Big box update

Bunnings has provided a submission to a parliamentary inquiry into the price setting and market power of big box retailers, their negotiation practices and how they engage with suppliers.

The inquiry was called by Nationals Senator Ross Cadell, who sat in on the inquiry into supermarkets earlier this year that heard Bunnings had allegedly treated its plant suppliers like "slaves".

Plant lobby accuses Bunnings of "stranglehold" on greenlife category, April 2024

Senator Cadell told The Australian Financial Review (AFR) he wanted suppliers and smaller businesses to detail their treatment by big box retailers in inquiry submissions. He believes Bunnings "had to be investigated" over price gouging allegations.

They're only allegations at the moment. They are certainly, prima facie, interesting to me, and that's why we have this committee to interrogate them.

In response, Bunnings managing director Mike Schneider told the AFR the retailer takes its promise to beat any competitor's price seriously and critics would not find evidence that it had engaged in price gouging.

Mr Schneider said he was surprised by the claims (of price gouging), given the company had long advertised using the slogan "lowest prices are just the beginning". In the AFR, he said:

I had to read it a couple of times when I heard the words price gouging. To advertise using the word 'lowest' means we've got to do a lot of work to prove that.

Mr Schneider said the company invested "tens of millions of dollars" in a sophisticated pricing ecosystem to track competitor pricing and test claims that it had the lowest prices on items carried by other retailers. The business then invested tens of millions more to match competitor discounts and promotions.

Senator Cadell said Mr Schneider's comments were directed at Wesfarmers shareholders and would not dissuade him from examining Bunnings via a parliamentary inquiry. He told the AFR:

I think he's setting the baseline case for the financial markets and the stock exchange with what he says. He's got to do the right thing by his company and maintain investor confidence in his share price.

He's doing that and we will do the right thing by the Australian people and quiz him on it.

Mr Schneider said Bunnings' everyday low prices model also informed its operating model, which was designed to be low cost. He said that model explained why Bunnings stayed out of some product categories that were complex or costly, and why it preferred to pay staff above-award wages to ensure high retention of permanent employees.

While Mr Schneider said critics would inevitably find a dissatisfied supplier or former supplier given the size of his business, many suppliers had worked with Bunnings for decades. He said any parliamentary inquiry would be a "great opportunity to explain" the group's pricing approach and business model.

You don't want to hear [criticism], but it's important to listen to it and you understand it so that you can, if it is the problem, put it right.

The Senate committee will also look at whether big box retailers that sell grocery items should be included in the grocery code of conduct. Mr Schneider said Bunnings should not come under the grocery code of conduct as Senator Cadell had suggested but would adhere if required.

Brand relationships

Exclusive brands were discussed in the inquiry submission by the next biggest player in hardware retail, Metcash/Independent Hardware Group (IHG). Metcash claims the arrangements being locked in by Bunnings are problematic. Its submission said:

Our major competitor in hardware has exclusive arrangements in place with many national suppliers such as Ryobi, Irwin and Nylex. These brands were once available to consumers via the independent market and are now only available in the hardware channel via our major competitor.

Dominant market participants have the power to demand exclusive arrangements, detrimental to smaller independent retailers, suppliers and ultimately consumers.

The rise of exclusive brands in the tools space has also not gone unnoticed by independent hardware store owner, Frank Penhalluriack. He said they can lock customers into using tools only sold by one retailer, and make it difficult for his store in the Melbourne suburb of Caulfield to offer parts to customers who own these products. He told ABC News:

The batteries are compatible for that brand, but generally not between the brands.

Mr Penhalluriack said his store is struggling with lower margins as it tries to keep up with the larger retailers. For instance, it is currently selling a 15L tub of Dulux at the same price as Bunnings, at a very low margin. He said:

Our margins are squeezed down because we will match Bunnings' price. We can't afford not to because we don't want to have our customers going elsewhere.

I just fear that as too many of the smaller traders go out of business, then you will lose that competition. It's becoming very, very difficult, harder and harder.

Bunnings notes that exclusive brands are common in hardware retail, with Ozito having Bunnings and Metcash-owned Mitre 10 selling its range Rockwell. The retailer's submission said:

Whilst Bunnings uses exclusive brands to differentiate our offer, we do not use them to exclude operation of our lowest prices policy or as a reason to not apply our Price Guarantee.

Mr Schneider said exclusive supply relationships with brands such as Ryobi and British Paints were not only common in the global hardware sector, these arrangements were often required by large manufacturers.

ACCC

The inquiry comes as Treasurer Jim Chalmers announced new legislation to overhaul the country's merger rules.

The Australian Competition and Consumer Commission (ACCC) said in its submission big box retailers can acquire "significant market power" through large-scale operations and extensive supplier networks. It reiterated its limited power to control mergers, even where certain market share or market capitalisation levels are met.

The increased powers of the ACCC were introduced after concerns were raised by the competition regulator about acquisitions in the pet retail category. Specifically, Petstock made "a large number of acquisitions" that had eroded competition from small stores. The ACCC ended up ordering Petstock to divest 41 shops before Woolworths could take its controlling stake.

In the wake of the Petstock situation, the federal government is set to introduce laws that will require major merger and acquisition proposals to seek approval from the competition regulator.

Metcash also raised concerns that these merger powers don't go far enough. In its submission to the big box inquiry, Metcash said the ACCC should have "intervened" to stop Bunnings having "complete dominance" in a specific regional Queensland town, and that planning laws were failing to stop store openings that forced its smaller Mitre 10 hardware stores to close.

University of Sydney Business School retail academic researcher Lisa Asher told ABC News:

With big box retail, we've seen consolidation and expansion occur under single banners over a long period of time.

Ms Asher - who worked as a supplier to retailers for years before turning to academia - said a lack of competition is problematic because it increases the stand-over power that retailers have over their suppliers. She said:

When a retailer has a significant amount of market power, if anyone speaks out against them, there is fear of retribution. You could lose your business.

This fear is why Ms Asher doubts many suppliers to the big box retailers will front the looming inquiry.

While the big box inquiry may put more heat on big box retailers, Ms Asher isn't sure it will achieve much in the way of policy or law change.

The inquiry was called by the Nationals, which isn't the ruling power. The federal Labor government has already ruled out changes to powers that could help split up retailers that have gotten too big and powerful. Ms Asher said:

Suppliers need to know that if they speak up (to an inquiry that) something good could happen from it.

Hearings are expected before the end of the year, with the six-month inquiry due to report by February 2025.

New Zealand stores

"Opening Soon" signs for a new Bunnings store have gone up on fencing located at 1150 Cameron Road Gate Pa, Tauranga, a harbourside city in the Bay of Plenty region on New Zealand's North Island. It is located down the road from the local Mitre 10 Mega.

The signage comes about a year after a company linked to the Mitre 10 Mega store was fined NZD500,000 for engaging in anti-competitive conduct to prevent Bunnings from opening nearby.

Bunnings told the Bay of Plenty Times it was "looking forward to bringing a new, smaller format Bunnings store" to Tauranga.

Bunnings' overall investment for the new retail store was NZD23 million and "about 50 staff" would be employed. The retail space of the site was about 4500sqm including a nursery area, and there would be 80 car parks. The hardware retailer said:

We've started some works to prepare the site for construction and we're hopeful of a mid-2025 completion date.

Court documents show Bunnings acquired the site in 2018 for NZD7.9million.

In 2019, NGB Properties Ltd, the then sister company of the Mitre 10 Mega Tauranga operator, bought the site next door. After an investigation, the Commerce Commission accused NGB Properties Ltd of putting a covenant on that site preventing it from being used as a hardware store, to stop Bunnings from opening. In 2021, the covenant was lifted and the site was sold to another party. NGB Properties was fined NZD500,000 in the High Court at Wellington last year after admitting the covenant breached the Commerce Act.

Tauranga Business Chamber chief executive Matt Cowley said Bunnings' Cameron Road development had advantages for tradespeople, retailers and shoppers. He told Bay of Plenty Times:

Firstly, it shows that brick-and-mortar stores are far from dead with significant investments like these happening across the country. Consumers still want to buy in store and take it away, unlike buying online and waiting for the delivery a week later. Having these two retailers aggressively compete in price is good for tradies and shoppers.

For transparency, Mr Cowley noted Bunnings was an alliance sponsor of the New Zealand Chambers of Commerce. He said having the two competitors operating nearby on the same road, was "market forces at play".

As long as there is a good selection of players in the local market, such as Placemakers, ITM, Hammer Hardware etc, the competition will be good for consumers.

Mr Cowley said Bunnings and Mitre 10 served a diverse range of customers, and not everyone was just after the cheapest item.

Consumers weigh up several factors, such as personalisation, service, range, convenience, as well as the best price.

Tauranga Mayor Mahe Drysdale said the proposed Bunnings store still had to go through the building consent process but represented "an exciting opportunity" for Tauranga's growing city.

Tauriko ward councillor Martin Rozeboom said it was especially "good news" for Bunnings customers currently having to travel to the Mount Maunganui store.

I'm quite in favour of having more competition between retailers and businesses as it gives shoppers a greater choice and the opportunity to compare prices.

He said he shopped at both businesses as each had a different range of items and healthy competition was good for everyone.

Bunnings already has a retail store in Mount Maunganui (almost 6km away) and a trade store in Tauriko (just over 9km away).

Bunnings Westgate

New Zealand's largest Bunnings Warehouse in Auckland's Westgate shopping park has been sold by property developer Ben Cook to property investment firm Investore for NZD51 million. The 16,000sqm branch sits on a 21,200sqm site.

Investore announced on the New Zealand Stock Exchange (NZX) that it had "entered into an unconditional agreement to acquire Bunnings Westgate, for an initial purchase price of NZD51 million, payable in cash".

The NZX statement said the Bunnings deal was expected to settle in December 2024.

The Westgate Bunnings had been listed with Colliers agents Blair Peterken, Josh Coburn and Shoneet Chand and first hit the market in November 2023. The agents highlighted in their marketing that the property was leased to Bunnings in December 2020 for 12 years and earned NZD 2.869 million plus GST per year in rental income.

Sources: Canberra Times, Australian Financial Review, ABC News, Bay of Plenty Times (NZ) and OneRoof (NZ)