Strategy days have been cancelled for just about every ASX listed company, including Wesfarmers. That means that for this year (at least) we will not receive any insights into the strategy settings for Bunnings - which should make for an interesting full year results release in August.
In the meantime, what has been provided is a "Retail trading update" for the first five months of the company's second half. To put it bluntly, after a moderately successful first half, in the second half Bunnings produced a very good result. Bunnings saw total sales grow by 19.2% over that period, which, combined with its first half sales growth of 5.8%, means the company is on track to close out its FY2019/2020 with growth of around 11%.
That growth comes with two caveats, however. Firstly, the growth has come at some cost, as Bunnings moves to make its facilities safe for both its employees and customers. As the update states:
While disciplined cost control remains a focus, Bunnings has invested approximately $20 million in additional cleaning, security and protective equipment to respond to COVID-19 over the last three months. In addition, Bunnings will incur costs of approximately $70 million in the 2020 financial year associated with trading restrictions in New Zealand, the permanent closure of seven small-format stores during the half, and the accelerated roll-out of its online offering, including the write-off of legacy e-commerce platform assets.
Secondly, the company is also aware that current market conditions are unlikely to continue in any predictable way.
Significant demand growth has continued in Bunnings and Officeworks as customers continue to spend more time working, learning and relaxing at home. As a result, sales growth in the calendar year to date has increased significantly relative to the levels achieved in the first half of the financial year. Given the significant changes to the usual customer shopping patterns and expected future changes to government measures, it is uncertain whether the higher levels of sales growth will continue for the remainder of the calendar year.
Speaking to The Australian Financial Review's (AFR) "Chanticleer" column, Bunnings managing director Michael Schneider is reported as saying:
For the foreseeable future ...that cost base [is going to be] baked in .... We're just not going to compromise on safety for our customers and our team members. I think there's a "new normal" for all businesses on hygiene, health and safety. It's going to be a really slow road back.
As testament to just how strong the demand has been, and how much it has stretched Bunnings' supply chain, the company experienced such low stock levels on some of its most popular power tools that it removed these from its website, not even listing them as stock-outs. Perhaps most prominent among these were lower-end cordless circular saws from the retailer's Ozito Power X-Change (PXC) sub-brand.
HNN spoke to Bunnings' media people about the stock situation, and they were kind enough to provide a quote from Phil Bishop, who is director of merchandising.
Overall, we've been well supported by suppliers over the lockdown period, and we have good availability of products in store. We source products from thousands of different suppliers, from all parts of the world and have options to source from elsewhere should supply from one of those areas be affected.
We've seen really strong demand for Ozito cordless circular saws over the past couple of months and demand has exceeded supply for some models at a number of our stores. For this reason, we've temporarily taken two of these products down off our website.
Bunnings also pointed out that these products would be back in stock before the end of June. According to some sources, the stockouts are due to high demand and the same slightly slower logistics in Australia that have affected most retailers. They are not a result of manufacturing or logistical problems overseas.
Whatever Bunnings is doing, it seems to be working. According to Roy Morgan, Bunnings is once again Australia's most trusted brand in 2020 - with ALDI at number two.
The many facets of Michael Schneider
Perhaps partially in response to the lack of a strategy day, Mr Schneider would seem to have something of an increased presence in the press these days. It has been interesting to see how each press outlet has come up with a slightly different version of who he is.
Like HNN, all respect his talents and capabilities, but the way this gets expressed varies.
Mike the Teddy Bear
Australia's CEO magazine is known for its softer portraits of Australian business leaders, but its portrait of Mr Schneider seemed somewhat extraordinary. Written by Wendy Kay, the profile conjures up a cosy image, one which might be not entirely familiar to, for example, some of Bunnings' suppliers.
Ms Kay begins: "A chat with Michael Schneider is a bit like having a yarn around an Aussie barbie," and continues:
[T]he first thing that strikes you about Michael is his warmth - the same easy going nature of the Bunnings "reds", the men and women dressed in their natty [sic] red shirts framed by forest green aprons who serve us in one of Bunnings' 380-plus warehouses, stores or trade centres.
There's no pretence, no spin; what you see is exactly what you get. And what you get is a glimpse of the 15-year-old casual who fell in love with retail while working his first job at Target in Sydney's north.
OK. Very well then.
Definitely looking forward to the movie. Guy Pierce, do you think? Hugo Weaving for Mr Gillam, of course - and Erik Bana for Grant O'Brien?
Are their aprons really forest green? (As Bogart might have said.)
While HNN has long been an admirer of AFR's "Chanticleer" column, it is also true that it's the one place in the business tabloid that really does love a good narrative - even if it takes a bit of creativity to get there.
As its report begins:
The inside story of how Bunnings balanced surging sales with the need to adjust its business to a radically different trading environment - and how it will now try to get back to something like a new normal - already has the makings of a great case study.
Fortunately, facing into the threat the COVID-19 virus posed, Bunnings had Mr Schneider to rely on - bold, intrepid, determined:
Schneider's challenge went beyond keeping the shelves stocked - something he praises his suppliers for. His biggest task was keeping staff and customers safe.
Beyond that, though, he also had to keep the digital end of the business running:
Schneider and his team also had to put the foot down on a digital offering that the chain had been too slow to develop under the previous management. "We've innovated the daylights out of our offer," he says.
And these frantic, last minute efforts bore fruit:
Ten weeks later, Bunnings' e-commerce offering is transformed.
Well, there is a fair bit there that could be picked apart, but really - "the previous management"? Mr Schneider has been managing director since March 2016.
Facebook Mike appeared in the press in July 2019, after Bunnings adopted the Facebook Workplace platform to drive staff communication and engagement. Mr Schneider spoke at a Facebook event to help popularise the platform, and this boosted him into the media spotlight.
As a consequence, he was featured in the article every business leader dreads: the "Six leadership tips from a CEO", this time for Inside Retail. His tips were (in order):
Create a community
Keep it small
Communication is key
Empower your staff to become leaders
Use technology to keep it real with staff
Create a culture around authenticity
Mr Schneider actually did really well for such a setup piece, despite some poor editing. His last point is:
There's a real humility in Bunnings and I think that stands through, not just in the organisation, but the leaders that build successful careers there. They're very down-to-earth people, we don't stand on ceremony. There's always going to be hierarchy, bureaucracy and politics in big organisations, but compared to other organisations I've worked in, it's a very free-flowing, down-to-earth, real organisation, and humility is a really important part.
Will the real Mr Schneider please stand up?
For those who have been following Bunnings' (and Wesfarmers') leadership for some time, the story of who Mr Schneider is, and specifically who he is to the company, is more complex. One view with some currency is that Mr Schneider was potentially at his happiest when he worked as the company's IC2 under the leadership of John Gillam. There was an incident where, lured onto the stage at the results presentation one year, Mr Gillam turned part of the announcement over to Mr Schneider - with a very audible vocal protest from the latter.
Which is to say, what makes some of these versions of Mr Schneider really amusing is that he is very much a modest and self-contained man. However, the leadership Catch-22 of retail is, of course, that it's often the person who doesn't quite want the top job that is the best candidate.
Also, you really cannot fault anyone for having some doubts about following in the footsteps of a manager like Mr Gillam - who remains, in HNN's view, Australia's greatest retailer of the past 20 years. Though it is certainly worth noting that Mr Gillam himself evidently had few if any doubts about the capabilities of Mr Schneider, and his suitability to lead Bunnings - an intuition that has proved to be correct.
What the various views of Mr Schneider offered by the non-specialist press miss about him is that he combines two characteristics that are rarely found together in top management. Firstly, Mr Schneider is really, truly a very tough guy. He's tough in a way where he applies this toughness to himself first, it's true. But he's also well known for acerbic, deflating comments, often at the very end of a meeting, that are very effective.
Secondly - and unusually - he does not seem at all egotistical. A word that Mr Schneider uses a lot is "authentic". He's interested in things that have meaning, that are about doing more than saying, and that reflect genuine values, or at least an effort to get to genuine values.
That said, if "spin" is what is required in a particular situation, Mr Schneider is certainly capable of that. In fact, he's developed his own version of spin, which works by understatement instead of overstatement. Answering a tough question, or one he simply doesn't want to face up to (for strategic reasons), he has a way of making a distracting, undercutting, "adjacent" statement in response. He's a fighter, but it is never about brute force, just weaving slightly out of the way, and staying at least a half-step ahead.
The weaknesses that Mr Schneider does have are those you would expect from someone who hasn't just come up through the ranks in traditional retail, but who has genuinely really liked that sort of business.
Despite what the AFR has to say on the matter, Bunnings was at least one year, and probably two years, late in moving to a transactional digital platform. In terms of the pandemic, it only just made it across the line. And the truth of that is, Bunnings wouldn't have moved so fast over the past 18 months if it had not been for the leadership of Wesfarmers managing director Rob Scott.
It's easy to see how that happens. For traditional retailers, the online proposition just did not make much sense. Traditional retailers really liked the whole thing where customers came to a store, bought stuff off the shelves, and took it home with them. Digital commerce seemed to require a massive investment in an unfamiliar type of infrastructure and personnel, in order to sell goods online at a reduced profit - due both to competition, and the need for final kilometre delivery logistics.
Almost unwittingly, the path Bunnings had started down, after it closed the door on Woolworths' efforts to enter hardware through Masters, was to take as much profit as it could from a declining part of retail. It was a slow decline, and the profit was pretty good, but the problem was that committing to that path meant the resources to go down the higher growth path, with its high upfront costs and more limited profits, were not being developed - and would cost exponentially more to develop the further down the familiar path they progressed.
What Rob Scott brought to Wesfarmers was the confidence and vision to not go down the pathway of trying to solve problems by developing solutions, but to instead concentrate on building capacity - in data analysis in particular. This drove further developments by offering both easier solutions and available growth paths to the various siloed businesses in the conglomerate.
While that is a great advance, and Mr Schnieder was able to comprehend what Mr Scott had in mind, and execute on it, this is only just a start - something the current pandemic has brought sharply into focus. The "new normal" Mr Schneider mentioned to the AFR brings with a number of pressing questions. How does Bunnings grow and develop over the next five to seven years? How will it cope with a changed environment?
One reason these questions are so difficult to answer is that Bunnings has found itself in something of a development paradox. For example, it has become increasingly apparent that the basic Bunnings warehouse, while it continues to perform acceptably, is beginning to age itself out of the market.
Bunnings has made efforts to improve the format, but this has not been generalised across the existing fleet. That is likely because the improvements the retailer has tried out have been relatively incremental. While that makes them "safe" - unlikely to fail in any spectacular manner - it also tends to make then less than significant.
The paradox is that incremental improvements are likely to succeed at least to some extent, but the improvements offered will not be enough to drive change. On the other side, more extreme improvements will be more likely to fail, and increase risk, even though they could provide the kind of advantage needed to justify investment in change.
How do you achieve high-delta value, through a process that quantifies and reduces risk?
An oft-cited example of a solution to this quandary (first publicly identified in these terms by the computer scientist Alan Kay) is how the first truly successful human-powered flight vehicle was developed. Paul MacCready, an American aviation designer and crack sailplane pilot, took up the challenge in 1972, and solved it six months later - a problem that others had spent decades trying to solve. In the process he won a GBP50,000 prize.
His first insight was that the problem was so difficult that it was important to start by working out why others had failed to solve the problem. He noticed two aspects to the failures. The first was that the other contestants spent a year or more building an aircraft, flew it, crashed it, and then went back to the drawing board. Incremental development through a test/fail process was almost non-existent.
The second insight was that the others were designing airplanes. The problem, as Dr MacCready saw it, wasn't to build an airplane, but to solve human-powered flight - and they weren't the same problem.
Dr MacCready solved the problem by building a lightweight device out of thin plastic tarps and aluminium struts. When it crashed - which it did frequently - it would end up in pieces, but those pieces were easy to put back together or refabricate. His plan called for crashing at least 12 times a day.
He solved the problem of streamlined aerodynamics - which was why the other aircraft were so elaborate - by just ignoring it. His device aimed for a top speed of 16kmh, and at those speeds, aerodynamic drag was not much of a factor.
Alan Kay - Normal Considered Harmful, from YouTube 2012 Gossamer Albatross: Flight of Imagination, from YouTube 2019
Alan Kay summarises the task of understanding the problem as being one of finding "the minimum thing you can do that is qualitatively better". That might seem like a particularly "big ask" for a retailer, but it's worth remembering that the Bunnings Warehouse concept - driven by then-Wesfarmers CEO, and now current Wesfarmers chairman, Michael Chaney - was really the result of a similar process. The "qualitatively better" was selling to consumers at trade prices, and the "minimum thing" was using a retail offer that offered low amenity.
If HNN were to venture a guess at where the fruitful opportunities for Bunnings might be in the future, we can see two possibilities. In terms of its commercial and trade business, we believe that Bunnings could succeed by becoming a strong sponsor of modularity and pre-fabrication in everything related to building. Bunnings needs to understand, that the more modularity and pre-fabrication influence the market, the more the retailer will succeed.
For example, take the electrical wiring in a house. It's 2020, and we are still wiring buildings by sticking bit of conductive wiring coated in plastic down plastic pipes, and then manually twisting that conductive wire into plugs and sockets. Modular wiring systems have been developed, but these have encountered industry resistance.
For the trade organisations involved, rationalising the way wiring is installed - even though it would increase safety and ultimately decrease overall costs - would see fewer jobs and less income for "sparkies".
There are two reasons why systems such as these would boost businesses like Bunnings. Firstly, developing margin on products such as plastic pipes and rolls of wire is very difficult to achieve, as these are basic commodities. Modular wiring systems, however, are manufactured, and more complex.
Further, a truly effective modular wiring system should make it easy for homeowners to safely DIY the installation of elements such as more power outlets. A correctly designed system would require little more than some plaster work, and plugging the new outlet into the electrical bus.
The issue here is that, just as the Bunnings warehouse initially entered the market in such a way that it fundamentally changed that market to better suit its business model, today's Bunnings can equally not afford just to be reactive and passive. It has the capacity to become actively involved in areas such as standards, and to create change that will be a positive both for the company and its customers.
The real opportunity in the area of DIY, however, may come from a better embrace of what has come to be known as "maker culture". Makers today are what advanced DIYers were 20 years ago. The people who back in 2000 would have built bookshelves in the garage are today hooking up actuators to Arduino processors with a Bluetooth shield so that their toaster oven can "magically" lift out of a kitchen bench at the push of a button.
Again, though, we return to the need to establish a high delta through understandable risks, to do the minimum thing that is qualitatively better. All too often projects such as these are undertaken by retailers, tested out, do not return sufficient results, and are then discarded. Like the earlier efforts at human-powered flight, they have little incremental development.
That oft-repeated statement that "retail is detail" may still apply to current markets and businesses, but over the past decade or so it has been joined by a less-positive (and less assonant) truism: "retail is delay". The chief strategy for many major retailers has been to put off the need to truly change their business models to adapt to changed markets, necessary infrastructure, and new ways of engaging customers.
As we are seeing from both local and international experience, the idea that economies can somehow "snap back" to 2019 is unlikely to hold true. Without a vaccine for the COVID-19 virus, even when infections are brought down to a low level, the virus is so transmissable that it will flare rapidly back up to concerning levels. That means it is likely the economic slowdown will remain in place through to June 2021 at least.
What this means is that the time for delay in retail is now over. The very reason that major companies have had to cancel their strategy days is that pre-existing strategies make little or no sense. As we move into FY2020/21, companies that continue to pursue a delay in formulating new strategies will be punished not only by the stock markets, but by customers as well.
The highly positive article from the AFR referenced above begins by outlining a bold move by Mr Schneider to employ someone to record the history of how Bunnings has coped with the first stages of the pandemic. There is certainly something welcome about that, as it improves the ability of the company to learn from experience.
But one has to wonder if there is an equal - and as essential - team at work planning for a different future. That's the real question that will need to be answered by Wesfarmers and Bunnings at their annual results presentation in August 2020.