong showing.

Summary

In HNN's opinion, what Mr Adams termed a "tough market" for hardware is more illusion than reality. Being as generous as possible, we can look at the background numbers across the Metcash/IHG FY2019/20 H1 as being neutral. It's also arguable, from what HNN knows, that the removal of Bretts accounted for a loss of less than 1.7% of IHG revenue (1.5% is a more likely number). But even if we accept this, we're left with IHG down by over 2% from where it should be.

There are a number of potential reasons behind that. One of the most prominent is increased competitive activity by Bunnings in the trade sector. It seems entirely possible that Bunnings took about 1% of market share away from IHG over the half. That's $10 million or so, which is certainly more than a rounding error for Bunnings and Wesfarmers, but also not a surprising gain.

A second potential to consider is that IHG's "whole of house" strategy - positioned at its March 2018 Expo as a means of coping with a slowing market - has not been as successful as expected. That doesn't mean it is a failed strategy, but it is a program that would really take three years to fully implement. And the reason it was not implemented in 2018, for example, is that IHG was busy with the acquisition of HTH.

Finally, though, we really do need to consider if some parts of IHG's core strategy should be revisited. The hardware retail pattern that we've seen over the past three years in terms of fluctuations that include gains and losses is likely to continue for the next three to five years. This is what Bunnings and Wesfarmers realised two years ago, hence a move into increasing trade sales, launching online commerce, and starting up MarketLink.

There really has not been an equivalent move by IHG. One problem that HNN has seen for some time in IHG is that there is a little too much of what we sometimes refer to as "supermarket thinking". Supermarkets are one of the very few retail industries that actually can grow through cost-cutting - because they sell "must buy" staples, and consumer price is a major purchase trigger in those categories.

About the only thing that approaches a "must buy" in hardware retail is exterior paint. For almost everything else, it's necessary to inspire the consumer to make the purchase. Upgrades such as those the Sapphire program offers are neat and convenient, but do they really inspire consumers?

In short, there is a real need for more innovation in IHG retail, if it is to continue to grow in a market that has more subdued growth. Just waiting to see if the market goes up so that your results can go up is not a strategy, it's an admission of strategic failure.

The Australian Financial Review has revealed some information about the potential acquisition of power tool franchise provider Total Tools by Metcash. Presumably, if acquired, Total Tools would be merged with Metcash's existing hardware operations in the Independent Hardware Group (IHG).

The AFR article was put together by journalists Sarah Thompson, Anthony Macdonald and Tim Boyd, and published on 2 December 2019.

The article indicates it does not have definitive information, but suggests a high probability of likelihood about the following:

The CEO connection

One element to consider in the competition for Total Tools is that the company's current CEO, Paul Dumbrell, previously headed up the automotive division of Metcash, both prior and consequent to its sale to the Burson Group in June 2015. He took over as CEO of Total Tools in August 2018 - most likely with a mandate to realise the company's capital.

That association could enhance the attractiveness of Total Tools for Metcash, as the CEO of IHG, Mark Laidlaw, has worked with Mr Dumbrell in the past.

Competition

Some commentators, including the AFR, have mentioned the acquisition by Bunnings of Adelaide Tools as being possibly related to Metcash's interest in Total Tools. That seems unlikely, as a possible strategy of Bunnings with that acquisition is to develop its own version of UK retailer Kingfisher's Screwfix. Total Tools for IHG is more in line with its current strategies, adding scale, breadth and depth.

Total Tools history

Total Tools was started in 1989 as a cooperative, and grew to 39 stores by 2014. It then expanded to its current 81 stores, including 26 stores in Victoria, 18 in both New South Wales and Queensland, nine in Western Australia, six in South Australia, two in Tasmania, and one in both the Northern Territory and the Australian Capital Territory. Today there is also an extensive range of tools sold through its online ecommerce website.

The company's expansion has been extensive, matching its goal of achieving over 75 stores by 2019. That said, its 2014 strategy was to eventually have 113 stores Australia-wide, indicating room for further growth.

In 2012, the company was basically 50% cooperative, 50% franchise. The journey to being more of a franchise company was something of a struggle for many of the earliest participants. In 2014 then-CEO Tim Cockayne described that process in CEO magazine:

I think in the early days it thrived as a cooperative because that was the way a lot of businesses were built, but the secret was really unlocked when it became a franchise and introduced standards around compliance and discipline. For those stores that were cooperative, that change was difficult and they had to give up a lot of things. They gained a lot, but they also had to give up a lot. In doing that, the discipline of making sure our stores looked the same and felt the same and were all open at the same hours has been the real point of difference.

Analysis

Metcash has something of a history of making acquisitions and divestments at critical moments in the development of its mainstay businesses. In the past it has used these as a balancing mechanism, to indicate new channels of growth, or to realise profit during a difficult phase.

On average, Metcash generally performs OK, but after its one disastrous plunge in share price, when former CEO Ian Morrice announced the cessation of dividends and a one-year turnaround program (that eventually ran for four years), the company has gone to extraordinary lengths in developing creative messaging about its performance.

Total Tools could be more of a strategic acquisition than an exercise in future messaging. A major feature of the hardware industry since around 2005 has been Bunnings' dominance in the power tool area. That dominance is built on the basis of very low prices, and this means that many hardware retailers are not able to sell power tools for a reasonable margin. From a business perspective, they essentially sell power tools so as to sell power tool accessories, which continue to have high margins.

Bunnings is almost completely dominant in the DIY/consumer power tool market, as well as in mid-range trade tools. The one major weakness it has is it does not distribute Techtronic Industries' (TTI) Milwaukee brand - despite being the sole distributor in Australia of TTI's Ryobi brand. Instead of Milwaukee, Bunnings does offer Stanley Black & Decker's DeWalt brand, the Bosch "blue" trade tools, and is the exclusive distributor in Australia of TTI's other trade brand, AEG.

TTI has, a little surprisingly, allowed IHG to sell some of its Milwaukee range in 2019, mostly through regional Mitre 10 retailers, such as Hume & Iser Mitre 10 in Bendigo, Victoria. Previously TTI has limited the Milwaukee range to smaller independent retailers. It may be that the growth of some of these once small companies, such as Sydney Tools, has forced it to reconsider how it distributed the Milwaukee brand.

If Metcash went ahead with the acquisition - which remains a big "if" - IHG could make use of the tool retailer in one of two ways. The first way would be to continue with Total Tools "as is", perhaps adding on more fully IHG-owned stores to the existing network. This would enhance its ability to obtain better deals on tools through volume purchases, and those benefits would flow through to all IHG members, potentially "rescuing" the category from break-even to profit. It is IHG's "core ranging" strategy writ large.

Alternatively, though, IHG could adopt a very different strategy with Total Tools. What if Total Tools became the IHG brand for all tool sales? That could see the power tool section of IHG's joint venture and wholly owned stores rebranded to Total Tools.

It would even be possible, at the furthest stretch, for Total Tools to operate as small franchises inside existing IHG stores, operated by the store owner, or by a third party, leasing store space from the store owner.

Bunnings, as HNN has suggested in the past, traffics in part, in surprise. It's the surprising low price that encourages consumers to buy, or a surprise in the width of range. Increasingly, they are surprising the hardware retail industry itself, with the launch of online marketplaces such as MarketLink. Most recently they've also surprised with the launch of a new video series aimed directly at the Millennial market, titled "Make It Yours".

The Millennial/Boomer market dilemma

Hardware retailers face a difficult market situation in the DIY/consumer part of their businesses. Increasingly this is a market that is dividing sharply between the "boomer" generation, and the "Millennial" generation, with "Generation X" somewhere in-between. The Millennials represent the future of hardware, but the boomers are currently - for most retailers - the largest market segment.

What makes this split difficult, is that it is hard to imagine two more different groups of consumers. Boomers are spending big on home renovations, either upgrading or downsizing their current homes. Millennials are mostly buying a first home or first investment property, or - more likely - renting to save for a future home.

There are also differences in terms of culture. Boomers tend to believe that more is better than less, and newer is better than older. Millennials place a greater emphasis on "the right thing" - though it's possible they place an even greater emphasis on not buying "the wrong thing". Boomers collect, Millennials curate.

In the DIY realm Millennials often get somewhat unfairly "dinged" for lacking basic skills. Where boomers were subject in their youth to helping Dad and Mum paint the nursery or the kitchen walls, Millennials were more likely to be holed-up in their rooms learning conic sections and the fun bits of integral calculus.

There may be some truth to this stereotype of a lack of basic skills, but it is also true that Millennials have other, different skills, ones that boomers don't always adequately value. Their sense of style is more advanced. They tend to be more consultative in their approach to tasks. They are, a little surprisingly, less influenced by advertising directly, but more influenced by peer opinion, especially peer opinion that is transmitted via social media.

The part of Millennial culture that hardware retailers continue to struggle with today, is their ardent desire to not own anything that resembles a tool, unless they really, really have to. After decades of selling more and more to boomers, who were eager to expand their DIY universe with quality power tools once well beyond their price range, this new attitude is a hard one to cope with.

There is a solution, of course, which seems just slightly counter-intuitive: sell versatile, multi-use tools that provide great functionality, even if they cost more than standard tools. So far, the only power tool company to really catch on to this market is Bosch, with its EasyCut line of saws, the EasyImpact 12 drill/driver, and, most recently, the EasyCurvSander 12.

Beyond that, though, the secret of Millennials is that they are very focused on the results of DIY work. DIY is less a joy and a pleasure to them, and more a necessity. They want results, and they want those results with the smallest possible risk of failure, the lowest expense, the fewest purchases, and the biggest possible effect.

Solutions

That last sentence could well have been a part of the inspiration for the "Make It Yours" video series.

The premise of the series appears at first to be nothing all that new. Bunnings has bought a house in an unidentified suburb of Melbourne, and has assigned a number of teams to lightly renovate different areas, such as the kitchen, bedroom, livingroom, and bathroom, as well as the front and back yards.

This doesn't seem all that different to other efforts by Bunnings in the past. Bunnings has already purchased a house and renovated it, making videos of the renovations as part of their online information base.

That said, the older series was a bit advanced at times in the renovations it demonstrated. HNN's favourite episode is one where one of the Bunnings staff whips out an arc welder and does a casual bit of welding (and a very good job, too) on a gate. Ten points for going all-out on the job, but maybe only two or three points for really knowing what the market for the video is.

"Make It Yours" is pretty much the exact reverse of that approach - ten points for knowing the audience and six points for demonstrating DIY know-how. That is not to pan the series at all - sneaking in six points worth of DIY is actually quite an achievement.

This is achieved by employing a familiar modern marketing tactic, but one done at Bunnings scale. All of the renovation work is done by Millennial "influencers", who have already gained an audience via social media, and often are on their way to developing their own personal "brand".

That could, of course, not have worked out all that well, but Bunnings has succeeded in selecting influencers who are down-to-earth and pleasant, then combining them with a good camera and directorial team - and some really first-rate post-production editing. As a result, the show is clean, crisp, attention grabbing, and very watchable not only by Millennials, but other generations as well.

The caveats

With hundreds of viewing experiences just one mouse click or finger-tap away from any video content presented online, it's evident producers need to keep the interest level high. Unfortunately, that means this new form of DIY video tends to lurch into the "here's one I prepared earlier" school of presentation.

For example, on many of the episodes, the DIYers rely on that incredibly photogenic and helpful tool, the nailgun. With the least expensive nailgun at Bunnings running to $290 (the Ryobi Airstrike), plus another $80 for a battery and charger, it's an unlikely tool to find in the toolbox of any young and "financially-challenged" DIYer. Especially because, let's face it, the nailgun would only get used a couple of hours a year, at most.

It's also remarkable, as is stated in the first episode of the series, just how quickly the flooring they use gets put down. That might be in part because there are bits that never get discussed, such as having to horizontally rip the first row that goes down to make sure the end finishes correctly, and adding mouldings along the edges to cover the expansion gap. And, while it's understandable they use vinyl flooring, as it is simpler to cut and lay, let's face it, it still looks like vinyl, while laminates continue to improve at a rapid rate.

There are other omissions as well, of course. It's a series that, in the balance between inspiration, and practical know-how, leans more towards the former.

The non-caveats

However, all of that is forgiven, because Make It Yours does one outstanding thing that has long been missing from DIY videos: the episodes show mistakes. In the episode on the lounge design, the two presenters disagree slightly about the colour of paint to be used. The result is a room where blue and green walls meet up - almost never a good thing. They end up repainting one of the walls, in a really good-humoured and valuable way.

Similarly, in one of the slightly funnier episodes, the male part of a New Zealand design couple redoing the bathroom ends up getting stuck in the bathroom, because he mis-installed the door knob. The couple also scornfully discards the hinged "Australian" shower heads, replacing them with graceful "New Zealand" fixed heads - which turn out to be too low for practical use.

This is very good for a whole range of reasons. It breaks through that "everything is perfect" feel that so many DIY videos provide, it adds real entertainment value, and it makes the influencers who present more approachable and more "real".

Analysis

While this is a great step by Bunnings, it should be only be the start to the retailer's efforts to better connect with the Millennial generation. Marketing is great, but there are some really low-level moves that need to be made as well.

For example, if you look at the kind of brands - both external and its captive brands such as Tactix and Ozito - the company stocks, these are overwhelmingly designed to suit the needs of the boomer generation. For Millennials, trying to shop at Bunnings can feel like rummaging through the stuff their parents buy, rather than finding something they themselves can connect to.

One way out of that is for Bunnings to ask itself what the pathway would be for Bunnings itself to become an influencer. The lesson of the Millennials isn't just that it is possible to build a personal brand, one that acts as a kind of passkey in the world of social media. The real lesson is that, for the Millennials, all brands are ultimately personal.

Boomers grew up with brands that were built through manufacturing and hence design processes. Car brands, for example, were important because they indicated durability and reliability - something we almost don't think about anymore, as the general quality of cars has vastly improved.

Brands today instead relate to the notion of personal curation. They are driven by the desire to connect with others, and to have others connect with the consumer as well. As such, they no longer signal social status as much as they once did. Instead they indicate a cultural set, the influences to which a consumer chooses to subscribe.

So the question is, who is Bunnings as a brand? That is the identity, the personal one, that will be important in the future, not corporate messaging, or assurances of community involvement - both of which are, ultimately, "lazy" half-solutions.

The role of all good marketing is to, of course, raise better questions. That is certainly one thing that Make It Yours has done well. It has almost turned it up to eleven.

The big box retailer has confirmed to The Adelaide Advertiser that it will open a store on Sir Donald Bradman Drive in the warehouse once occupied by Masters Home Improvement, at Adelaide Airport.

Work has begun on a $15 million redevelopment of the site, opposite Ikea, with the 13,000sqm store set to open mid-next year.

Adelaide Airport property executive general manager James Sangster welcomed the addition of Bunnings to the airport. He told The Advertiser:

Bunnings' presence will create more retail jobs at the airport on top of those already being created by (the airport) as part of the expansion of our main terminal.

Bunnings acting general manager - property Garry James said the new store was a "significant investment" for the hardware retailer. Masters had two locations in South Australia and two under construction when it closed all stores in December 2016 after enormous losses.

Real estate sell-off

In other developments, Bunnings has also been selling off some of its real estate holdings around Australia.

Horsham

The building that houses Bunnings Horsham has gone to auction and is expected to have a sale price of $9.25 million. The 9581sqm site has three street frontages on Horsham's Wilson Street. It is the only Bunnings in the Wimmera.

The property returns $560,766 per annum and is on a 12-year lease until 2025, with a further four five-year options until 2045.

Melbourne-based commercial real estate agency Burgess Rawson has auctioned the property. Burgess Rawson director Shaun Venables said the property's location added to its appeal. He told The Wimmera Mail-Times:

Horsham is the capital of northwestern Victoria and it's a really captive catchment endorsed by the fact that all of the major supermarkets are represented. Coles, Woolworths, Aldi and Kmart are all within 500 metres of the site.

Perth

The Charter Hall Direct Consumer Staples Fund has bought a Bunnings-anchored retail centre in Perth in an off-market deal worth $35 million.

The property at 303 Stirling Highway in Claremont has 5460sqm of space across three levels. The Bunnings store accounts for 93% - a little more than 5000sqm - of the total retail space and has a lease expiry of 2027 plus options.

The property is located about 10 kilometres south-west of Perth's CBD.

Charter Hall also announced its Long WALE REIT had made several off-market property acquisitions collectively worth $331.5 million, including a Bunnings Warehouse site in Darwin.

The deal, worth $41.3 million, was transacted on a passing yield of 5.7% with a 12-year lease to Bunnings.

Warragul

Newmark Capital has acquired a $51 million large-format retail centre in Warragul (VIC), anchored by Bunnings and Kmart. The 25,238sqm centre on a 5.7-hectare corner site is about 107 kilometres south-east of Melbourne.

It will sit within the Newmark Hardware Trust, which owns three Bunnings properties in Launceston, Lake Haven and Maroochydore.

A 6% yield is anticipated on the completed development, which Newmark purchased with development deals in place with Ballarat-based Troon Group.

Newmark Capital joint managing director, Chris Langford said since restructuring and opening the Hardware Trust to new investments, $20 million of fresh capital had been raised.

The Warragul centre includes nine tenancies and is 85% pre-leased, including leases to Bunnings and Kmart. The site settled in July and construction has commenced, with completion expected next June.

Mr Langford said the retail centre was in an area of strong population growth. He told the Australian Financial Review:

[Nearby Pakenham] is going like blazes. It has the highest population growth in the state at 3.5% per year.

Clyde North

Bunnings has placed its recently opened large-format Clyde North warehouse in Melbourne's south-east up for sale.

The 16,634sqm retail warehouse and 372-vehicle car park will be sold with a new 12-year lease in place, bringing in net income of about $1.9 million a year. Based on a yield of around 5% struck for similar Bunnings assets, it could be worth about $38 million.

The Clyde North Bunnings is on Berwick-Cranbourne Road and fronts developer MAB Corp's Element Park, a 30-hectare master-planned business and retail park.

Ballarat

Ballarat's original Bunnings Trade Centre in Mitchell Park (VIC) has been auctioned. Bunnings Trade was a tenant at the warehouse at 19 Waringa Drive until November but moved out before that after the opening of the new Bunnings store in Delacombe.

The 6738sqm property includes surplus land that could be developed or sold. Graeme Watson from Burgess Rawson commercial real estate said the location capitalises on an upgraded road network, which services the western part of Victorian and connects to Melbourne.

Sourced from The Adelaide Advertiser, Wimmera Mail-Times, Australian Financial Review and Ballarat Courier

The Block contestants Andy and Deb Saunders were special guests at the Maclean Mitre 10 store opening recently. The Daily Examiner reports that families lined up to meet the TV celebrities. A stand-up comedian, Andy easily broke the ice with the store's customers. He told the newspaper:

We just love things like this because we love to connect to people. Their barriers come down when you're relaxed and having fun with them. The alternative is not having fun with people...

I love watching smiles on people's faces. Some people don't have as many teeth as others, but it's still a smile nonetheless.

The couple share a lot in common with many people in the region. Their home at Wallabi Point on the Mid-North Coast was recently saved by the NSW Rural Fire Service.

Maclean Mitre 10 co-owner Shaun Johnson said Andy and Deb were the latest in a string of The Block contestants to visit the store. He told the Daily Examiner:

The Block is just such a fantastic show and Andy and Deb would probably be the

fourth or fifth couple of contestants we've hosted over the years.

It's great for the local community to come out and engage with celebrities and appreciate how down to earth and normal they are.

The opening also acknowledged the hardware store's branding switch from Home Timber and Hardware. Mr Johnson and Jason Southwell have co-owned the store since September 2018 and have been in the process of transitioning the business to Mitre 10 since July 1. Mr Johnson said:

In a town like Maclean, we understand the community needs to have responsive, knowledgeable staff in the hardware store so we can give them the right product for their jobs, at the right price.

Sovereign Place Town Centre

As one of the contestants of the latest series of The Block, Deb was also special guest at the opening of the Home Timber and Hardware (HTH) store in Thrumster (NSW).

The store is just one of the Hasting Co-op's rural and hardware offerings that also includes a Mitre 10 and CRT, and is located in the newly opened Sovereign Place Town Centre in Port Macquarie. Hastings Co-operative CEO Allan Gordon said the opening was the beginning of a different era for retail in the Hastings.

The IGA supermarket is a concept store which has been designed as a one-stop destination for shoppers with an in-house butcher, bakery, a significant range of locally-made products and produce as well as partnership hubs with HTH and Harvey Norman.

Mr Gordon said the new IGA outlet, which has a creche, has set a new benchmark. He told Port Macquarie News:

This project is at another level and captures the latest trends. Having a creche in a supermarket is a real winner for us too. We have set the new benchmark for future development in this area.

The centre is home to Port Macquarie's first NRMA electric vehicle charging station. NRMA executive general manager motoring Neil Payne said this charger would help drive the next generation of motoring tourists to the region, improving mobility and contributing to the local tourism economy.

Sourced from The Daily Examiner, Wauchope Gazette and Port Macquarie News

A number of sources have suggested to DataRoom in The Australian that building materials company CSR could be a takeover target.

It is understood that Gupta Family Group (GFG) Alliance made efforts to buy the business about a year ago when shares were trading at $2.69 - their lowest level since 2016. Some industry analysts believe CSR is still good value with a market value of $2 billion and its share price at $4.33.

GFG Alliance is an international group of businesses associated with industrialist Sanjeev Gupta and the British Gupta family, and are involved in mining, industry and trading. It purchased the failed Australian steel manufacturer Arrium in 2017 for $700 million.

The talk surrounding CSR comes as building materials is expected to be an in-demand sector when it comes to mergers and acquisitions in 2020, with two private equity groups - one understood to be Lone Star Funds - recently looking at Boral. Some also question whether Fletcher Building could be a target for a break-up or an acquisition, while Adelaide Brighton is expected to merge its operations with its largest shareholder, the family-controlled Barro Group.

BGC is also up for sale through Macquarie Capital, while speculation has been mounting that LafargeHolcim has been looking to sell its Australian assets (Holcim Australia), although this has been denied by the Swiss company

New housing approvals jumped 7.6% in seasonally adjusted terms in September so that a major increase in demand for building materials could follow. In line with this, building materials suppliers are emerging as potential takeover targets as the residential construction market begins to recover.

CSR is a diversified business with brands that include Gyprock plasterboard and Bradford insulation and Monier roof tiles. It also has a significant share in the Tomago aluminium smelter near Newcastle (NSW), about 40 manufacturing plants in Australia and New Zealand, and commercial real estate, which may make the company appealing to a private equity firm interested in carving up and selling the assets.

Asbestos liabilities may be seen as a deterrent for an acquisition, but the liability is understood to have been largely isolated and would not impact any acquirer.

Building products performance

Earnings before interest and tax (EBIT) for its building products division in the half year to September 30 fell 18% to $95.9 million, a direct impact of the slowdown in residential housing and undermined by a 19% drop in housing starts across the industry.

Revenue for the building products division was down 5% to $839 million with lower volumes reflective of slower construction activity.

CSR's chief executive Julie Coates said the company would expand into the commercial building products sector to reduce its reliance on the residential sector. A slowdown in high-rise apartment construction, particularly in NSW, has hurt the business.

However, the company believes there are signs that housing activity would increase, citing improved house prices, increased credit availability and low interest rates. But it expects that it will take at least another year before the residential construction market resumes growth. Ms Coates said:

I think we are looking at a 12-month lag ... We've seen housing activity starting to be driven by population growth, high employment and low interest rates and positivity around access to credit. But we're not seeing that come through yet.

Ms Coates said it would take some time for the positive developments in the housing market such as interest rate cuts and the easing of lending restrictions by banks, to translate into higher orders for the company. She said:

I think there's been quite a lot of positive news from the developers around deposits on housing lots and that should flow through to us, but there's a lag.

The use of our products in the building of houses comes later, so insulation, gyprock [plasterboard], bricks, they come later in the construction cycle.

CSR building products brands include Gyprock plasterboard, PGH bricks and pavers, and Bradford insulation.

Group results

Ms Coates took over as CEO in early September from Rob Sindel, who had been chief executive since 2011. She said she would be disciplined on costs in the short-term and also wanted to unlock more value from the group's extensive property portfolio. It owns 58 freehold sites.

In the half year ending 30 September, CSR reported group EBIT down 16% to $113 million reflecting a lower result from the building products division.

Net profit fell 20% to $71.6 million but net income jumped 157% to $68.8 million a year ago after the prior period was hit by impairment charges on its now sold Viridian Glass business.

Results in the second half of the financial year are expected to be lower than the first half due to seasonality in volumes. It expects net profit for the 2020 financial year between $107 million and $133 million.

Land sale

CSR also announced it has sold its 20-hectare Horsley Park brick manufacturing plant in outer Sydney for $142.5 million. The company said earnings from the sale would be split into two 10-hectare stages that would fall within the 2021 and 2023 financial years.

The sale comes after the business sold 10ha last year for $58 million.

The 30ha of land offloaded by CSR has been "surplus". The business still owns another 20ha where its brick manufacturing facility operates.

The buyer is ESR, a logistics and warehousing business of no relation, prominent across the Asia-Pacific. ESR will build four-to-six distribution houses on the property, the company's chief executive Phil Pearce said.

The land sold by CSR falls within Western Sydney Airport's industrial zone, is close to the M4 and M7 motorways, and is bolstered by large infrastructure projects, including WestConnex, Sydney Metro and Moorebank Intermodal.

CSR has netted $200 million by selling 30ha of land in Horsley Park over the last two years. It has filed paperwork to demolish the PGH Bricks manufacturing plant on its remaining 20ha property in Horsley Park. This has been subdivided into eight independent properties and can be sold off in parcels. Another nearby PGH Bricks plant, PGH Bricks & Pavers in Cecil Park, could be sold off too.

Sourced from The Australian, Sydney Morning Herald, The Australian Financial Review, Motley Fool and Fairfield Advance

The building materials assets of the late billionaire Len Buckeridge is expected to attract the buying interest of companies such as CSR and Wagners as well as private equity firms, according to DataRoom in The Australian. This follows the sale of BGC Contracting, the mining services business unit, to NRW Holdings. It has now been renamed NRW Contracting.

The Buckeridge business empire also spans transport operations, real estate, quarries and a cement grinding plant, and is highly regarded for its scale and market dominance.

BGC's cement grinding plants could be a major drawcard for CSR and Wagners. Fletcher Building is considered the most obvious owner but it has many challenges at its home base in Auckland, New Zealand.

Just prior to the sale of its mining services and contracting operations, it was believed BGC attracted the attention of a suitor based in India, which was in negotiations to acquire the bulk of the operations.

While it remains unclear what group is eager to gain a presence in the Australian market, some speculate it could be Indian conglomerate Tata Group, or Sanjeev Gupta's Liberty Steel.

The sale is previously thought to have been slow-paced for various reasons. It is thought that the group's divisions are all interrelated and are largely reliant on each other for profitability.

But the opportunity for a buyer is to pick up BGC's numerous operations all at once, in a move that would provide an industry newcomer to Australia an instant construction materials platform.

When Mr Buckeridge died in 2014, the empire was to be divided up between his family, and he had placed it in five separate trusts for his children and grandchildren. The situation has resulted in a legal battle in the Supreme Court over, among other issues, the payment of dividends.

BGC is considered among Australia's top 10 largest privately-owned companies, with 3500 employees, an annual turnover of at least $3 billion and is one of Western Australia's largest home builders.

Sourced from The Australian and Australian Mining

The CSG-7410ES cuts metal and concrete with ease, according the manufacturer.

ECHO has developed a brand-new 73.5cc engine for the CSG-7410ES that features a chrome cylinder and patented Kaniboron(r) piston plating to reduce friction and improve heat resistance. For the best power output and compression, a twin-ring system is used. For lighter weight operation and strength, the engine is fitted with a magnesium crankcase. Coupled with a 2.6:1 drive ratio to the 14" cutting wheel, the CSG-7410 provides the torque for exceptional cutting performance in tough applications.

The CSG-7410ES has been designed for high frequency use with a patented 4-stage air cleaner system, dust sealed starter assembly, stainless steel shield, and brass water valve as standard. It is a robust unit made for years of service.

ECHO has also considered the operator and the CSG-7410ES has spring assisted starting with a decompression valve and automatic fast idle for easier starting, a stop switch that returns automatically to the ON position, and a padded aluminium front handle and a shield adjustment lever. This ensures the shield is easy to rotate even when matted with dust.

The cutting arm is reversible and can be fitted to the inside for ergonomics, or the outside to cut close to obstacles. Belt tension is easily adjusted from the side of the machine with a visible gauge for improved accuracy.

It was a milestone of sorts when we completed this edition of HI News. We put together one of the largest retail profiles we have ever done so far on the Sunshine Mitre 10 group in Queensland. In the same edition, we also profile Stephen Iser from Hume & Iser in regional Victoria. The store has long been the gold standard for independent hardware stores in Australia.

Simply download the latest edition here:

VIDA Wood has had its product offering strengthened by its link to Canadian company Canfor. This includes longer lengths of structural timber. VIDA is pushing to expand its reach in Australia, and has appointed Jacinta Colley as its national sales director.

Klingspor Australia's managing director, Paul Hoye believes there is a good market for belts, and that Klingspor can offer "an excellent product range, and the knowledge to suit all applications". We profile Klingspor's belt-making capabilities and speak to some of its satisfied customers.

Plus, Bunnings' latest initiatives, a new name in Australian rural merchandise, Ikea is pushing hard into smarthome, and technology is driving change at international home improvement retailers such as UK's homebase and Lowe's in the US.

Other companies featured in this edition include James Hardie, Laminex, Wattyl, Swann Security, USG Boral, Imex Australia and many more.

How will Australia's home improvement industry develop into the future? After spending several days with the managers of Sunshine Mitre 10, Travis Cunnane (general manager), Darren Fanshaw (group retail manager), Deen Saint (group trade manager) and Jason Monahan (trade operations manager), HNN thinks we might have had a glimpse of one possible future.

It's a future that could enable more independent retailers to take a greater share of the ongoing growth in the home improvement category. It also might help some hardware retail entrepreneurs to escape the defensive, low-capital rut in which they have been trapped since the early 2000s.

Sunshine Mitre 10 has 20 business units at 18 different locations, based in Queensland's Sunshine Coast, about 100km north of Brisbane. While the Sunshine Coast is central to Sunshine Mitre 10, its locations range from Ipswich, to the immediate west and south of Brisbane, up into northern Queensland, at Weipa. That is a span of some 2500km - roughly the same distance you would have to travel to reach Moscow from Zurich.

It's a thriving, well-run business, with turnover of around $100 million a year. But what makes it really interesting is that Sunshine represents one of the best examples of a new kind of retail structure in the independent hardware and home improvement retail sector (iHHIR). It's a pointer towards the real potential that exists in this sector of the market, even as competitive pressures continue to grow.

The Sunshine solution

The big question is: what does that response need to be? Looking at the example of Bunnings itself, it's not difficult to give an answer. What is clearly needed is more market innovation, particularly when it comes to developing better path-to-customer offerings. However, innovation was a major problem for the iHHIR sector even before the global financial crisis (GFC) and reduction in mining activity that followed. With the Australian economy in a period of sustained slow growth, an increasing number of retailers now find innovation too risky a strategy to chance.

These survival factors are compounded by structural difficulties in the small to medium business (SMB) sector. A major difficulty is that the sector does not have readily available sources of capital (as we'll discuss in more detail later), especially for innovation investments. Much of retail, and especially iHHIR, is dominated by small retailers, which struggle with innovation, because any change will affect their entire revenue stream, which means the risks are consistently high.

What this points to is that if the iHHIR sector is to survive and thrive in the future, it needs to change more than just its processes. It needs to shift structure, to develop an overall business model which makes innovation more possible and less risky.

It's important to note that this doesn't mean every retailer has to engage in risky innovation. It does mean, however, that the industry needs to develop significant centres of innovation, which can help to generate needed change for the overall industry.

After spending several days on Queensland's Sunshine Coast being given a tour of, and insight into, IHG's Sunshine Mitre 10, it is fairly clear to HNN where the industry can find at least one starting point for building this kind of innovation engine.

What Sunshine has done, over the past decade, is to mould its business into a kind of regional hub, a store network that not only can act as a growing profit centre, but which also - almost paradoxically - strengthens rather than diminishes the independent stores adjacent to - but outside of - its own network.

It's not the case that most retailers in the iHHIR should consider becoming part of such a network - a type of network HNN is calling a "hub network". But most retailers would benefit from there being more regional hub networks in the Australian market.

Sunshine history

Sunshine Mitre 10 today is a network of stores, along with a small warehouse facility in Brisbane, and a truss plant. The company also participates directly in the business areas of locks, appliance sales, and steel products.

Its formation dates back to 2008, before Metcash acquired the Mitre 10 group. It was built on the merger of two established Queensland retailers, Lanham's and the Melville family business, Melco.

Lanham's began as W. Lanham & Sons Timber Mill in 1910, based in Nambour. The steam-powered sawmill provided timber for construction as the town prospered in the shadow of its sugar mill. By the 1970s, Lanham's had moved beyond timber to hardware supplies, and opened an additional store in Cooroy.

John and Mark Melville opened their Noosaville Melco store in 1988, selling timber and building supplies. Subsequent stores were opened in Gympie, Maroochydore and Caloundra.

When the two companies got together in 2008, the combined business was initially known as MelcoLanhams Mitre 10. The business also held the registered name of Sunshine Hardware Pty Ltd, and some years after the merger changed its operating name to Sunshine Mitre 10.

Such amalgamations are not uncommon in hardware retail, but what followed was uncommon, as the Mitre 10 organisation (prior to its acquisition by Metcash) entered into a 49% ownership joint venture (JV) with Sunshine. According to Travis:

John Melville wanted to get out, the Lanhams wanted to stay in. There were a few brothers on the Lanhams side, and two of them stayed. Dave Lanham is the chairman of Sunshine, and Tim is a shareholder who also works in the business. He's part of the management team.

They own the freeholding in Nambour and Kingaroy. So that's how the joint venture came about, and they renamed it "Sunshine". And from there, opportunities [for expansion] came about, like [the stores at] Roma and Kingaroy.

This investment ended up as a significant feature of Metcash's eventual acquisition of Mitre 10. The proffer documents from Metcash indicate that Sunshine produced earnings before interest, taxation, depreciation and amortisation (EBITDA) of $4.9 million in the 12 months to 30 June 2009. Mitre 10 gained $2.4 million for its 49% share. That equates to over 13% of Mitre 10's $18 million overall EBITDA at the time - a considerable contribution.

The next change was that at some time during FY2013/14, Mitre 10 acquired a further 35.7% of Sunshine, moving its ownership up to 84.7%. The company also aquisitioned Northern Hardware Group in April 2016, which included the Weipa Mitre 10 and the Mareeba Mitre 10.

Sunshine helped to create a key strategy that Mark Laidlaw adopted after he took over as CEO of Mitre 10, following Mark Burrowes, who was the first CEO after the Metcash acquisition. While Mr Laidlaw made it clear that Mitre 10 would not pursue a strategy of corporate ownership of stores - one of the wrong steps Mitre 10 had taken, with the development of a subsidiary to develop and own "Mega" stores, in a countermove to Bunnings - JVs offered an opportunity to extend Metcash's reach, while retaining the advantages of the knowledge and skill of independent hardware retailers. Similar JVs followed with companies such as Fagg's Mitre 10 stores in Geelong. (Metcash now controls 90% of Fagg's.)

While the strategy has been copied and repeated, Sunshine has itself become something unique and original for Metcash's IHG. It could be said that Sunshine has become less of a JV arrangement, and more of a "hybrid" enterprise.

In a standard JV, there tends to be a strong separation of concerns. The capital partner provides finance, and sets a series of guidelines and goals. The operational partner follows those guidelines and goals, but also pursues its own goals, and provides certain guidelines for the capital partner as well.

The difficulty with this is that capital and non-capital partners can have very different objectives. In general, capital partners want to see growth, and non-capital partners concentrate on return on investment (RoI). The end arrangement is typically a balance between these two - but, in many cases, it is the RoI approach that wins out. JVs frequently provide above-average returns, but are a poor vehicle for growth.

What has happened at Sunshine is that both the capital partner, IHG, and the independent principals are obviously committed to achieving high levels of growth, through innovation tied to appropriate - but far-ranging - expansion.

The need to push beyond some of the unwarranted assumptions people have about JVs is something Travis is passionate about. As he told HNN:

One of the things that frustrates me is because we're a JV corporate - whatever - people say a lot of nonsense about how the business works. Listen, we treat this as if it's our business. For the management team, this is our baby.

Apart from the board meetings that we have, to be fair to Mark [Laidlaw] and to the directors, IHG gives us a fair bit of autonomy to deliver the outcomes, and they support us when we need it, pull us into the line on the odd occasion when we need that.

It's really like every other single retailer in hardware, in that if you're passionate and you treat it like it's your own business, you generally get good results. If the people who work here are turning up just because they're getting a pay cheque, I think we're in trouble.

Travis is also adamant that JVs do not get special privileges when it comes to treatment by IHG. They do get exposed to new ideas first, but that can be both good and bad, he says.

We trial things before we roll them out to independent members and all that. It's true. We do. We often have this stuff, two years, 12 to 18 months before it gets rolled out to independents.

We give a lot of feedback. We've told them some stuff is just crap and you need to start again, and they do it. It would be very difficult for an independent to put in, say, the core range for the first time, because what if it turns out to be a disaster?

Whereas for us, we can just roll with the punches, and modify it, and give them the feedback. So it is really important from that regard.

Travis also sees the expansion through the acquisition of HTH as offering considerable advantages:

If you don't have a network, it's easier for the builder to go to Bunnings, because they have a network. Since Metcash have come onboard, and particularly with the Danks acquisition, we're starting to act like a network now. We have given jobs to Hudsons in New South Wales, through Murphy Builders, actually.

We've started to act like a group, now. We've actually got a larger network than Bunnings. But yeah, historically we've never really taken advantage of that. I think now we're starting to do that.

Travis and the rest of the Sunshine team also see JVs as providing a very good exit strategy for many independent hardware retailers, especially those that are "ageing out" of the business, without a clear path of succession.

Having joint ventures is good for members that do want to get out. Because there aren't people queuing up to buy an independent hardware store, and if there's no succession planning, it's just becoming more common now. [JVs] are a good way for owners to extract some value out of the business. And they're entitled to that.

To read more about Sunshine Mitre 10, please download HI News:

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Since the 1990s, Hume & Iser has been a watchword in the industry for how a regional retailer should operate, first under Home Timber & Hardware livery, and more recently as it has transformed into the virtual epitome of what a modern Mitre 10 Sapphire store should be.

Stephen Iser, the company's managing director, is one of the stalwarts of his generation of retail managers, the people who have really defined what the modern hardware retail industry is all about. It is a generation that has been slowly but steadily retiring out of the industry. The reasons are usually, like Stephen's, family related.

Hume & Iser modernises

While Stephen modestly says he got the top job because he was "the last man standing" after many management changes, that was far from the case. By the time he was appointed, he had spent 22 years working at Hume & Iser, the last 10 of those as sales manager.

In fact, as it turned out, this was almost perfect timing at Hume & Iser. Someone with a heavy sales background was exactly what was needed to take advantage of what was going to be the a strong, sustained surge in spending on home improvement by Australian households, and a rapid expansion in Bendigo.

According to the website Australian Property Investor:

Ranked 209th out of a total of 550, Greater-Bendigo was among Australia's top 20% when compared to the rest of Australia.

The median price for a house in Bendigo has increased at an average of 8.3 per cent average annually, from $98,500 at the start of 2000 to $320,000 at the end of 2014. Average rental yields of 4.7 per cent resulted in a total return of 13 per cent.

Bendigo's population has grown by an average of 1.5 per cent over the last decade, lower than the national average of 1.6 per cent.

Currently, Bendigo also has home ownership of over 70%, and a steadily increasing overall population, with new suburbs growing at the fastest rate.

The challenge facing Stephen, after he was appointed general manager, and the company had time to readjust to its changed circumstances, was how best to take advantage of the available growth. The solution he came up with for Hume & Iser was to make sure that it could grow its DIY/consumer business - something that he was very successful at doing. Even today, the balance between trade and DIY stands at around 50/50 - a considerable achievement, considering that it is now close to 70/30 across IHG.

One of the main reasons for this is Stephen understood early on that to take advantage of the growth potential of the area, it was necessary to appeal to a broader market, especially women. A key part of that strategy was Hume & Iser's ongoing membership in HTH. After joining its early incarnation, Pro International, the company did leave for a while in the late 1980s, but rejoined HTH in the 1990s.

The move to Sapphire

Stephen admits that when Metcash initially took over HTH he was somewhat sceptical about how that arrangement was going to work.

I just didn't think, you know - how could it work? How could one company own Mitre 10, Home Hardware, Thrifty-Link, and True Value?

I!t just didn't gel with me. So in the interim, we joined Natbuild [National Building Suppliers Group] because I thought, we're going to end up a creek without a paddle. So we joined Natbuild in the interim.

I sat on the national council of HTH, and we merged the HTH and Mitre 10 councils together. They started talking how they're going to manage it, in discussions with Mark Laidlaw and Annette Welsh. Anyway, a path became reasonably clear of how it could be done, even though it was very complicated.

Then IHG said they would prefer us to go along with the IHG. They said, "And here's what we can do". So, cutting a long story short, we got out of our relationship with Natbuild.

At that stage, Hume & Iser were still an HTH store, but clearly part of IHG. The Sapphire process started later in 2017,

Then the process started about the Sapphire program, and they introduced the Sapphire program. And the Sapphire program was for them to build 200 Sapphire stores of this size throughout Australia by 2021 or 2022. And they came to us and said, "We want you to build" what they call "the best store in town: the Sapphire store".

What is interesting about this is that, where for most retailers Sapphire has meant boosting their DIY/consumer business, in the case of Hume & Iser, it meant improving the store's trade business.

When this Sapphire program came up, while we had a good business, I could see that there was better layouts and that it was a fresher store. In particular, we hadn't done anything out in this area, in the timberyard, for over 25 years. That was old hat [the way it was], so I said to the board, "We could've done that out there".

Stephen realised that, given the current market, the under-investment in the trade area had meant some lost opportunities.

Yeah, all the racking and that hadn't been updated. Inside, it wasn't too bad. It was quite reasonable in the main store, but I said to the board, "If we do [the store], we have to do [the outside trade area].. We just have to do this". So they agreed. They could see the merit.

Builders are changing all the time, as you can imagine, the younger ones coming through now. Most stuff gets delivered, but they also pick up a lot of stuff from the first thing in the morning to the last thing at night.

So we had massive congestion out there [in the yard] when we had a lot of staff in there, and a lot of utes and trailers. So [IHG] came up with this plan. The group's got a lot of experience in the people that are doing this. We could've fiddled around with it [ourselves], but would've got it as nowhere near as good as what they've done.

[IHG] gave us a whole new concept, a whole new plan for the whole place. And then we put it on a big piece of paper, and we said week one, week two, week three, and off we went.

To read more in Hume & Iser, please download HI News:

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Not that long ago, every time HNN would visit a hardware retailer to check in on the market and how things were going, at some point the retailer's eyes would glance over to the wood storage lot, and you would see concern bordering on panic show in their face. The lots were mostly empty, and several retailers confessed that they had exhausted even their "reserve" storage, which they kept for their best customers. That shortage was especially acute for framing timber.

That's a thing of the past, today, of course. The stocks of wood are plentiful, and negotiations have turned back to issues of cost and quality, rather than logistics. The question that still remains, however - especially as some commentators have raised fears of a "glut" on the current market, causing more cyclical problems over the next couple of years - is how did the forecasting go so wrong?

Morwell shutdown

The most significant local event for the problems with supply was probably the shutdown of Morwell, Victoria softwood sawmill by Carter Holt Harvey Building Supplies Group (CHH) in mid-2017. The press release put out by the Victorian government at the time stated:

[T]he Government has been told the closure is unavoidable given poor sawlog quality and a lack of volume available from the privately-owned softwood plantations which supply Carter Holt Harvey.

The reason for the decline in volume was given as:

A number of damaging fires, including Black Saturday, across HVP's Gippsland plantations over the past two decades has severely affected the volume and quality of 28 year-old sawlog available to supply Carter Holt Harvey.

While this is understandable, what is less understandable is how much it seemed to take the industry by surprise, particularly given that CHH has been reducing its Australian holdings since 2015.

Demand fluctuations

A very evident problem has been global fluctuations in demand. The global financial crisis (GFC) of 2008 saw the high level of demand in the US and Europe shutdown rapidly over the course of two years. Demand in Australia did not decrease as much, but this was followed by an unexpectedly rapid recovery in the US and Europe. That kind of "whiplash" effect was a major contributor to supply issues, as timber initially destined for import into Australia found other, more lucrative markets.

Exports to China

A third influence promoted by some commentators is a rise in exports of timber to China. The well-regarded Australian source of all news timber-related, Timber Trader, outlined this problem in an article entitled "Softwood Shortages", published on 22 August 2018. As that article points out, China decreased the amount of sawlogs from local forests, and increased imports. This was a welcome market, Timber Trader suggests:

In the years when local sawmills were finding it uneconomical to compete with imports, some growers looked overseas to develop new markets to future-proof their plantations against Australian downturns. China welcomed Australian sawlogs, seeing them as a low-cost, high-quality product. And for Australian growers, Chinese contracts represented an additional layer of security for forward planning.

However, as Timber Trader goes on to suggest, these export markets probably contributed to shortages of softwood in South Australia and regional areas of other states.

Causes

While these are all valid matters to consider, the reality is that we are really looking at elements that are symptomatic, rather than causative. The underlying condition is that timber markets have changed sharply over the past 10 years, but the Australian timber industry itself remains locked into practices from the 20th Century.

That's not surprising. Timber, especially in Australia, is about so much more than business, economics and market forces. There is an ecological aspect, a cultural aspect and - especially important - an aspect that relates to providing employment in regional areas where the local communities continue to decline. All that adds up to heavy political involvement. That can be clearly seen in, for example, other parts of the Victorian governments press release regarding the Morwell closure:

The plantations from which Carter Holt Harvey sources its wood were privatised and sold to Hancock Victorian Plantations (HVP) by the Kennett Government in 1998.

Solutions

It's difficult to imagine a time when the catch-all word "globalisation" will really apply to the timber industry - partly because of the organic (and therefore slightly chaotic) nature of the product, and partly because local factors will always exert a strong force on the industry.

However, we can identify some industry moves which indicate a general direction towards a globalised supply market. There is hope that many of these moves will provide a means for retailers to seek better stabilisation of demand.

For example, there is a lot of good news about two, linked moves that started in the timber industry last year, and have now rolled through into the current market. In November 2018, the very large Vancouver, Canada-based company Canfor announced that it was purchasing 70% of the Swedish timber company VIDA Wood, a deal that was finalised in February 2019.

Coupled with that news, VIDA Wood has announced that it is revving up its business in Australia, and seeking out new markets and opportunities. To help them advance the company, VIDA head-hunted one of the timber industry's star executives, Jacinta Colley, to take over the position of national sales director with the company. HNN sat down with Ms Colley and VIDA's director of operations, Ian Brett, to find out what is in store for VIDA.

Ms Colley is familiar to most in the hardware industry from her ongoing senior roles with Simmonds, where she worked for over 13 years. Mr Brett joined the company in early 2017. His early career was spent with Brett's Timber & Hardware, the well-known Queensland company. As he says, he's been involved in wholesaling timber all his life.

It became evident as we spoke with Ms Colley that VIDA had, in the past, not lived up to the full potential the company has to affect the market. As she told us:

What is important to us and the market right now is that we can provide continuity of supply, followed by quality, followed by a competitive price, and that our relationships are strong.

I think that relationships play a really big part in the business. In the past, VIDA was sometimes a little light on the ground, to be fair, and has not paid dividends. But when you've got more feet on the ground, you can cover territory quicker. By having me on board now, it means that I can get on a plane if need be, same day, and get to Melbourne. Whereas in the past, Kurt [Schrammel, the CEO] was covering off Melbourne. He's based in Sweden and it's just not viable.

Ms Colley is very adamant that the company now has very strong Australian credentials, and a strong presence in the market.

Our head office is in Narangba [QLD]. We run a third-party logistics operation out of Melbourne, but that's more to service the Bunnings stores, and then we top it up with some of our merchants. We also have our wholesale distribution arm through VTW. But we haven't yet really tapped into New South Wales, and we really haven't tapped hard enough into Queensland. That's what we're starting to do now.

As part of that presence, VIDA now has six key staff members in addition to Ms Colley and Mr Brett. Mick Dixon is the account manager for Queensland, and has been with VIDA since it first came to Australia. His background includes over 20 years working at Boral. Trish Bressow looks after internal sales. Trevor Dixon is the logistics warehouse manager for Queensland and Victoria. Alicia Nagle is on accounts, handling credit. Malinda Dalzell handles importing, including everything related to overseas shipping. And Tanya McDougall is in stock management.

It's a substantial commitment. VIDA has gone through its own struggles, growing in Australia, but it is evident from what Ms Colley says that they've tackled these head-on, and are setup for growth.

I think a fair observation would be that VIDA has flown under the radar in the past. They have been quiet achievers, to a certain degree.

We did go through a bit of a troubled times with quality three years ago, which wasn't a fun time for the business. Then Ian Brett joined the business. He helped to bring in a phenomenal amount of quality control. We spent 18 months having quality assurance on site every week to get that right. And that's now paying dividends.

Now with me coming on board, it has enabled the sales team to focus on sales, for me to help with the backend, with the administration, with my connections and networking, and help grow the brand and its presence, in a really professional manner.

All that is set to accelerate as the potential of Canfor is added to the solid base VIDA has established. Mr Brett outlined for us how Canfor would expand the range of products:

I think the biggest change for us from a Canfor production sense was that we had been limited to specific lengths coming out of Sweden. Other supplies out of Europe, Canfor can be heavy, particularly in the long length market. Something that the Swedes struggled with, particularly in five to six metre lengths in continuous supply. So the Canadians were very good and had large volumes in Spruce Pine, Fir Larch and Doug Fir in the six metres. So that's been very good.

The quality of product we've seen to date, when we got our first shipments in looks really good quality.

VIDA's view of the industry's future

VIDA had a very direct experience of the problems of a scarcity of timber. As Mr Brett puts it "we could have played a cricket match in the timber warehouse, it was that empty at one time". But now he is very concerned that the cycle has shifted too far over in the other direction:

Buyers had gone overseas, and we did the same, bought wood and a lot of wood arrived. The Australian sawmills got their production scaled up, and demand dropped.

That wasn't coincidental. We put regulatory controls in banking, we had a banking royal commission. We controlled immigration. We did everything to reduce demand.

And now we find ourselves in a completely opposite situation where there is too much wood. It was such a brutally quick cycle. I have never seen all the stars align at one point to go one way, and then, in a very short period of time, they align to go the other way. Almost instantaneously.

Mr Brett sees some tough times immediately ahead for some timber suppliers, though there are also signs of real moderation.

I think it's gonna be a tough twelve months, going forward. However, housing starts are still reasonable. Interest rates are low. The banks are making it a little bit difficult to borrow money, but I think that might improve over time.

The end note of this is that, like most people in the timber industry, they do see things improving, and continuing to improve over the next five to ten years. The general tendency, just about everyone agrees, is up. It's working out how to somehow cope with the swings and roundabouts along the way that poses the real challenge.

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The competition watchdog recently launched an informal review into Bunnings' planned purchase of Adelaide Tools. It is looking at the impact of the proposed acquisition on competition in South Australia and around the country, reports the Financial Review.

The Australian Competition and Consumer Commission (ACCC) has sought submissions from interested parties on how closely Bunnings and Adelaide Tools compete with each other. It wanted to know which products/services they competed over, which other retailers competed in the tools, hardware and power equipment categories, and the likely impact of the acquisition on prices and service.

The ACCC review will look closely at competition between bricks and mortar and online stores. The findings from the are expected to be announced in late January next year.

Bunnings said the acquisition was always subject to regulatory approval and the review was part of that process.

About the acquisition

As HNN reported previously, the Adelaide Tools acquisition sees Bunnings set to sell Milwaukee brand tools. It could signal an increased interest in developing an online driven trade brand similar to the UK-based, Kingfisher-owned Screwfix.

In the media release that announced the acquisition, Bunnings managing director Michael Schneider stated:

The acquisition ... will allow us to improve the way we connect, serve and engage with trade customers and is aligned with our strategy to accelerate the growth of the trade business.

Bunnings also said it will to continue to run the business as Adelaide Tools.

Established in 1949, Adelaide Tools is headquartered at Mile End and has stores in St Marys, Pooraka, Lonsdale and Gawler, as well as Oaklands Mower Centre at Somerton Park. Its online store lists over 8000 products.

Analysis

The acquisition, as with all acquisitions by Wesfarmers, will be subject to regulatory approval. However, as HNN has remarked in the past, the amalgamation of the Home Timber & Hardware group with Mitre 10 has lessened many of the competitive checks that might previously have applied to Wesfarmers.

In an immediate sense, the acquisition of Adelaide Tools is unlikely to have a direct impact on revenue or earnings before interest and taxation (EBIT) for Bunnings. The impact on the company's future strategies, however, is likely to be outsize in proportion to the acquisition's financial weight.

It's worth noting that press releases from Wesfarmers in general usually bear some analysis. They are never directly misleading, but they do tend to direct the attention of the media away from the core issues.

In this case while HNN is sure that the comments of one of the directors of Adelaide Tools are heartfelt when he says that "this [acquisition] shows a vote of confidence in the South Australian retail market", it seems unlikely that this is factually the case.

Bill Peach and his co-directors have built a great company that is well-regarded, and should be proud of that achievement, but it is doubtful Bunnings expects the Adelaide market to experience a building boom in the near future.

There are, however, two aspects to the strategic leverage we are likely to see result from this acquisition. The first is Bunnings' stated intention not to rebrand these operations in line with its Bunnings retail warehouses. An additional part of this puzzle is that Adelaide Tools has established such a strongly competitive position online, with its prices often matching leading discounter Sydney Tools (which has long been the subject of "grey market", parallel importing rumours).

Added together, it's tempting to suggest that Bunnings might be planning on launching something like UK home improvement company Kingfisher's Screwfix operation, which continues to drive growth, even as its traditional DIY sales decline in profitability. Screwfix began as a catalogue company for tradies, then expanded to a same-day delivery operation online. It has begun expanding its physical store presence over the past three years.

The potential for Bunnings would be a separate brand with a major online presence and limited physical store presence, but offering click-and-collect as well as servicing drop-off through Bunnings warehouses.

The second, major aspect to this acquisition is that Bunnings will, for the first time, be selling Techtronic Industries (TTI) Milwaukee brand in Australia, through Adelaide Tools. (HNN confirmed this with Bunnings.)

With Metcash's IHG now selling Milwaukee tools in some regional stores, it may be possible that Bunnings was able to wrest a concession to sell Milwaukee through stores it owned that were not branded Bunnings - subject to similar constraints to those placed on independent retailers.

Extending from that, it would seem possible that a new Bunnings-owned retail brand might be permitted to sell other TTI brands, such as AEG and possibly Ryobi. While Ryobi is not warrantied for professional, trade use, it has become a popular brand with businesses in the repair, maintain and improve (RMI) industries, as its fleet costs are around half of those of brands such as Milwaukee and Makita.

Even if these two possibilities do not develop beyond Adelaide Tools, it's likely this acquisition will have something of a chilling effect on some sectors of the professional tool market. Total Tools would be one company that could suffer from this kind of direct competition, along with a number of smaller, non-franchise retailers.

Finally, HNN has to say that we have, once again, been surprised by the astuteness of Bunnings. Adelaide Tools is very close to being a perfect acquisition. While larger operations might be tempting, Adelaide Tools has long been recognised as one of the canniest operators in the tools business, with a particularly strong presence online, and a good record of ethical business practices.

It marks, in HNN's opinion, a return to the kind of strategic practice Bunnings pursued pre-BUKI, with innovation rather than scale as a strong focus for growth.

Related:

Sourced from The Australian Financial Review and Adelaide Advertiser

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