Recent events in Melbourne, where members of the Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU, aka CFMEU) instigated a series of protests, are likely to shape the future of the construction industry in the state of Victoria (VIC).

It is easy to take the path of working these protests into the general fabric of the COVID-19 pandemic. One could view it as worker frustration boiling over under the threat of restrictions, fanned by people peddling various forms of ridiculous misinformation, mixed in with trace amounts of pure anarchy.

Another thing not to overlook, is that this is peak footy season for Melbourne. The annual release provided by the "Grand Final" has, for a second year, been rendered at the very least more remote. It seems highly unlikely there would have been such big mobs if many of those "angry young men" had tickets to the MCG for an upcoming Saturday game.

All those arguments, exceptions and excuses have a little validity. However, even allowing for these added boosts to a general sense of frustration, this kind of pandemic narrative cannot fully account for what has happened.

Equally, attempts by the CFMEU and others to portray this as the result of "professional protesters" are also likely misguided. According to reporting in The Age newspaper:

Senior CFMEU figures say far-right activists and anti-vaxxers exploited the situation, but it was wrong to say, as Mr Setka did on Tuesday, that there was a "small minority of construction workers" at Monday's melee who had quickly walked away because of the violence of "professional protesters".

Senior figures estimated that about 80 to 90 per cent of the protesters were construction workers. Others said they knew many of the people at Monday's rally as union delegates and members. Not all were opposed to vaccinations or were right-wing. Some were annoyed at the union caving in on safety and workers' rights.

It may be true that some of the most violent protestors were not union members, but it was union members who provided the opportunity and the platform to these groups.

One way of viewing what has happened is to see that the two "sides" of the conflict came from very different viewpoints, and held different values as well. From the side of not only the Victorian government, but - HNN would suggest - the broader Victorian community as well, the deal was that the construction industry had been granted a considerable and generous concession. The industry view is that it is more of a right than an honour.

In the process of trying to control a pandemic, the government has had to start by finding the likely locus of virus transmission, then calculate how to balance controlling that transmission in the context of broad community concerns, including the mental health and financial concerns of families and individuals, and the prosperity of the overall state economy.

What the construction industry has not seemed to understand is that the reason Victorians have a curfew, are limited to a few hours outdoors each day, to 5km of travel from home, and no at-home visitors, is to compensate for risky business activities such as construction. In that sense, the whole state, and particularly the greater Melbourne region, has already contributed a great deal to allowing construction activity to go ahead.

The Victorian construction industry's perspective - or at the least that of a significant majority of CFMEU members - is almost the reverse of this. They seem to believe that, in the midst of a pandemic, they have some inherent right to go about construction as "business as usual" - and that any restriction placed on them is somewhat "optional", and, if enforced, actually unfair and unjust.

What has happened, from the Victorian government and community perspective, was the construction workers failed to honour the details of the agreement offered. They were given the privilege of working, even though this placed the community at greater risk. They were supposed to do this in the safest way they possibly could. Instead, they blatantly ignored COVID-19 safe practices at work, and when asked - as so many other workplaces have been asked - to get vaccinated, rebelled.

Deeper causes

What seems to not always be fully understood outside of Victoria, is how deeply the Victorian community has been affected by these days of demonstrations. That might be because there are no counter-demonstrations - because, you know, it's a pandemic, and the way you counter-demonstrate is to stay home.

The result of these demonstrations could be something like the construction industry being viewed over the next three years as dubious, if not held in contempt.

As a result, from a purely rational standpoint, this union behaviour doesn't make much sense. Watching hoards of construction workers swarm the Westgate Bridge, attack police, and riot in the city streets is far beyond anything reasonable. It cannot possibly achieve anything except disruption.

There have been several attempted "thoughtful" analyses of how all this has happened. Most concentrate on the controversial leader of the CFMEU, John Setka, and the tensions inside the union between its left-wing past, and a present heavily inflected by the views of Mr Setka's more right-leaning lieutenants.

The reality of this major rift between many of the members of the union and its leadership is likely due to much deeper and - ultimately - more serious forces at work. Members of the union do not completely understand the task the leadership faces, and, in turn, the leadership is somewhat reluctant to communicate the details of that task.

Mr Setka's willingness to embrace mandatory vaccination is the result of understanding the considerable force behind that move by the state government. It's also an acknowledgement that nothing harms a union more than overstepping its influence and capabilities.

In simple terms, the CFMEU, while still an important union, has seen its importance decline significantly over the past five to ten years. That decline in influence for the CFMEU has come from a number of sources. To begin with, some would say that simply spelling out the acronym - construction, forestry, mining and energy - indicates how much the union will be affected by coming moves to limit climate change.

More to the immediate point, it can be seen that the union has been steadily losing influence. That's down to the way in which construction is moving to a different place in the economy. This is relatively easy to discern in the economics graphs supplied by the Reserve Bank of Australia (RBA).

The three charts presented here do not show an industry that is in decline, but they do show that other industries represent stronger growth. The top chart, labelled as (1), shows an ongoing trend in construction, which is relatively low capital investment. It has been reliably around 5% of total business investment. Meanwhile, industry categories such as other business services (which broad embraces the technology sector) are currently at over 20%.

Likewise, in terms of industry share of output, the chart labelled as (2), construction peaked around 2014, and then slowly declined over the next six years to be around 8%. Again, other business services are much higher, at over 16%.

When it comes to employment growth, while the construction industry was on its way to a new peak in 2019, the COVID-19 pandemic saw this decelerate rapidly, and the industry has been slow to regain that growth. Meanwhile, both business services and household services have provided very high growth percentages, both pre- and post-pandemic.

Beyond these statistics, there is also the growing sense in the global construction industry that fundamental changes need to be made. McKinsey & Company, in their June 2020 report "The next normal in construction: How disruption is reshaping the world's largest ecosystem" see a future in which construction activity is radically reshaped, as the diagram below illustrates.

Integrating building information modelling (BIM) with as much pre-assembly as possible could change the nature of construction by the end of the decade. It's similar to the changes expected in the energy sector as well, as fossil-fuel power is replaced by solar and wind.

When it comes to the next several years, future growth is largely linked to the-pandemic recovery in larger construction projects where union membership dominates. According to a forecast document from real estate specialists Knight Frank:

Beyond 2021, it is anticipated that any previously mooted developments could be reconsidered or have their development commencement dates pushed back due to uncertainty surrounding demand caused by COVID-19.

It seems quite unlikely, given vacancy levels, and the growing dominance of work from home (WFH) practices, that there will be strong demand for new office towers through the current decade. In fact, some of the larger projects may be converting office towers to at least partly feature apartments for city-dwellers.

The importance of all this is not just the shape that the construction industry will take in the future. It's also about how key it is to the prosperity of Victoria as a state. At one time, shutting down office tower construction sites in the Melbourne CBD could be felt as having a significant impact on the state's economy. Limiting office capacity would, at that time, limit growth, and encourage businesses to locate elsewhere in Australia.

Increasingly, that relationship does not hold anymore. Office space in the CBD remains important, but it is now likely that more significant growth will be decentralised, and require less ambitious use of space. This means the power of the CFMEU to negotiate has significantly diminished.

This is the situation that Mr Setka and his leadership team face. The power of construction unions may be at its lowest point since the mid-1990s, when legislation granted the legal right for unions to strike. It is understandable that this is not something the union leadership can clearly communicate to members - partly because they might adopt more extreme measures, and do irreparable harm to the sector.

At the moment, as things stand, the CFMEU has ended up doing considerable damage not only to their own union, but to trade unions in general in Australia. That is not being helped by more recent moves to blame the Victorian Government for making simple, rational, evidence-based requirements on various industry sectors.

One way out of this, which would produce a good outcome, and help to salvage what is left of the public reputation of the CFMEU, is for the industry, the union and the government to hash out a plan to actually make construction project sites, including facilities such as tea rooms, much more COVID-19 safe. That should range beyond the provision of well-ventilated service facilities, and also include some form of active, ongoing enforcement of CovidSafe practices.

The big mistake

What has been missed, especially by the trade union movement in general, as well as many industry associations, is that Australia in September/October 2021 is not the same as Australia in March/April 2021.

If the Delta variant of COVID-19 had not come along, we would likely all be treating anti-vaxxers and so-called "libertarians" as annoying and slightly harmful eccentrics. Delta, and the need to abandon COVID-19 suppression, has changed all that. They will become, inevitably, sources of future transmission. There are only two ways to stop that: isolation or vaccination. That's really the choice that is being provided.

People are going to die of COVID-19 in October, November and December this year. Hospitals will be overwhelmed, health workers find their lives turned into a long, difficult slog through day after day. Families will be devastated by the loss of loved ones.

In terms of VIC and NSW managing to maintain community stability, and not descend into the pure inhumanity of forcing nurses (and it will be nurses) to decide who lives and who dies because there will not be enough beds, ventilators and staff to help everyone, it's going to be a close call.

Stopping the spread of SARS-CoV-2 through vaccination and safe work practices is the least each of us can do. And one thing we can guarantee that will not help is disruptive protests, which can only damage the few freedoms we still retain in the midst of a deadly pandemic.

As we approach a time when the phrase "post-pandemic" seems something more than wishful thinking, it is possible to consider how markets for the hardware retail industry may evolve.

One of the surprising boosts from the COVID-19 pandemic has been a sharp increase in spending on DIY projects. It isn't, as some have suggested, the "supercharging" of one particular market. Rather, this surge has affected a wide range of homeowner demographics. This is an indication of the emergence of several new, potentially valuable markets.

In the midst of the pandemic, when retailers were coping with interrupted supply chains, and finding ways to get product to customers safely and quickly, it was too much to ask for them to pivot quickly to better cater to these new markets. As a result, as the peak of the pandemic demand has declined, there has been a fading participation from these new markets.

However, that doesn't mean these new markets are lost, or have permanently migrated elsewhere. A good question to consider is how local independent retailers, as well as the suppliers that support them, can re-engage with, and develop a better relationship to these emergent markets.

What's in a market?

There are really two difficulties that the hardware retail industry faces in these circumstances. One relates directly to the nature of these emergent markets, and how best to promote into them, and cater to their precise needs. But the bigger, encompassing problem is, how can the hardware retail industry adapt to just about any change at all?

Over the past 12 or 15 years there has been, at best, incremental change in the industry. We've seen most retailers stuck in the repetitive grind of trying to make things work with existing products marketed into existing markets using well-established distribution channels and familiar marketing approaches. While these have worked well as survival strategies, the truth is that this approach has led, for most, to a gradual but persistent erosion of either market share or profitability - and sometimes both.

It's not as though this is somehow entirely their fault. We all know that the independent hardware market has people who work very hard, are very experienced and savvy, and relatively adaptable to changing conditions - witness how quickly they stepped up to cope with the COVID-19 challenges. What has forced them into this defensive position has something more to do with external market conditions than internal business dynamics.

What are those external market conditions? In a simple form, we could summarise it with a single proper noun: Bunnings. That's simple because it doesn't really reflect what is going on. Bunnings itself did not create the current market conditions. Wesfarmers - specifically its current board chairman Michael Chaney - worked out in the late 1990s how the model pioneered by The Home Depot in the US could be adapted to Australian conditions. Then John Gillam essentially supercharged that model during the 2000s.

The difficulty is that, while the North American market is large enough to accommodate not just one major big-box hardware retailer, but really three or four, plus a dozen additional large businesses as well, the Australian market is not. Evidence for this is the effort made by then-CEO of Woolworths Grant O'Brien to launch Masters Home Improvement. It's notable that from the beginning Mr O'Brien saw Masters not as an attempt to add an additional retailer to the market, but rather to displace Bunnings. (And, indirectly, it was more about the competition between the Woolworths supermarkets and the then Wesfarmers-owned Coles supermarkets.)

Similarly, Metcash's integration of Mitre 10 and the Home Timber & Hardware (HTH) into the Independent Hardware Group (IHG), which was supposed to create a Bunnings competitor, did not generate the expected synergies. It was certainly a profitable move, but not, in the argot of acquisitions, "a game changer".

In this the third decade of the 21st Century, economists have come to realise that past measures used to identify monopoly power in markets no longer really apply. In particular, during the late 20th Century the key identifier of monopoly power was an increase in costs to consumers. Today, the view has shifted to considering that monopoly power is indicated by the ability to limit and control innovation in a market.

While economists such as Joseph Stieglitz do see temporary monopoly control as potentially being a good thing for innovation, as it incentivises initial investment in new developments, longer-term monopolies are generally seen as stifling innovation. That is because companies that have a majority share of a confined market see innovation as less an investment, and more as a necessary cost. It has the purpose of maintaining market share, rather than expanding it - essentially it serves the same function of advertising.

In simple terms, monopolies shape markets to a form that suits their business model, then make it difficult for differing business models to be sustainable. They optimise sales flow, and thus reduce costs to themselves and customers, but this is done at the cost of an increasingly narrow focus. Breaking that focus, and introducing new and valuable innovations, often takes extreme efforts.

Example industries

While it is a little difficult to identify these dynamics in the Australian hardware industry, it's more evidently on display in other industries. One industry that has been, in particular, caught up in monopolistic behaviour, and undergone something of a re-evaluation, is the North American automotive industry.

It's a rather amazing fact, but if we look back at cars as they were developed by, say, 1980, and cars today, there really has been very little in the way of true innovation. Some technologies have benefitted from computer chips and electronics, such as fuel injection, internal combustion engines (ICEs) have as a result improved incrementally in terms of reliability, longevity and power output - but overall, it's a market that has been almost unchanging.

That was, up until 2012, when Tesla, Inc. introduced its all-electric Model S family sedan. While Tesla experienced many teething problems, and needed to add both its crossover model Y and less expensive Model 3 to the range, by 2021 it became apparent the all-electric automaker was a major player in the automotive industry. Rather astonishingly, Tesla now has a market capitalisation of over USD730 billion. That compares to the General Motors (GM) market cap of USD75 billion, while Ford is at USD50 billion, and Fiat Chrysler Automobiles is around USD31 billion.

How did the established car companies completely miss out on such an important emerging trend? While car companies such as GM did experiment with electric cars (notably the EV1 in the late 1990s), these were discontinued when the company realised they did not create an adequate revenue stream. While GM portrayed this as a lack of consumer demand, this is not supported by many indicators. What seems more likely was that many car manufacturers saw that electric cars would disrupt the valuable car ecosystem, where vehicles become highly profitable in terms of parts sales after their fifth year of life. How big is that market? Business consultants McKinsey provided some estimates in a 2017 report:

McKinsey's proprietary modelling of the automotive aftermarket was developed to project growth of the global industry. The model represents values at the end-customer price level, including parts, labour, maintenance, and crash-relevant revenues, with a granular differentiation by region. It imputes a total global value for the market in 2015 of approximately USD760 billion. More granularly, three regions accounted for over 75% of this value: more than a third came from North America (35% or approximately USD267 billion), Europe was second with approximately USD237 billion (31%), and China's approximately USD72 billion market accounted for 10% of global value.

The Detroit News, which has long specialised in car company reporting, reported on estimates in 2017 as well:

The US market for replacement auto parts and service is growing and in 2017 will be a $277 billion industry, estimates the Auto Care Association, a trade group that represents manufacturers, distributors, parts stores and repair shops.

The McKinsey estimates takes in a broader scope of parts supplies, including aftermarket additions for new cars. The Auto Care Association estimate is more focused on vehicle repair. In either case, these are large numbers.

TechCrunch, a well-regarded publication which tracks tech industry investments, put some numbers on just how electric vehicles would impact the maintenance and repair business:

With one-fifth the number of powertrain parts and an almost total elimination of oil, the typical automotive dealer will suffer 35% declines in maintenance and service revenue, or roughly USD1,300, for an EV versus an internal combustion engine vehicle over a five-year period.

But this disruption is not even. Two of the top three maintenance items - oil changes and brake service (24% and 5%, respectively, of all maintenance transactions in the U.S. market) - are reduced or eliminated entirely by the move to EVs.

Why are brakes impacted? EVs often use a process called regenerative braking, which slows vehicles down while also saving energy. The reduced wear on pads and rotors is striking: some Toyota Priuses are still operating on their first set of brake pads after more than 100,000 miles [160,000km] of use, whereas you'd normally assume pads would be replaced after about 30,000 miles [48,000km].

That's only part of the story, however. Even in the US, consumers are keeping vehicles for longer (over 11 years), and that number has always been higher in the US and European markets. Most repair expense begins after the fifth year, with the seventh to tenth year seen as the "sweet-spot" from the point of view of parts suppliers.

(Some part expenses do increase for EVs, in particular tyres, as instant high torque results in more wear. However, this could be partially solved by, for example, tyres made specifically for EVs.)

Of course, electric cars still do have some maintenance costs - in particular one big cost, which is the eventual need to replace the Lithium-ion (Li-ion) batteries. Estimates currently are that Teslas lose 5% of battery capacity over the first 80,000km. However, they only lose another 5% over the ensuing 160,000km. This doesn't mean they stop working, but a vehicle that started with a range of 640km would be reduced to a 576km range after 240,000km. The current average driving distance for Australians is 13,300km a year, but EVs are driven more frequently, so at 15,000km a year that would mean it could be more than 15 years before a battery replacement was not needed but advised.

A Tesla is not a car

While these numbers are important as background, they don't really address what is really going on with Tesla vehicles. The clue to the success of Tesla, is that Teslas are no longer cars in the sense that we understood cars in, say, the late 1990s. The reality of the Tesla is that it is far less a mechanical contraption, and much more a complex mass of software with wheels attached.

To get what has happened, we need to return to that landmark essay by Theodore Levitt, which first appeared in the Harvard Business Review in 1975: "Marketing Myopia". This paragraph is perhaps the best indicator:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad-oriented instead of transportation-oriented; they were product-oriented instead of customer-oriented.

If you wanted to locate a popular antithesis from the past to the Teslas of today, one possibility would be the original Ford Mustang. Advertising from that time didn't focus so much on performance, as on experience. The Mustang was marketed as the key to a new, different, more exciting life - your own personal action/adventure movie.

There was, in fact, some justification for this hyperbole. Before we had the Information Superhighway we had, well, the actual, concrete highway - which was its own technological innovation, both in the US and Australia. Highways enabled the young adults of the 1960s and 1970s to explore places their parents had seen only through the window of a bus or train while passing through.

But the coming of the less-material Information Highway has changed the literal highway. Faced with a three-hour drive today, the average young adult confronts a situation that mixes tedium and boredom together with high risk and potential danger - not to mention, a lack of connectivity. (Take a long car trip with anyone under 25 years-old, and you'll find they schedule hourly breaks just to catch up on their texting.)

It's no accident that Tesla knew to combine EV technology with semi-autonomous driving, including "Navigate on Autopilot". This provides the capability to change lanes to get around slower drivers or to leave the highway when the vehicle reaches the desired exit. Those actions that "real" drivers once relished as a test of skill are now seen as inconvenient and difficult, a cause for tension. The Tesla promise isn't about action and adventure; it's to help you get from A to B in the most relaxed, stress-free way.

It's a difference that most standard car reviewers - and likely many car manufacturers - still struggle to understand. For example, when Tesla's most recent performance vehicle, the Model S Plaid, was launched, there was a great deal of commentary on flaws such as marks on the external paint finish. Certainly, the reviewers had a point - paying over $200,000 for a car that comes with paint speckles on the outside mirror is not good. On the other hand, the Plaid - which is a family five-seater sedan/hatchback - can do 0 to 100kmh in 2.1 seconds, faster than a Porsche 911 Turbo S.

Even more to the point, though, is that reviewers totally miss what is so wrong on just about every other car. Stepping from a Tesla, with a full-featured 17-inch landscape touchscreen display, to a dinky 12-inch display in, for instance, a Mercedes E-Class, can feel like having to re-experience Windows 95. The reviewers see the paint, but they don't see the really awful software, such as the lack of true driver-assist that Tesla has developed using over 10 years of careful real-time driving data collection. Yeah, the Mercedes has great paint - but how does that get me from A to B more safely and with less stress?

Teslas of the hardware industry

What does this have to do with hardware, and especially hardware retail? HNN sees the Australian hardware industry as being close to where the US auto industry was around 2008. In the DIY market, all the pieces are in place for transition from a singular market model, to a dual model that accommodates very different influences.

What stops that from happening, in part, is the same as for that auto market: monopoly participants in the market who are invested in keeping things the same, as that is the model that delivers them the highest sales and continuing profit growth.

The bad news is, it's unlikely the market will see the advent of a company like Tesla, which breaks things up enough that different competitors emerge (a number of EV companies have emerged in the wake of Tesla's success). The good news is, it is still possible for smaller companies, meaning both smaller suppliers and smaller retailers, to break open the market. That's because, unlike in the car market, smaller companies will have a slight marketing advantage.

The new market

What does the new DIY market look like? It is based on some of the same shifts we have seen in the auto and other markets. But to define it, we need to consider how the core DIY market that has been around for the past 20 years worked.

In the early 2000s there were some really complex things going on in DIY. The end of tariffs on many goods in the preceding decade, coupled with the rise of Chinese manufacturing for the rest of the world, meant that products such as power tools that were once quite expensive became obtainable. That coincided with a shift in house interior and exterior design, as patterns from the past were replaced with a more mix-and-match attitude. As the website Domain described it in a 2018 article entitled "Home-grown style: The elements of design that Australia is known for":

One concept repeatedly singled out by industry insiders is the Australian penchant for designing exemplary indoor-outdoor spaces.

With backyards becoming smaller, particularly in major cities, these spaces make the most of the often limited outdoor space while embracing their surrounding environment and encouraging added natural light and ventilation.

While for indoors:

"The quintessential Australian home celebrates open-plan living," [Aimee] Tarulli says. "We lead busy lifestyles so it's important that our homes complement our busy family life and attempt to make everyday living easy and relaxed.

The widespread adoption of open-plan floor plans in Australia is largely the product of mid-century designers such as Robin Boyd, Alistair Knox and Harry Seidler, whose homes essentially changed the way Australians live.

Mid-century architecture principles are similar to those of Scandinavian design - another style that has experienced a renaissance of sorts in recent years. Both styles prioritise craftsmanship and earthy materials, which is typically complemented in Scandi homes by a lighter and brighter overall colour scheme.

Combining those elements has given rise to a form of home that is, essentially, classless. The social drive behind much of DIY from the late 1990s to the early 2010s, HNN would argue, was to achieve a "look" and function to a house that elevated a family from its origins, and to a new place in a modern Australia.

There is little doubt that for many Australians Bunnings was the hero of that particular story. A deck might be beyond a reasonable budget, but with a cheap drop saw, an impact driver, framing timber, decking timber and a big bucket of screws, it was possible to create something over two or three weekends.

For the generation who grew up in those homes, however, there has been something of a different track - one that has been accelerated by the COVID-19 pandemic. From free-flowing space, the shift has been to a more intense use of space. The idea of adding a deck to a house might have some attraction, but what about adding a deck that incorporates a work/study nook, as well as a place to store and use an exercise bike or an elliptical trainer? Similarly, the "video room" which replaced the lounge/TV room now becomes much more exciting if it is also an exercise space, where the video screen can be used with a Peloton bike, or Apple Fitness session.

As importantly, the new generation of home is less about "joining in" to an established set of design ideals, and more about how personal a space can be made. With Amazon, Ebay, Aliexpress, Banggoood, Catch and Etsy all readily supplying "stuff", the real differentiation is about that personal engagement.

To shorthand what is going on, it's possible to see the umpteenth generation of Channel Nine's "The Block" TV show as at one end of a continuum, and Channel Ten's recently launched "Making It Australia". In this new DIY market, most consumers are at least mid-way between the two, with the distribution tending more towards the latter than the former.

One indication of how vibrant this new market may be worldwide is that that once-austere publication of Conde Nast in the US, Architectural Digest, has itself started a digital division called AD-DIY. This is a good resource if you want to become better acquainted with this part of the market.

A classic project represented there would be the deck build by writer Zoë Sessums. To extract some principal quotes from the four-part series:

Because lumber prices were so high this spring, I had to find other ways to keep things affordable (under USD1,000). Though my partner and I have a lot of enthusiasm and motivation, we agreed to keep the project in the realm of something we could accomplish in a weekend. It was important that the design be simple and require as few modifications and tricky calculations as possible.

I decided that the best option for my yard and skill level would be a simple, rectangular freestanding wood deck. The process of planning the build involved a combination of googling "simple deck" and doodling. I found a lot of amazing free resources that helped me figure out all the supplies and tools I would need to get the job done. Be sure to look into the local building codes in your area when you have your deck plans drawn up, but know that low, freestanding decks have less hassle involved as far as building permits are concerned.

A major goal of mine was to do as little cutting as possible, so my partner and I thought about what dimensions of lumber we could buy to minimise how much we would need to cut. As much as I can repeat "measure twice and cut once," I'm not the greatest with accuracy. This led us to decide on a 12-by-24-foot [3658mm x 7315mm] rectangular deck that would run along the south side of our house and be assembled with 12-foot planks of wood. It wouldn't be high enough to require a railing, but it would need a set of steps to the back door and a set of steps from the yard to the deck. In short: almost no need for a saw!

There are very few experienced DIYers (and hardware store owners) who would not find fault with Ms Sessums' deck. Yet, that's really a bit like car reviewers focusing on the exterior paint finish of the Tesla S Plaid: it misses the point. Will the deck last for the next 10 years? No. But the core point here is that Ms Sessums - and her partner - are hardly interested at all in the process of building the deck. All they want is to have a deck (for a few years), and to get that done as simply as possible, and well within their available skillset. That's going from A to B with minimum stress.

Developing the market

You have to ask what would happen if someone like Ms Sessums wandered into an Australian hardware store, explained her project, and asked for advice. It is likely that in the majority of hardware stores she would have been told not to do it, to hire a tradie, and so forth. That would have resulted not only in the loss of this one sale, but probably any future sales as well.

The standard kinds of advice that are readily available to people building decks in Australia are actually not all that useful to someone like Ms Sessums. For example, many of us (including at HNN) would find this description of building a low-level deck which is supplied on Bunnings' Workshop social platform to be really helpful:

For a real beginner, however, who is not interested in DIY for itself, this would likely seem complicating and confusing. Just the idea of necessarily having to install noggings ("blocks" in US parlance) might be enough to crash the entire project.

The important thing to bear in mind is the objective. It is taken for granted in the experienced DIY community that any project should be built to last for 10 years or so. But there is no real reason why that has to be the case, and people who have a different objective, such as three or four years, are not, in any objective sense, "wrong".

Taking the general out of these specifics, what we could say is that there is an inbuilt sense in many hardware retailers that they represent a kind of standard which they expect their customers to meet. If they can't meet that standard in terms of knowledge and experience, then they expect their advice to be accepted and followed.

Conclusion

The real difficulty with change in all Australian markets is that it tends to present itself as something of "falling off the cliff" event. One moment everything is following a well-worn groove and a traditional pattern - then there is a sudden disruption, and everything changes, it seems, "overnight".

We've seen that happen most recently with the rush to initiate fully transaction ready websites for hardware and other retailers. Yet these changes really do not come out of nowhere, and it is frequently the case that industries have been warned long before their advent.

The real difficulty, when you examine these situations, is that most businesses still base their strategic planning on the past, rather than the future. They perceive change as threat and expense rather than opportunity and profit.

While the pandemic has been something of an extraordinary event, it's also true that since 2015 we've been seeing more extraordinary events occur. It may be that most strategies need to be revised, with the probability of change, in the future, considerably increased.

Independent Australian hardware retailers have recently rediscovered the potential represented by the consumer/DIY market. For the last 10 to 12 years, the dominance of Bunnings in that market has seen many of these retailers invest more time, effort, and money into their trade business lines, with DIY frequently slipping down to 20% to 30% of their business by volume, and around 30% to 35% by profit.

The COVID-19 pandemic pushed DIY customers into their stores for two reasons. First, it wasn't possible for them to go to their "usual" Bunnings store, either because it had long lines due to density limitations or was outside the allowed travel radius. Secondly, homeowners paid increased attention to taking care of their homes during periods of partial lockdown, both to improve the place they were now spending 160 hours of a week's total 168 hours, and to find some way of not going stir-crazy due to limited stimulus.

As Australians collectively gain some sense of how we might pursue an almost-normal life for at least six weeks out of every seven (given the ongoing minor outbreaks of infection), those retailers are very concerned with how they might hold onto at least 50% of the new DIY customers that came through their doors during the last nine months of 2020.

In the past, the main technique independent hardware retailers have employed was to try to compete with Bunnings on price. It really took the overall industry about 10 years to catch up with Bunnings on this basis, as it required not only a change in the originating supply line, but also in final distribution. While Bunnings continues to have an advantage in overall scale, hardware retailers have significantly closed the gap.

What the COVID-19 pandemic also illustrated clearly was that these retailers do have a persistent advantage they can leverage against that scale, which is simply location and proximity. While Bunnings has worked hard to expand its store fleet over the past decade, unless there is a Bunnings within 2km, hardware stores nonetheless have their own "customer radius" where, from a travel perspective, they are the most convenient hardware outlet.

While that has long been a reliable advantage, another trusted advantage has proved itself over the past decade to be somewhat less reliable: the service difference. There is little doubt that a higher, more knowledgeable, more personalised level of service in independent hardware stores does create an advantage (though it is as much a way of life), but that advantage has not been significant enough, from the DIY customer perspective, to keep them away from big-box retailers.

So where is the advantage? What do independent hardware retailers need to do to retain and grow their DIY customer base? How can they really satisfy homeowners, and keep at least some of their custom as the threat of COVID-19 recedes?

In today's market, the lesson that we keep learning and relearning is that knowledge of the customer's needs and wants is key. One of the main drivers behind that requirement is that, especially when it comes to the DIY customer, we could say there isn't really any such thing as a "traditional" customer. What was once a large, fairly unified market in Australia has split up into a series of "micro-markets".

As a result, hardware retailers need to take three actions:

The micromarkets

That expected, "traditional" DIY market is perhaps best reflected in the coverlines of Handyman magazine from the 1980s and 1990s. The articles that dominated at that time were all about building pergolas, decks, fitting out wardrobes, garage storage, outdoor entertaining/barbecue areas, verandahs, painting - and an amazing amount of advice on perfecting lawns.

While that market does still exist today, it tends to be seen as the really "serious" end of DIY, and includes more serious renovation tasks as well, including redoing flooring (laminates and vinyl planks), retiling bathrooms, and fitting out kitchens. It is also, simply, a lot smaller than it was 25 years ago.

Instead, we have a new cluster of micro-markets, which would include:

When you look at these categories as opposed to "traditional" DIY, one feature clearly stands out: the projects they describe are what might be termed "high time-value". They make use of little time but produce a high-value product at the end.

For example, take furniture upgrading. Twenty years ago, you didn't have to look too far to find articles on how to build your own chairs. Today, who really has time for that? Instead, it's easier to hunt through the op-shops that seem to be everywhere, find something you like, and spend a couple of afternoons staining, painting and reupholstering.

Similarly, with a category like smarthome, you can quite literally spend $1500 to upgrade convenience and security and get far better results than you would have by spending $15,000 about 20 years ago. When we get into another tech-inspired area, maker culture, the difference is even more acute. What you can today make with 3D printers and CNC routers is simply beyond any DIY project imaginable in the 1990s - especially when these are combined with internet of things (IoT) devices, such as Arduino and Raspberry Pi processors.

All that might seem a little overwhelming, but one advantage in this area is that most people will have done quite a bit of online research before they tackle one of these projects. They don't come to the store expecting the retailer to tell them what to do, but they do expect some help in choosing one option over another.

The core thing to grasp from a retail perspective is that while most of these customers are price-aware, they are even more time-aware. They are coming to a physical retail location both because they don't want to waste time ordering online and waiting for a delivery, and they are in slightly unfamiliar territory and want to see what they are buying. As a result, they are less fixated on price and more concerned with convenience and reducing frustration.

The tools

We can best illustrate what this cluster of micro-categories is like by looking at a new tool that Bosch Power Tools released in November 2020 (though it is not available in Australia just yet). At first glance, the Easy Cut&Grind (ECG) can seem something of a confusing product. The existing Bosch product that it most resembles is the Bosch (blue) 12V 76Mm Compact Angle Grinder, which provides a handy, one-handed way to cut through materials such as metal pipes and rods.

What the ECG most resembles, however, is Bosch's redesigned IXO screwdriver (and drill, plus other functions). Its physical appearance is similar, and it seems to have the same Li-ion fixed battery system as well, which recharges conveniently through a USB port.

It comes with a carbide disk, capable of cutting to a depth of 14mm, as well as a multi-material cutting disk. The latter could be used to, for example, cut out gaps for pipes and other irregularities in laminate flooring, trimming plasterboard, or cutting plywood sheets. In addition, it also comes with a fixture that turns it into a mini-disk sander, the sanding pads attaching via a hook-and-loop system similar to Velcro.

From the viewpoint of "traditional" DIY, this is a very underpowered tool with a limited range of functions. But for people doing tasks in this cluster of micro-categories, there is simply little need for the kind of power than standard tools offer. Instead it offers lightweight versatility, no-fuss operations, and ease of storage when not in use.

What to do now

While the distribution of the more innovative Bosch DIY products to Australia is a little slow, retailers could get ahead of this market by dealing with another part of the huge Bosch corporation: Dremel. Dremel makes what are widely recognised as some of the best rotary tools in the world. The range has been around for some time and offers not only a wide range of tool bits, but also add-ons that turn the Dremel into a plunge router and even a drill press.

Analysis

What the surge in DIY sales should be communicating to retailers is that there exists a market they might have disregarded, but which actually can provide not only decent revenues, but especially better margins. Like other markets, catering to its needs means not only the sale of certain speciality products, but also more common adjacent products as well. Provide the means to sand down the tough to reach parts of a refurbished chair easily, and it's more likely that the paint for that chair will be bought from the same place as well.

Of course, it's not just about getting the products stocked, either, but also communicating what is available, and backing that up with service where staff don't dismiss these new customers - especially if they are women.

Bunnings is not going anywhere, and it will continue to dominate many categories. This is one set of categories, however, where the combination of proximity, service and familiarity can really help to drive sales in a way that big-box retailers are unlikely to equal.

As a hardware retail buying group, Hardware & Building Traders (HBT) has come a long way from the first time I met them in the early oughts. Now under the leadership of CEO Greg Benstead, it is more equipped to battle the challenges ahead, and doing it with a few laughs along the way.

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In this edition, we also have a long, investigative article on why Australia - and specifically, Melbourne and Sydney - is in the grip of housing price bubble. Rising house prices are being used to compensate Australian workers for poor productivity growth, which has resulted in very low levels of wage growth.

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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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.

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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.

Here's a puzzle: Ask any average DIYer to drill a hole through a plank of wood with an old-fashioned brace, and they would likely look at you like you were crazy. Similarly, while many DIYers might, from time-to-time, take a handsaw to a piece of wood, few would make a dozen cuts through 2x4s manually.

We know why. Today, just $500 can buy a basic but complete set of cordless tools. For the DIYer it's not just that power tools make jobs easier, it's that they make them possible. Making a couple of very straight cuts through a 300mm plank with a handsaw is hard if you do that only once every three years. It takes far less skill with a circular saw.

That combination of affordability, ease of use and indirect upskilling for DIYers has boosted the sales of cordless power tools over the past seven to eight years. That, in turn, has boosted other areas of DIY, as more jobs become possible in less time with greater chances of success.

While that is the general picture, there are some specific (very interesting) areas where this dynamic has not taken hold. In those areas, even though there have been advances in the affordability and functioning of power tools, DIYers continue to use "traditional" means of performing tasks - though many traditional tools have also been improved.

One of the most puzzling of these areas is painting. Companies like Wagner SprayTech (part of the Swiss-based Wagner International AG) and Graco have done a good job of getting their products onto the shelves of Australian hardware retailers. Yet even as their products have improved, and delivered better value for money, the DIY painting category has continued to be dominated by paint brushes and rollers.

That has resulted in what, in the power tool market, would be regarded as somewhat sub-standard growth forecasts. One market researcher, QYR Research, for example, forecasts compounded annual growth (CAGR) for sales of paint spray systems at just 2.8% between 2019 and 2025 (a figure which includes industrial and contractor as well as DIY). QYR sees the market reaching a global figure of USD1560 million by 2025, up from an estimated USD1250 million in 2017.

A broader problem

While painting is interesting purely from the perspective of a category that is relatively retrograde in terms of technological adoption, there are additional reasons why it is interesting.

Most hardware retailers would agree that the DIY sector is undergoing something of a change, or, more accurately, an evolution. We've seen several evolutions over the past 25 years, most recently when Li-ion battery cordless tools became readily affordable, bringing a broader interest in DIY across many categories.

While that evolution was about existing customers evolving and becoming more committed, the current evolution is more about the interaction between two existing markets. We can broadly describe these as the "old guard" Baby-Boomers, and the "neophyte", younger Millennials. Though, of course, it is a little more complex than this, with both Generation X and Generation Z playing roles, so it is best to simplify it into DIY G1 and the younger DIY G2.

While it is evident that G2 will eventually take over the market, at the moment most hardware retailers market mainly to G1. Long-standing familiarity with this market is the main reason, but there are some valid structural reasons.

Retailers see the older market as having the greatest potential for sales, as G2 is a group frequently weighed down with tuition debt and/or high dwelling mortgage repayments, coupled with lower earning power.

Another difficulty is that there is often an almost binary choice between G1 and G2. The current G1-based merchandising of a product might not suit G2, but shifting to a more G2 approach will not suit G1, which liked the former approach.

Let's take, for example, an app (mobile or web-based) designed to help customers buy cordless drills. It's pretty easy to imagine how to do that: provide a wide range of specifications, features, prices and customer reviews. There would be a checklist for different uses, design features and price range, which would generate two or three suggestions.

That app might sound like it's suited for G2 (as it is online), but really this is G1 merchandising. For G2, such an app would be confusing and not useful. What G2 wants is an app that enables them to select one of two drills (a high-end 12-volt, or a mid-range 18-volt) which they can rent over a weekend. Preferably, the tool comes in a box in the mail, and is returned the same way.

What is going on there?

G1 and G2 have different attitudes towards tools. For G1, tools are mostly about capability. Buying a drill for a G1 consumer means that they can enter into a wide range of activities, from hanging pictures on a wall, to fixing up a bit of dodgy guttering, or even building a bookcase.

For G2, tools are useful only in achieving specific projects. Hanging pictures on the wall, for example, is likely a sub-project to the larger project of redecorating the livingroom. The livingroom is important to them, but not the drill. Tools and their use have a limited, narrower focus for them.

A second factor is that while G1 enjoys buying new things such as tools, G2 does not. That's understandable. For the older generation, there has been a steady development in the development of everyday equipment, and a constant sense of surprise at how much things have improved.

But over the past 20 years, that development pace has plateaued - with the exception of software-based technology. This is part of what is behind one really important characteristic of G2 that it is very important for retailers to grasp: The ultimate luxury, for G2, is not having to buy and own something.

G2, for the most part, simply does not want to own a lot of tools - and some don't even want to own any at all. We could say that part of the trend is just good common sense. The majority of DIY tools, after all, get less than 60 hours of use in the first three years post purchase.

Yet this goes beyond practicality. For G2 almost every purchase is something of an act of self-definition, and self-communication to both close and more distant social groups as well. In those regards, power tools do not rank highly - but making a comfortable, quirky, lovely livingroom would.

Backing this up, US home security company Alarm.com had consultant OnePoll conduct a survey of 2000 "DIY Dads", regarding their attitude towards DIY. The survey found that the rate of tool ownership had dramatically declined for Millennial families:

Younger Dads are less likely to own tools that older Dads would consider essential. 46% of Millennial Dads reported not owning a cordless drill. 48% don't own a stepladder, 38% don't own a set of screwdrivers, and 32% don't own a hammer (a tool owned by 93% of Baby Boomer Dads).

Painting

How do these attitudes affect painting, and particularly spray painting?

For G1, paint sprayers meet few of their requirements to inspire a power tool purchase. A spray gun has a very narrow range of use, as it is specialised to one specific job. Also, it doesn't so much add a new capability, as change an existing one. And those changes, for G1, aren't all that comfortable.

If you think about the tasks where G1 has really excelled, such as building bookcases, brick barbecues, decking, or even brush-and-roller painting, they all have a similar pace. They need to be worked at steadily and constantly, with a sense of care and commitment, and what we could call a medium degree of stress. Attention and endurance are both important.

Spray painting does not follow that pattern. In brush-and-roller painting even DIYers will spend over 30% up of their painting time on preparation, while professionals will commonly go over 60%. (Some of them joke it shouldn't be called "painting", but rather "sanding", as the key to a great finish is a perfectly smooth and flat surface.)

With spray painting, its normal to spend 80% to 90% of project time on preparation, depending on the room. That preparation is a lengthy period of low stress, but also low involvement work in masking off areas where you do not want paint. That's followed by a brief period of relatively high stress, when operating the spray gun. (And we mean brief: you can paint a 3m by 3.5m room with 2.5m ceilings in under 18 minutes.)

That pattern - low involvement, lengthy prep, followed by brief, intense performance - is a common and preferred pattern for G2. It's the pattern in much of tertiary education (study/exams, thesis/oral defence), video games and even social media.

The other factor to bear in mind is the quality of the results. It takes a lot of brush-and-roller painting to get really proficient, and be able to produce a good room. For G1, that slow gain in proficiency is actually one of the attractions, and one reason why these DIYers are reluctant to switch techniques.

G2 is less interested in gaining that kind of proficiency. It takes very little time to gain an average competency at spray painting, as difficult tasks such as cutting-in are eliminated. Even if a mistake is made, it's also very easy to cover that up with a subsequent coat of paint - which can take just another 15 minutes to complete.

Marketing spray painting to G2

It's not possible to really reduce the success of marketing spray painting to G1, because it simply has not been that successful. G2 offers both a genuine growth opportunity for the category, and a chance to develop the marketing and merchandising skills necessary to capture the G2 market in other categories.

Manufacturers

Both Graco and Wagner SprayTech have a strong presence in Australia. However, Wagner has achieved better penetration in the DIY market with its Flexio brand, so we will concentrate on that brand, though most of these comments would apply to Graco as well.

Marketing at the manufacturer level immediately brings up some problems. One of the marketing boasts of Wagner is that its Flexio products is that they can spray undiluted wall paint.

That's true, they can. It's also simply not a good idea. When using a premium wall paint such as Taubman's Endure, or Dulux's Wash & Wear, it's a really good idea to dilute these slightly. The results will be much better.

The marketing problem that Wagner and other companies face is this: what their systems are good at isn't just spraying thick paint, it's that they can adapt to a wide range of paint viscosities. The problem with lesser spray guns is that the viscosity of the paint has to be exact to within a 2% variance to get good results.

With Flexio, it just doesn't matter that much, partly because you can adjust, with three simple dials, the amount of airflow, the volume of paint delivered, and the width of the spray. This means that paint dilution comes down to dumping 50ml to 90ml of water into the 1.3l tank of the Flexio 590, and mixing it for a couple of minutes. It's really not a big deal.

However, it does present a difficult marketing situation, because "works with a wide range of viscosities" just isn't as catchy as "no need to dilute paint". One way around this though, that would work with G2 but less so with G1, would be to provide a comprehensive, detailed video that illustrated how paint viscosity and the controls relate to each other.

Where manufacturers including Wagner really do fall down, however, is with the induction learning for novice users of spray painting. Most of the advice they provide makes sense - if you already know a little about spray painting.

The critical moment you have to get new users past, both pre-purchase and immediate post-purchase, is how are they going to learn the basics? There is a very simple and highly effective solution to this. In fact, every novice spray painter should do this. After washing the walls, filling and sanding cracks, they should go ahead and mask up the painting area. Then they should fill the spray painter with water, and simply "paint" the water over the walls.

Doing this eliminates most of the fear new users have about operating the spray gun. It enables them to get used to the motions they need to make, and they can play with the different settings to see how they affect the spray pattern.

At the end of the water spray, the DIY painter can check the masked areas to see if there is any overspray - a flashlight held at an angle helps. It's also necessary, of course, to wipe down the walls with a towel, and give the walls more time to dry, depending on the air temperature, before painting can start.

Finally, a word needs to be said about the quality of the manuals that Wagner and other manufacturers provide. These are the fairly standard manuals that come with power drills and other tools, monochrome printed on very thin paper. If there is one big difference between G1 and G2, it's that G1 will, at most, glance through a manual, while G2 will almost always read at least one part of the manual.

At the very least, Wagner and other manufacturers could include a four-colour printed information card on 300gsm coated stock that shows the basics of the spray adjustments and how to clean the spray gun. The real pity here is that Wagner has done a very good job of making the Flexio spray heads easy to clean, but if you read the manual it seems really complicated and difficult.

It's such a great product, it's a real shame to see its capabilities not communicated in an interesting way.

In-store merchandising.

Unfortunately, just as teachers often pick on their brighter students in class for criticism, so in talking about merchandising spray painting we need to pick on the one retailer that has done the most consistent job in merchandising Wagner SprayTech - Bunnings.

To be clear, the current Wagner merchandising by Bunnings would rate a definite 7.5 on a scale to 10, while merchandising at most other hardware retailers would struggle to reach a 6.

The simple, good things that Bunnings have done in marketing Wagner products are: 1) allocated an entire bay to the product line; 2) located the bay actually in the paint department; 3) displayed a good range of products in a clear and informative manner; and 4) added a few useful accessories to that display.

The current display is a good one for marketing to G1 - but it falls short in marketing to G2. That's because, as is outlined above, G2 doesn't think in terms of tools and materials, they think in terms of projects. To meet that need, merchandisers need to think (at least partly) in terms of "project pods". The idea should be to gather together the key elements needed to complete a project, or to a least indicate what those are and where they are located in the store.

There are a number of advantages to this approach. It is certainly key to introducing new technologies, such as spray painting, as the pod approach makes starting out more approachable. Customers can see what they need to buy to get going, and they are saved from hiking around the store, to unfamiliar departments, finding products which they are unsure are really the exact right thing they need.

From the retailer perspective, what we are looking at here are two of the most magic words in the profession: "up-sell" and "profit-centre".

DIYers trying something new have a disproportionate tendency to purchase more expensive materials, in the hope these will be easier to work with, and help them through the initial phase of learning how do something. All that is needed to up-sell them is the hint that these products will ease the task a little.

Similarly, if we look at a task such as spray painting, what is its predominate feature? That would be the time spent in preparation, especially masking a room. Wouldn't it be great if there was a product specifically for that, which would make for a repeat sale instigated by the sale of a spray gun?

Wagner's own Mask-it is just such a product. It provides 21m of 55cm wide masking plastic film, with a strip of adhesive masking tape along the top edge. Bunnings does stock it, at $9.50. However, it is located in a different aisle than the Wagner display, in some Bunnings Warehouses, at the very back on the topmost shelf, making it a little difficult to find.

The same holds true for other masking products. Unipro makes several masking products, though these are mainly for covering larger areas, and relate to painting in general. It does, however, make a product that is similar to Mask-it. It's designed in a more environmentally friendly manner, with the masking product plus dispenser retails for over $11, but with refills at around $7.

Again, though, the novice DIY spray painter is not going to know this product exists, unless they do considerable research. It's important to note how much is gained when such a product is properly located. It is not only that the product is now easy to find. Locating it near the Wagner bay will introduce them to the product, and also - very important for G2 - make them aware that an ecosystem has developed around spray painting.

Where this notion of pods and projects gets more serious is when safety is involved - and this is as much about manufacturers as it is store merchandisers. The instructions for many spray gun products recommend only using the tool in a well-ventilated area. That's great, but how do you spray paint the walls of a 3m by 3m room and keep it ventilated? It may have a window, but that's likely masked up. The door will be closed, as otherwise the hallway will end up being spray painted as well.

After 15 minutes of spray painting, you will end up with air misted with latex paint particulate, plus 25 square metres of freshly painted wall, all of which will be off-gassing volatile organic compounds (VOCs). You don't want to be breathing that, even for a short time.

The painting masks that Bunnings and other retailers offer for sale alongside Wagner products are adequate for tasks such as outdoor painting, painting in larger rooms with some ventilation, or smaller jobs. They do not work for small rooms.

To be fair, Bunnings in its brief introductory video to spray painting does suggest using a full respirator - though the model used, sold at most Bunnings, is a really poorly designed, outdated model.

The issue of respirators takes us back to the difference between G1 and G2. It is true that for G1 raising concerns about safety and the need to take precautions can be off-putting - after all, how long did it take to introduce mandatory seatbelts, and limit smoking? Not exactly a safety conscious generation.

For G2, however, raising legitimate safety concerns and providing a solution is actually a positive for sales. Given the choice between a $14 dusk mask with an exhalation valve, and a $60 twin filter respirator that protects against VOCs, it's an easy decision for them.

This raises an interesting issue, however. Bunnings does sell a very good spray painting respirator from 3M for $59. However, a "virtually identical" respirator, also from 3M, is available from Amazon Australia for $39, delivered.

Conclusion

If we really focus in on what has been said above, it all comes down to one thing: information. The product is great, it's made by some really interesting companies with good engineers. The store merchandising is actually quite good. There is a demonstrated need for what it achieves.

But all of that is really not enough, if the product and its merchandising cannot connect with consumers on the level of information. As power tools evolve, all of them gain an increasingly helpful - but more complex - ecosystem. Consider, for example, all the accessories now available for impact drivers, or the range of attachments available for some Makita routers.

Anywhere there is an ecosystem, there is a need to make this more available through a better use of information.

What we are beginning to see emerge is a new configuration in hardware groups. IHG is increasing its focus on trade, with its mix moving to 65/35, while simultaneously moving more stores into its Sapphire fitout. HNN thinks the company may be "cooling it" on DIY, but building the potential to snap-back into DIY in three years time.

Bunnings meanwhile is doing what it does best when the market gets tough, and decreasing costs to increase profitability. Questions remain about its shift into online ecommerce, as it launches an expanded click-and-collect service.

Meanwhile, in true HBT style, the retailers in the group continue to innovate, with Andrew Graham at Traralgon H Hardware showing how it is done.

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HI News Vol.5 No.1: Traralgon H Hardware

In addition to major retailers, we also speak to Jason Ellis, marketing manager at outdoor power equipment company EGO. He is part of a team that is educating end-users to make the switch to cordless.

Implementing digital strategies is also a recurring theme in this edition. Bunnings, IKEA Australia and UK-based Travis Perkins are in different stages of executing their digital plans that are expected to deliver growth.

There have also been some major acquisitions with Sika taking over its rival Parex and on a smaller scale, US-based Klein Tools has purchased Melbourne tool brands, Wattmaster and Alco. Australia's Ruralco including its Combined Rural Traders store network may be owned by a Canadian agribusiness giant.

Other companies mentioned in this edition include Stanley Black & Decker, Reece and Fletcher Building's Tradelink. There are also new product releases from Gerard Lighting, Gyprock, Victa and Imex Lasers.

The Diamond Valley Mitre 10 store in Diamond Creek, Victoria is an old-school success that is being managed for the digital retailing age. There are not many entrepreneurs like the store's founder, Norm Hastings any more but the business is being well managed by its current team that includes his children, Paige and Brock Hastings.

This issue features an in-depth profile of the store, and look at how it balances between being a member of a corporate group and maintaining its independence.

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As the group head of brand for Methven, Laura Keogh spoke about the importance to her of post-grad education, and her experiences working for a wide range of companies in her native US and Australia. We also caught up with David Banfield, Methven' CEO, who let us in on some of the secrets behind the company's diverse and innovative culture.

With the most recent season of "The Block" not managing to match the ratings for the previous season, the question mark over the "reality" renovation competition series is hovering once again. Is the franchise still really relevant to today's prospective renovators?

We also speak to Houzz country manager for Australia, Tony Been about the site and how it can benefit hardware retailers and suppliers.

Other companies featured in this edition include BGC, Stanley Black & Decker, CSR, SKIL and Portwest Workwear. There are also new product releases from Gerard Lighting, Kelso and Nylex.

The strategies and actions of big box hardware and home improvement retailers have an impact on independent store owners. This is a fact not always embraced by in the industry, at large.

In this edition, we take a deep dive into how the biggest home improvement big box on a global scale are disrupting themselves in order to continue to grow and develop. We illustrate the strategies from The Home Depot, Kingfisher, Bunnings and Lowe's Companies.

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Non-corporate independent group, Hardware & Building Traders (HBT) held its Business Workshop event in a new format. The group's CEO, Greg Benstead, discussed some of its developing strategy, and later saw members break up into smaller interest groups to discuss ongoing developments that were relevant to them.

Hong Kong-based Techtronic Industries continues to develop innovative technology and produce global sales growth. HNN presents its results for its power tool products. As part of this feature, there is a transcript of the transcription by the always interesting TTI CEO, Joe Galli.

Other stories in this edition include updates on corporate-owned independent, Mitre 10, Australian-based online homewares retailer Temple & Webster and Beacon Lighting.

There are also updates on suppliers such as Stanley Black & Decker, Boral Timber, James Hardie and Dulux. New product releases from Imex Lasers, Fiskars and Mr Fothergill's are featured in this issue.

Something big is happening in the plumbing industry.

The headline news of the moment is the move by the highly successful but previously somewhat passive Reece Group to expand its operations to the US through the acquisition of the Fort Worth, Texas based MORSCO. This was purchased from US private equity firm Advent International for USD1.44 billion.

Meanwhile, behind the scenes, there have been rumours that Wesfarmers, especially through its Bunnings retail operations, is planning to increase competitive pressure in this area. One strong rumour is that Bunnings has a new line of products sourced from Chinese suppliers and ready for launch in the final calendar quarter of this year.

Also, while it has emerged that Wesfarmers did not move to acquire a 3% stake in New Zealand based construction and building supplies company Fletcher Building (as suggested by Fairfax Media), there is a rumour Wesfarmers still has an ongoing interest in the company. One possibility would be that Wesfarmers might seek to acquire Fletcher's struggling plumbing supplies business, Tradelink. Tradelink was the cause of a NZD153 million impairment for FY2016/17. While it has picked up performance in the FY2017/18, it remains a relatively underperforming asset for Fletcher in a market that continues to grow.

Whether either of those rumours is true, what is certain is that Bunnings is planning to ramp up its efforts to supply plumbing to tradespeople. (Please see our coverage of the Wesfarmers Strategy Day 2018 in this issue for more details.)

Meanwhile, other plumbing supplies businesses in Australia have been innovating and seeking to engage the market in new ways. Samios (a member of the Hardware & Building Traders group) has been expanding its trade-oriented showrooms across Australia, and is about to launch a new own-brand range of plumbing products.

Australian plumbing supplier manufacturer Linkware International has also been steadily building up its business over the past two years. The company has brought out a cleverly designed range of packaging for products aimed at the DIY customer, which have gained marketshare through Metcash's IHG, in particular its Mitre 10 Sapphire stores.

So, what exactly is going on? On the face of it, this investment does make sense, as an increasing number of Australians are willing to invest more in the their bathrooms. The question remains, however: Why now? What has triggered this investment?

HNN believes there is a central source for these moves, one which runs through much of the big-end investment in plumbing/bathrooms. Those investments then have a flow-on effect to the rest of the market.

That central source of change comes down to just one, simple phrase: data analytics. What's important about this change is that plumbing is just the first of several home improvement market segments that will be affected by this over the next five years. Australia has finally come to the stage where it needs to rapidly catchup with data analytical practices that have become common elsewhere in the world.

To put it in the simplest possible terms: for today's larger retailers, data analytics will become in 2019 what warehouse and transportation logistics were 20 years ago. It is that important.

A number of factors are driving that change. The plumbing industry itself is undergoing some shifts. For example, quick-connect systems are replacing older methods of soldering for plumbers themselves, opening the field up to many new innovations.

Online retailing is also on the rise. Plumbing is expanding quickly online in markets such as the UK. In Australia, Amazon is building its offer of plumbing fixtures and accessories online, following on from its parent in the US, which offers dozens of products in categories such as showerheads. In slightly wilder online territory, Alibaba and its offshoot Aliexpress offer direct access to hundreds of Chinese-made products.

On a practical level, it is also true that the resources necessary to manipulate and interpret big data have improved dramatically over the past two to three years. Companies such as Amazon and Alphabet (Google) now make mammoth, data-centric processing capability available on an hourly or daily basis, eliminating the need for companies to scale their own data operations. Processing power is available at a fraction of the cost of 10 years ago, and new developments arrive on the market every two or three months.

Combined, these factors suggest that for major companies, and even larger mid-sized companies, those that have not developed some data analytics capability will be left behind in two to three years.

Background: data at Home Depot

The company with the most outstanding data practices in the home improvement retail market is, without doubt, the US-based big-box retailer Home Depot. At an Investor & Analyst Conference held on 6 December 2017, Home Depot senior vice-president and president - online Kevin Hofmann spoke at length about the importance of data to the Home Depot operations.

He began by giving an introduction to the sheer scale of data that Home Depot has available:

So I'll give you some detail and some examples on investments we'll be making, starting at the top, how we're trying to become a more personal retailer. Becoming more personal will all start with the power of our data. Through our size and our scale, we have a great deal of data on our customers, their homes, their businesses and their preferences and needs.

We have most of the US in our database, and nearly 50 million households of the country have been active with us in the last 12 months. Through those interactions, we are now modelling 1.7 trillion data points a week just from our own data sets. And we leverage our data - combined with third-party data sets, we have an enormous opportunity to understand communities, neighbourhoods and businesses at scale. This is all in the quest to understand our customers better.

For Home Depot, one of the main uses of all that data is to model and develop its engagement with existing and potential customers.

So let me give you some examples on investments we'll be making. We will invest into capabilities that make us more location aware. When the customers receive those tailored weather-triggered ads or those messages influenced by their location, the customer's going to expect to land on an experience that also understands their location, understanding if you're in your home, at your place of business or in a store or not. In the example you see here, there are different product recommendations for Atlanta versus Boston.

We will also invest to build machinery to be more context aware, understanding if the customer is just looking for a simple $100 item or if they're contemplating a full remodel project or understanding if they've been engaged for the last few weeks, trying to get inspired, and maybe they just need some design help. These are all important contextual elements that are vital to creating a great and easy customer experience. We'll be investing to gather intelligence in real time to personalise the experience by the customers' context and provide the best products, content and services for their need and situation.

And lastly, being persona aware. Personalised content curated for individuals, consumers versus Pros, DIY enthusiasts or novices. We will invest heavily to become a more personal store for the customer. So for example, when we recommend products to Pros, we'll show them case packs and pro-grade brands. For the consumer, we'll show them individual quantities.

Obviously, while the data can be used to deliver the best possible promotional experience to individual customers, it has a wide range of other uses as well. One area in particular is pricing, especially as it applies to online products (and therefore to in-store products as well). Just one sign of how serious Home Depot is about pricing data, is the establishment of its BlackLocus operation.

BlackLocus was a venture-funded startup, founded by Carnegie Mellon alumni with a passion for creative deployment of new technology. It was acquired by The Home Depot in December of 2012. Its engineers and scientists use disruptive techniques to analyse data from online retailers. By applying machine learning and revenue management techniques, the BlackLocus platform enables intelligent retail software to identify opportunities for competitive advantage.

Beyond that, there is also the way that data informs customer profiles, and can make this available to salespeople on the floor and elsewhere in the organisation. At the same investor day, Home Depot's Bill Lennie, the executive vice-president of outside sales and service, explained how one part of this works:

We recognise the need to equip our associates for success. One of the ways our PASAs [Pro Associates in the stores] have been able to deliver a 20% growth in account spend is through the My View tool found at the Pro desk. My View provides store and customer data in a simple format that arms our Pro sales associates with the information they need, empowering them to serve our customers better.

Here's an example [see Figure 1] of the store level data that a PASA sees when they go into My View at the Pro desk. As you can see, it paints a clear picture of activity at the store level as well as customer-specific information. When the associate drills down, he or she can get a great view of that customer's spend pattern as well as potential opportunities for growth.

The associates focus on 2 key areas of growth to help their Pro customers. Products, which are merchandising categories, that the customer may benefit from in their line of work; and services that provide business benefits that reduce friction for our Pros like credit, tool rental and delivery. New this year are alerts. Alerts indicate potential opportunities that customers may be missing based on their buying habits.

Finally, there are additional products with suggestions that may make sense given how similar customers spend with us today. All of these data points help facilitate a conversation between PASAs and our Pros, allowing them to highlight what we bring to the table in a tailored fashion.

Home Depot has sometimes referred to its marketing and channel availability as providing "360 degree" coverage. Now its use of data analytics is moving towards a similar coverage, as it becomes more infused into most aspects of its commercial enterprise.

Background: The market

GWA Group, makers of brands such as Caroma and Clark, provided a very good summary of the Australian bathroom market for their presentation to investment analysts. Figure 2 shows slide 35 from that presentation. This is a market breakdown based on a 2x2 box that shows market size and position on the axes of experience and the form/function split.

If we think of Reece and most other mainstream retailers in the bathroom market, it's evident that they provide services and products that match up with four of the five market segments diagramed. The one they all miss out on is the segment labelled as "The Novice".

Looking at Figure 3, one reason for this is apparent. The Novice segment is at the lower end of the quality/price incline. Even though it represents a hefty 22% of the total market, conventional thinking identifies it as a low margin, low expenditure segment. It's notable that even GWA Group, which ramped up its Clark range specifically to provide better design and quality at a lower price point, effectively dismisses 80% of the Novice market segment as not viable for its products. Clark is really aimed at the Dreamer segment, and is designed to combine practicality with clear style/design elements.

However, HNN would suggest that the true potential of the Novice segment is quite understated in these diagrams. This is likely accurate as a portrayal of the current, actual market, in terms of those who do complete bathroom renovations. But what about the potential market, which would include non-completes, and those who give up in just the planning stages?

When taking over running the UK-based home improvement retailer Kingfisher, its managing director, Veronique Laury, launched a lengthy survey over all the markets the company services, including France, the UK, Ireland, Poland, and other Eastern European countries. One result of that survey is the bathroom renovation journey diagram shown in Figure 4, which was part of a January 2016 analyst presentation. This indicates that well over one third of bathroom renovations fail to be completed.

It's likely that this is also a fair description of the situation in Australia as well. If so, then it is likely that the actual size of the Novice segment is around twice that ascribed to it by GWA Group - or over a third of an expanded market view that includes non-completes. This makes it a very significant segment - and one that is ideally suited to the model of customer engagement that Bunnings uses.

In a recent interview with the UK newspaper Mail on Sunday, Ms Laury added some colour to this research:

[Laury] is adamant, after extensive research, that younger customers are not the inept and lazy types that some among the older generations like to think.

What customers are looking for is someone who helps them make the right choice.

It's a myth - not true at all. They want to have a go but they haven't been taught by their parents. They just need more support to learn skills," she says, pointing out some of YouTube's most-watched videos are for DIY jobs.

Ms Laury also thinks that home improvement's expansion of do-it-for-me is overrated:

It is a question of money. Are you telling me the most successful retailers are the low-priced retailers like B&M or Aldi and Lidl, and at the same time people are going to have tradesmen doing everything for them? Are you kidding?

It is a familiar retail story for the 21st Century: the marketers have remained fixated on the baby boomer generation, and have failed to see the opportunities in the emerging Millennial market.

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The hardware retail industry has underestimated the extent to which the acquisition of the Home Timber & Hardware Group (HTH) by Metcash would change the hardware retail market. Rather than being a footnote, just a shifting around of the existing players, it has instead unleashed new competitive forces.

Overall, we could say that prior to the failure of Woolworths' Masters Home Improvement venture at the end of 2016, the hardware retail market was divided into two, or, at most, two-and-a-half sectors. Today, it has become clearly divided into three sectors. All three are now in competition with each other.

In addition, strategic changes at Bunnings, accelerated by shifts in the overall strategy of its parent corporation, Wesfarmers, will also add to these new competitive pressures.

This means that buying groups for independent hardware retailers outside of IHG will need to rethink their strategies, and their management metrics. What strategies will work in this new competitive environment, and what metrics should they be supported by?

Changing roles

Fundamental to these questions is the consideration of what the real role of the buying group will be for hardware retailers in the future. Up until the present day, the primary focus of buying groups has been, understandably, on helping member retailers obtain reasonable wholesale prices and rebates on a wide range of products.

While that will obviously be an ongoing, and very important role, we need to consider whether these buying groups need to consider expanding on what they do offer members. Now that there are two players in the market, Bunnings and IHG, which place a competitive premium on driving down prices ever lower by leveraging volume, other retailers participating in the market may need to consider further leveraging the advantages they have outside of price, in order to retain both their marketshare, and reasonable margins on the products they sell.

Most independent retailers see one of their prime market advantages as being their close working relationships with tradies and building businesses. Could it be that in the future buying groups need to also concentrate on helping their members enhance that aspect of their businesses?

Background

In order to trace how the hardware retail market has changed, it's necessary to consider how it has developed over the past 25 years.

After its full acquisition by Metcash in 2012, up until 2017, Mitre 10 represented one alternative path for independent store owners to take. The CEO of Mitre 10 (and now of IHG), Mark Laidlaw, worked quite hard in public speeches during that time to suggest that Bunnings was something of an endlessly accretive force aimed at "gobbling up" as much marketshare as possible. He presented Mitre 10 as offering something of a shield from that, and many independent retailers were grateful to accept what seemed at least a safer harbour in the market.

We could say that during this time the independent sector, outside of Bunnings, had something of a "soft line" between the Mitre 10 and HTH businesses, both of which were corporate-owned, and the rest of the independents. Mitre 10 certainly wanted to coax more independent stores to join the group. That competitive drive, however, was balanced by the near-equal market share of HTH. HTH also had very strong corporate backing from Woolworths, with its massive investment in Masters. This limited the extent of competitive actions by Mitre 10.

With the acquisition by Metcash of HTH in late 2016, competitive actions by IHG were directed largely to self-preservation, especially in discouraging either Mitre 10 or HTH stores from leaving the network in the wake of the amalgamation of the two. One aspect of that shift was that the company's public statements as regards competition with Bunnings shifted from providing a safe harbour, to IHG being able to "take it to Bunnings". IHG suggested, in comments repeated in the mainstream press, that its $2.1 billion in annual revenue somehow compared to the $13.6 billion of Bunnings.

Overall, IHG's actions to retain stores have been successful, with relatively few leaving, even after the announcement that the Home brand would eventually become secondary to the Mitre 10 brand in 2020. Publicly Mr Laidlaw has stated that IHG has lost only a few smaller stores to the Hardware & Building Traders (HBT) group, as of the end of the first half for its FY2017/18.

Perhaps encouraged by that success, by late 2017 there began to emerge moves by IHG to compete more directly with other independents. This went beyond encouraging more stores to join IHG. Instead, it shifted to taking marketshare away from stores in the independent sector.

Take, for example, the recent dustup between Natbuild and IHG regarding allegations of unauthorised access to a database of trade agreements made between the former and its suppliers. This could be taken as a clear sign of a change in competitive strategy at IHG. While there has never been any suggestion in these allegations that this was part of a formal strategy by IHG, in HNN's opinion the allegations portrayed the actions of not just one or two "rogue" individuals, but showed a wider (though limited) involvement. Those allegations (if they were factual) indicate a degree of independent-on-independent competition that is completely new to the market. (We note that, according to industry sources, a settlement has been made in this case.)

From this we can see that the independent market, after the consolidation of the market power of HTH and Mitre 10 into a single entity, has fractured into two distinct, competing parts. This split market operates alongside the existing competition with Bunnings.

In FY2018/19 Bunnings, with the divestment of Coles by its parent company Wesfarmers, and the cessation of its UK-based expansion, will likely be stepping up its competitive pressure in the Australia hardware market.

This combination of factors means that as we move into FY2018/19, the overall hardware retail industry is facing a very different competitive situation from that of the previous six or seven years.

IHG and critical mass

While this is the overall picture, its effects on individual store retailers remain muted, so far. Most of the retailers in IHG might compete avidly with nearby stores from other buying groups - but no more avidly than they would with stores from IHG that are also located in their immediate geographic market area.

In general, all independent retailers see themselves as sharing a great many values and vulnerabilities with most other independent stores, from all buying groups. Some of that unification is an indirect result of having to constantly deal with highly effective competition from Bunnings over the past eight years.

The reason why store-on-store competition is not noticeable just yet is that the real competitive arena is currently at the supplychain level. Each sector of the current market has its own supplychain strategies. While these have broad similarities, they also have important differences, and carry varying strategic consequences.

The Bunnings strategy is very sophisticated, and makes complex use of captive brands and, in the case of certain suppliers, what we might even term captured brands (Irwin being an example of the latter). This is a supply (rather than purchasing) strategy, in that it reaches all the way back to the manufacturing process for many products. It is this strategy that in many ways is responsible for creating the market conditions under which the entire market operates.

The IHG strategy is simpler, and borrows heavily from the Mitre 10 strategy, which was in turn largely modelled on the overall strategy of Metcash's wholesale food businesses. In that strategy, a system of distribution (as opposed to storage) warehouses is central to a buying system that seeks to purchase goods in bulk, then distributes these directly to member stores. This model is aimed at creating highly efficient purchasing, such that IHG can pressure suppliers into ever-lower prices, creating - in theory - wider profit margins and/or higher sales volume through lower prices.

Key to the success of this strategy for a wholesaler such as IHG, which has a far from dominant position in the market, is the consolidation of demand. The fewer suppliers it contracts with, and thus the higher the volume for each of its product lines, the more pressure it is able to exert on suppliers, and the better the deal it will be able to obtain.

Yet, as the majority of the stores in its retail network are independently owned, it cannot overtly control what is sold. It can, however, exert some influence through, for example, requiring that stores stock items marketed through a print mail catalogue, or promoted on TV and radio. Incentives, such as the Sapphire store program, can also help to impose narrower choices by placing constraints on retailers.

Ultimately, of course, if all goes according to plan, and IHG is able to reach a kind of critical mass of order consolidation, the lower prices on its approved product lines will be so attractive that stores will have little inclination to order anything outside of them. This creates a circular relationship were lower prices drive concentrated demand, and concentrated demand further drives lower prices.

Both Bunnings and IHG seek to use scale to obtain lower prices. The scale (order volume) that Bunnings provides across several lines of goods is enough to facilitate manufacturing economies, as typically the production cost-per-unit drops as volume increases. That applies less frequently to the level of scale that IHG provides. Both, however, can provide scale benefits that reduce distribution costs, especially for imported goods. And, of course, through guaranteed forward order volumes, both substantially reduce risk for suppliers, which, in a very fragmented market, has considerable value.

Independents and scale

In the third sector, outside Bunnings and IHG, made up of small independent buying groups, strategies have until recently been much simpler. Several of these groups were formed as something of a "rebellion" in the late 1990s against what were seen as restrictive and unprofitable requirements by the Danks and Mitre 10 management of the time. Their goal back then was to bring together retailers into groups which could better negotiate with suppliers to get sharper deals on supply price and rebates than retailers could manage on their own.

As these groups have grown in terms of size and complexity, their strategies have shifted. There are, at the moment, really two main aspects to these strategies.

One of their most important developments (from the perspective of the overall health of the market) has been the introduction and support of comparatively new brands and suppliers. As many of these brands are, to some extent, excluded from dealing with Bunnings and/or IHG, or have only a minor presence in those retailers, they are eager to cultivate alternative distribution.

Doing deals with these brands provides the buying groups with two key advantages: lower prices and better rebates, as well as a clear point of differentiation from larger retailers and retail groups.

The second part of the strategies has to do with scale. However, scale for the smaller buying groups behaves differently that it does for the other two market sectors.

Over the past two years, these buying groups have begun to follow IHG somewhat in terms of trying to concentrate orders through an elevated group of suppliers, so as to increase volume, and create further opportunities for better margins and/or larger rebates. While this does certainly make sense, and does deliver definite benefits in some areas, it may be a case of pursuing a smaller advantage at the cost of a greater one.

To uncover some of the potentially greater benefits in the market, it is necessary to look at:

Pricing and market goals for independents

In analysing pricing strategies it is almost impossible to start anywhere other than the influence of Bunnings on the market. Bunnings has used its scale to bring prices down very low in certain key areas, such as power-tools, to the extent that many small- and mid-sized independents have all but given up on these ranges.

As a result, one of the primary considerations for small retailers is not to achieve price leadership, but rather to achieve "price nullification". As much as possible, they want to remove price as a consideration.

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The possibility of an Uber-like disruption to the power tools category is not a popular notion in the hardware industry but the time to discuss it is now. We explore renting tools as a future option for power tools in this issue.

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Included as part of the power tools feature is a transcript from Joe Galli, the CEO of Techtronic Industries, home to the Milwaukee and Ryobi brands. He talks about new product releases as he presents the company's 2017 results.

In other stories, we provide a preview of the 2018 HBT conference in Adelaide, and report on the latest numbers of entries and exits in hardware retail.

Bunnings' conversion of Homebase stores in the UK has stopped while Kingfisher experiences growth through digital and addresses the gender pay gap.

In the US, Lowe's Robert Niblock is stepping down as CEO and True Value makes a deal with private equity.

Companies featured in our regular Supplier Update include Fletcher Building, Knauf, Brickworks, Duluxgroup, Philips Lighting and Jeld-Wen, There are products from De-Walt, Worx and Crescent.

This edition also includes a profile of paint accessories maker, Oldfields.

What are the major trends we have seen emerging in power tools, and what do these trends indicate about the direction of the industry? The established trends that we can see today are:

Each of the four major power tool companies - Stanley Black & Decker (SBD), TTI, Bosch and Makita - are typically engaged in three of these four trends.

TTI has a particular emphasis on the connected tool, range expansion into niche areas, and further battery development, for example, but only a small program for tools featuring motors with voltages above 18 volts. Makita does not have a connected tool program, SBD arguably does less niche expansion than the others, and Bosch does have an OPE program, but it is very different from that of the other three.

A shared consequence of these general trends, however, has been something of a massive range expansion by each of the manufacturers, and it seems this expansion is set to continue. This has consequences in particular for the retail channels that service these brands. While the manufacturers are free to continue to produce new models that split familiar categories into several sub-niches, retailers have limited shelf space, limited warehouse/stock space, limited funds to allocate to stock, and, quite frankly, less expertise than they might really need to effectively sell many of these different variants of cordless power tool.

A prime example

One tool in particular has stood out for HNN as a prime example of how these product range expansions have come to affect retailers, even large retailers with a great deal of resources to make use of. This single power tool has been sitting on the desk of one of HNN's editors. There is nothing all that spectacular about the tool - in fact, as it was purchased used on eBay, it is somewhat the worse for wear.

It's a Ryobi. It performs a function that is very common. It uses the conventional Ryobi battery system. It is well-liked - according to online reviews - by those who use it, but it is not, in any way, really a "game changer" - though it does have some notable and interesting innovations.

There is one outstanding quality it does have, however: despite being a mainstream Ryobi product, it is not sold by Bunnings. That could have something to do with supply issues, but given the outstanding sales growth that Ryobi has experienced in Australia, it seems unlikely that Ryobi parent company Techtronic Industries (TTI) would be inclined to deny Bunnings access to the tool.

This tool is probably not sold by Bunnings because Australia's largest hardware retailer would likely struggle to find a place in the market for it - even as a non-stocked "special order". Bunnings may boast a very wide range of power tools, but it is no secret that even the swath of space allocated in its largest warehouse stores is no longer sufficient to display even a significant portion of what the power tool industry has served up over the past five years.

The tool in question is the Ryobi Quiet Strike (pictured on the opening page of this article). The Quiet Strike is an unusual tool, even for Ryobi, which does have some unusual tools. This tool is based on a different take on a Milwaukee/AEG tool, the oil-pulse impact driver. Where most impact drivers rely on a tensioning spring to deliver the rapid pulses of power that help drive self-tapping screws into wood very quickly, oil-pulse impact drivers instead rely on a more complex hydraulic system to deliver similar results.

The hydraulic systems are, ultimately, more effective, and they give tool designers a great deal of freedom in terms of how they are setup to perform. In the AEG oil-pulse driver, the system is oriented to deliver the maximum bang (literally) for the buck, resulting in surprisingly quick screw drives. The Quiet Strike, as the name implies, has taken a different approach. It is designed to perform at around the same level as a standard Ryobi impact driver - but at a sound level that is close to half that of most impact drivers.

It isn't just the design that makes this Ryobi so interesting. People who pay close attention to the types of tools being used for common tasks have probably spotted the same trend that HNN has: far from being, as Ryobi modestly describes its products, designed strictly for DIY, these tools have become more accepted by certain types of tradies and handymen. Though still rare on construction sites, they've become very common among those primarily concerned with different types of standard maintenance work.

So, while Ryobi may claim the advantage of the Quiet Strike is that a cross neighbour may not drop over at 8am on a Saturday morning to complain about the deck you are building in your backyard, the "real" purpose of this tool is to make life easier for maintenance workers in commercial premises such as schools and hospitals, where noise containment is essential.

Which illustrates just exactly why Bunnings likely does not sell the tool: we're not talking just about a niche use here, we're talking about a niche within a niche. And Bunnings, as HNN has frequently suggested, just doesn't do segmentation. There are two reasons for that (as far as we can determine). Segmentation can be appealing, but it nearly always ends up saying both "yes" and "no" at the same time - and Bunnings goes out of its way to not say "no", under any circumstances.

Secondly, segmentation often requires explanation and genuine salesmanship. Bunnings offers some guidance to customers, but it doesn't always match up to the more sophisticated products.

What is highlighted here is an inefficiency in the way Bunnings is able to service some newly developed markets: it is a new, innovative product, with an evident, and perhaps eager, market - but Bunnings lacks a legitimate, assured path to that market.

HNN would argue that it isn't just Bunnings that finds itself in this kind of curious situation - it's actually large segments of the power tool industry, both retailers and manufacturers, that find themselves facing similar contradictions. While these forces have been present for around the past decade or so, recently they have come increasingly into focus, to the point where they are starting to exert a dominant force on some market sectors.

The Bosch paradox

While it might be tempting to see this situation as having to do mostly with the professional, tradie end of the market, in fact it has come to affect the consumer range of tools as well, though with a slightly different inflection. We can see this mostly clearly with the new range of consumer-oriented tools that Bosch has released in 2018. These tools are relatively unique, in that they are aimed not just at the consumer market, but at the lower-skilled end of DIYers, with the explicit purpose of enabling them to do more in a better, less stressful way.

Some of these changes are useful tweaks to existing product types. Thus the new AdvancedDrill 18 and AdvancedImpact 18 take the conventional drill and impact driver and make them a little easier to use for DIYers, with a low unit weight of one kilogram, an electronic switch to handle forward/reverse, and a way to preset the drilling speed. The same is true of Bosch's PushDrive screwdriver, which is a battery screwdriver that responds to a push against a screwhead by starting its motor and driving in the screw. Similarly the Gluey hot glue pen is a reformatting of the standard trigger-based hot glue gun to a pen-like shape, which makes it work more like a standard adhesive applicator.

Stepping away from the standard, Bosch has also expanded its range of NanoBlade cutting tools, adding both corded models and an 18-volt alternative to the range of what seem like micro-chainsaws, with 4mm cutting blades. These are designed to make cutting material such as wood as simple as possible, and are suited to areas such as gardening and crafts.

Perhaps the most interesting DIYer product, though one which is simpler than the rest, is Bosch's SystemBox. These are containers designed to hold the tools associated with a specific task - such as sawing, or screwdriving and drilling - as well as providing a suitable work surface. Bosch describes this product:

In the future, DIY enthusiasts will also be able to implement projects simpler and faster with our SystemBox range. What's behind this? With the SystemBox from Bosch, you have your tools, accessories and any materials you need to hand at all times. The new stackable storage and transport system clearly organises everything that is required to carry out preparatory and follow-up work for projects while saving time. The SystemBox is available empty or already equipped for the three most common DIY tasks: Sawing, drilling and screwdriving as well as working with multifunction tools.

These are innovative tools, and this shows Bosch is moving in a very useful direction, by helping to equip the less-skilled with the resources to achieve some basic tasks. At the same time, however, the same range-expansion problems that we've seen with the tradie end of the market are now likely to affect the consumer end as well. In addition to the standard range of "green" drills and impact drivers, there is now an additional number of tools, some with new and unfamiliar uses.

More than that, though, Bosch is likely to find itself engaging with an interesting paradox in launching these tools. In the past, less-skilled DIYers would tend to buy the cheapest tools on the market, on the basis that they would not get value from more expensive tools. These new tools from Bosch, however, are quite expensive. For example, the corded version of the NanoBlade-equipped EasyCut 50 sells for GBP74 (about AUD135) on Amazon UK and the cordless EasyCut 12 sells for GBP106 (about AUD190). That's far more than the equivalent jigsaws would sell for - and justifiably so, given the new technology.

A coming change?

What we are beginning to see develop in the power tool industry is a mismatch between the tools that are being developed by the manufacturers and the channels to market that are offered by retailers. While product ranges have dramatically increased in size over the past six to seven years, retailers continue to rely on the same sales process they were using 15 years ago.

Online selling has taken up some of the slack in the system. Notably Bunnings offers a "special orders" service, where customers can buy products such as Makita's extensive 12-volt range, and it has recently enabled ecommerce on those transactions. However, even retailers that are predominantly online, such as Sydney Tools, struggle to represent the breadth and depth of products available, and typically fall back on providing only the more popular products.

It has become a familiar recitation to mention that 20 years ago if you had to get someplace and didn't have your car with you, you hailed a taxi. You rented your entertainment from stores that stocked racks of DVDs. And if you went on holiday anywhere, your choice of a place to stay was limited to hotels, motels, and possibly dodgy bed-and-breakfast places. All that has changed now.

Individually, innovations such as Uber, Lyft, Netflix and Airbnb seem fairly innocuous. Taken together, they don't so much signal the rise of technology (in particular of the social interactions that get privileged by what mobile phones make possible), as a deeper understanding by consumers of what it is they really need and are willing to spend money on. Consumers don't want taxies, they want to get from A to B with the least possible inconvenience. They don't want the "convenience" of digital media stored on physical media, they want vast selection, and immediate, spur-of-the-moment access. Nor do they actually need or want the stuffy rituals of hotels. They want a place to sleep and to perhaps eat a meal, and having direct contact with "real" locals, rather than hotel staff, seems a particular plus.

A good question to ask is what happens when we begin to apply that same kind of thinking to the power tool industry. How much do consumers really benefit from owning, say, a cordless power drill? They may be cheaper, more powerful than ever, and so forth, but all that has not altered the use pattern that most follow, where the drill is used a maximum of 50 hours a year, and for the rest of the time sits fallow in a toolbox or drawer somewhere, becoming rapidly outdated, its Lithium-ion batteries ageing into oblivion.

Of course, there is the argument that, try as you might, power tools remain a very physical product that requires a very physical presence - you can't simply choose to download them. But, unlike movies and Netflix, but very much like Uber and cars, it is likely that consumers will be able to plan and anticipate when they want and need this kind of service/tool. It's very rare that today the average homeowner manages to avert disaster because they have, waiting in a drawer somewhere, just the right kind of impact driver.

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Over the next 15 months or so many Australian independent hardware retailers will make core decisions that will affect their businesses for five to 10 years to come.

There are multiple reasons why the remainder of 2018 and much of 2019 will be "decision time" for independents. While there are a couple recent, direct events that have helped to "trigger" the need to make choices, what is more important is that several industry forces that have been around for some time are coming into tighter focus. In the reasonably cautious "wait and see" balance many retailers adopt, we've now moved more into the "see" portion.

For many individual independent retailers the key question at the moment is whether they should remain with their current buying group affiliation, move to another buying group, or simply forgo the expense of any affiliation. Or, to put that a little differently, what are the real benefits of belonging to each buying group, and how are these benefits likely to change over the next five years or so?

While that might seem a difficult question to answer, it is possible to work through the models the main buying groups plan to implement, and to arrive at some understanding of the differences.

Along the way, it seems necessary to gain some understanding of two basic questions, as well:

Background

What shifts have taken place for the major players engaged with the Australian hardware retail market over the past two years?

After a year and a half of converging the Home Timber & Hardware Group (HTH) with Mitre 10, the industry is starting to see the outlines of Metcash's Independent Hardware Group (IHG) become visible. With much of the management team from HTH let go, it's no surprise that this tends to lean a bit more towards Mitre 10 than HTH in terms of culture.

As announced at the IHG Expo in Adelaide in mid-February 2018, the decision that Metcash will develop Mitre 10 as the main brand out of the four store brands currently operating has been made. The implementation of this has been delayed until early 2020. It doesn't seem clear whether during those interim two years the HTH brand will receive equal treatment to Mitre 10 in terms of resources such as advertising expenditure.

In any event, internal survey results from IHG released at the Expo would indicate this outcome might not suit many HTH members. It's also not the answer that the investment analysts were looking for. Amalgamating the brands would result in an additional $5 million added to earnings before interest and taxation (EBIT) annually, according to some estimates. The delay is another indication of a certain fragility to the current alliance between independents in Mitre 10 and HTH.

Meanwhile, a smaller but rapidly growing competitor for independents, the Hardware & Building Traders (HBT) group, after over a year of operating under the guidance of "the two Mikes" - Mike LoRicco and Mike Coates - has recently appointed a new CEO, Greg Benstead. Interestingly, both Mr Benstead and IHG's CEO, Mark Laidlaw have experience working for Metcash's main retail business, the Independent Grocers of Australia (IGA), to which IHG is a corporate sister.

There's little doubt that HBT sees itself as providing a good option for HTH stores that are interested in alternatives to IHG. As Mr Laidlaw mentioned in response to an analyst's question at the presentation of Metcash's first half results for FY2017/18, the few HTH stores that IHG have lost so far migrated over to HBT.

In the independent area, the National Building Suppliers Group (Natbuild), has an unusual profile, with just 34 long-term members operating 140 trade outlets in Australia, generating $1.8 billion in trade sales a year. It has a long-term strategy of seeking larger, more successful retail operations as members, which are especially attractive to suppliers due to their market clout and stability.

While Natbuild has been overtaken by IHG, which looks like it will generate over $2 billion in sales a year, there are indications that the latter company is still not getting the same level of volume-based discounts from suppliers the former does. Recent allegations of IHG staff gaining knowledge of deal terms through unauthorised access to the Natbuild website (allegations made in October 2017 and then withdrawn in late February 2018) may give some hint of the degree of competition between the two companies.

Outside of these major players there are a number of smaller buying groups, most of which have either a speciality or regional focus - or sometimes both. They offer varying degrees of support and access to supplier deals, and for many hardware retailers provide an excellent solution to their needs.

Then there are speciality hardware franchises such as Total Tools. The company calls itself "Australia's largest trade and industrial tool retailer". Its website states that it features over 7000 tools in its stores, with access to a total of 60,000 products across Australia.

Finally there is the emerging category of retailers who operate primarily online. Sydney Tools is perhaps the best known, and it has continued to expand its offline presence by opening new stores in Melbourne. Added to that are emerging specialist ecommerce retailers such as Monsta, which is building a paint business online. Amazon Australia, while it is devoting some attention to an online home improvement section in its store, is unlikely to have much of an impact until mid-2019.

Bunnings

Australia's largest hardware and home improvement retailer, the Wesfarmers-owned Bunnings Australia & New Zealand (BANZ), continues to be the single largest force in the Australian hardware market. With revenue for its most recent half of $6.6 billion, up by over 10% on the previous corresponding period, and earnings before interest and taxation (EBIT) of $864 million, up over 12%, it remains the dominant player in terms of both market share and market growth.

Power-tools represent a good example of the influence of BANZ on the overall hardware market. Bunnings has pioneered low prices in this category. Many independent hardware retailers will admit that their power-tool sales return very slim margins when they attempt to be at least price-comparable with Bunnings, and that they only stock these tools so as not to disappoint loyal customers, and as a gateway to selling the far more profitable power-tool accessories.

While Bunnings does apply specific strategies to the power-tool category ("captive" brands, exclusive distribution, wide range, everyday low pricing), its ongoing success is less dependent on well-developed strategies in individual categories, and more on an overarching, carefully applied strategy. In fact, Bunnings is the only retailer in Australian hardware that has a clear answer for the two pressing questions we are looking at here: they know where their margin/profit comes from, and have a clear vision of the changing economics of the wholesale/retail hardware market.

This is evident in what is perhaps the company's most revealing statement made by former managing director of Bunnings John Gillam in 2015. In response to an analyst's question about why Bunnings did not increase its prices, Mr Gillam responded by stating that "the margin is the outcome". Unwound, one of the meanings of this statement is that pricing is effectively set by the market itself, not the retailer. Given that, margin is not a matter of "cost-plus", it is a matter of controlling the supply-chain so as to produce low supply costs, producing better margins.

The shape of the market

Over the past 25 years the Australian hardware market has been subject to a number of disruptions. While many see Bunnings as being a principal cause of that disruption, it is probably more accurate to see the disruption as being somewhat external to the hardware market, and Bunnings as the only hardware retailer that really understood and used those disruptive forces.

The major shift from the early 1990s to today has been from largely dominant suppliers and brands, to the dominance of retailers and the stores themselves. Brand names continue to matter in some specific areas (such as interior/exterior house paints), but in most other areas their influence has faded, and continues to decrease.

These cycles of domination by brands and then by retailers has been extensively studied by one US-based economist, Robert L. Steiner, who has brought a unique perspective to his analysis. Far from being an "ivory tower" theoretician, Mr Steiner obtained an MA in economics on the US GI Bill after World War II (in which he flew 35 missions over Germany in B17s), then went on to become president of the Steiner family-owned toy manufacturer Kenner Products. This was a very successful company which developed (among other products) the Easy Bake oven for children, marketed Play-Doh and Spirograph, and was the original licensee for Star Wars toy figurines.

After his time at Kenner, Mr Steiner was appointed senior staff economist at the US Federal Trade Commission, where he was mostly concerned with competitive policy. He authored over 20 academic papers, three or four of which are quite seminal. His work was greatly enriched by his "hands-on" experience as a supplier in the fast-moving consumer goods market. That experience frequently contradicted the accepted wisdom of more academically-based economists.

In more recent years, the economist Michael P. Lynch has built further on Mr Steiner's work. Writing in 2003, he outlines concisely how ignoring the retail/wholesale aspect of economics distorts the reality:

For more than three decades Robert Steiner has been arguing that economists have neglected both retailers and the competition between retailers and their manufacturer suppliers. The most extreme form of neglect is to act as though retailers do not even exist; manufacturers or importers are assumed to sell directly to consumers.

Steiner calls the latter "single stage" thinking in opposition to his "dual stage" theory in which both retailers and manufacturers play an important role in determining consumer prices and the quantities and types of goods sold.

While many of Mr Steiner's papers are worth reading, the one that is most helpful with the Australian hardware market is entitled: "The Inverse Association Between the Margins of Manufacturers and Retailers". There is an extensive commentary on this paper by Mr Lynch, entitled: "Why economists are wrong to neglect retailing and how Steiner's theory provides an explanation of important regularities". These can be downloaded in one document from the following link:

The axes of retail/supply

The main insight that Mr Steiner offers is that competition in the retail/supplier sector can be viewed along two "axes". The horizontal axis is made up of like participants competing with like - stores with other stores, brands with other brands, and products with products. The vertical axis runs up the actual supplychain, where retailers compete with suppliers, and suppliers compete with retailers.

What makes Mr Steiner's work of particular interest is that he interrelates competition along these two axes. His statement regarding this is:

In a dual stage environment, the market power and the margins of an individual manufacturer or retailer are a joint function of its horizontal competitive position against firms at the same level, and its vertical bargaining power with firms at the other stage.

That is, he sees the vertical competitiveness of a retailer or supplier as affecting its horizontal competitiveness, and vice versa. High-performance retailers can demand more from suppliers. High performance brands enable suppliers to demand more from retailers. But also, importantly, there are tactics that both retailers and suppliers can use to influence this relationship. Retailers can make use of "home brands", and suppliers can alter the balance through the use of advertising.

As it turns out, considering the relationship between these twin axes is very helpful when it comes to understanding what is going on in the Australian hardware market.

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If you wanted a single metric on which you could judge what happened to kitchens in 2017, you could do worse than to look at that perennial source of overstated kitchen style, the television reality renovation show, "The Block".

In the most recent season 13, the "kitchen reveal" clocked in with 1.545 million viewers, in third place behind the "backyard reveal", and, the winner, "master suites reveal". The "interim" shows about the kitchen building process were also very low on the rankings. This is in sharp contrast to the previous two or three seasons, where kitchens were ranked first or second, and the interim shows attracted decent audiences as well.

Looking at the kitchens themselves, it's easy to see why. They are (mostly) functional and pleasant. However, in contrast with past seasons where some kitchens on "The Block" have been extravaganzas of vast counters, expensive appliances and high-end finishes, these kitchens were mild, bland, a little outer suburban. Appearing in the aftermath of the near operatic drama of the very large master bedroom suites from the previous week, they seemed almost negligible.

Design changes

The most recent "The Block" kitchens were also, universally, "off-trend". While they all clung to the standard accoutrements of what has come to be a "modern" kitchen -- bench seating for meals, textured benchtops, contrasting dark cabinet doors, displayed appliances -- much more pared-down kitchens began moving into prominence for the fashionable in late-2016.

As shown in such display showcases as the recent Australian Interior Design Awards, the leading-edge kitchen today is simplified, with the clean lines of a modern table replacing stools at a kitchen counter, near seamless and handle-less cabinetry the ornamental efforts of the past, with appliances either concealed or modestly displayed.

They are also, near universally, dominated by the colour white. "White", of course, is a way of referring to an entire design trend, which we might think of as being all about "simplicity", delivered in a spare, smooth style, that is not Scandinavian in origin, but heavily influenced by Scandinavian design. The overall colour pattern remains white, but this is accented by "blush" colours, including pink and grey. Another strong trend is white-and-timber, with light- and mid-brown timber used to accent a white kitchen, or white used to accent a predominately pale timber kitchen.

Why white?

The move to white in kitchens tends to be significant whenever it occurs. It is motivated by a number of different factors, some cultural, some commercial, and some oriented around a shift in the way consumers view and use their kitchens.

In terms of the commercial aspects, it pays to be aware that the kitchen area, which is one of the most profitable ones in home renovation, is highly competitive. There are four levels of competition: the "flatpack" kitchens; the mass-kitchen suppliers; builder/specialist custom kitchens; and high-end designer custom kitchens.

Group 1, the low-end, is dominated by Kaboodle and IKEA, though Freedom has launched its "Essentials" range in order to compete in this area, and Hafele is expanding its marketing to include more independent retailers.

Group 2, the mass-market area, does sell to DIYers, but it is more strongly focussed on tradies who install kitchens. One of its key players is Principal, which seems to have taken over the Mitre 10 business after being the main supplier for the Home Timber & Hardware Group (HTH), when these merged into the Independent Hardware Group (IHG).

Group 3, the builder/specialist segment, features some major chains, such as Freedom and The Good Guys, but also smaller, regional players.

Finally there is Group 4, the top-end designers, who are often associated with architectural firms, and whose renovations are usually part of a more comprehensive refit or refurbishment.

In terms of the costs of kitchens, there seems to have been some movement on this since mid-2016, with the amount most consumers are willing to spend steadily coming down. There is a general consensus among those HNN contacted that $18,000 would pretty much mark the middle of the market in terms of numbers.

Kitchens under $18,000 are clearly dominated by Group 1. Kitchens from $18,000 up to $27,000 are in the most competitive area of the current market, with Groups 1 to 3 competing. In the $27,000 to $48,000 region, Group 3 dominates, and over $48,000 is the territory of both Group 3 and Group 4.

The HIA pegs the average price of renovation kitchens at around $20,411. Chart 4 shows the spread of spending as determined by the Houzz Kitchen Trends Study - Australia for 2017. This is tilted a bit more towards the high end than the HIA figure would indicate, as it is based on the Houzz market, which would tend to be a little more "upmarket" than the general population.

While these are average figures, HNN's own research indicates there are some differences between the states. In particular, kitchens in NSW tend to be priced about 10% over the average. Surprisingly, over the past two years, that trend has been reversing in VIC, where kitchen costs are averaging down about 10% on the HIA number.

So, how does white play into these numbers? Well, for one thing the Houzz survey certainly supports the "rise of white": the top three colours for kitchen cabinetry are white at 61%, grey at 7% and black at 5%.

In terms of its commercial effects, however, white is very much a competitive strategy adopted by the more high-end kitchen installers and designers. One of the factors that have driven them to this strategy is the high level of success of both Kaboodle and IKEA in the lower-end market. IKEA's new Metod kitchen has proven to be very popular, especially as it reflects basic Scandinavian values, and Scandinavian design is growing in popularity. Kaboodle's colourful kitchens have brought a sense of play and engagement to what was once a very plain utility room.

The success of these kitchens has driven custom kitchen makers to find new ways to differentiate their offerings. Initially they did this through the use of more exotic benchtops, but both IKEA and Kaboodle devised strategies to match this. Eventually, though, they found the perfect weapon to hold back these competitors: white.

Nothing is quite so difficult to bring off as a really good, all-white kitchen. With the removal of colour, the kitchen is all about form and -- to some extent -- texture. Every seam, every knob, blemish in a benchtop, every slight jot of colour, is shown up and broadcast.

These kitchens virtually demand custom design. Without careful customisation and fitting to a space, they can end up being cold, clinical and formless -- in fact, simply "cheap looking".

Pared down to extreme simplicity, without the "breakfast counter" (actually designed in the US to mimic the counters found in most diners), relying instead on a matched and carefully chosen table, it is a look that really is beyond the reach of most DIY/flatpack kitchens.

While IKEA has not done too badly out of this shift -- with a semi-custom installation these kitchens can come close to matching this style -- Kaboodle seems to have fared less well. Even its in-store displays at Bunnings, which were really designed to showcase colourful kitchens, fare less well when white and very pale colours dominate. Added to this is that IKEA kitchens have given rise to a wide range of "hacks" that enhance and extend their utility, as people all over the world experiment with additions and variations, such as custom wood doors mounted on IKEA cupboard carcasses. Kaboodle has yet to really benefit from this kind of (partly social media driven) innovation.

The other side of white

While these commercial aspects are an important part of the story of white, there is much more to it. What is also going on is a restructuring of the kitchen, in the sense of the role it plays in the house. While the past four or five years have seen the rise of the "kitchen as living-room", the kitchen is instead now becoming more of an integrated part of the house, functioning as a conjunction to living, dining, and family rooms.

To get a glimpse of how this works, it is really worth reading a blog post by London-based designer and blogger Cate St Hill, on what she calls the "transformation" of her apartment through an IKEA kitchen makeover.

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Sometimes it can seem like the internet's second purpose is to function as a giant irony machine. In that vein, it's worth noting that October 2017 marked the fifth iteration of Cyber Security Month across much of the world. Nicely synchronised with that, it was also the month when allegations emerged that person(s) working for Mitre 10 (part of the Independent Hardware Group (IHG), which is owned and operated by the Australian Stock Exchange-listed Australian wholesaler and retailer Metcash) had made an unauthorised access to the website of The National Building Suppliers Group (NatBuild) in late September 2017.

News of this alleged breach was scooped by Sue Mitchell of Fairfax Media, writing in the Australian Financial Review (AFR) of 2 October 2017. Her article can be accessed here:

Since then, further details have emerged, largely through filings with the Federal Court of Australia. We summarise below what is known so far, and how that information came to light.

What we know so far

How alleged breach was uncovered

The damage done

The affidavit is said by the AFR to cite NatBuild product category manager Jon Rodman as alleging that the direct damage done by the unauthorised access could be between $8 million and $18 million. Further, according to Mr Rodman, this would place Mitre 10 in a better position to lure existing NatBuild members away.

Ms Mitchell's AFR article quotes NatBuild chairman Martin Hartcher as saying:

We are concerned that the information has been accessed unlawfully and we are concerned that this will impact on the confidentiality of our agreements with suppliers. We are at a point in time where we are openly competitive with Mitre 10 for independent building supplies firms, and that this forms part of that competitive struggle.

Much of the investigation into this alleged breach is going to centre on exactly how much damage could result. Beyond giving a legal rendering of the extent of damage caused, it is also, of course, vital in an operational sense to NatBuild, which now finds itself, through no fault of its own, embroiled in an effort to control and limit any damage caused by the alleged behaviour.

The core difficulty with unassociated breaches of highly confidential information that have occurred in the past is that, to use an American expression, they represent a bell that cannot be unrung. Once confidential information has been accessed, it cannot be unaccessed. Even if it can be proven that confidential information was not widely disseminated, it is always the case that little can prevent its future dissemination.

Beyond NatBuild, there are also the concerns of the suppliers themselves, who are uninvolved bystanders. Corinthian Doors, in particular, has found itself at the centre of these issues, and may face exposure to the public of many of its confidential dealings with NatBuild, though it is likely steps will be taken to limit any harm from this by the Courts. It is a risk that applies whether the allegations are proven true or not.

Just how vulnerable any interference in the business of negotiating rebates with suppliers can make Mitre 10 parent Metcash is revealed in the statements of Metcash's auditors, Ernst & Young, in its audit of annual accounts:

The Group [Metcash] receives income from suppliers which is determined based upon a number of measures including quantities purchased, quantities sold, purchase values and the performance of promotional activities.

We considered this to be a key audit matter as supplier income contributes a significant value to the Group's results, there are a large number of varied agreements in place and some of the arrangements require judgment to be applied in determining the appropriate consolidated statement of comprehensive income classification based on the terms of the agreement.

This is not a "hack"

While some commentary has suggested that what is alleged is that "Mitre 10 hacked NatBuild's website", what is alleged is really not a hack in the conventional sense.

In purely general knowledge terms, there is just no way that anyone with any real computer knowledge at all (including many savvy 15 year-olds) would ever use unauthorised credentials to access a website from a known, fixed IP address. At the very least, even if you aren't very technical, you could use the WiFi at a shopping centre, a library, even a McDonald's. If you are technical, there are a dozen different ways of masking an IP, by using a proxy server or VPN host, and so forth. Sites such as Hidester (/https://hidester.com/proxy/}Hidestar.com) offer these services for free.

Speaking entirely hypothetically, based on experience in other, different cases, sometimes people have obtained confidential login information, and think the "safe" thing to do is to log onto the website using a smartphone, so as not to compromise their company's systems. Except, of course, that the smartphone turns out to be connected to the office WiFi, and therefore uses the company's IP address.

Who is to blame?

Setting aside the specifics of this particular case, we're really looking at a very common type of situation in the world today. There are three players in these situations: the company that has the online data resource; an individual or small group of individuals that has obtained information, altered information, faked data or something of that nature; and then there is the company that person or people work for, which stands to benefit (theoretically) from their activities. It has a very wide range, from conventional hacking for information, to what happened at Volkswagen over its intentional hacking of tests for diesel engine pollution.

Much of the debate in these cases comes down to whether we are willing to accept the narrative of the "rogue employee", or if we acknowledge that the company that employed the hackers shares some responsibility as well. In cases such as Volkswagen, and even in the case of "rogue" financial services traders, it is increasingly the case that the individual and his/her employer are seen as sharing the blame.

Senior managers at Volkswagen are now undergoing scrutiny and prosecution for what is seen as their part in emissions dodging. French Societe General trader Jerome Kerviel was convicted for his part in EUR4.9 billion in trading losses. While his conviction was upheld, Societe General has now been judged unjustified in his firing and forced to pay compensation. Additionally, instead of being required to pay back billions of euros, Mr Kerviel is now held accountable for EUR1million. That's because the courts recognised that Societe Generale was largely responsible for those losses through their past conduct. (Society Generale is appealing these rulings.)

In general terms, there has been a shift to see employers as having an active responsibility in these matters. The questions that get asked include: did they provide clear ethics guidelines to all employees? Did they enforce ethics, or covertly encourage unethical behaviour by concentrating only on results, and not on means? Was there any audit/review process in place to ensure employees were acting ethically?

It's likely that as the business world comes to terms with the allegations involving NatBuild that all of Metcash operations are going to come under this kind of scrutiny.

NatBuild's role

First and foremost, NatBuild really should be congratulated, especially NatBuild's IT team. This is some great work, and they deserve kudos. Not only were systems set up which enabled NatBuild to trace information accessed by a specific login, but also they were evidently able to act swiftly and effectively in getting that information to management.

HNN notes also that NatBuild has a very good terms and condition document on their website. (We checked, this is the same one they had in February 2017, so it wasn't updated after the fact.) Among its terms and conditions it states:

You must not: republish material from this website (including republication on another website); sell, rent or sub-license material from the website; show any material from the website in public; reproduce, duplicate, copy or otherwise exploit material on this website for a commercial purpose; edit or otherwise modify any material on the website; or redistribute material from this website.

Where content is specifically made available for redistribution, it may only be redistributed within your organisation.

If The National Building Suppliers Group provides you with a user ID and password to enable you to access restricted areas of this website or other content or services, you must ensure that the user ID and password are kept confidential.

And later adds:

Without prejudice to The National Building Suppliers Group's other rights under these terms and conditions, if you breach these terms and conditions in any way, The National Building Suppliers Group may take such action as The National Building Suppliers Group deems appropriate to deal with the breach, including suspending your access to the website, prohibiting you from accessing the website, blocking computers using your IP address from accessing the website, contacting your internet service provider to request that they block your access to the website and/or bringing court proceedings against you.

So not only a good IT team, but a good legal team as well.

That said, as of 22 September 2017, the rules for data security in the home improvement industry have radically changed, and this applies as much (if not more) to NatBuild as to anyone else.

From now on the minimal acceptable standard for securing data online will be a two-factor authentication (TFA) system. If a company securing valuable data online is not using TFA, and there is a data breach, they could be held responsible. Beyond that, as the NatBuild situation indicates, even the suggested breach of this kind of data has long-running, severe consequences, and no company can risk that happening.

TFA is a system that many are by now familiar with. Accessing services such as MyGov, for example, typically requires TFA. After logging in with a username and password, the system will text a four-digit temporary "PIN" to your mobile phone, which you then enter to obtain access.

Had TFA been used on the NatBuild website, the alleged unauthorised access would have been almost impossible. In the case of an unauthorised access, the person whose credentials are used would receive a PIN notification, and could alert NatBuild's IT department that an attempt had been made.

Fortunately, TFA systems have become more sophisticated and easier to deploy. Companies such as Trilio offer packages that include TFA. Also Google Authenticate is an app for both Android and iOS devices that eliminates reliance on texting for TFA. The app enables you to set up a special PIN generator, based on a "secret" that users share with the website they are accessing. When you want to access the website, you enter your username and password, then look up the PIN on your smartphone, and enter that as well.

It is vital that every buying group, as well as suppliers, and even retailers, make the move to TFA. These security needs are only going to increase.

Analysis

It is important to note that the progress of these allegations through Australia's legal system is in its very early stages. We really cannot tell, objectively, how much substance there is to the NatBuild allegations. That is what the Federal Courts are for. HNN will be following every aspect of this case as closely as we can.

For many of us in the home improvement industry, however, these allegations do not come as a big surprise. We've all been aware of how heated the competition has been to get the best possible price and biggest ever rebate from suppliers. There has been for some time a fair amount of "grey area" dealing around this, with some retail buying groups working on the very edges of what is ethical when it comes to finding information.

Perhaps the real question we need to ask is whether this concentration purely on knocking suppliers down to the lowest price possible is such a great idea. One cause behind it all is the perceived need to compete with the giant of the industry, Bunnings, on its own terms.

HNN would contend that this is a massive misreading of the market (and of Bunnings). Certainly, Bunnings does seek low prices from suppliers, but it does so in the context of demonstrated, consistent high volumes of sales across a broad range of products. It also has arrangements that enable it to work closely with suppliers to tailor products to the needs of its stores and the markets they serve. Captive brands such as Ozito and Tactix provide it with unique advantages, as do exclusive distribution deals with brands such as Ryobi and AEG.

To respond to such a sophisticated supply infrastructure by merely negotiating over small percentages of margin for a very limited range of products is to demonstrate an inability to grasp how the home improvement market differs from broad commodity retailing in areas such as supermarkets. It limits the ability of suppliers to effectively market their products, makes innovation very difficult for them, and will, eventually, create markets controlled by supplier duopolies.

HNN would strongly suggest that it is not simply the case that "customers want low prices". Customers actually want a lot of things, and low prices is just one of them. It is possible that some retail buying groups have become obsessed with low prices and little else because the other deliverables -- real product knowledge by staff, genuine in-store help, and a focus on helping customers get things done -- are a lot harder to achieve.

The store that would become the Yarra Junction H Hardware did not present itself, back in 2008, as a sterling opportunity in a high growth area. Instead, it was a rundown, poorly performing store that was one of two being sold by brothers who had decided to get out of hardware retail.

It's not so surprising, however, that Chris Moorfoot had developed a bit of a retail sixth sense, and could see some potential in the failing business. Much of his life has been spent in industries associated with home improvement retail. That began with his first job as a casual sales assistant at McEwan's in 1984, before he turned 18 years-old. While working there he added a job as an automotive spray-painter, working for his father's business.

All that came to something of an abrupt halt in 1990. After getting engaged, and spending eight weeks on a trip overseas, he returned to find much of Victoria's economy seemingly upended. The Pyramid Building Society had collapsed, John Cain stepped down as state premier to be replaced by Joan Kirner, and Mr Moorfoot's father was basically out of business - so much for his plans to eventually take over the family enterprise. In Melbourne and Victoria the event famously described by the then-Treasurer, Paul Keating, as "the recession we had to have", cut deeply, as asset prices declined, leading to defaulted loans and financial collapses. The AUD was at one stage worth USD0.51, despite expensive intervention by the Reserve Bank of Australia.

Mr Moorfoot's experience in the paint department at McEwan's proved invaluable, as he found a job working for DuluxGroup, where he stayed for eight years. At the end of those eight years he began a working journey through many of the key players in the hardware industry, such as Danks and Kincrome. Mr Moorfoot describes this time of his life like this:

I have to say that my motivations for leaving were always good, and I suppose also, you apply to a place, and you hear how good it is going to be. I was always thinking "well we're going to change this, it all can be fantastic." Then two years later, it's as though nothing has happened.

Any business that has been around for a while is a little like a big lumbering bus, and you get new passengers on board that say "yeah were going to take it off in this direction." But it turns out that the bus is really hard to turn!

Finding a business

After 18 years of that kind of effort and disappointment, and after a particularly bad experience with one employer, Mr Moorfoot decided he would try a different direction.

I had a lot of exciting opportunities that turned out to be disappointing. I think I was also probably a bit anxious and ambitious to try to make things happen. So I ended up saying, "Well, you know what? This is getting too hard."

While he had experience working in many different businesses, Mr Moorfoot had yet to run a business himself. After looking at several opportunities, such as franchises, and an aborted consideration of taking over the Post Office in Warrandyte - which was, he says, incredibly expensive for its declared earnings - he began to consider hardware stores. He passed over one located in the eastern Melbourne suburb of Templestowe, as he wasn't happy with a location that was too urban.

Then he came across the hardware store located in Yarra Junction.

I thought, "Hello, I know exactly where that is." As a rep, I used to call out here [Yarra Junction]. At that stage we were channelised reps, so I was doing Mitre 10 stores only. But I was driving past the store all the time. It always seemed to be busy. It was a Thrifty-Link at the time, and I knew the rep who was dealing with the store. He said the place was amazing and that they would sell a lot goods there.

His first consideration was the same one that most people getting into hardware have: Bunnings. However, he could see that Yarra Junction was an unlikely destination for a big box store, with both Lilydale and Healesville more likely to attract their business.

Next stop was to start looking through the books for the store. That's when he discovered that the store in Yarra Junction was paired with the store in Templestowe. He also found out that both stores were in a lot of financial trouble.

So we started to go through the process. I don't think we ever really thought we would complete the purchase. We thought we would go through all the financials, through all the legal requirements and then something would happen, and we would think, "Well that was a real experience." But everything, rather than becoming a roadblock, became a hurdle that we managed to jump over. So we ended up taking over the store in July 2008.

Taking over and starting to run the business, Mr Moorfoot found himself facing some unpleasant realities.

It was a shell of a business. There was no core range, there is no goodwill. The computers were held together with Band-Aids. It was really shocking. Even though we didn't pay a huge amount, we still overpaid, both for the stock and for the business. But then we were green. We simply didn't know.

A lot of it came down to what the previous owners had done to the business.

It did come with a few accounts, but they were all really quite shocking. For the most part [the previous owners] had transferred their business over to their other store in Templestowe, which was a larger enterprise. They did a number of other things as well. In my opinion, they basically raped and pillaged this business.

Surprisingly, though, all these troubles did not really put Mr Moorfoot off the business - quite the contrary, in fact.

Thankfully there was still some life in the old girl yet, and it turned into a labour of love, because when you're passionate about an industry and you enjoy it, you keep going.

That said, it was still pretty tough.

I remember going home each night. At that stage my wife, Anthea, was not in the business as yet. I remember the numbers were quite woeful: $1500 one day, $1200 the next. We spent our first three months apologising to customers for not having stock. Because the store had such a bad credit history that we couldn't get any stock.

Just as icing on the cake, Mr Moorfoot discovered that some of their problems had to do with their staff. The most serious one had to do with the person handling their accounts.

We found out that one person who was running the administration side of our business was a thief! This person knew the system better than any of us, and it was only when my wife Anthea came on board, and became more familiar with things, that we found that person out.

We had blocks of invoice numbers that were missing, and we couldn't work out why that was happening. This person was actually reversing cash sales out. Then the person would pocket the cash. !Since that employee left, all of our invoices are back to being sequential. Previously, we had thought there was a fault in the system.

We would caution anyone who is buying a business that comes with an employee who has been running accounts receivable, payments and paying bills for a long period of time, that they should audit the entire business.

So we had some real challenges with staff, some serious. There were psychological issues, whatever. It has taken us some time to get staff that are here because they want to be here. They understand this will never be a business that will make them a fortune, but they are five minutes from home, and that means a lot to them.

All of the original staff are now gone, except for one, Ken, who is definitely a "keeper".

Ken who works here, we worked out that between the pair of us, we have close to 90 years of experience! He has just turned 65 ,and I think he started in Wales at the iron mongers, when he was a wee lad. He has probably forgotten more about hardware than I know.

Developing the business

In getting the business going, Mr Moorfoot faced a major problem in simply stocking the shelves and displays. Few suppliers were willing to extend any credit. Having chosen to go it alone without any partner, the business did not have a lot of cash to spread around. That meant the store had to become proficient at stocking the bare minimum needed to keep functioning.

The challenge that we had back in the day, was the that as our business was so damaged we couldn't buy a lot of stuff, because we did not have a lot of money. So one of the things that was prohibitive was the matter of minimum orders.

To continue reading this story, please download the HI News pdf at:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Each annual Wesfarmers' Strategy Day, from the perspective of reporting on Bunnings, tends to fall into one of three categories. Type A is when Australia's largest home improvement retailer is making an investment in something controversial - such as when it radically expanded its store network in response to the challenge from Masters Home Improvement - and needs to both announce this and defend it under questioning from investment analysts.

Type B is when Bunnings is doing something a little controversial, but not very obvious, so the company can get it past the analysts by either not emphasising it, or by making it seem as though something else is being referenced. Type C is when some other event has occurred outside of Wesfarmers that has captured the analysts' attention, and coloured their attitudes and questions.

This year's Strategy Day, held on 7 June 2017, was mostly type C, with a dash of type B added. The exterior event that captured the attention of the analysts was the imminent arrival of the world's largest online retailer, Amazon, to the Australian market. Analysts came close to suggesting that some of Wesfarmers' divisions, in particular its still-failing mid-range department store Target, were unlikely to survive the arrival of Amazon in the Australian retail market.

Bunnings did not come in for that level of questioning, but analysts did push to understand what the retailer's online strategy would be over the next two to three years.

All this is to say that it's always a good idea to keep in mind that "Strategy Day" goes both ways when it comes to Wesfarmers, and particularly Bunnings. Analysts do get an opportunity to ask more questions, the company does present more of the fundamentals of its plans for the next year or two years. However, Wesfarmers has always been adept at concealing elements of its strategy from competitors. It's not uncommon to find that a little less has been said than at first seemed to be revealed. And on occasion, what seems to have been said is not quite what was really said.

That's one side of the Strategy Days. The other side is that, especially for Bunnings, the top executives do deliver some of the most dense, and at times the most profound, statements about the basics of how these businesses intend to operate. They can often be a kind of very modest, but nonetheless ambitious, operational manifesto.

For Bunnings, these manifesto-like statements reference what is perhaps the deepest part of its DNA. Bunnings' most closely held belief, as nourished by its former CEO, John Gillam, is that "nothing is deserved, everything must be earned". The Strategy Day introductory statements are, at their heart, a reiteration of this belief, and a careful listing of the ways in which, in the coming financial year, the retailer intends to (again) earn the trust, loyalty and engagement of its customers, its staff and its suppliers, as well as acceptance by the communities in which it operates.

The manifesto delivered this year by Michael Schneider, who has replaced John Gillam as both managing director of Bunnings Australian and New Zealand (BANZ), as well as overall CEO of Bunnings, including Bunnings UK and Ireland (BUKI), was particularly dense, and deserves close parsing and interpretation. In HNN's view it presages some more difficult times to come for not only Bunnings, but also for home improvement retail in general.

Smaller stores

Before getting into this deeper view, it is best to start with something on the lighter side of the Bunnings presentation. As remarked above, while this Strategy Day was largely a type C affair, there was a dash of the type B, which in this case is all about a little bit of "misdirection" by understatement.

We saw something of this in the response to what was a good question from respected analyst David Errington, Bank of America Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia. Mr Errington asked:

The one area that I've really been interested to watch in the last five years is the flexibility in your format. I mean, John [Gillam] always used to say, and you used to say, you're not a cookie cutter, but you're taking that to new dimensions like the Collingwood store. With the carparks all around the place, it didn't seem to be a typical Bunnings, but you seem to be a lot more flexible now in where you're putting stores. You can put car parks on the roofs. You can put them underground. You can do anything you like.

What's the sales density of these new type of formats? Are they comparable to a typical 15,000 to 20,000 square metre one out in the sticks or - and do they - what sort of return metrics are they? And going forward, what sort of proportion are we going to see with these new type formats that are outside of the norm of what we expect the Bunnings Warehouse to be?

Mr Schneider replied:

The Bunnings stores we open - so Bunnings Warehouse will always be the big box, big stock, big box, stores that you know. And the Bunnings stores are our small format.

For a long time, we had formed a view that the future was only warehouses. We revised that in the last probably six or seven years, to say the small formats play an important role. They play a role in going into a market to get the communities to having a Bunnings store in the area before you migrate to a warehouse. We've done that a few times where we have them, with the feeling 'well, we couldn't get anything else in Collingwood.' So we took the old credit building and turned it into a Bunnings store.

So from a format point of view, I'm pretty agnostic. I think if we can get the numbers to sort of work, and Richard [Goyder] and Terry [Bowen] touched on some of the sort of modelling that we do, then we can get in and get going. It's great, and some of them are good infill, particularly as traffic in major cities gets worse on weekends, and they're very convenient during the week for charities to drop in and get the things that they need. In terms of productivity, they perform really well. Some will be better than others and some of our warehouses also have high stock turn.

Well, there is nothing wrong with that response. However, the underlying reality is that Bunnings is engaging in some really experimental new formats, such as the store it has proposed for the inner-Sydney suburb of Rozelle.

Where the Collingwood store does a good job of compressing the content of a Bunnings Warehouse to a "pocket edition" that covers most of the needs for that area, the proposed Rozelle store would seem, based on its plans, to offer lower stock density and more amenity in an urban environment. It even includes a turntable in the delivery area, to reduce the problem of turning trucks in urban traffic:

Service vehicles (up to 12.5m long) will be provided with a turntable to turn within the site enabling them to enter and depart in a forward direction and these vehicles will approach along Parsons Street from Crescent Street and depart along Parsons Street to Mullens Street.

It is a quite radical, and very interesting idea.

Any other retailer - just about - in Australia, given this question would have gone on about these new formats, what the company plans to do with them, their potential, other plans under development.

But not Bunnings. Not Bunnings, because the retailer simply does not see any real advantage in doing so. All it would be doing, we expect the Bunnings' view would be, is to increase expectations, telegraph strategy to competitors, and possibly increase local resistance to the development application.

In the end, if the store gets approval (the first version was rejected), the store will be built, and it will be judged on how it justifies that investment and satisfies the needs of its customers.

The next bit of this conversation with Mr Errington is just as masterful. He asks another very good question:

But going forward, say if your next 100 [stores], which arguably ... could be the rolled out in, say, five or seven years, how many of those would be warehouses compared to how many would be these infill type stores?

That question is fielded by Justin Williams, the incoming chief financial officer for Wesfarmers (replacing Terry Bowen):

Majority is still warehouses. It's still the preferred format, but where there's opportunities, where there's markets, as I said, where it's rightsized, then we take advantage of that flexibility.

The majority. If 100 are built over the next seven years, that's...well, it's 51, isn't it? Once again, the company answers, but it doesn't advertise its strategy, or limit its future options by much.

The manifesto

After carefully reading the introductory comments that Mr Schneider made at the Strategy Day, HNN has reached the conclusion that the Bunnings strategy for FY2017/18 - and possibly beyond that - is based on expectations of a flat to slightly reduced market for home improvement goods and services.

This does not mean that Bunnings is suggesting or forecasting a reduction in either revenue growth or earnings before interest and taxation (EBIT) growth. It does mean that the company will likely be making some changes to strategy and its approach to ensure it does deliver its expected good growth results.

Probably the most significant data point which could suggest this is Mr Schneider's careful description of the opportunity he sees for Bunnings arising from the exit of Masters:

In the last 12 months, we've seen some fairly significant change in the market with one large competitor closing down.

Accounting for range overlap, the differential in average pricing and the role of competitive marketplace on those dynamics, we see some opportunity for growth, but at a much more modest level than some analysis has suggested.

In fact, the number that Wesfarmers has suggested is 20%. The company is stating that Bunnings will pick up only 20% of the revenue that was going to Masters while it operated.

This gave rise to some questions from analysts. Bryan Raymond from the Research Division of Citigroup asked:

On the residual sales you expect to pick up from Masters' closure, I'm just interested in your workings how you got to 20%? It seems, given the crossover that amounts to 70% to 75% of the overall range, it seems like a relatively low number. I would be keen on [understanding] ... how you got to your 20%.

Mr Schneider handed over to Mr Williams to respond.

Yes, 20%, consistent, obviously, with our market share, and it sort of really reflects the competitiveness of the industry. As Mike's slide showed, there's a myriad of competitors out there.

So, the sales were built up. They came from a large number of competitors, and it make sense that they would be shared back between that similar suite of competitors. We don't expect to pick up large numbers of those sales. The industry is much more competitive than that. That's the reality of the industry, it's highly competitive.

Mr Schneider then picked up on this answer:

And probably on a unit basis, we - if you thought about gain on a unit basis, it might be a bit higher, but we've also invested significantly in price and we also recognise that there was a price differential between us and that business.

So if you normalise some of that, if you - how many hammers you're selling, as an example, it might be more than 20%. But in dollar terms, that's sort of where we see it planning.

He is suggesting that a Masters' customer might spend $199 on a cordless power tool, but an equivalent power tool might cost only $189 at Bunnings, so a 5% reduction in revenue would be built in.

It fell to Richard Barwick, an analyst with CLSA's Research Division to ask a key follow-up question:

I think your comment, Mike... was it "lower than some analysis that's out there"? Is that code for "the market's expecting too high sales in Bunnings over the next 12 months"?

Mr Schneider clearly denied this:

I don't think that we'd sort of suggest that for a second, I think it's really just about trying to make sure that we can give all of you and everyone listening in sort of a good sense of the mechanics and how we've worked out our numbers.

Without the kind of modelling Bunnings can do on its own business, but thinking through typical customer interactions and the dynamics of the market, it is just really hard to get to the 20% number for the transfer of sales from Masters to Bunnings.

The narrative that Mr Williams and Mr Schneider are suggesting is that a customer back in 2014 stops going to his or her local Thrifty-Link for drill bits, sandpaper, paint, nails, hammers and mitre saws, and switches to a nearby Masters. Two years later, after Masters closes, he or she then says "Righto!" and shows up back at the Thrifty-Link.

In support of this, there are, of course, some people who just do not like Bunnings, and will not shop there. But so strong a preference is quite rare. It seems that, in general, a more likely narrative is that customers who have previously sought out a big-box experience by shopping at Masters will, when Masters closes, transfer their purchases to the only other big-box in the market, Bunnings. This is especially the case given that some Masters stores are within 100 metres of a Bunnings, and most others tend to be less than a five-minute drive away.

Again, though, allowing for a two-month aftereffect of the Masters liquidation sale on the market, Bunnings does have modelling not only for March of the previous quarter, but probably for April and May as well. That is "low season" modelling, but it would still be telling.

HNN's prediction, in line with other analysts, was around a 60% pickup for Bunnings of Masters customers. We could assume that is too high, and 50% is more likely. Given that, the only way that HNN can make sense of this prediction is to suggest that what is going on is that the Masters market (which was tilted towards more affluent consumers) will itself see a contraction, of around 35% over the FY2015/16 demand. Combined with a (to be generous) 10% price difference, that would mean overall potential demand was 90% of Masters demand, further reduced to 58.5% by a decline, with Bunnings then picking up, overall, around a 29% gain.

Of course, all this eventually just becomes a game of numbers and assumptions. If we are lucky, five or more years from now we'll be able to look back and have some clarity about the shape of the market.

What is very clear, however, is that the outlook is essentially pessimistic. Neither Mr Williams nor Mr Schneider is saying "Well, there was an 8% differential in price between Masters and Bunnings, but that will be wiped out through increased demand".

Competition

The exchange reported above also brings up another feature of Bunnings' presentation at the Strategy Day. The reason why Bunnings will get less share of Masters' revenue is, Mr Williams tells us, the competitors in the market.

Mr Schneider made repeated references to competition in his prepared remarks. A standard slide Bunnings uses in its presentations showing the logos of its competitors has swelled considerably to include about 200, where in the past it listed a more modest 60 or so.

He began by stating:

...as competition increases and the broader addressable market is further explored, we must ensure we're listening closely to what our customers are asking for as well as evolving our offer to reflect the changing landscape of our industry.

His fullest statement about competition came mid-way his remarks:

In stark contrast to what many people talk about, we see and experience a market that's incredibly competitive. It has a wider range of specialists, mass merchants and category killers. Whilst many have a strong physical offer, many others have a strong online presence, and increasingly, we're seeing both. By focusing on ensuring we have a winning offer and drive our real focus on having the lowest prices, we continue to work really hard to ensure we have the products, the prices and the service that allows us to compete effectively regardless of format.

Later he stated:

We take no competitor, and I mean no competitor, local or global, physical or digital for granted. We are never complacent. If we ought to be successful, we must continue to give great value and fantastic experiences to our customers, and in doing so, be chosen by them.

These remarks are, on face value, quite true. Competition has increased in the home improvement market. The main independent hardware groups, chiefly Metcash's Independent Hardware Group (IHG), and the smaller Hardware & Building Traders (HBT) as well, have realised that whatever other advantages they offer, they need to start by having the best supply chain possible. Beacon Lighting has optimised its business, Reece continues to dominate some sectors in bathrooms, and retailers such as Sydney Tools offer low power tool prices online, and are expanding their physical presence.

However, it should be noted that the main reason why Bunnings has so many competitors in so many markets is that it keeps entering new markets, and taking considerable market share away from the incumbents. A business will certainly gain competitors through that strategy, but it is not as if it is beset by competitors popping up out of nowhere.

It is possible that both in these remarks, and in its remarks about gains from Masters, Bunnings is dealing with a concern that the Australian Competition and Consumer Commission (ACCC), which has been active recently in the home improvement sector, might be wary of how much market share the retailer has now gained. Even a simple suggestion by the ACCC that Bunnings should limit its future expansion could be damaging.

Leaner times

While concerns about some kind of regulatory intervention may have shaped a narrative that sees Bunnings depicting itself as a little less strong than it really is, HNN does still believe that underlying this is a genuine concern about a weakening home improvement market.

Bunnings would not be alone in this. The Housing Industry Association (HIA) is forecasting (as of 8 March 2017) volume growth in renovations of 2.0% in 2017/18, and 2.7% in 2018/19. The Reserve Bank of Australia (RBA) has also suggested that the "interest rates and equity windfalls" may be balanced by increased concern over the future. Writing in its "Statement on Monetary Policy" for May 2017, the RBA noted:

A substantially weaker housing market could have broader implications, including slower growth in consumption and dwelling investment than expected.

The way in which the company looks at gains from Masters' exit wasn't the only indicator of a Bunnings strategy geared to delivering ongoing growth in a down market. In the opening part of his prepared statement, Mr Schneider made reference to delivering:

...strong and sustainable returns across a variety of economic conditions. Working to stay nimble and responsive to what our customers are looking for is evident in the consistent track record of performance that Bunnings has continued to deliver.

In addition to this slightly unusual comment, there are three areas of focus that come up which indicate Bunnings may be gearing up for tougher times.

The first is an increased focus on existing customers, over gaining new ones. This isn't to say that Bunnings is not also seeking new customers and new markets, but where in the past that was a primary focus, the focus seems to have shifted to engaging more with customers the retailer already has.

The strongest statement about this Mr Schneider made was this:

Unsurprisingly, our strategic agenda remains the same. A deep and strong focus on the lowest prices, the widest range and the very best of service. In doing this, we ensure we remain absolutely focused on creating value for our customers over the long-term, and supporting these with physical and digital experiences that create inspiration and confidence to take on many types of DIY projects and do them in ways that create real values for the customers who do them. If we do these things, as I said, we get to be chosen more often, hoping to not only expand the market, but the degree to which we get to participate.

This is a well-known strategy for dealing with flat or declining markets. Gaining new customers in new markets carries upfront development costs, which can take a year or two to recapture. Convincing existing customers to buy more or from a wider variety carries lower costs.

The second element is what Mr Schneider has termed "better use of capital".

Bigger products and the changing technologies, store formats and the ability to use our capital more effectively to create better, even more convenient store offers or being more productive to invest in more value for customers.

Later he states:

Supporting this, we'll continue to improve operating efficiencies, lowering both our operating and capital spend on a per-project basis, meaning we can drive our growth agenda even more efficiently.

Referring to new stores and the rollout of new store formats, he said:

Trials across the last year on using capital more effectively and efficiently in these sorts of projects has been really pleasing to us and will form part of their model going forward, which enable us to do even more work with less capital.

In a down market, conserving capital is very important to providing good performance numbers. This is especially the case with Bunnings, which as a service/retailer, judges its performance using return on capital (RoC), rather than, say, return on net assets (RONA), which is more common in manufacturing.

Finally, there is Mr Schneider's focus on efficiency. This is an area where he has long been acknowledged as an expert. The recent shift in Bunnings Warehouses to combine the kitchen ordering, special orders and information desk into a single staffed in-store unit is typical of the clarity he and his team bring to this task.

Mr Schneider is also an enthusiastic supporter of using technology to improve both efficiencies and customer experience:

We're finding even more ways of using our tech platforms to improve efficiencies in the business from HR to supply chain to in-store tools to make our business even easier to run.

And:

Simplifying processes, using apps and other technology, such as mobile point-of-sale will ensure even faster and more enjoyable experiences in store.

It goes almost without saying that pursuing efficiencies is a really key strategic move in a down market. It is a fundamental to ensuring growth continues.

Community

Not associated with market conditions, this was perhaps the most surprising feature of Mr Schneider's address: he re-emphasised the need for Bunnings to be more engaged with the communities in which its stores operate. The word crops up no fewer than six times in what he had to say.

By working hard to be trusted by our team, our customers, suppliers community and of course, the wider market, we continue to ensure that the sincere and genuine way we participate in both the broader market and local communities is maintained. And the customers are willing to choose to shop with us because they understand and they appreciate it.

Later he said:

And our plan reflects this. It focuses on even better experiences for both our commercial and consumer customers and in the communities, which our stores are and our teams live.

As well as:

Speaking about stores, the unique environment of our stores is something that we know our customers really enjoy. And doing more to bring our stores to life and participate even more in the community in which we operate will be core to the engagement we want to continue to build with our customers.

HNN is sure that Mr Schneider and his team, like all good retailers, has a strong and genuine desire to engage with the communities where he does business, in a way which reaches beyond the store itself. It could be equally true, however, that the campaigns run by small retailers of all types is having some effect on customers' attitude to shopping at larger, corporate-owned stores.

Product lines

In terms of hints as to what new product developments can be expected from Bunnings, the slide presentation did call out a new outdoor power equipment offering from Honda. It also suggested that Bunnings would be continuing to market smarthome, LED lighting, and assisted living items for ageing Australians.

Perhaps one of the more interesting hints at what is coming is a couple of references Mr Schneider makes to "big products":

We'll continue to expand our reach through rolling out an online offer that supports and grows our already substantial special orders offer, enabling customers to buy large products in areas, such as playgrounds, sheds, outdoor structures, mature trees, bulk landscape, all of these in an online platform.

This is only part of this article. To read the remainder, please click on the link:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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This is an edited version of the Bathroom feature. To read the entire version, go to the PDF magazine:

While kitchens may still remain the "king" of home renovations, there is little doubt that bathrooms are rapidly catching up. Surveys in the US and the UK indicate that the two are coming closer to parity.

A survey based on data collected from the US National Association of Home Builder's Remodeling Market Index (RMI) survey, which measures conditions in the remodelling market, showed that kitchens and bathrooms topped the remodel list for 2015, with kitchens hitting 81% and bathrooms 79%.

Those numbers are based on home renovation businesses reporting their most common jobs.

A UK report from MTW Research shows that spending on bathrooms has increased by GBP230 million over the six years between 2010 and 2016. UK homeowners are thought to have renovated some 830,000 bathrooms during 2016.

For Australia, the Housing Industry Association (HIA) paints something of mixed picture of the future for bathrooms overall. It predicts that when it comes to the installation of new bathrooms, these numbers will drop from 441,200 in 2015/16, to 338,900 in 2018/19, a decline of over 23%. This will occur as new home construction slows, according to the HIA.

However, the decline in new home construction will likely support an increase in renovation activity. While the HIA does not forecast renovations, it suggests that the number of bathroom renovations will continue somewhere around 220,000 a year through 2018/19.

Beneath the numbers

While predicted numbers are nice to have, they don't really go that far in telling the real story of bathrooms. After a period of some consolidation in bathroom trends, from 2010 to 2016, HNN is seeing some signs of a more complex market developing. Rather than being influence by strong market signals from just a few sources, there are demographic and cultural differences starting to emerge that will change the nature of the bathroom industry as we move towards 2020.

Of the trends that we do see emerging, it seems useful to concentrate on four of them in particular: ageing in place, the polarisation of the market, and, perhaps the most important, something that HNN is going to call "design dissonance".

Ageing in place

The easiest trend to spot, and one which is receiving much more attention internationally than in Australia, is ageing in place. The bathroom is a particular focus for the changes that older Australians need to make to their houses if they continue to live at home and not move to an aged care facility. Falls are a real health menace for older people. In 2011-12, 96,385 people aged 65 and over were hospitalised for a fall-related injury in Australia. This is three and a half times as many people who were 45 to 64 years old, according to statistics collated by the Australian Institute of Health and Welfare.

According to ABS statistics dating back to 1995, falls in the bathroom are a high risk, especially for men. Some 7.7% of all falls by men took place when bathing, showering or dressing, while the number was just 3.3% for women. For both genders, falls resulting from a slippery surface underfoot were 10.3% of the total.

It would be possible at this point to quote from a number of surveys and studies which indicate that, despite there being solid evidence of the demographic increase in people over 70 years of age (something that will ramp up still further by the middle of the next decade), and lots of well-meaning plans and governmental initiatives, there is little evidence that much has been done to improve house safety for the elderly.

Beyond these elements - the statistical weight of more older people, the lack of action, despite good intentions - there is another factor to consider, which is simply culture. Many of us have a fixed mental image of what it is to be older, which can include rapidly declining health, frailty, lack of mental acuity, and simply not being "with it".

The reality of older people today is that there is far more variety than there once was. Fewer people have lived physically tough lives, more have had good nutrition constantly, most have received medical care far beyond what was possible a generation ago. Some people certainly do (unfortunately) age according to the expectations of past generations, but many do not, and it's quite likely that the "spritely" 75 year-old will become the usual, rather than the exception.

Graeme Hugo writing in a "Policy Brief" for the Australian Population & Migration Research Centre at the University of Adelaide in early 2014 put it like this:

The third dimension of population ageing in Australia is one which is often overlooked and relates to their characteristics. They are quite different to earlier generations entering the retirement stage of the life cycle - economically, socially, and in their values, attitudes and their expectations. This is because each cohort lives through quite different economic, social and cultural conditions, they have different levels of education, world experience, etc. Baby boomers will differ in a myriad of ways from the previous generation of older people. This will also have a major impact on the nature of the care and residential arrangements which they seek, prefer and can pay for.

In terms of the bathroom industry today and how ageing in place affects the markets it serves, it's possible to see that market as splitting into two. At one end of the market - and this is, a little curiously, the part that seems to get much of the attention - are what we might call the "wise and well-off elderly". These are people who, at 65 or 70 years of age, will go systematically through the house where they live, and work out what they need to change in order to go on living there safely for another 20 or 25 years. They get the kerb removed from the shower (a major source of trip-and-fall), the bathroom floor resurfaced with non-skid rubber, install a walk-in sitting bathtub, put a bench in the shower, add brighter lights everywhere, and so forth.

For many people, even in the bathroom industry, that is how they think of ageing in place, and its market potential. It is well-off couples or individuals who can spend $20,000 to $40,000 getting their house kitted out for a comfortable life as an older person.

Yet these wise and well-off are, without doubt, a smallish minority, and the real need for ageing in place as it applies to bathrooms is far more general, more broad, and actually more urgent. For example, a March 2011 report for the NSW Ageing Disability and Home Care, Department of Human Services, entitled "Housing And Independent Living: Environmental and built factors for maintaining independence in older age" went around looking at where older people in New South Wales were living to assess how well those dwellings met their needs as older people. This is some of what they discovered, just for bathrooms:

Looking at overall conditions in these homes, the report states that 27% of them had eight out of a possible 25 potential hazards, and were thus at high risk of causing injury.

This is not a market that needs to go out and spend $25,000 on kitting up the bathroom to a comfortable standard. Look at the list of things that are wrong: that's about $3,500 to maybe $6,000 that needs to be spent. To at the very least stop a 75 year-old getting a nasty fright and bad bruise, if not winding up in hospital with a broken limb, with all the potential health risk that come with being elderly and bed-ridden, that is not a significant cost.

Now, here is the thing. We'll be looking at this more closely in the section on polarisation of the market, but go to the really very well done Bunnings bathroom gallery at:

There are about 20 bathroom combinations on display there. Click through them all. Now tell me, how many grab rails did you see?

Yeah. None.

That is not in any way a dig at Bunnings. You could look at any of a half-dozen bathroom companies, and while they may sell grab rails, it's not there in the marketing.

You simply are not going to see a bathroom visual display carousel for bathrooms that lists the Modern Minimalist Bathroom, the Timeless Allure Bathroom, the Black Vogue Bathroom, the Pamper Bathroom, and then the Ageing In Place Bathroom.

And there is a good, solid, sound sensible reason for this. Really. We all know as retailers that if, say, a thirties-ish couple were to be browsing through an online bathroom catalogue, and they came across an image of handrails, non-slip mats and a shower with a folding seat, well, one of them at least would likely crawl under the bed with a pillow over their head moaning softly for an hour. For sure.

This is, very explicitly, a retail problem, in the sense that it is a bit of an unthinking reflection of some outdated cultural notions about ageing itself. To be very clear, HNN is not making the kind of argument that if you don't have doggy doors specifically designed to accommodate blind, left-handed Beagles, you are somehow discriminating against their owners as a minority. Not at all.

There is a good, solid market out there. At least for two or three years, it seems likely that if this market were properly explored, it could bump revenues from bathrooms up by around a good 3% or so. Yet even the ultimate market rationalist, Bunnings, which declares itself as being always on the look out for expansion markets everywhere, a company whose former CEO would declare he wanted to sell toilets to everybody everywhere without barrier or obstacle, cannot overcome a cultural bias from the past, and actually overtly market to old people.

Built into this is also a reflection of just how fragmented the bathroom industry really is. Compare it to, for example, the solar power industry. Solar power went out and campaigned to get some massive subsidies from governments to help cover the cost of solar power installation in homes, both because this would be good for the environment, and because it would help with loading and resilience of the urban power grid. Estimates put the amount spent by government to subsidise solar roof panels in Australia for FY 2015/16 at $726 million.

The case for subsidising ageing in place bathroom conversion is potentially much better than that for subsidising solar power. Increasing medical costs are of prime concern. Those costs will increase with an ageing population. Spending money on preventative measures in the home to make bathrooms safer makes every bit as much sense as spending on safety in the workplace.

Imagine a program where trained assessors could help home owners determine what alterations need to be made, then arrange for a 20% to 30% discount on the materials and labour needed to perform the installation. Politically, looking after pensioners, reducing health care costs, just making "mum and dad" feel more comfortable, would surely be something of a winner.

Yet it is unlikely to happen. Purely because the bathroom industry as it has developed is far more competitive than it is cohesive. There is no effective single voice to speak for the bathroom retail industry as a whole. It is a massive, wasted opportunity.

Polarisation of the market

In the home improvement/DIY sector, market polarisation is often masked by failure.

That's an important statement to make, because of three major Anglo-based markets, US, UK and Australia, it applies more to the home improvement market in Australia than the other two. Can't DIY? Don't have the funds to pay for the high prices tradies charge for the work? Well, then, you are, simply, no longer part of the market.

Think of it like this: right now, here in Australia, there are probably (conservatively) 85,000 couples under 35 years old with no DIY skills that could scrape up $4500 to spend on either a kitchen or bathroom renovation. That's a $38 million market, and almost no one is really catering to it.

Instead, what the bathroom market in particular does, is to compete over different parts of the middle market. Reece goes after the higher end of the middle, Bunnings goes after the lower end, and IKEA flits between the two, offering some higher end features at the lower end price points. There is another half-dozen companies that would get allocated different points on that middle spectrum. The upper end of the market has its own suppliers and sources, most of the international companies that distribute directly through architectural firms and some house designers.

The thing to really think through is this: that little money, few DIY skills market is just going to get bigger. Job prospects in Australia, even for those who go through universities, are not going to get magically better over the next five or six years. And we all know that DIY skills are declining through the general population.

Much of Western Europe (let alone Eastern Europe) has been in a similar situation for well over a decade. It is almost normal in many countries to not get a "real", decent job before you turn 30, and only then if you've managed to find some work for the six years since you graduated from university.

It was understanding this, and the way in which European society has developed, that made UK-based home improvement retailer Kingfisher choose to go down a particular path. When Veronique Laury took over as managing director of Kingfisher in February 2015, she was, after years of working for the company, aware of many of its operational inefficiencies, and knew some of what needed to be done to fix that: fewer SKUs, a centralised IT system, more rational staffing of various departments.

What she also knew, and a basic fact that everyone in home improvement should remind themselves of from time to time, is that if Kingfisher was experiencing slipping sales revenue (as it was), that would come down to one thing: the company was not selling things that people wanted to buy.

Ms Laury's response to this was to set out and to carefully study the markets where Kingfisher operated - Britain, France, Ireland, Poland, Russia and elsewhere - to discover how people lived, and how Kingfisher could help them improve their lives.

What Kingfisher discovered was quite surprising. For example, Kingfisher found that in France, 39% of home improvers would abandon a bathroom renovation project well before it was completed. Of course, the comparable number in Australia is ... well, we don't know, do we? And that is precisely the point.

Perhaps the best story Ms Laury tells about responding to the kind of market needs Kingfisher discovered doesn't have to do with bathrooms, but with fencing. Kingfisher wanted to offer some simple fencing solutions for people, fences that would be so easy to put together that if you could build a tower in Lego you would probably not have a problem.

As they researched customers' needs as regards fences they discovered something very interesting: the majority of customers only had access to their backyards directly through their house. In other words, any material they used to repair a backyard fence would have to be carried through the front door, down the hallways, probably through a couple of narrow doorways in small rooms, and then out the backdoor.

To quote Ms Laury's delightful way of describing this:

Another one is the fence that you see here. This is not a completely new product. It has been developed on the basis on a product that was existing in France. And that was highly successful, but not democratic at all. So you will have different components: you have aluminum, you have wood, you have composite, you have glass, you have those kind of decorative panels. And you can assemble all of that.

One of the things we learnt from our deep customer insight, as an example, in most people who have a garden, they don't have any way to go on the site. When they have to do things in your garden they have to go through the house. And when you are doing fencing, I promise you that going through your house with those big fencing is not easy. This one is completely disassemble, and you can put it in your car and easily go through your home with those parts. So, this is the kind of things that we do. This is how we are going to bring some new stuff to people in every of our markets.

That wasn't an insight any other home improvement retailer had come across before. It meant that in designing these easy-to-build fences, Kingfisher would need to design them with smaller components that could be easily carried through a small house.

Kingfisher has spent about 18 months now beginning to design and build a whole new kind of bathroom system, based on this research, and the kind of concerns it discovered about fencing. The goal of these systems is to embrace the needs of home improvers who have been at least partially forgotten by most home improvement retailers. The systems will be easy to design, easy and inexpensive to install, and adaptable to the very small bathrooms that most houses throughout Europe have.

Nobody is doing anything like that in Australia. The market is not polarising here around people who have enough money to buy more expensive fittings, and those that are happy to find something that works, that looks nice, and that is easy to install and repair. In Australia, the real polarisation is between people who can do bathroom renovations because they possess the right combination of money and skills, and those who can't do bathroom renovations.

It's another lost opportunity.

Design dissonance

"Design dissonance" is a term we are borrowing from the world of systems design in technology. Perhaps the best definition is this:

Design dissonance occurs when a product or service sends out cognitive signals that run counter to the desired effect.

What is being pointed to here is that design does a number of things. It should facilitate the use of whatever is being designed - of course. It should also, perhaps, unfacilitate a bad or unsafe use of what is being used. For example, the safety button on a power tool trigger makes it a little harder to use, but it makes it really hard to use it in an unsafe way, by accidentally starting it up.

The other main function of design is to contain and communicate a narrative about the things that have been designed. When we purchase an object or simply go to use it, we might have no or just very little experience with that particular object, so we look at its design in an effort to determine how it might perform.

Of course, this opens up the way for profitable miscommunications as well. A typical one is buying some product in a box, then opening up the box to discover that it is half-empty. The design of the box should have accurately described size or quantity, and instead it has been deceptive.

Between those two extremes - design that accurately describes an object, and design that misleads - is an area where design can be somewhat ambiguous. The guy who buys a simple family sedan, but chooses the option to have racing stripes on it isn't being fooled into thinking the car is faster than it is. Rather he is expressing something that is aspirational. Either he wishes he could own a sports car instead of a family sedan, or that he could afford a faster car.

A lot of retail has a high component of the aspirational attached to it. While there is certainly a place for that, from time to time the aspirational begins to overwhelm the basic reality of whatever is being sold. The situation often seems to become one of people buying half-imaginary products for half-imaginary uses.

At least a part of the Australian bathroom industry seems to be developing toward this. In particular, looking through most of the home design magazines available today, it can be difficult to know what exactly it is they are describing, or, really, why. Take this sample of text from a picture caption in Real Living (ironically) magazine:

A whirlpool bath (left) with matt black tapware sits among the urban jungle housed in an atrium. Dual sinks and round mirrors (above) provide a contrast to the grid design of the tiling. The greenery of the atrium (right) is complemented indoors with a small flowerbed of grasses that provide a handy border to hide the loo.

It's a bathroom with a skylight, and underneath the skylight is a glass box with a couple of plants and a bunch of rocks. This sits between the bathtub and the shower. ("Among the urban jungle"? Really? You can just imagine saying to a designer, "I desire an urban jungle to be among".)

What is just as interesting as the words, is the way the bathroom is portrayed in images in the magazine. There are four pages of content, spread out over six pages in the magazine (due to ad pages), consisting of three double-page spreads. The images on the first of these two spreads are a little confusing and disorienting, in that they make it hard to get a sense of this bathroom. It is only on the final spread that a clear, overall picture of the bathroom is shown - making possible the rather simple description we've provided above.

What is clear is that the magazine is taking something of a cinematic approach to the architecture it describes. It's not designed, as the magazine in other ways suggests it is, to provide a clear overview of what is going on with this design so as to aid other designers. Instead it is designed to dazzle the eye, to introduce a narrative experience that has to do with "jungles", geometry, and secrets somehow concealed in a small brightly lit room that is wall-to-wall white tiles.

Often when we venture into territory such as this, HNN falls back on finding some actual practitioners in the real world of whatever it is, the people who actually put things together. When it comes to bathrooms, and what people are really doing, we fell back on Klaus Tietz. Mr Tietz was, once upon a time, a hardware retailer, but swapped over for the other side of the counter and became a specialist in bathroom renovations for the past 15 years.

His company, Bermagui Bathrooms, did most of its work in Canberra, but he has recently moved location to the south coast of New South Wales.

This is an edited version of the Bathroom feature. To read the entire version, go to the PDF magazine:

This is an edited version of the story. For the full version, please go to the current issue of HI News PDF magazine:

http://hnn.bz/hinews-3-05.pdf

What is the big news in power tools for 2017? It might just surprise you.

US/Hong Kong company Techtronic Industries (TTI), makers of Milwaukee, Ryobi and AEG tools, continues to develop its niche product line, but as HNN described in our lengthy analysis last issue, it's likely on a tick-tock-tock cycle, with strong innovation coming every third year.

In fact, our take on TTI at the moment is that it seems that while the company's CEO, Joe Galli, is enthusiastic about more rapid future development, he's being "braked" a little by the company's investors, who don't have his appetite for innovation.

Makita, as always, has gone ahead down its path of quiet excellence. There is something very Makita-like about its launch of a compact 18-volt cordless line of tools, making use, of course, of its standard 18-volt battery, but with a tool body size close to that of 12-volt tools.

However, Makita is struggling with a very difficult problem: for a company renowned for its great designs and high standards of manufacture, how does it develop a less-expensive, "value" brand that doesn't cannibalise its main brand? The MT Series partially answered that question in 2016, but while parts of its range (for example, the corded routers) make sense, the cordless tools, in the Australian market, really do not. (HNN will be looking in more detail at both Makita and Hitachi in the next issue of HI News.)

That leaves us with two remaining large power tool companies, US company Stanley Black & Decker (SBD), and the power tools division of the vast German firm that is Bosch.

The two companies have much in common, in addition to their size. SBD seemed to emerge during the past year from a five-year process of digesting the merger between the two big companies (Stanley Tools and Black & Decker). Not only did it bring out some real innovations in its FLEXVolt range, but it has also gone on the acquisition path again, getting hold of the well-respected and familiar Sears Craftsman brand of tools.

Its DeWalt brand also "teased" details of network-connected tools, which appeared (by a remarkable coincidence) just as TTI was releasing its annual results. The teaser was largely images, with only one sentence that declared anything definitive:

Tool Connect[tm] updates are coming soon; including a new app, inventory management software, and 3 new ways to connect anything on your jobsite. Stay tuned for more details in the coming months.

That was three months ago, and there doesn't seem to have been any further information released. It will be interesting to see if we learn more over the coming three months.

As impressive as SBD has been with its developments, however, it's really Bosch Power Tools that has begun to show it can take advantage of the very big potential the company has, both with its stand-alone expertise and history, and through its association with the larger Bosch company, and its ongoing research into sensors. While it is likely that 2017 won't be an outstanding year for the company (only a good one), both 2018 and 2019 could turn out to be significant, not only for Bosch itself, but for the industry as well.

Stanley Black & Decker

SBD recently released its results for the first quarter of its FY2016/17. The company reported overall revenues of USD2,800 million, up by 5% over the previous corresponding period (pcp), which was the first quarter of FY2015/16.

SBD also noted that its operations had become more profitable, with an operating margin up by 1.1% on the pcp (excluding merger costs). Gross margin was 38%, up by 1.4% on the pcp. Excluding one-off items, earnings before interest and taxation (EBIT) were up by around 8.5%.

Australia did not perform especially well, with its revenues slipping by 3%, following a similar decline in the fourth quarter to FY2015/16. North America currently accounts for 65% of the company's overall revenues, while Europe accounts for 18%.

Tools and storage

The company's tools and storage division outperformed other divisions, returning a net revenue increase of 6%. SBD states that overall revenues increased by 9% over the pcp, lifted by volume expanding by 6%, and acquisitions adding a further 4%. Fluctuations in currency exchange rates reduced these gains by 1%.

Regionally, North America produced the highest level of growth at 8%, while Europe grew by 6% and emerging markets grew by 1%. The North American growth was boosting in particular by growth in the US market, with commercial (Pro/tradie) sales up by over 10%, and DIY sales up by between 7% and 9%.

Operating margin for the division grew by over 16% on the pcp, to reach 16.4%. In discussing this growth, chief financial officer Don Allan said that every region worldwide showed positive revenue growth for the quarter in this division. He said that:

New product introductions and successful field conversions drove growth in the commercial channel. Strong e-commerce volumes and continued momentum from the FlexVolt launch, field growth in the US retail channel as we did overcome some modest channel inventory tightening.

SBD's backstory and FLEXVolt

The merger between tool companies Stanley and Black & Decker was finalised in November 2009. This has been something of a vast undertaking, though also a proficiently managed one. It has also come at something of a cost, in terms of actively managing some aspects of the business, such as innovation in cordless power tools.

Some measure of that can be seen in DeWalt's 12-volt cordless drill range. A revised version was launched in 2010, ahead of its time in featuring slide-on Li-ion batteries, as opposed to the in-handle batteries that many manufacturers still produce. However, from that time until today, this product has changed little.

While Milwaukee, Bosch and Makita have moved to brushless motors on their 12-volt lines, DeWalt has persisted with its brushed motors. In a recent ranking of the top 10 12-volt drills by respected website Pro Tools Reviews, DeWalt came in fourth, behind the brushless tools of Makita, Bosch and Milwaukee. It's a seven year-old design.

Innovation had slipped so far as a priority in the cordless tool business that at one point SBD management, in response to an analyst's question at a results briefing, suggested that they didn't expect much innovation in the cordless tool area. They suggested development would largely consist of the spread and commodification of existing innovations, such as brushless motors as well as larger and better Li-ion batteries.

The focus at the company was mostly on commercial performance, which resulted in some interesting new product launches - the introduction of the Stanley FatMax range, for example, was a brilliant move in the market - but very few ground-breaking products.

By 2014, with Milwaukee in particular continuing to take marketshare from DeWalt, and evidently starting down the path of more radical innovations, SBD realised it needed to take action. The result was what the company calls the "Stanley Fullfilment System 2.0" (SFS 2.0), which works like an "operating system" for innovation. This was introduced in early 2015.

In its corporate financial filings, SBD describes SFS 2.0 like this:

Entitled "SFS 2.0" this refreshed and revitalized business system will continue the progress on core SFS, but importantly, provide resources and added focus into (1) commercial excellence, (2) breakthrough innovation, (3) digital excellence and (4) functional transformation.

SFS 2.0 is something that gets SBD executives very excited - which is great to see. It's also probably one of the few corporate innovation programs that sometimes gets marketed directly to shareholders. In a "letter to shareholders", the effort is described as "breakthrough innovation special forces teams", that

... have been assembled across core business units that are entirely focused on generating breakthrough ideas, beyond the incremental. These teams, modelled after the incubator approaches of standout innovators and startups across Silicon Valley and elsewhere, are delivering solutions to unmet user needs and creating disruptive, industry shaping ideas.

FLEXVolt

FLEXVolt, a cordless tool system from DeWalt that makes use of 54/60-volt batteries that can, through switching between serial and parallel connection, be stepped down to 18/20-volt for use on the rest of DeWalt's 18/20-volt line. This system is used to power tools such as table saws, grinders and circular saws, that would otherwise have to run off of mains power. The larger units actually run off of two of these batteries, or 120-volts of current. This is the same as mains current in the US, and the tools can also be directly plugged into the mains, where it is available.

On its launch, DeWalt released information about its considerable success that met with more than a few raised eyebrows in the industry. Really new product launches need quite a lot of what is called "sell-out" in the US, which refers to retailers stocking up on product for future sales, while "sell-through" is product that has reached the consumer.

SBD claimed a figure of USD100 million in combined sell-out and sell-through sales for the last four months of calendar 2016 (to the end of SBD's financial year). There were concerns voiced by industry commentators that much of the apparent sales success might have more to do with sell-out than real sell-through.

Asked about the prospects for FLEXVolt in calendar 2017, the normally quite staid executives at SBD often become very optimistic and enthusiastic. Here is the company's chief financial officer, Donald Allan, describing what he sees as the product's potential in response to an analyst's question at the company's announcement in January 2017 of its full-year FY2016 results:

Yes, I would just add that related to 2017 your comment is correct Nigel, we do see another USD100 million of incremental revenue that is included in our guidance. Jim however did discuss in his comments that we have capacity up to USD400 million. So, in total we have USD200 million in our numbers with incremental of a USD100 million next year so there's capacity to take on another USD100 million.

That enthusiasm has continued through to the most recent results for the first quarter of 2017. Jeff Ansell, the head of SBD's tools division, describes just how far ahead of some expectations the company sees FLEXVolt performing:

What tends to be in this marketplace competitors are violent and if your competitors don't have a response they tend to - they have a negative view on what you - what you're doing and how it's performing. The reality is we couldn't be happier with FlexVolt and if you think of 7% growth in this first quarter 8% in North America, 6% in Europe. We're very pleased with that. But half that growth came from the core, so what it says, our core business vibrant we comped a very big quarter from last year and grew the core at the same time while allowing FlexVolt to provide the other half of the growth.

Our retail execution of FlexVolt is now more than double-digits ahead of what the customer expectations were, which is fantastic. And the uptick and uptake in industrial channels is every bit as good if not better. So if you consider those things and you look to the fact that we are loading new flexible products as we speak in this quarter and we will continue to load new introductions throughout 2017. And as Jim said, in the next several years that has been the real, the real driver behind what you do with this breakthrough innovation team. We have to continue to keep this fresh and we feel that we are quite nicely doing that.

The last point I would tell you is, while it takes time to introduce new systems and power tools, the fact that this does leave the old system behind has led to a much faster adoption than most new power tool platforms. As such, our growth in FlexVolt, the ramp in FlexVolt is 10 times faster than the ramp in brushless as an example. So we couldn't be more pleased and we are we know it's a competitive advantage and the average of five stars. The average user rating of FlexVolt is 4.9, so if you get the product right for the user everything else takes care of itself. So we feel great.

Mr Ansell also explained elsewhere some of the future potential that SBD sees for the FLEXVolt line of tools:

Well, the beautiful thing about FlexVolt is we are able to develop 20 volt tools where they're appropriate, where the max watt outperformance is appropriate. At the same time, develop 60 volt tools where the max watt outperformance is required and obviously there is a cost difference because the 60 volt tool is a more expensive proposition for the user and for us that delivers unprecedented performance, at same time the user wants the right tool for the right job, at the right cost.

So all those things come together and what you'll see over the next 36 months we'll be presenting this to Jim and team in the next few weeks and then you'll see some of it at the May 16 session, you'll see fresh introductions of both 20 volt and 60 volt tools coming within the FlexVolt range and I will tell you that the users pick up on them has been equivalent. The user likes what they can do with FlexVolt batteries under 20 volt system but they really have also embraced the 60 volt performance. Circular saw in particular is absolutely killing it. The portable you mentioned 120 volt, the portable products like mitre saws which are 120 volt absolutely killing it. So the user has embraced all those various platforms and because it gives them the performance of corded in a cordless package. So more to follow but yes, we are very, very active in development of 20, 60 and even 120 volts going forward.

This point about possible future developments was also made by president and CEO Jim Loree at the full-year FY2016 results announcement:

It really is a market share gain mechanism that has enormous potential even at the voltage levels we are at today. And we haven't even talked about going up the voltage curve or the power curve, which we have the capability to do as we develop this technology. And that breakthrough innovation that we're working on will have some more surprises I'm sure, positive surprises in the future.

Mr Allan was also clear that, as optimistic as the forecasts for FLEXVolt have been, the company sees those goals as being largely met during the most recent quarter:

We expect the momentum surrounding FlexVolt, which by the way did meet expectations for the quarter, will be maintained and bolstered by our commercial team's launch strategy, which has a well-designed roadmap of promotions and new FlexVolt tool and accessory SKUs hitting the shelves regularly over the next few years.

Of course, a major concern for SBD overall is the extent to which the FLEXVolt range will be "cannibalising" its standard range of tools, through replacing sales rather than being completely a matter of new sales. Mr Allan commented on this:

The USD100 million makes sense to us right now based on it's too early to really know what the cannibalisation is going to be. And that's something we'll watch closely, but if the cannibalisation is not as high then there's certainly a possibility that we're somewhere between that USD200 million to USD400 million number as the year progresses, combined with some of the factors that that Jim just mentioned.

The FLEXVolt market

The success of FLEXVolt, which seems to be confirmed by the most recent results, was not that expected by most market observers. It's a product that has two "strikes" against it: it is very expensive, and it is close to being "ultra-niche", in that it appeals to a niche within a niche.

It's not only heavy construction builders that will use most of these tools, but those builders whose business would get a big boost from the convenience of very powerful cordless products. The DCS7485 cordless table saw costs $1300, complete with charger and two 6-amp batteries, or $1000 as bare tool.

At a guess, what is driving high levels of sales is a combination of three factors. In many world markets pressures on housing are continuing, driving up prices and pushing developers towards considering more multi-floored, multi-dwelling unit buildings. There is also an uptick in infrastructure construction projects, as government seek ways to support regions which previously relied on more outdated forms of production.

In both these cases, the need for high capacity tools which reduce logistics support problems through being cordless would be high. The third factor is the ongoing skills shortage. Tools which help the existing workforce get more done faster are bound to be popular.

That said, of course, there is little doubt why SBD was so enthusiastic in launching this particular product. Mr Loree explained this in presenting the fully-year 2016 results:

And where we are really trying to attack is at the competitor's install base. And so think of FLEXVolt as a battery system that is establishing an install base as aggressively and quickly as possible that requires DeWalt tools to operate and then think of every year a wave of new tools SKUs coming in that will enhance the substitution of corded products and the ability for us to substitute corded products in the higher voltage, higher power requirements, higher duty cycle type SKUs.

And if you think of it that way, I think it's helpful because then you will understand it really is, well there is going to be some cannibalisation of our own coated tools, it really is a market share gain mechanism that has enormous potential even at the voltage levels we are at today.

The competitor, of course, is Milwaukee. In terms of strategy, at its core FLEXVolt is also a mirror to the Milwaukee strategy of achieving market "lock-in" not only by making high-quality mainstream products, but also by making unique "can't do without" products, that help get customers - especially large customers - to go with one particular charger/battery system over another.

Other developments

As mentioned in the introduction to this article, DeWalt did send out press notices about a new networked tool system it had developed in late February 2017, but, three months later, there seems to be nothing happening with this. The notices suggested it would feature three different connecting systems.

The "Tag", which is similar to Milwaukee's "Tick", is a simple tracker that can be stuck onto any tool - power or hand - to provide tracking.

The "Connector" looks like an adapter that fits directly to the battery slot on a cordless DeWalt, then accepts a standard battery into it, and provides Bluetooth-enabled monitoring of the battery.

An image shows a row of four power tools, likely one impact wrench and three drill/drivers from the back, with a blue WiFi logo on the rear of the motor chassis. In front of the handgrip, on the battery connection plate is what seems like a row of four blue LEDs and a selector button. The text reads: "Tools: Integrated Bluetooth Technology".

To be generous, we could describe these evidently mocked-up images of tools as "artist's renditions of possible future products". The control panel featured, if actually produced, would be an ergonomic nightmare, as it would require reaching around the shaft of the tool to operate. To function, the panel would have to be rotated by 90 degrees, or a full 180 degrees, facing the front of the tool - the way the actual control panels on existing Milwaukee One-Key tools, which already offer this full functionality, are positioned.

HNN would be pretty certain both that SBD has some plans in place for developments such as these, and we also would suggest it will be very unlikely we'll see any of them before 2018. In large part that is because the efforts of the development team will be focused on building out the FLEXVolt line of tools, and SBD will likely not want anything to complicate, blur or distort its marketing messaging around FLEXVolt.

Additionally, of course, there is the matter of DeWalt's much promoted Bluetooth-connected battery, which these proposed tools relate to. In general, most commentators (including HNN, which has tested this device) agree that this particular approach, while not without its uses, is not the best starting point to a fully connected worksite. It provided DeWalt with a connected product that could be quickly launched before Milwaukee launched its far more extensive One-Key connected tool systems.

Given things as they currently stand, DeWalt might be better served by starting development on the next generation of connected tools. These are likely to rely on a central worksite "hub", such as a worklight or bluetooth speaker/radio, that is hooked into the internet via a 4G chipset when WiFi is not available.

Tools would connect with these hubs via WiFi, and provide full offsite monitoring without the need for intermediate connection through Bluetooth phones. It makes sense that this will be the end point both Milwaukee and Bosch will be working towards for 2020.

Stanley Black & Decker's DIY story

SBD had been represented in the DIY area largely by the dark orange and black Black & Decker brand. The company's recent acquisition of Craftsman Tools from failing US retailer Sears could indicate that it is considering reviving this sector of its business.

At the moment, Black & Decker is not competing well with brands such as TTI's Ryobi, and is constantly being encroached on by brands such as Worx, which offer innovative tools designed to make chores around the house and garden easier to perform.

One possibility that could emerge during 2018 is the formation of a division of SBD that is dedicated to the DIY product across a range of products. For the moment, however, it is clear that SBD's focus is more on the professional market and we will probably not see much development of the Black & Decker tools.

Analysis

The apparent success of SBD's FLEXVolt system is a reminder that tools succeed through the combination of two factors: the size of the market sector they go to, and the intensity of demand within that sector. SBD through some very good research has found a niche that is of a smaller size, but has a high intensity of demand - these tools have rapidly moved to the "must have" list.

As with many of the developments of its arch-rival, Milwaukee Tool, there is also the question of to what degree the FLEXVolt technology will create an effect on other tools in the range. For professionals who will never use any FLEXVolt tools, the only possible improvement is that they can, if they wish, buy a large, heavy battery and another expensive charger, and attach that battery to their drill or circular saw to get extended life.

This is starkly different from the approach that Bosch in particular has taken, which is based on developing new systems that benefit a broad range of users. That said, in the process of moving from a company that saw development strictly in terms of commercial excellence, to one that now evidently values the gains that can be made from new technologies, FLEXVolt is an excellent first step. HNN is sure most of us are eager to see what comes next.

Bosch

Robert Bosch Power Tools has reported its results for 2016, and these show an ongoing improvement. Sales were a record for the division of the vast German firm Bosch, reaching EUR4,500 million. In local currencies, the company states, it experienced 7% growth over the previous corresponding period (pcp), which was calendar 2015. Taking account of currency fluctuations, growth came in at 4% over the pcp.

To read more, please go to the current issue of HI News PDF magazine:

http://hnn.bz/hinews-3-05.pdf

Concern over what exactly Metcash's Independent Hardware Group (IHG) plans to do with its recently acquired Home Timber and Hardware Group (HTH) continues to grow. HNN has received reports of what appears to be two sub-groups planning to break away from IHG in the near future - though as this is rumour-based it could be one group described in two different ways.

One set of rumours identifies a group that has a primary focus on the DIY market, and the other group would seem to have a heavy trade focus. There is little doubt that, if we have become aware of one or two such groups, there are likely another two or three under development across Australia as well.

HNN hasn't been able to confirm any rumours by actually speaking directly to members of these groups, so we can only speculate about the reasons these groups have to break away. One possibility is that IHG, as HNN and others have suggested, may be planning to either eliminate the Home branding for home improvement stores, or at the very least to heavily de-emphasise the brand.

In a recent article in the Australian Financial Review (AFR), the CEO of IHG (formerly of Mitre 10), Mark Laidlaw, is reported as saying that Metcash has yet to decide what it will do with the HTH Home brand, but it should have some idea by the end of the current calendar year.

Brand equivalence

As HNN has said in the past, the difficulty is that the two brands at issue, Metcash's Mitre 10 and the former Woolworths Home Hardware brand, are nearly equivalent in terms of market regard. For example, while Mitre 10 has scored some major sponsorships, most notably of Channel 9's "reality" renovation show "The Block", and has the well-known Scott Cam as its brand spokesperson, Home Timber continues to rate very highly on consumer surveys, such as Roy Morgan's Single Source Survey, where it consistently scores as Australia's best hardware retailer.

It is no easy task for an individual store to switch from one brand to another. Aside from the cost of a new fitout - for which IHG would presumably offer some assistance - it also requires a deal of remarketing and repositioning. Stores that have used the brand difference to distinguish their offering from nearby Mitre 10 stores would be particularly affected.

That said, there is a relentless logic behind why IHG is most likely to move to a unified Mitre 10 brand. The single outstanding reason is that if the new entity is going to be able to hold onto share in a market dominated by the Wesfarmers-owned Bunnings, it will have to spend up on marketing. If it tries to spread its marketing spend across two similar, competing brands it will dilute the effectiveness of each campaign to around 40% of the effectiveness of getting behind a single, Mitre 10 campaign (40% instead of 50% because the brands will end up competing with each other in some regards).

Metcash's brand woes with HTH are actually even more considerable than this difficult situation suggests. There are some indications that Woolworths in selling HTH to Metcash really held the company's "feet over the fire" in extracting the maximum price.

Just on the numbers alone, Woolworths acquired Danks in July 2009 for a deal that was valued at $87.6 million. In 2016 dollars that would be the equivalent of $102 million (according to calculations by the Reserve Bank of Australia). Woolworths then added both Hudsons Build Supplies and Hardings to those stores, which, combined would have added another $46 million in 2016 dollars at most. There were other additional, smaller acquisitions along the way that would also have added value. Being generous, it might all add up to $155 million or so.

However, Metcash in the end paid $163 million for a property that is a fragment of a proposed hardware empire that didn't work out. It paid that money right on the cusp of the final collapse of Masters, a failure that would hand the major, dominant competitor in the market easily another 5% of market share, in a downtrending environment with substantial economic concerns on the horizon.

On top of that, for the deal to go ahead, Metcash had to enter into a fairly onerous undertaking with the Australian Competition and Consumer Commission (ACCC), a deal that effectively opens up most of the HTH stores to access by third-party suppliers, potentially cutting directly into Metcash's profit margin.

Further, of that $163 million, it is quite likely around $12 million to $14 million could be allocated to the value of the Home Hardware brand alone. This is value that will simply vanish from this deal if Metcash goes ahead and mothballs that brand.

And yet, it has to be said, that from a Metcash corporate perspective, there is little doubt that it did the right thing in acquiring HTH. To understand why that is the case, it is necessary to look into the recent history of Metcash itself, to understand the role that Mitre 10 has played in helping the corporation pursue its goals.

The inevitable

In the end, the reason Metcash was willing to pay as much for HTH as it did, despite all the negatives and upcoming management difficulties, was because the alternative would have been much worse. That alternative would have been the acquisition of HTH by Anchorage Capital, the firm that successfully acquired Dick Smith Electronics, then listed it on the stock exchange (followed by its collapse a few years later, after Anchorage had exited its position on the company).

If Metcash had not come up with the $163 million, it would have found its Mitre 10 division facing heavy competition from a brand that was not only just as well regarded, but was backed by enough capital to boost both its growth and its marketing.

While that would not have done Mitre 10 itself any favours, Metcash acted because it would potentially, through a flow-on effect, have endangered the entire company's operations. Since 2014, Metcash has been in a constant struggle to secure its place as a supplier of wholesale grocery products to its IGA brand, as well as to other independent grocery retailers throughout Australia. In an effort to try to gain market share, the company has invested heavily in attempting to match key prices offered by Australia's two major grocery retailers, Woolworths and the Wesfarmers-owned Coles.

With the collapse of Woolworths' efforts in hardware, and a subsequent shift by Woolworths to an everyday low prices (EDLP) pricing campaign to match that of Coles, this task has grown increasingly difficult, and more expensive. Added to its woes is the ongoing growth of German discount chain Aldi into areas such as South Australia, as well as US discount household bulk supplier Costco in metropolitan areas. It seems likely now that other discount grocery stores may also enter the Australian market, further intensifying the price war.

In its most recent results, for the first half of its FY 2016/17, released in late November 2016, Metcash showed an overall decline in earnings before interest and taxation (EBIT) of 4%. Food and grocery EBIT declined by 8%, while hardware (Mitre 10) EBIT increased by 8%, and liquor EBIT increased 5%. Excluding one-off items, profit after tax fell by 13.8%. Hardware contributed close to 10% of Metcash's EBIT, out of only 8.8% of its total revenue. Metcash needs hardware.

Put simply, Metcash could not afford to find itself fighting retail battles on two fronts, both in its grocery business and in its hardware business. Had Anchorage Capital purchased HTH, it would have faced at least three years of a hard fought battle against firstly considerable investment by Anchorage, followed, most likely, by further investment from a newly listed hardware entity. Aside from the direct competition in the market, this would also have moderated investor enthusiasm for Metcash shares, as the possible sale value of its hardware holding would have been negatively affected.

Legacy of underinvestment

Since the mid-2014 "reboot" of Metcash there is little doubt that the company has been underinvesting, in relative terms, in its hardware division. As HNN has stated repeatedly, what Mitre 10 has managed to do with limited marketing funds over the past two to three years has been quite amazing. It has carefully selected major, cut-through marketing channels, and capitalised on both the controversy around "The Block" TV show, and the Logie-winning success of its main spokesperson, Scott Cam.

However, at some point, the weak funding for its brand has had an effect. Had the brand received the kind of funding it really deserved from Metcash, given its great marketing team, it would likely have been considered very much a dominant brand as compared to HTH.

Instead, starved of marketing funds, and with HTH itself doing some innovative advertising both on TV and on the internet, the two brands have stayed close to being equivalent in terms of brand presence.

The result is that, for HTH members, there is no real "big boost" to come if they are required to re-identify themselves as Mitre 10 rather than HTH.

The end game

What happens next with Metcash's food businesses, and the impact this will have on its hardware business is difficult to forecast. When Metcash began its reinvestment program in mid-2014, a centrepiece to that was its "Diamond" programme which sought to, essentially, lift the standard of certain key IGA stores up to that of the new retail outlets from Woolworths and Coles. This could point to a possible future.

While Metcash may have found itself put under pressure by Woolworths over a potential sale of HTH to Anchorage Capital, Metcash may be planning to turn the tables on Woolworths - as well as Wesfarmers - in the future.

Its plan could be to develop its network of IGA stores to near-supermarket equivalents, then do a deal to offer them for sale. That could see Woolworths and Wesfarmers enter a bidding war, as each struggles for an advantage in a tight market.

That would require a complex deal, as most of these are wholly or majority owned by its members, but it's likely these members would be willing to exit what has become an increasingly difficult business with an unexpectedly big payout. It is also quite likely, given the ongoing, significant competition in this market, that the ACCC would be quite willing to sign off on such a deal as being, ultimately, the best bargain that could be made. The fate of Metcash's hardware operations in that eventuality would be difficult to assess.

Alternatively, Metcash may consider listing its hardware operations as an independent company on the Australian Stock Exchange. If it can build a successful business over the next three years, it could seek to capitalise on that investment, in order to continue funding its own participation in the grocery price wars.

The immediate situation

Even if IHG's statement that it is still considering its options as regards branding is taken at face value, it seems unlikely that Mitre 10 will benefit much from a delay in announcing what it intends to do with the HTH brand. Metcash would be well-advised to determine a strategy before releasing its full-year FY2016/17 results in June 2017.

If it does hold off on saying anything until the around the time of the FY 2017/18 half year results announcement in December 2017, it will likely see ongoing fragmentation of its membership, as more small groups of retailers form, as they opt for some kind of certainty so that they can plan their businesses.

If Metcash does choose to shut down the HTH brand, or to sideline it as a minor brand under the major Mitre 10 brand, members should expect to be informed about what the consequences will be for their businesses, and how the company intends to more effectively market its Mitre 10 brands to help them improve their sales in the future.

Out of all this, there is one issue that could, and perhaps should, help to unite many of the different owners of home improvement retail stores in both the Mitre 10 and the HTH groups. Over at least the past five years both groups have found themselves in situations where the corporate owners of their group have simply not reinvested in their businesses to the extent that the performance numbers they have produced would warrant.

Just imagine, for example, if Woolworths had invested as little as 5% of the funds that they lost investing in the Masters venture back into HTH - let alone 10%. Ironically, had they done so over only the past five years, they would likely have built a store network that could really bring something of a challenge to some aspects of Bunnings in the current market. It is a sadly wasted opportunity.

Something similar could be said about Mitre 10. Metcash did provide a good refuge for the group after the unfortunate years from 2006 to 2008 when it all but handed over a leading market share to Bunnings through a poorly planned effort to match the big retailer in the marketplace which did not shift quickly enough to a more modern method of sourcing supply. It is time to move past that, and time for Metcash to make some real investments in this business that are about something more than merely keeping IHG ticking over and delivering its tithe of EBIT every year.

Related:

From the archives:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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It's likely that 2017 will be a year of considerable changes for the Australian home improvement retail industry, as well as the larger economy. Ford Australia has already halted production of locally made vehicles, and late in 2017 both General Motor's Holden and Toyota will do the same.

In the retail world, there is a high probability that US ecommerce company Amazon will open up local distribution for its products. This will eliminate high shipping costs from the US, and open up a new era of discounting on products ranging from power tools to washing machines. Amazon is also likely to launch an array of high-tech products that help it push its products, and has already extended its video content streaming services to include Australia.

If that is not enough, the home improvement industry, over the next four to five years, is going to encounter cultural shifts that will change one of the key areas of its business, the DIY home-owner. Up until recently, the sheer size of the baby-boomer generation, and the increasing difficulty most people under 30 experience in buying a house due to high prices and a lacklustre job market, has protected retailers from this demographic shift.

The population, of course, is always ageing out, with younger people replacing older people in the demographic areas that buy more DIY and other items. What makes this shift more important is that, without being conscious of it, many retailers have been tailoring what they sell to the baby-boomer generation. Even as it ages its way out of prime demographics, it represents such a large group, that it has managed to remain a prime marketing target. Retailers have, as a consequence, grown a little less sensitive to the need for constant change.

Over 27% of the population is now aged between 25 and 40, with a significant chunk of the baby-boomers shifting into the lower-spending and less DIY-prone over-60 group. Ageing-in-place conversions might be one of the next booming markets, but you can be pretty sure most of that work is going to be done by trades, and not the older people who are the target market.

There is another, really crucial factor that many commentators tend to ignore. As the crucial baby-boomer population does age, what else happens? That situation is summed up by demographics researcher Mark McCrindle like this:

The Baby Boomers currently comprise 25% of the population yet they own 55% of the nation's private wealth. And in 2020, when the oldest Boomers hit their mid 70's, we will witness the biggest intergenerational wealth transfer in history.

Inheritance, or in many cases simple generosity, will see a very delayed shift of wealth from an older, highly invested generation to a struggling younger generation.

How will this affect DIY? The baby-boomer generation may be the last generation to be provided with generally applicable DIY skills. Some see this as a lamentable state brought about by inattentive parenting, or a lack of training at school. One major contributor, however, is simply that things tend not to break down so often, and when they do break down they require complex repairs.

Few of the Millennial generation, for example, know how to start a car with a flooded carburettor - because just about every vehicle is fuel-injected now. Not to mention that twelve years from now, probably half of all cars sold will be electric.

Even a simple skill like changing a flat tyre is becoming more rare, simply because, where you could once count on getting a flat at least once every two years, roads and tyres have improved to make flats far less common. Many cars use run-flat tyres as well, making it more convenient just to drive to a garage. In short, car maintenance, as it was 30 years ago, is simply no longer a valued skill.

You can extend that to a range of other DIY activities. Why would you build your own bookcase, for example, when you can pick up one that is so much better from IKEA for $70? (Not to mention that you probably don't own that many printed books anymore.)

Plus, with the block sizes for houses getting ever smaller, and a confirmed move to multi-dwelling residences, that icon of male adulthood, the shed, is fast disappearing. It's hard to even find a spare corner of a garage for a workshop these days.

We're as little as five years away from the point where many households will likely find a 3-D printer to be more useful than a power saw.

What to do?

If home improvement retailers (and their suppliers) are going to have any hope of retaining the profitable DIY market for the next ten years or so, they will need to change their approach to this market. This means new and different products, different ways of selling in-store, and promotional activities that are more attractive to younger people.

One way to determine how to latch onto better growth in the future is to observe what other industries are doing as they struggle with similar problems. There is some inspiration to be found in a slightly surprising source: the laptop computer industry, and in particular the changes that Apple is bringing to its products and marketing in that area.

The MacBook Pro situation

Recently there has been a backlash towards Apple over the release of its latest MacBook Pro laptop computers. People who consider themselves to be "professional" users have complained that, for a "pro" computer, it's a bit lacking in features and power.

The addition of a "touchbar" in place of function keys has attracted as much bewilderment as criticism amongst this same set of critics. The touchbar is a touch-sensitive graphics display system that responds to whatever software is running front-most and provides quick access to the most commonly used features and commands.

Most truly "professional" users have not found this to be a very useful feature. After all, after years of intensively using specific software, they already know most of the key commands they need. Even its display of suggested phrases to ease the task of typing is relatively useless. If you touch-type at a speed over 30 words per minute, you really don't need that kind of feature.

Look beneath the surface of this apparent stress and rejection, however, and you can see the shape of a clever strategy that is being implemented by Apple. What seems like a few not-so-clever product tweaks is actually a vast shift in product design, and a realignment in the market place.

One indication of how seriously Apple is taking this change can be seen in its use of one of the "sacred phrases" of Apple lore when introducing the product line: the "Hello, again" message that was contained in the media invitations to the event. Famously, when Steve Jobs introduced the first Macintosh computer, the screen showed the "Hello" message in a styled font, then a first for any personal computer. Later, when Mr Jobs returned to company and revitalised its product line with the colourful iMac, the message "Hello, again" appeared.

What is the purpose of this "third-coming" of the Macintosh? In the past, Apple has done what almost every PC maker has done with its product line. They began at the pinnacle of their user pyramid, the high-end, pro users who really stress out their machines, as designers, software engineers, web developers, video editors and photographers. The laptops in particular, which started out as a very premium line, were designed for their use, and then "de-featured" for less intense users as the standard MacBook. Diagram 1 shows roughly how this market approach maps out.

>http://hnn.bz/mac-diagram1.jpg}Diagram 1: Old market approach}http://hnn.bz/mac-diagram1.jpg

With the new MacBook Pro, however, that approach has been almost reversed. Instead of appealing to the highest level of users, these laptops are designed with less proficient users in mind. The goal of these laptops is not to make the top users happy, but to take less proficient users and make them more proficient, through the addition of features such as the touchbar. Diagram 2 shows how this approach works.

>http://hnn.bz/mac-diagram2.jpg}Diagram 1: New market approach}http://hnn.bz/mac-diagram2.jpg

Why? There are really two, interlocked reasons. First, those less proficient users who want to be more proficient make up a much larger market than the fully proficient users. Secondly, the fact is that there is now a gap between less proficient and fully proficient users. The market has actually split. It has split for a variety of reasons, but one of the main ones is that much of the market is now made up of people whose main experience with computing has to do with their smartphones rather than computers.

This is a very big change to the way Apple markets its products. It really is about reinventing the Macintosh.

The DIY situation

Similar market forces are at work in the DIY hardware world. There is a considerable prize that will become available over the next three to five years for retailers and suppliers who manage to crack the code, and actually make DIY products that are suited to this changing market.

The initial problem for suppliers and retailers is identifying what needs to change. Many of us have had the experience of asking a computer expert of some sort how to perform a certain task, and getting back a stream of what sounds almost like gibberish instructions. For many DIY users, the DIY world is treating them in a similar manner.

That's a little hard to believe, so let's take a very simple example, and walk our way through it to show how confusing and difficult DIY can be.

Fitting the lock

As our relatively simple task, let's consider the steps you need to go through to fit a deadbolt lock to a door that hasn't been pre-drilled for it. That is the kind of task that many DIYers would take on. A typical case might be a door that leads from an attached garage into the house. It's currently fitted with a knob, and has a button lock on the knob, but the homeowner decides it might be a good idea to fit a deadbolt before going away on holidays, just to make it a bit more difficult for any prospective thief to get in. To make things a little easier, we'll only look at fitting the lock in the door, and not the steps necessary to fit the receiver for the bolt into the door jamb.

Let's just go through the steps necessary to perform this task.

1/ Measure place where lock will be inserted.

2/ Drill large hole through door for the body of the lock.

3/ Drill smaller hole along the plane of the door for the bolt to go through.

4/ Chisel out a recess for the faceplate to be screwed in.

5/ Insert the bolt.

6/ Fit the faceplate, and screw it in place.

7/ Fit the lock onto the bolt.

8/ Secure the lock with screws.

9/ Add the rose plate to the lock to hide the screws.

Think for a moment about where you believe the real "pain points" will be for an inexperienced DIYer attempting this task for the first time.

Most people would focus on the "big tasks", drilling the two holes as being the most difficult to get right. That could be the case if you relied on the paper templates provided with most locks. Fortunately, several companies have come along and produced special jig kits specifically for this task. HNN bought two of these kits, one made under the Irwin brand, and one made under the Sutton Tools brand, to test out.

As it turns out, these kits, for the most part, work very well. There are some significant differences in the approaches each takes. The Sutton Tools kit provides a one-sided jig for the door holes, while the Irwin kit provides a two-sided jig. As it turns out, this doesn't really matter all that much.

The process involves using a hole saw with a pilot drill to cut through the door from one side about two-thirds of the way through, then reversing the drill and completing the cut from the other side of the door. While the two-sided jig was a little bit of a help, it turned out that using the Sutton one-sided jig was just as easy. Cleverly, the jig can be attached to the door edge using the screws that go into the faceplate, making it very secure. Drilling in from the opposite side wasn't difficult, as the pilot hole made alignment simple.

However, where the Irwin jig did have a big advantage over the Sutton jig was in the latitudinal adjustment for the length of the bolt. The Sutton jig takes care of this with a plastic-on-plastic slider which, in the jig HNN purchased, was somewhat jammed. It seemed at first as though some fault had occurred in manufacturing, fusing the two parts of the slide. It was only after giving the slide an almighty tug that the slider worked. It's possible that some DIYers would actually give up at this point.

On the Irwin jig there is a simple push together and slide mechanism, that is also conveniently notched for the two most common sizes of backset.

The hole saws provided in the kits for drilling the large lock hole were tested out on solid pine, and both performed very well. The jigs really made what could have been a difficult task very easy to perform.

In order to save costs, both kits came with two hole saws, one for the main lock and one for the barrel of the bar, but only one arbor. So, after drilling the main lock hole, the next task was to remove the arbor from the larger hole saw and fit this to the smaller hole saw.

Which is where the real problems, for an amateur DIYer, begin. Any amateur DIYer using a hole saw is going to do what? They will either push the drill too hard, or tilt it a bit too much, making the bit jam, the drill torque -- and when the drill torques it is going to set the arbor good and solid into the drill body.

If you have a workshop vice handy, it takes about six seconds to free the arbor from the drill body. Just set it in the vice, grab a spanner, apply a bit of elbow grease and it comes off easily. If you have a G-clamp handy, it takes about 30 seconds to secure the drill body and get a grip on the arbor. But what if you have neither? What if the only tool to hand is a single, fairly wimpy adjustable spanner? What do you do then?

The real answer to that is -- as is the case with so many things -- not what you do then, but what you should have done before. An old trick is to take a bit of thin fence wire, and wrap it once or twice around the arbor where it meets the drill body (you can dab a bit of WD-40 on it as well, if you want to be fancy). Drill the hole, and if the arbor has bound, it pretty easy to work the wire out (a pair of needle-nose pliers can help). Once the wire is removed, the arbor can be spun off by hand.

If you don't know that, if you don't have either a vice or a G-clamp available, it's likely your door DIY project has just come to a halt. Unless, of course, you find some way to get ingenious about jamming the body of the hole saw in a door or something or (dangerously) try jamming the hole saw with the drill set in reverse to torque your way out.

The problem is, of course, with an inexperienced DIYer, it's likely providing instructions to use the wire trick probably wouldn't work either. That's because people new to DIY really do expect clean, simple solutions. Twisting a bit of wire around the arbor just seems clumsy, and makeshift.

So, there are really only two solutions. One is simply to either supply two arbors in the kit, one fitted into each hole saw. The other is to use the kind of click-on arbor you can find in Starrett kits. There is no reason, after all, that the arbor should attach via a threaded coupling. The major force is torque, not pressure.

So that is the first point of absolute failure with these kits. What is the second point? What task remains that a novice DIYer is going to find really hard to complete?

It is what is required by the deceptively simple requirement to "chisel out a recess for the faceplate". If you have never used a chisel before, how are you going to do that? Bear in mind this is a very shallow recess, about 2mm deep. It's also highly visible, and affects the entire fit and finish of the lock.

Irwin did actually think about this problem, while Sutton did not. Irwin includes in its lock kit a small router bit that can be fitted to a drill, and small plastic template to use with it. The template enables the user to cut around the edges of where the faceplate goes, then chisel out the remaining wood.

It's not a bad idea, except for one thing: unless you are very careful when you are using the router bit, you are going to chew right through the thin plastic template, making it almost worthless for someone who is not experienced.

As it turns out, this is such a considerable problem, that there are kits you can buy to help you perform this task. The one HNN purchased is made by Ryobi. It consists of a plastic device, with a metal ring in the shape of the faceplate sticking out. The user bangs on the plastic handle, embedding the metal ring in the wood, then pulls it out. The device has a built-in chisel that can then be used to chip the wood inside the indentation out.

It's not bad to use -- except that the built-in chisel is close to worthless. But you can bang in the metal ring, and then effectively use a real chisel to chip out the wood to form the recess.

So, to make this kind of kit effective for the real novice DIY market, you would need to solve the arbor problem, and include some simple tool to make fashioning the recess much easier. Of course, the objection most tool designers would have to these changes is that they will increase the cost of the kit.

That's true, but the core thing to understand is that, in this market, price is not nearly as important as providing all the ingredients needed for success. There is no point in being a novice DIYer and buying a lock kit that ends up not working.

The new market

The point of the above example is not so much a review of two particular lock jig sets, or identification of the problems they don't quite manage to resolve. What it is really about is investigating a certain frame of mind. Can we look at typical DIY tasks and see all the obstacles they present to people with limited experience? Can we find our way to solutions for most of those problems, or at least bring those solutions within the reach of people with a low level of skills?

One of the core values involved in this that it is important to get right is that cost is far less of a consideration than might normally be thought. For someone with some experience, the cost of a jig for fitting a lock might matter a lot. For someone whose only alternative would be spending money on a tradesperson to do the work, cost is far less of a concern.

It is a difficult set of adaptations for the industry to make, but looking into the mid-term future, it is a crucial adjustment to make.

Other cultures

In addition to adapting to people with fewer skills, the other task that faces hardware retailers and suppliers is adapting to people with widely different skills. There are two sets of cultures that while they not strictly about DIY, come very close and could offer effective DIY-like markets in the future.

The first of these is something that has become known as "maker culture". Here is one definition of what that maker culture is:

Maker culture emphasises learning-through-doing (active learning) in a social environment. Maker culture emphasises informal, networked, peer-led, and shared learning motivated by fun and self-fulfilment. Maker culture encourages novel applications of technologies, and the exploration of intersections between traditionally separate domains and ways of working including metal-working, calligraphy, film making, and computer programming.

Community interaction and knowledge sharing are often mediated through networked technologies, with websites and social media tools forming the basis of knowledge repositories and a central channel for information sharing and exchange of ideas, and focused through social meetings in shared spaces such as hackspaces.

Typical maker culture activities consist of everything from simple electro-mechanical home automation (remote controlled solenoids connected to wi-fi that mechanically turn on/off light switches, for example) to robots that perform basic tasks. Some of this has a practical bent, and some is purely playful or exploratory.

The second is the world of "craft", but not quite craft as we have known it. It is often just as much about a form of "hacking" traditional forms of craft to produce startling and different results. Much of this is about repurposing both found and purchased objects to suit new needs.

For example, there is a whole sub-culture of this kind of craft that is dedicated to reconfiguring and repurposing IKEA furniture so as to make it serve radically new purposes. This includes people using IKEA to subdivide new rooms in their apartments, and create entire new categories of furniture, often combining the functions of two or three pieces into one.

Analysis

It is necessary to emphasise that, while some of the above might seem a little negative, in fact the future for DIY is a very bright one. One reason car manufacturing is ending in Australia, is that there is simply too much capacity worldwide, and much of that capacity is in nations where labour costs are lower. There is little doubt that, over the next 15 years, private ownership of vehicles is set to diminish. Autonomous vehicles, even if they provide only limited transit areas, will make owning a car less vital to everyday life. At the very least, two-car families will likely transition to one-car families, and in the inner cities in particular, the number of no-car families will increase.

What is also set to increase is the amount that families and individuals spend on fixing up their houses. That money is less likely to go into expensive leather lounge suites and marble countertops in vast bathrooms. Where it will go is into home technology. The modern home, with solar energy roof tiling, a complex battery system to store off-peak power on sunny days, comprehensive energy monitoring, water recycling, and, most likely, a central computer that runs all these and many other systems, is going to become even more a focus for spending.

The thing to grasp, for retailers and suppliers that really want to benefit from these coming changes, is that the spending will be on areas that are today only just beginning to become viable. There really is a new era coming to the home improvement industry, and it will reward those companies and retailers that understand it early, and being preparing for the change soon.

Hydrox Holdings, Woolworths' failed home improvement joint venture with US big-box home improvement retailer Lowe's, continues to do damage to Woolworths even as it draws its final breaths.

Two prongs of the three-prong exit strategy Woolworths has formulated seem to be going well. GA Australia is handling a slow sell-off of $700 million in inventory from Hydrox's Masters Home Improvement stores. The sale of the Home Timber and Hardware Group (HTH) to Metcash for $165 million seems to be remaining on track, with completion expected in early October 2016.

The third prong, however, which involves the disposal of the property assets of Masters, is in danger of becoming somewhat bent and twisted at this stage. Woolworths had planned to dispose of these assets by selling them to an investment group, Home Investment Consortium Company Pty Ltd (aka Home Consortium) for a sum which reports peg at somewhere between $750 million and $820 million.

Lowe's disputed this resolution, announced by Woolworths' newly minted managing director Brad Banducci immediately prior to the company's results announcement. Woolworths seems to have at first suggested that Lowe's consent might not really be required. Since then it has moved on to saying that the contract between Lowe's and Woolworths requires arbitration, and has put forward High Court chief justice Murray Gleeson as its candidate for this arbitration.

Lowe's has moved directly to request that Hydrox be placed in voluntary liquidation. It disputes that arbitration would be possible, citing actions by Woolworths which it has termed "oppressive conduct"' and acts of "bad faith". In the case of such liquidation, the Court would appoint a liquidator.

Lowe's is currently attempting to prove its allegations of less than fully ethical conduct by Woolworths. It has requested a range of documents from Woolworths, and begun to describe the events that led up to the closing down of Hydrox.

In an affidavit from the assistant general counsel for Lowe's, Robert O'Neale, Lowe's claims that immediately prior to Christmas 2015 Woolworths proposed selling half of its 66.6% holding in Hydrox to Lowe's for $580 million, effectively swapping roles, with Lowe's becoming the senior partner in the joint venture, and Woolworths the junior partner.

More recently, Woolworths valued the 33.3% share of Hydrox held by Lowe's at $180 million. That would be 31% of the $580 million Woolworths wanted to charge Lowe's for an additional one-third share.

The affidavit also claims that at this time Woolworths valued its Home Timber and Hardware Group (HTH) wholesaling business at $255 million. HTH was recently sold to Metcash for $165 million, $90 million less than the proposed figure.

Lowe's has put forward additional details of how the deals surrounding the disposal of Masters' assets were put in place. This includes a colourful account of the US directors of Hydrox being informed that the company was in danger of trading insolvent, which could result in criminal charges, and even their imprisonment. Meanwhile, it is claimed, Woolworths may have made moves to reassure its own representatives that this would not happen.

Lowe's objections to the deal with Home Consortium put forward by Woolworths appear to be that this deal may have had regard for factors other than obtaining maximum return. Home Consortium plans to make the ex-Masters properties available for a range of retail operations, including those of consortium members Spotlight and Chemist Warehouse. It is notable that while Woolworths is noted as a possible future tenant, neither Coles nor Kmart are mentioned.

Analysis

It is easy to be distracted by the soap-opera-like elements of this dispute. Putting those to one side, one of the most interesting questions to ask is: why has Woolworths been so adamant in resisting voluntary liquidation? By continuing this dispute, the company is risking a high degree of damage to its reputation. If the deal with Home Consortium is a good one, surely a liquidator would go ahead with it, or put something in place that was at least equally as good?

On a simple level, it may be that Woolworths is not used to losing, and doesn't know quite what to do when it does find itself clearly on the losing side. The truth is that the kind of near-invincibility that Woolworths thought it enjoyed for over a decade simply doesn't exist in retail anymore, and especially not in the supermarket business in Australia.

Whatever the cause of Woolworths' current difficulties, however, one thing we can be fairly certain of is that its ongoing drama with Lowe's is going to have little effect on Australian home improvement retailers. With inventory sales in progress, Masters is still set to close entirely by 11 December 2016.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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The do-it-yourself (DIY) sector of the home improvement/hardware market will become a critical one during 2017 and 2018.

Two linked events - the exit of Masters from home improvement retail, and the sale of Home Timber and Hardware Group (HTH) - details of which should be finalised by 24 August 2016 - will see the home improvement industry change sharply during 2017. So defining will these changes be, that they will take until the third calendar quarter of 2017 to sort out.

The Masters effect

In terms of strategy, the biggest single change we are likely to see is a harder push by many current Mitre 10 and HTH stores into the DIY market - along with, potentially, a new competitor which might acquire some of the Masters store fleet.

Two forces will drive that push. The major strategic push is, simply, opportunity. While Masters did fail, it also dragged in around $1 billion in sales a year, and much of that (estimated at 75%) was DIY consumer. Even if a competitor emerges to replace Masters, that expenditure is still going to be "in play", providing a unique market opportunity for other retailers to grow their market share in the industry's most high-margin, profitable sector.

The second, compound reason relates to competing with Bunnings. Bunnings today seems unbeatable, but it will become even more so if it manages to capture an additional $500 million in consumer spending from ex-Masters customers.

Bunnings is well-positioned to do that, not just in market terms (as the only competing big-box), but also geographically. Many Masters stores are located close to Bunnings, and Bunnings is itself seeking to take over some ex-Masters locations. Customers could drive up to "their" Masters store, find it closed (or even converted to a Bunnings) and probably find a Bunnings less than a kilometre away.

The retreat from DIY

Beyond that, HTH and Mitre 10 stores as a whole simply need to take back some of the DIY market if they are to fully secure their future. Historically, from 2005 to 2008 the then powerhouse in the DIY market, Mitre 10, essentially surrendered much of its DIY market to Bunnings. This was formalised when, as a failing company, Mitre 10 was acquired by Metcash. Metcash immediately established that it would concentrate on trade sales rather than DIY.

That was certainly the right decision at the time. While there is still something uncertain about the modern Mitre 10's market position, there is no doubt that, particularly under the stewardship of CEO Mark Laidlaw and his team, Mitre 10 has been steadily improving its situation. Focusing on trade sales as a strong base to its ongoing growth has been a good tactic.

However today, seven or eight years later, the situation has changed. While the building, construction and renovation markets will no doubt remain active enough to ensure that trade sales continue to be healthy, the most obvious area for real growth (in the sense of expanding into under-serviced markets) will be DIY.

If Metcash acquires HTH, it is likely it will seek to spin out its hardware operations in an Australian Stock Exchange listing within two to three years. If Anchorage Capital Partners acquires HTH, it will also seek to eventually list those operations on the ASX -- though it is likely to take at least four years to turn it around. In either case, to produce good results, it is necessary to grow the business. The only really available avenue for that is in DIY sales. This growth is likely to be concentrated in inner-urban areas, where HTH is under-represented, and where less-skilled DIYers are over-represented.

Additionally, every trade-based hardware business should be aware that Bunnings is likely to start putting pressure on trade sales in 2018.

One of the "thought experiments" Bunnings CEO John Gillam has mentioned several times at analysts' briefings is that he can see Bunnings supplying every toilet in the building where those briefings are held. As Mr Gillam has said: "Why not?".

Those "why nots" have turned out to be the forerunner of strong market moves in the past. The effect on overall trade sales of Bunnings moving to displace Reece in the plumbing market, as an example, could be very strong.

Just to add additional motivation to that, there is also the fact that the new Bunnings Australia managing director, Michael Schneider, will want to demonstrate the retailer's Australian business is in good hands. He will be doing that in a market where standard renovation spending is expected to contract over 2017 and 2018 (according to the Housing Industry Association, and other sources). Mr Schneider is an intelligent, driven man, and has a reputation as a very strong negotiator. Given all that, it is unlikely he will pass up many opportunities for growth.

Following the basic principle of how you win asymmetric competitions - never try to directly match what the major competitor does - the best strategy to limit expansion by Bunnings will be to focus on DIY sales.

What's so hard about DIY?

When it comes to analysing why Mitre 10 and other independents have not done well in the DIY market, most retailers lay the blame on two factors: the lower prices on some major DIY items at Bunnings, and the fact that DIY customers don't appreciate reliable, knowledgeable customer service - the area where independents seem themselves as excelling - the way that trade customers do.

There is some validity to both these claims. Some DIYers are real price "mavens", who are determined to spend as little as possible on certain purchases. Others either feel a bit embarrassed by their lack of knowledge, and still others have difficulty explaining to anyone what they want to do. This makes the attention provided by independents difficult to use well. Inexperienced DIYers often prefer to prowl the aisles of Bunnings until they come across the products they need, or, by trial and error, to solve their problems themselves.

However, when you speak to many individual DIY customers, across the spectrum, often what emerges as the major reason they prefer to shop at Bunnings (or even, in some cases, to simply not shop at all) is that the service they do receive is not really appropriate to their needs. It's not bad service, it's not unfriendly service, but it doesn't answer to the requirements they really need to solve in their DIY tasks.

Adjusting to DIY

The main reason behind this is a very simple one: DIY hardware retailers in Australia (including, even, Bunnings with its success in this area) tend to view DIY home improvement as being a kind of "subset" of trade hardware. Frequently, the attitude is that the way tradies do things is the "correct" way, and that DIYers should be trying to emulate this.

That might not be the best attitude. To explain why this is the case, it's helpful to look at quite a different industry, but one where there is also a mixture of professionals and amateurs doing the same things.

If you pick up a recipe book written by a well-known chef, such as Gordon Ramsay, you will find any number of elaborate and delicate recipes. Many of these will take one or two hours to prepare.

Go to a restaurant run by the same chef, however, and you will not see a single one of those dishes on the menu. Why? Because that is not what restaurant food is all about. The ideal restaurant dish has three elements: exotic/special ingredients, the need for excellent technique -- and very quick preparation. The average amount of actual attention required in preparing a restaurant dish is about five minutes (though the total cooking time might be longer).

In the home improvement world, tradies are like restaurant chefs, while over 60% of DIYers are like home cooks. Like chefs, the tradie is looking for solutions that provide results that are a little special, that require solid technique, and that are very quick. Time is money. Tradies save time by using their skill, experience and training.

For inexperienced DIYers, time is not so important. A short list of their priorities would look something like this:

What works

With this in mind, let's consider a simple, but very revealing question: What is the single most successful DIY product/tool of all time?

To even start to answer it, we have to work out what that question actually means. Successful in terms of all-time sales? Current popularity? As something that transformed the industry? The best designed? The most used? The most liked? The toughest? The most powerful? The most reliable? Best value?

It's a tough question. Though one person HNN poised this question to had an almost immediate answer. A relatively experienced DIYer who is married to a partner known for having somewhat high standards, he sighed heavily, shrugged his shoulders, and said "The excuse".

So, that makes it a little easier to define what we mean by the most successful DIY product/tool of all time.

It's something that is even better than the excuse.

A hard call that -- but HNN does believe there is actually a contender. It's a product that is known to sometimes cause marital stress, but has healed more rifts with partners than chocolate fudge brownies and backrubs combined. In the hands of a skilled master, it can produce amazing results, but even the most duff of DIYers can pull off results -- with time, effort and care -- that are passable, and worth the expense and time.

More than any other product, it makes a house, a flat, an apartment a home, something "owned" in a sense which is way beyond a mortgage, a title deed or lease contract.

The answer (which is obvious when you really think about it) is paint.

Everyone who has ever done any kind of DIY has done some kind of painting. It might be a bookcase, a single bedroom, a kitchen, a bathroom, on up to an entire house, inside and outside. What's remarkable about this is that painting is far from an easy task. It's messy, it takes specialised equipment which can't be used for anything else. It's not dangerous (except, possibly, when it comes to ladders), but it takes a big commitment of time, and it can be, frankly, pretty tedious.

The accessibility of paint is shown in the numbers for the Australian industry. IBISWorld estimates that Australian decorative and specialty paint manufacture is a $2 billion market, with 304 companies participating, which employ 4,150 people. That's excluding, mind you, imported paint.

The most surprising thing, however, is that this industry, in terms of both revenue and profit, is heavily geared towards the DIY market. Sales to trade are important, but that is responsible for only 30% of net profit.

>http://hnn.bz/Sherwin_Williams_Hero_v3.jpeg}The consumer paint: easy to use, long-lasting}http://www.lowes.com/pd/HGTV-HOME-by-Sherwin-Williams-Infinity-Tintable-Flat-Acrylic-Exterior-Paint-Actual-Net-Contents-123-Fluid-Oz/999988706

What makes paint different?

How did paint get to be so successful in DIY? One of the first and most obvious things to note is that paint companies, over at least the past 20 years, have worked hard to develop two different categories of paint. One is aimed at the trades and one is aimed directly at the DIY market.

Trade paint tries to achieve three main goals, which are, in order of their importance: good value for money, superior finish, and medium-term durability.

The goals for DIY paint are quite different. The main goals, which share equal importance, are: ease of application, guaranteed results, and long-term durability.

It's clear why there are such differences in these goals. For tradies who have either served an apprenticeship as a painter, or had quite a bit of experience at painting, paying for paint that is easier to apply just doesn't make sense. They would prefer to pay less, and to rely on their own hard-won skills to make sure the end result measures up. The end finish has to be good, to suit the expectations of customers, and it had better last for several years at least, but the rest isn't all that important.

For DIYers, however, the most important thing is getting the job done so that it is at least adequate. With limited painting experience, and probably a gap of two or three years since the last time they painted anything, they can rely on only the most basic skills.

Beyond just getting the paint to stick to the walls and ceiling, their major fear is that somehow when the paint dries it's not going to look good. They need a paint that is going to be as forgiving as possible.

Finally, so difficult is the painting experience, that they need something that is going to last as long as possible. For that alone, they are willing to pay a great deal.

What's interesting about all these aspects of DIY paint is that they have very little to do with the actual retailer. Most DIYers who buy paint arrive at the store pre-disposed, possessing a range of prejudices and judgements. They usually have one or two main preferences in paints, and they will make a choice between them based on perceived quality, and price versus performance.

Those choices will be based mainly on two factors: past experience, and the narrative that has been supplied to them via advertising. The retailer's role is to tint the paint to their preference, to advise - perhaps - on undercoats, but that's about it.

Why only paint?

Let's contrast that situation with the one that is currently present in - to pick a clear category - power tools. Most retailers do make some attempt to split out what they think of as DIY tools from trade tools. However, this is largely done on the basis of quality, durability and price. DIY tools are, for the most part, cheaper, less durable, and less well-designed.

This isn't entirely pointless. It's true that the average DIYer is not going to get full value out of a $350 18-volt Makita impact driver. That's a tool designed to last a professional a good five years or more, no matter how constantly it is used on tough jobs. So the thoughtful and considerate home improvement retailer will direct customers to the "consumer brands", such as Bosch Green, or Black & Decker, and, at Bunnings, Ryobi or Ozito.

Yet, does this really make sense? The paint experience indicates not that DIYers are interested in paying as little as possible for everything, but rather that they are willing to pay a great deal more for products which answer their major problem - which is, typically, that they are not confident in their skills (often with good reason).

To use a concrete example where the "cheaper is better for the DIYer" principle has been shown to not work all that well, let's take the single most common tool out there, the cordless power drill/screwdriver.

The Sweet Home is a US-based website which is regarded as being one of the best "home gadget" sites on the internet. Every year, they review a large number of drills, and select the one which they think will meet the needs of homeowners the very best. In 2016 the reviewers selected six test drills and used these to drive 1,669 three-inch screws and bore 345 one-inch holes in testing to find the best of the bunch.

The winner? It was the Bosch Blue PS31-2A 12-Volt Max Drill/Driver. While that specific model is not sold in Australia, it seems very close in specification to the Bosch Blue Bosch GSR 10.8-2-LI 10.8V (though that drill has a hex chuck). It's a standard drill/driver, but does provide a maximum 30 newton-metres (nm) of torque, up from the more standard 20nm.

>http://hnn.bz/bosch-sweet-home-drill.jpg}Bosch Sweet Home drill winner}http://thesweethome.com/reviews/the-best-drill-for-common-household-projects/

Wait a minute - a Bosch Blue "professional" tool, in 12-volt no less, recommended for the average DIY home owner?

It's not just The Sweet Home, either offering this kind of advice. UK newspaper The Independent recommended the Einhell TE-CD 12 Li drill, similar in specifications to the Bosch, but with on 25 nm of torque, as its ideal drill for DIYers who use a drill more than once a month.

That said, this does go against much of the advice that is common in Australia and overseas. Most home improvement retail staff would, without hesitation, probably recommend an 18-volt hammerdrill as being the best all-round drill for home use, probably in one of the cheaper, "DIY" brands.

Typical of this line of thinking is the recommendation made by US online magazine Popular Mechanics, which suggests the Ryobi 18-volt P203 was the ideal drill for DIYers. Business Insider, similarly, doesn't even consider 12-volt in its selection of the top drills available. It's an attitude common from both specialist and non-specialist sources.

The other way

Why does the Bosch 12-volt drill make sense for the 60% of inexperienced DIYers? One main reason has to do with storage. If the drill is used, say, about once a fortnight, and it is kept in the garage or the garden shed, the Rule of Family Storage Drift means it will, at some stage, get lost for a period of time.

A smaller drill, with a single battery, can be kept in a closet or a kitchen drawer, ready to be used instantly. To use another external analogy, it's a bit like cameras. What camera do you use most of the time? You might have a really fancy DSLR, but it's likely most of your photographs get taken with your smartphone. Availability is incredibly important.

What can be learned from paint?

If we go back to the paint example, we can see that what helped make paint so successful has been understanding that DIY and trade users have different priorities and needs. What happens when we apply that same kind of thinking to drills?

Where the tradie is looking for a reliable workhorse, DIYers may be buying their first drill, or even more commonly, their first cordless drill. For them this isn't about a tool that is highly performant, but rather one that will help them to do things they haven't done before.

That's really the key. Without a drill, hanging a picture would come down to guessing where a wall stud was and banging in a nail. Putting up shelves, even simple "floating" shelves, would be impossible. Given the poor level of DIY skills many DIYers have, even screwing in screws can seem a very daunting task with a regular screwdriver, but become easy with a basic drill.

What do DIYers want in a drill? It needs to to powerful enough to get these simple jobs done, but it also needs to be easy to use, lightweight, and comfortable in smaller hands. And, as we mentioned above, something that an be stored near at hand.

Then there is IKEA. For many drill users, the drill becomes the ideal way to take much of the hassle out of assembling IKEA furniture. Fitted with the right hex bit, it flies through assembly processes that otherwise take endless, annoying turning and turning with an Allen key.

For the low-end DIYer, then, power tools really represent an extension of their capabilities. It's not about doing familiar things better and faster, it's about being able to do things they could only dream of doing previously.

Other tools

Several tool manufacturers really understand the needs of the DIY market. In particular the Worx brand produced by the China-based Positec has long designed unique and interesting tools that make use of this understanding of DIYers.

Take, for example, the Worx WorxSaw. This is a small, one-handed circular saw that makes use (in the smallest, 400-Watt model) of a 85mm diameter saw blade. There are tradie versions of this saw made as well, under Positec's Rockwell brand. For a tradie, this is the kind of saw that would be used in awkward situations, where reaching up a vertical wall to make cuts might be required, or for working in confined spaces such as low attics or the crawlspace under houses.

For the DIYer, however, this is a very different kind of package. What it really does is to provide access to the power and convenience of a full-scale circular saw, in a much smaller package, that is both easier to use, and much safer. Bear in mind that for many DIYers the simple act of using a handsaw to cut through 100mm x 19mm pine board can be really difficult. Handsaws require a surprising amount of skill and experience to use successfully in producing a square cut.

Even the DIYer's favourite cutting tool, the jigsaw, is actually quite difficult to use when it comes to producing a square cut. It requires much less effort than a handsaw, but given it's actually designed for cutting curves and curlicues, it can be difficult for the inexperienced to keep in a consistent, straight line.

The WorxSaw, for the inexperienced DIYer, transforms the task of a straight cut from several minutes, and likely a few failed attempts, to 20 seconds and almost guaranteed success.

The safety aspect is particularly critical with this tool. Many DIYers really do understand they are not safe with tools. Looking at the jagged blades of a serious circular saw, they can easily imagine what will happen if they miscalculate. The WorxSaw is still a dangerous tool, but it takes a lot more inattention to get into trouble with it.

>http://hnn.bz/worx-worxsaw.jpg}The Worx WorxSaw}https://www.worx.com/en-GB/WorxSaw-Compact-Circular-Saw-UK.aspx

Beyond this kind of safety and convenience, the other feature DIYers will look for in a tool is versatility. Tools that can be used for more than one function have a high appeal value -- even if those tools actually are a little average at both tasks. Take, for example, the Worx Trans4mer pivoting jigsaw tool. This is a lightweight, 12-volt cordless jigsaw-like tool where the cutting head pivots through 90 degrees. In one position it works something like a traditional jigsaw, and in the other position it works more like a very lightweight reciprocating saw.

It's a good tool for lightweight craft work, as it's very easy to handle. It's not all that good at heavier cutting as it lacks the pendulum action which can help better jigsaws cut faster. In the non-jigsaw configuration, however, it can be used for a wide range of functions. It makes cutting through plastic pipe and dowel rods much easier, and even works quite well as a simple pruner for fruit trees and other smaller plants.

Looking beyond Worx, even more mainline tool manufacturers understand the kind of tools many DIYers are really looking for. For example, Techtronic Industries (TTI) received high praise for its Ridgid brand Stealth Force Brushless 18V 3-Speed Pulse Driver, which it advertises as having twice the power and half the noise of comparable impact drivers. This tool uses a variation in pressure through a sealed, oil-based hydraulic chamber to create impact "pulses", rather than the usually spring-driven high impact anvil system used on most impact drivers. It is both quieter and faster than the mechanical systems.

In bringing this tool technology to its Ryobi consumer brand, TTI has taken a very different tact. It has released the Ryobi QuietStrike, which uses oil-pulse technology tuned for producing a low-level of noise, and around the same performance as a standard impact driver. This is an excellent consumer insight. Standard impact drivers are exceptionally noisy. Working through a Saturday afternoon on installing a deck with a standard impact driver can pretty much wreck that part of the weekend for all the neighbours. HNN believes this tool will be so attractive to many homeowner DIYers, that it will be deciding factor that causes them to adopt the entire Ryobi tool system.

Another tool that fits into this category is the EasyCut 12 with NanoBlade technology developed by Bosch, and set for release in Europe in early 2017. This replaces jigsaws and sabre saws both in the workshop and in the garden (for pruning) with a tool that uses a 4mm wide chainsaw-like blade for cutting. This reduces vibration, makes plunge cuts easy to achieve, and provides a broad, 65mm surface for making cuts.

>http://hnn.bz/bosch-easycut12.jpg}Bosch Easycut 12}http://hnn.bz/bosch-easycut12.jpg

While so far we've looked only at how tailoring offers directly for DIYers could work well for a few power-tools. It applies much more generally than this. Nail-guns are a good example. While these are often thought of as being "professional" tools, there is a reason why consumer brands such as Ryobi have released their own, lightweight version of nail-guns: hammering in nails is actually very difficult for low-end DIYers. It's physically tough, requires a surprising amount of skill, and frequently results in persistent low-level injuries. Where for the tradie a nail-gun is a lifesaver when it comes to getting certain jobs done quickly, for the DIYer it's often the difference between an agonising, difficult afternoon, and a chore that is actually manageable.

Laser levels are another classic area where this kind of thinking applies. For tradies and experienced DIYers, the task of, say, mounting a shelf on a wall and getting it to be level by using the classic bubble-level doesn't seem all that difficult. For a beginning DIYer, however, it can easily turn into a complex and bewildering task. The result will often be a shelf that isn't level, which means disassembling everything, potentially making a bad patch to the wall paint, and putting it all up again -- and possibly making the same errors once more. Comparing that with spending $90 on a simple laser level makes the purchase seem much more reasonable.

Implementation

The CEO of US-based big box retailer Lowe's, Robert Niblock, made some comments about the new kinds of customer service needed in a 2009 interview with the Association for Talent Development:

Six or seven years prior to the slowdown, there was a lot more outsourcing of home maintenance. For example, customers were outsourcing their lawn maintenance and their painting but now they're doing it themselves. Today you have more DIY customers showing up who didn't grow up doing the work themselves, and they lack experience. We've always been able to help the DIY customer, but where there's a lack of experience, you have to make sure you spend extra time. So it's important that associates are aware that they might be talking to a first-time do-it-yourselfer. We want our associates to recognise that each customer's situation is different and to take the time to give the right amount of advice.

The important point here is the idea of "recognition". It's easy for retail sales staff to fall into a pattern where their main focus is on the task a customer needs to perform. Without realising it, they end up treating a DIY customer as though he or she is a kind of "mini-tradie".

There is a general pattern that can work in selling to these customers. The mistake that most sales staff make in the beginning is concentrating on the task at hand, instead of on the customer. The first questions, at least, should be about the customer, their level of experience, what tools or capabilities they might have.

From there the salesperson can move on to defining some of the options. For example, they can indicate to a customer who is putting up a shelf that for more experienced people, a mechanical level works really well, but if you are a bit uncertain, a self-levelling laser level can make part of the job much easier.

Of course, this is expensive. Staff need to be trained. At critical times, especially on the weekends, there needs to be adequate staff on the floor, so that they can spend enough time solving the problems of customers. But, just as with paint, where the very expensive advertising campaigns, and product development to make paints easier to use, are balanced by several multiples of margins on consumer paints versus trade paints, the high margins on most consumer-oriented tools are also there for a reason.

Conclusion

The good news is that DIY consumers do actually value the kind of time and attention independents can offer. But this is very different time and attention from what is typically supplied at most home improvement retailers today. At the risk of sounding overly optimistic, inexperienced, untrained consumers really are not a problem. They represent a very good opportunity for sales and growth.

Bunnings has become the "default" choice of these consumers, but they haven't done a great job of directly capturing this market. That is largely because the main marketing driver of Bunnings -- low prices -- is a secondary driver in this market. Just as they are willing to pay much more for paint that is easier to apply, they are willing to pay much more for solutions in tools and products that makes success easier to achieve in DIY.

The question that faces the overall home improvement industry is whether whoever (or whatever) ends up owning HTH -- and, in the future, perhaps Mitre 10 as well -- will be willing to invest the time and capital to expand into this market. Doing so could be the first step to creating a truly competitive environment.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Bathrooms, as Australian home improvement retailers know, are a good business -- as well as a big business.

The Housing Industry Association (HIA) estimates that there were 429,400 new bathroom installations in FY 2015/16, at an average cost of $16,731, for a total of $7,184 million. In bathroom renovations, there were an estimated 219,600 installations, with an average cost of $17,779, for a total of $3,904 million. The total market is thus estimated to have been worth over $11,000 million. The actual market size for bathroom fittings alone is estimated to be a little less than 50% of this, about $5,400 million.

The Australian domestic market is currently dominated by two companies: Reece Group, and the New Zealand-based Fletcher Building, through its Australian wholesale chain Tradelink. Reece holds around $2,000 million of the market, for 38% overall share. Tradelink has around $800 million for a 15% share. The share that Bunnings controls is difficult to determine, but it is thought to be somewhere between 7% and 9%.

The rest of the market consists of companies with shares of less than 4% of the market. These range from large integrated retailers such as IKEA, to smaller national chains such as BGW's Samios Plumbing, which has over 20 outlets around the country. A large proportion of the market is also held by smaller, regional and local companies.

In the commercial market, there are major players such as the RBA Group, which supplies, among others, the Harvey Norman Commercial division. Harvey Norman Commercial has been expanding in recent years, and opened a showroom in Canberra, ACT in March 2016. Harvey Norman has also expanded this commercial offering to online services, most notably as a hot water replacement service supplying systems from Rheem.

It was never going to be easy.

In January 2016 Wesfarmers managing director Richard Goyder and the then managing director of Bunnings, John Gillam, made a surprise announcement. Wesfarmers was about to acquire Homebase. Based in the UK, Homebase was a slowly failing home improvement retailer owned by the UK's Home Retail Group, along with home goods retailer Argos.

The two Wesfarmers stalwarts introduced not only the acquisition of Homebase, but also a reorganisation of Bunnings. Mr Gillam would become chief executive officer of Bunnings overall. Peter Davis, who had been the effective "number two" at Bunnings, would take charge of Bunnings UK and Ireland. Michael Schneider, long responsible for directly managing the Bunnings stores, would move up to manage Bunnings in Australia and New Zealand (Bunnings ANZ).

The acquisition was not the result of a sudden opportunity that had to be seized in an instant. Bunnings had started working on the possibility of buying into the British market more than a year previously. By the end of 2015, the project was far enough advanced that in November a Bunnings "shadow" team consisting of the executives who would take over the management of Bunnings ANZ was already meeting, ready to move.

It was evident from the initial outline presented in January 2016 that the plan was daring indeed. The initial acquisition would cost around AUD705 million. After working to fix up the basic Homebase brand so that it stopped losing money, Bunnings would then set about entirely rebranding every store.

They would be transformed from Homebase to Bunnings UK. With the rebranding, the chain's entire strategy would also be transformed. From a brand constantly seeking out mid-margin opportunities, it would become an everyday low price (EDLP), segmentless retailer. In other words it would duplicate - with strategic adjustments - the business model of Bunnings ANZ. The depth of capital expenditure required to get all this underway would be GBP500 million.

Beta to version 1.0

Over four months later, at the 2016 Wesfarmers Strategy Day on 22 June 2016, Mr Gillam and his team set out to explain the company's thinking not only about the Bunnings UK/Homebase development, but also about how Bunnings ANZ would function as well.

Some aspects of the plan originally announced have been tweaked a little. A more generous timeframe has been allocated for the transformation to Bunnings UK, up from three to four years to three to five years. The capital allocation called out has increased by a couple percentage points as well, from the previously announced GBP500 million (AUD984 million), to AUD1 billion.

Selling the vision

During his introduction (HNN is publishing the full transcript of his presentation in this issue, along with some analyst questions of interest), Mr Gillam made repeated references to the history of Bunnings. He pointed out that it had begun as quite a small enterprise, that then grew through the acquisition first of McEwan's (largely in Victoria) in the early 1990s, and then of BBC Hardware, when Wesfarmers acquired the assets of Howard Smith in the early 2000s. He drew some parallels between the acquisition of McEwan's and the acquisition of Homebase in particular, pointing out that the former had actually been in administration when Wesfarmers bought it.

Mr Gillam also went to some lengths to describe the matrix of capabilities and market fits that Bunnings has created. He pointed out that Bunnings operates in the DIY, DIFM (do it for me), light commercial and heavy commercial areas. He drew particular attention to light commercial:

The light commercial engagement in our business is really, really pleasing. It actually synergises our stores, they shop us at different times, really, than consumers, but they are shopping mostly and nearly totally the same products, so it gives us more working capital benefits as well, and it validates the offer to have that quality of person shopping you, as well as people who are trying to do things around their home. There are more and more segments that just work on the home, and that's one of the exciting areas of light commercial.

Customers are serviced through not only the "standard" Bunnings Warehouse outlets, but also through smaller urban stores (such as the Bunnings in Melbourne's Collingwood), "traditional" smaller Bunnings stores in some regional areas, and Bunnings Trade stores (which are typically created on a somewhat temporary basis to provide building supplies in areas with active building and construction projects).

In addition, Mr Gillam pointed out that these markets are serviced through a range of means, including relationship marketing, direct marketing and standard mass marketing techniques. He described the structure of Bunnings as being a "multiple hybrid", which was engaged in both retail and wholesale operations. In describing the range of Bunnings' activities, Mr Gillam said:

We have nine major work areas, five growth drivers and four areas within our business that are looking to lift productivity and strengthen the core of the operations. Those work areas are all focused on making sure we have a winning offer, that we can do things that engage and involve our team even more, that we are growing the market, and from that perspective then looking to grow our share. All within that framework of long-term value creation.

For the year going ahead Mike and Clive and the exec team for Bunnings Australia/New Zealand have clustered the nine work areas around three major themes. A way of simplifying and energising what we are doing, so that we have a new, strong message for our team. We want to create better experiences, we want to improve the core, and we want to drive growth.

The nine work areas, as spelled out in the Bunnings "Plan" flyer provided for staff are:

If there was one theme that emerged from Mr Gillam's comments about both the Bunnings ANZ and Bunnings UK operations, it was an increased focus on the potential for outdoor living as a category. Mr Gillam has mentioned this at previous Strategy Days, but this time there was a particular emphasis.

In the UK this is driven by what he generously described as "possibly the worlds' best gardeners", referring to the British. However, the push for outdoor living as a category was extended in some of his comments to Australia as well. Mr Gillam has also singled out better barbecues as one of the products the company has planned for Bunnings UK stores.

The only other element that was a little unusual was that the idea of "brands" featured more prominently in Mr Gillam's statements. There was increased emphasis on the idea that the core Bunnings strategy was not just the low price, but also bringing established and well-known brands to customers at these prices.

It is an interesting emphasis. Bunnings has avoided full vertical integration (which Kingfisher, for example, is moving a little closer to under its recent restructure in commodity products such as lightbulbs), but it does rely on a number of "captive" brands, such as Kaboodle in kitchens, and Ozito in power tools.

The acquisition

The plan for developing Homebase into Bunnings UK remains essentially unchanged. The first phase involves building a retail team and changing products to better reflect the Bunnings EDLP strategy.

The most important point reached in the initial months will be the development of a number of pilot stores to test the Bunnings UK concept. The original number of pilot stores seems to have been four, but the UK financial paper-of-record, the Financial Times, is reporting there will be 12 pilot stores, to be rolled out over 18 months. It's likely both numbers are correct, with four pilot stores to be followed by a further eight stores to test the market in more regional areas, prior to a full-network roll-out.

A report in the UK-based Guardian newspaper indicates that the first pilot store will open in October, followed by one or two more before the end of calendar 2016, with more to come in the first half of calendar 2017.

According to Mr Gillam, the development of pilot stores that meet expectations will be something of a "hard stop". Until the pilot stores have provided a good indication of what will work in the market, the Bunnings UK rollout will not proceed.

Some help

One of the most interesting announcements Bunnings made was that it has formed an advisory panel to help it adjust to and understand retail conditions in the UK. The three people on the panel are all heavy hitters in the retail area - including Matt Tyson, the former head of the Masters Home Improvement retail operation in Australia. Mr Gillam praised his contribution in particular, saying:

Matt Tyson is an interesting choice. Matt knows us very well, because he's been here competing against us. So he understands what Bunnings is. Maybe he understand things that we don't understand about ourselves. Strengths that we don't understand, or weaknesses that we don't know about. He is also a very very well-credentialed UK retailer, born of Kingfisher, and has been part of Kingfisher's expansion in France and in Russia, and also in helping them out of the mess they had in China. It's terrific to have Matt on board.

The other members of the board are Archie Norman, the former head of Asda and a politician for the UK Conservative Party, and Michael Mire, a well-known McKinsey director, who has a background with both construction and the Kingfisher group.

It is interesting that two of these choices have extensive past experience with Kingfisher, which Mr Gillam cited as a key competitor at the initial announcement of the acquisition in January 2016, but barely touched on in this presentation.

Current status

As Mr Gillam pointed out, Homebase has only been under Wesfarmers control for around four months, so there is little data that could be offered to support any changes made. He said that moves towards lower prices are already underway, and that the stores are moving rapidly away from the "soft" products, such as doonas, and towards an EDLP pricing strategy.

In an amusing anecdote, Mr Davis recounted how some staff members at a store reported to him that the "scruffies" were starting to show up. This turned out to be a reference to British tradies, who had dared to enter the pampered confines of the Homebase stores, attracted by low prices. Mr Davis was very good humoured about the whole thing, but this does point at just how far Homebase needs to be taken. The class system, which is both frequently mocked and at times half-heartedly emulated in Australia, is alive and well, and sometimes raising barriers to successful retail in Britain even today. It is a long road indeed from welcoming light commercial customers as they "validate" a store, to regarding working men and women as "scruffies".

Questions

The questions offered by the financial analysts were, in the main, not particularly good this year. It was almost as though they were a little stunned. To be fair, their mainstay is financial statistics, and Homebase in its current state just isn't producing much to go on just yet.

The one exception was a long question proffered by the highly respected analyst for Bank of America Merrill Lynch, David Errington. Mr Errington has been raising grave concerns about Wesfarmers' investment in Homebase. In comments published in Fairfax Media before the Strategy Day, Mr Errington is reported as saying:

We were critical towards Woolworths entering the Australian home improvement sector via Masters and we believe Wesfarmers entering the UK market via Homebase will be as equally a compromising decision for Wesfarmers. Paying $705 million for a business generating $40 million of earnings before interest and tax, and where that business is smaller scale in a tough industry, raises questions.

In his analysis, Mr Errington questioned whether Wesfarmers would be able to maintain its high rate of dividend payouts.

With the drop in earnings now expected and post its Homebase acquisition, which brings with it more than $600 million worth of annual rent expenses, this strategy now looks to be closing and with a fixed-charge ratio forecast to fall to 2.44 times, its growth options look challenged. Wesfarmers' balance sheet can no longer afford paying out 90% of its earnings in dividends ... and it cannot afford any of its businesses sustaining further drops in earnings.

The exchange between Mr Errington, Mr Gillam and Mr Davis is provided at the end of the transcript in this issue of HI News. It's best read in the original, but suffice to say it indicates a good deal of conflict, potentially not only between Mr Errington and Wesfarmers, but also with other analysts as well.

Analysis

It is possible to feel some sympathy for the financial analysts. It is difficult to imagine a scenario that would more frustrate their analytical sensibilities than having Wesfarmers spend what could turn into AUD1.9 billion in total to first buy a failing home improvement retailer in a foreign country, then fix it up, and, when it is working reasonably well, replace it with a quite different brand imported from Australia.

All this introduces a wide range of uncertainties which simply, particularly in combination, cannot be quantified. Risk quantification and prediction are what is at the heart of financial analysis.

On the other hand, though, Bunnings' position must really be fully appreciated. One of the elements that was not explicitly mentioned by Mr Gillam or Mr Davis, but which emerged every time they spoke about the strategy, is just how deep the talent runs in Bunnings (and Wesfarmers as a whole). It's not just that Mr Gillam can easily tap both Mr Schneider and Mr Davis to take on leading roles, but that each of them can easily call on the services of five or six very competent executives to back them up.

In the end, what has really happened with Bunnings is that it has found itself, at the end of over 20 years of hard development - and after fighting off a rival for six years which was willing to spend billions of dollars to obtain market share - with a surplus of talent and ability. It's as though a team of Olympic level runners has been built up over the past ten years, and for the moment (while real developmental challenges do remain in Bunnings ANZ operations) many of them would find themselves consigned to the equivalent of taking long walks in the park, or working on improving their poetry, or something.

Most businesses really hate that kind of waste, but it is especially true of retailers. One of the frustrations that attends this talent surplus is that, given Australia's fears about its small markets coming under the control of monopolies, it is difficult for Bunnings to extend its reach in some markets.

Viewed strictly in terms of capital allocation, the move into Homebase might not make entire sense. When talent allocation, operational expertise, retail smarts, and disciplined management practices are added to that equation, it all does start to make sense. It's not about creating waste, it's about ensuring waste does not happen.

The real reason

There is a place, however, where these two elements, the tending after capital allocation and the careful preserving of talent, do blend together when thinking about the Homebase strategy.

One thing that HNN has learned is to take just about everything that is said by Bunnings (and especially John Gillam) very seriously. If it doesn't quite make sense at first, generally it's worth thinking about for some time.

One statement that really puzzled us came out of the original acquisition announcement. This was the idea that Bunnings might have found some way to reduce the lower levels of retail activity during the "off-season", the winter months in Britain. It is easy to dismiss this. Many people who grow up in temperate climates find seasonal weather to be a bit odd, while those of us who grow up with seasons see them as welcome and a joyful part of life.

What if, though, we began to wonder, Bunnings actually could do that? As a mild example, what if it were possible to extend the southern British growing season? The non-growing season runs on average pretty much exactly 16 weeks of the year. What happens if you take six weeks off of that, three weeks at both the start and end?

The first thought one might have about this is, if it is such a good idea, why hasn't anyone else done it just yet?

As it turns out, if you think about that question, some interesting possibilities open out.

It seems to be quite likely that if you are operating a home improvement retailer that is based on a High/Low pricing strategy, increasing the length of the growing season might not just have little or no effect, it could actually end up decreasing sales revenues and margins.

High/Low relies on and achieves high sales and high margins during times of what we might call "high sales compression". This is when there is a general spike in demand. This can be caused by certain celebrations, such as Christmas, Mother's day, and Father's day. It is also caused by moments of high seasonal demand, such as (in colder climates) the first two weeks of actual spring, when gardeners rush to buy seedlings for the coming summer.

Spring comes and the local garden centre offers a "special deal" on petunias (or something). Customers rush down to buy their petunias at this great price - but then there are these other petunias, which are so much nicer, though a bit more expensive. We all know how that ends.

For EDLP, the story is quite different. The petunias in the EDLP store consist of two kinds. There is the "better than expected" petunia, which is low-cost, but hardy and pretty enough. Then there is the "surprise" petunia. Much of the surprise is that a better petunia is offered at an unexpectedly low price. That sense of surprise is what triggers the purchase reaction in the customer.

For EDLP, extending the time during which people can buy plants, and/or plant supplies, is going to be very positive. In the end, part of the power of the EDLP model is that it can restructure markets. It often brings these changes about not through single products, but through combinations of products.

High/Low pricing, by contrast, does not rely on restructuring, but on creating a series of events. If a convenient cultural event is not available, then an event is created, by staging some kind of sale in a product category.

The important aspect of all of this is that it means High/Low retailers are particularly vulnerable to attack by EDLP retailers. High/Low lacks the tools needed to restructure markets, so EDLP are free to gradually change markets in fundamental ways which benefit them.

There are strategies that High/Low can employ to fight back against EDLP. However, those strategies tend to be sophisticated and complex.

What seems possible is that what Wesfarmers/Bunnings has really spotted in acquiring the Homebase business has much less to do with Homebase itself (it is simply an adequate vehicle), and much more to do with the British home improvement market. It is a market, Bunnings believes, that has a very high vulnerability to an EDLP competitor. That is because not only because low prices will work in that market, but also that the existing retailers do not know how to fight back against EDLP strategies that alter market structures.

That is the opportunity in Homebase - it's the market, not the retailer.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Home automation is often seen as being a single product set. It's a product set that draws on the tradition of the "smart home" that has actually been with us, in one form or another, since the late 1950s and early 1960s. "The home of the future" has been promoted through endless exhibitions since that time -- and frequently parodied as well, in movies such as the classic 1967 Jacques Tati films "Mon Oncle" and "Playtime".

>http://hnn.bz/Tati-playtime.png}Tati's film "Playtime" lampoons automation}https://youtu.be/nmTnJFLZJtA

Where mechanical-based efforts to automate homes in the way that many industrial and retail situations had been automated were laughable, by the 1990s electronic technology had evolved to the point where "serious" home automation could make progress. This consisted largely of centralised control panels that could, through a system of corded cables, solenoids, rheostats and transistors dim lights, open curtains and open doors.

The rise of the personal computer soon provided a new area for home automators to consider. In early 2005 the then-chairman of Microsoft Corporation, Bill Gates, introduced what was dubbed "E-Home Technology" in a "Home of Today" exhibition in Munich, Germany.

This featured a home-wide, wired communications bus that was hooked into a central computer, and could control home functions in much the same way they were controlled in modern high-rise office buildings. Four control panels located around the house could control its functions.

As recently as 2010, Microsoft released its idea for a HomeOS, which would be an operating system for the home. Like a PC, this would have a central controller, and devices in the home would be attached to the HomeOS system as peripherals.

This became connected to Microsoft's "Lab of Things" infrastructure, which is somewhat like the Internet of Things, except that every thing in it ends up involving Microsoft in one form or another. As Gigaom commented in 2013:

But in digging into HomeOS and the Lab of Things news today, I'm struck by how odd Microsoft's vision seems to be with regard to the connected home. For example, Microsoft's HomeOS vision centers around a home PC (it can be a netbook or a laptop) that the devices talk to -- something that seems more at home in 2003 than in 2013.

The new automation

As the GigaOm article points out, what none of these visions of the future take into account is the rise of the smartphone as a key tool. One way of looking at the difficulties we currently face with home automation is to see it as the struggle to tie together 40 years of development with technologies that have only been around (for most people) over the past seven years or so.

At one time, for example, being able to pipe music of your choice into a room seemed like a wonderful thing to do. One solution to this was the Sonos system, which made this vision easily possible in homes by interlinking a number of speakers.

More recently, this kind of function has been taken over by devices such as the highly popular Amazon Echo (voice-controlled through Amazon's Alexa cloud-based system), which can, on command, stream music from a range of sources -- without requiring any centralised controller.

The Echo doesn't make the vision of the same music everywhere possible, but that vision has itself dimmed somewhat. You might want a good speaker in the kitchen while you are cooking or dining, but sitting on the couch, you might be just as happy with your smartphone and some earbuds.

Similarly, devices such as the Nest Thermostat from the Alphabet-owned Nest Labs relies on recording past behaviours, then using these to predict future heating and cooling needs, without the need to network to any other devices.

Home automation and home improvement

From a strictly market-driven perspective, HNN believes that home automation will become increasingly important to home improvement retailers over the next two to three years.

One driver behind this is that home improvement retail is still in something of the "honeymoon" period when it comes to Li-ion cordless tools, but, from a DIY market perspective, this will begin fading in coming years. People are still replacing Ni-Cad cordless with Li-ion, or simply discovering that they can now afford powerful, long-lasting cordless tools that make many DIY jobs easier to do.

Today, as brushless motors slowly filter down to the DIY market there is an additional wave or replacement happening. However, strictly in the DIY market, HNN does not really see any further technology coming along that will continue to push growth.

DIYers will find their price-point in the market, brushed or brushless, 2.0 amp-hour battery or 4.0 amp-hour battery, 10.8 volt or 18 volt, and some will eventually be tempted to upgrade through a combination of better features and price deflation. However, the market will likely begin to contract, partly because these consumer tools are also, almost universally, very well made these days.

The situation at the professional, "tradie", builder, construction end of the market will be different. Both Techtronic Industries (TTI) and Stanley Black & Decker have indicated how they plan to add advanced Internet of Things technologies to their tools. We will likely see additional advances, particularly from companies like Hitachi, and while Makita has been quiet on this front, it is a power tool manufacturer that should never be underestimated.

It is quite likely these advances will change not only the tools themselves, but also how they are sold. For example, using these modern networking technologies, introducing a Hilti-like leasing system would be much simpler, and much more effective. We could see the rise of the power-tool as a service at the top end of the market.

If things work right, however, just as the DIY market for power tools sees a decline, the market for home automation products will begin to increase. It is HNN's belief that it is partly this vision that has influenced the TTI brand Ryobi to get into the garage door opener business, with what is, for that market, a very advanced product.

The situation today

One of the major problems in the home automation market today comes down very simply to price. To look at a single device that can be very useful, Belkin sells the WeMo Insight switch. This plugs into a powerpoint, and then devices are plugged into it. Aside from offering the usual features of such a switch, enabling the user to turn it on and off remotely, either from within the house or from just about anywhere in the world via an internet connection, it also monitors the current that passes through it, providing a reading on how much energy is being used.

>http://hnn.bz/belkin_wemo_insight_switch_1.jpg}Belkin Insight switch}https://ifttt.com/wemo_insight_switch

This means that energy hungry devices, such as air-conditioners and heaters, can be monitored overtime, providing feedback on when they are being used efficiently.

That's impressive, but the Insight Switch can also provide alerts when the amount of current changes -- in other words when the attached device switches on or off. That could be an alert that signals a battery has finished charging, that the washing machine has finished a load, or even that the coffee is (finally) ready.

Installation is simple and reliable. Connection methods include hooking it up to the home wi-fi network, or directly connecting to it over Bluetooth through a custom smartphone app.

All that is great, but each unit costs $100. A technology fan might buy one as part of a project, or just out of curiosity, but very few people and going to buy eight or nine for the home. Even the simpler WeMo switch, without the current monitoring built-in, costs $70.

In market technical terms, home automation is currently stuck at a bad place in the price/volume curve. Adoption isn't widespread enough to make volume purchases and subsequent price reductions worthwhile, and adoption is being held up by the high price of individual units.

Time will, most likely, take care of this issue. Adoption will continue to spread, and manufacturers will see their development costs amortised over the first two to three years of a product's lifespan, meaning that they can reduce margins on older items.

Forecasting adoption cycles is always difficult, and we do not take that task lightly at HNN. Reviewing the products on offer, and looking at adoption cycles we've seen in similar areas, it is our belief that during 2016 we will see a significant expansion in the number and complexity of the products that are being developed.

We don't think that the adoption cycle will begin to tip over into real growth until the end of 2017 at the earliest, and we don't believe strong growth will occur in the general market until late in 2018.

>http://hnn.bz/hd-inv-powertool-timeline.png}The development of cordless}http://hnn.bz/hd-inv-powertool-timeline.png

However, we do think that we will see the emergence of some quite profitable vertical categories before that. Security is one of the easier ones to spot at the moment, though the price-points in this area still seem to be set surprisingly high.

Another potential driver could be anything that can help people who have decided to age in place in their own homes. Home improvement retailers seem to be concerned about directly marketing these products, leaving many elderly Australians with the task of cobbling together their own systems. This could include everything from video doorbells that mean an older person doesn't have to get up from bed to answer the door or let someone into the house, to assisted lighting systems that automatically turn on lights even during the day in dark corners to help prevent trip-and-fall injuries.

Related:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

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If retailers are going to compete effectively in the new home improvement market that is currently developing, it's essential that they have a good understanding of the strategies Bunnings brings to that market.

In particular, it is not going to be helpful if competing retailers simply see Bunnings -- in the recent words of one senior retail executive -- as a "big green moon" which has the intent of "gobbling up" smaller retailers. This is misleading, and will result in retailers adopting poor strategies.

The actions of Bunnings, in particular its expansion in key markets, can and do lead to reduced performance by competitors. This sometimes increases the likelihood of their failure. However, this is seldom (if ever) a part of the actual intent of Bunnings.

Markets not competitors

While HNN is sure that Bunnings -- through Wesfarmers, its parent -- does have ethical and good business practice in mind at all times, there is an even stronger reason why it does not usually engage in that kind of direct store-on-store competition: It is simply not very efficient.

Bunnings is not primarily concerned with its competitors. It is, instead, very interested in markets. "Going after" competitors would mean the waste of a lot of effort and some capital expenditure. Developing markets is, in large part, self-funding, and has the goal of increasing returns, rather than just expanding market share.

In developing markets, Bunnings brings the following strong capabilities to the situation:

Restructuring markets

One of the company's most interesting insights is that home improvement markets can be structured by their retailers. Retailers effectively establish the "rules" of markets by setting the expectations and values of the markets. Customers follow the pathways established by these expectations to find the best value and solutions to their needs.

The way Bunnings disrupts a market is not to learn "the rules" and then tweak its operations to take advantage of these. Instead, Bunnings takes direct action to change those rules, so that the market better conforms to Bunnings' best capabilities, as outlined above.

HNN has suggested several times in the past that Bunnings is partly in the business of surprise. At these moments of surprise, when its customers suddenly find themselves confronted by a deal that is far better than anything they could possibly have imagined -- which triggers if not an actual purchase, then at least an impulse to buy -- this is exactly when Bunnings is in the process of restructuring the market.

Product focus

The market and store strategies of Bunnings make for a very interesting subject. It is also a quite complex area to get into. HNN has planned a series of articles over the coming months to look deeper into this subject.

In this article we are going to begin by looking at one small part of the Bunnings strategy, the part that has to do with products, specifically power tools.

Power tools are a great example to use, as so much is known about them, and so much data is available. More than almost any other product, they are also comparable across retailers and national/international markets.

To begin exploring power tools and how Bunnings structures this market, let's look at some charts of different retailers in Australia, the US and the UK.

These charts use data that relates to cordless power drills. This includes both "bare", "skin-only" tools without batteries and chargers, as well as kits that include chargers and one or two batteries, and accessories such as a set of drill bits. Kits that are based on more than one tool (such as drill/impact driver combinations) are excluded. The charts use the original currencies of the retailers. This is all about customer experience, so the actual numbers themselves count.

First looks

In order to discuss any one single chart, its necessary to have some reference to the other charts as well, so we'll start by looking through all four that HNN has produced.

Bunnings

>http://hnn.bz/Bunnings-standard.jpg}Bunnings cordless drill price chart}http://hnn.bz/Bunnings-standard.jpg

There are two easily-seen characteristics of this chart that are worth noting. The first is that there is a relatively even distribution of products in the under $100, $100 to $200, and $200 to $300 bands. The second characteristic is the pricing plateaus that appear at the $200 and the $300 level, with weaker plateaus at the $100 and $130 level. We will return to these, as they are clear indicators of what is going on with pricing at Bunnings.

Masters

>http://hnn.bz/Masters-standard.jpg}Masters cordless drill price chart}http://hnn.bz/Masters-standard.jpg

The Masters chart shows a strong price plateau at the $200 level, and a weaker plateau at the $120 level. The price area around $300 is much less well-developed than Bunnings.

B&Q

>http://hnn.bz/BQ-standard.jpg}B&Q cordless drill price chart}http://hnn.bz/BQ-standard.jpg

The B&Q chart is interesting as it is almost plateau-less, except for a slight flattening around the GBP140 mark (which would be close to the AUD300 mark).

The Home Depot

>http://hnn.bz/HomeDepot-standard.jpg}Home Depot cordless drill price chart}http://hnn.bz/HomeDepot-standard.jpg

In sharp contrast to B&Q, Home Depot's chart is highly plateaued, though this is also a function of the chart showing many more products than any of the other charts. The three strongest plateaus are at the USD100, USD129, USD169 and USD279 marks. As we will see when we examine these later, these plateaus have some unique features that make them quite different from those of the other retailers.

Masters and Bunnings at $200

Let's start by taking a look at the very different nature of the $200 plateau for Bunnings and Masters.

These are the drills that Masters offers at this level:

>http://hnn.bz/masters-200-plateau.jpg}Drills sold by Masters at around AUD200}http://hnn.bz/masters-200-plateau.jpg

And these are the drills that Bunnings offers just below $200:

>http://hnn.bz/bunnings-200-plateau.jpg}Drills sold by Bunnings at around AUD200}http://hnn.bz/bunnings-200-plateau.jpg

Probably if you were looking for one single datapoint that would sum up what happened in the competition between Bunnings and Masters, this would be it. There is nothing actually wrong with any of these tools, but it is as though Masters hasn't really thought through the kind of tool that people will be spending $200 on. More than anything, a $200 is going to have to either "establish" a brand of corded tool for a customer, or else significantly contribute to an already established collection.

The Bosch 10.8-volt Blue drill, for example, is a good tool, but the overall 10.8-volt blue range is very limited. Worx is a good brand, but it is a little limited, and makes up for this by offering inventively designed specialty tools, but it appeals more to single tool or limited multi-tool purchasers.

The Panasonic is without doubt probably the best quality tool offered at this price-point by Masters or Bunnings, but for most people it will be an "orphan" tool, as it is steeply discounted and prohibitively expensive to build out a collection.

The Hitachi drill is good quality and, for that range, this is a good price -- Hitachi charges a premium for batteries and chargers. However, its overall tool range is limited in cordless -- something the company will no doubt fix now it has acquired Metabo.

Then there is the Bosch green drill. This is a broad range, and the drill that is offered is not a bad model. But for Bosch green at this price point, customers expect something a little special, not the mid-range 18-volt drill/driver.

Masters' best effort at this price point is likely its Stanley FatMax drill, complete with two 2.0 amp-hour batteries and charger. It is a tool with a broad range to back it up, and a new design.

Except, of course, that Bunnings is offering the FatMax's big brother, DeWalt, at the same price point. The DeWalt kit on offer does have two 1.3 amp-hour batteries, which is a step down, but in terms of value, would outshine the FatMax in most people's estimation, though some would prefer the FatMax as building out a tool set would likely cost less.

There is a similar situation when it comes to the Bosch. The Bosch PSR that Bunnings offers is brushless, it has a unique, new design, and it features some of the company's latest power-saving technology. It is a real "establishment" tool that will convince a customer to adopt Bosch green as their main tool system.

This tool, and all the other tools that Bunnings offers at this price point make it seem as though Bunnings is whacking its competitors over the head with its great brand offering. There is the low-mid range DeWalt kit, two Makitas, one a skin-only brushless, and the other a full-kit brushed tool. And, of course, what is really Bunnings absolute ace-in-the-hole, a mid-range Ryobi drill kit.

The role of Ryobi

The Ryobi brand might have been custom-made for Bunnings and its segmentless market strategy. The owner of the brand, Techtronic Industries (TTI), has done a great job steadily building this brand out, expanding it from its low-cost roots, to a brand that actually encompasses a wide range of capabilities in a low cost way. The chart below clearly shows how Bunnings has used Ryobi as a "backbone" brand, spanning a range from very low cost to quite expensive.

>http://hnn.bz/Bunnings-Ryobi.jpg}Ryobi drills at Bunnings}http://hnn.bz/Bunnings-Ryobi.jpg

This is a very interesting and distinctly different strategy that TTI has developed -- and that Bunnings, more than just about any other retailer, has understood and adopted. Bosch has broken its range up into the green and the blue. Stanley Black&Decker has also segmented, with its high-end DeWalt brand, its mid-range Stanley FatMax brand, and its low-end Black&Decker brand.

You could say that one of the major tasks that Masters faced was the establishment of its own version of Ryobi. It made some moves towards that through Triton, but it faced a difficult task in establishing that brand's identity clearly for its customers.

Bunnings faces something of a similar task with its newly acquired UK operations. As the chart below shows, B&Q certainly also has a good understanding of Ryobi's potential.

>http://hnn.bz/BQ-Ryobi.jpg}Ryobi drills at B&Q}http://hnn.bz/BQ-Ryobi.jpg

The end lesson about Bunnings

This price plateau, and most of the others that Bunnings has developed, are used by the retailer as an important part of its market strategy. By providing very competitive value at these key points, it effectively "rewires" customer expectations.

To compete effectively, other retailers -- especially independents -- should consider a strategy that heads in the other direction from that of Bunnings. Where Bunnings is strongly unsegmented, they might do better to segment. This could mean offering less-usual tool combinations in kits, going up or down the scale in terms of power offered, or providing new and innovative approaches to solving problems for customers.

Home Depot plateaus

In the US market, the influence of TTI would seem to extend considerably beyond the use of its Ryobi brand. If we look at each of the major plateaus in the Home Depot range, it is striking how much a part TTI's Milwaukee brand plays in establishing these.

At the crucial USD99 level, Milwaukee provides five of Home Depot's 13 drills at that price point. At USD129, Milwaukee has four of the nine products and at the USD169 level, Milwaukee provides seven of the nine products.

Some of the products offered by Milwaukee represent outstanding value. For example, at the USD99 level, Milwaukee offers the (older) M18 18-volt Lithium-ion cordless drill/driver kit. It does feature just one 1.5 amp-hour battery, but this is still a great offer for customers seeking to establish themselves in the Milwaukee brand.

One conclusion we could draw from this is that in the US market, Milwaukee as a manufacturer is doing the same thing Bunnings is doing as a retailer in the Australian market: rewiring customer expectations to suit its own particular strengths.

B&Q pricing

As mentioned above, the B&Q pricing model is not designed around price plateaus at all. Instead it relies on a "bracketing" approach, which provides a high/low alternative around particular price points. Thus instead of encountering astounding value at one price-point, every buying decision becomes instead a matter of choosing between going a model up or a model down. This results in the shape of its pricing graph, which shows a steady upwards slant, though minor pricing arcs can also be detected.

It seems likely that in competing with B&Q through its UK Homebase acquisition, Bunnings will seek to introduce effective pricing plateaus at around the GBP80 and GBP110 ranges. In doing so, however, it will face considerable obstacles, as B&Q has control over some of the brands that Bunnings is used to using.

One scenario could see Bunnings gaining control of TTI's AEG brand, which B&Q has ceased to distribute. This could be combined with the new line of products brought out by Hitachi/Metabo to create some effective competition.

An even more intriguing strategy could see Bunnings work further with Ozito to establish a slightly more premium brand -- a true "Ozito Plus". Rather than extending over the entire range that Ryobi covers, this could target a set of particular price plateau points, and help to deliver the tools Bunnings needs to start rewiring the UK market.

Conclusions

If we were to look for the vulnerability in the Bunnings strategy, we would say that it rests in an underlying philosophy regarding tools that is not at first readily apparent. That philosophy might be described as following first and foremost: "the tradie way".

What we mean by this is that consumers are expected to accept the way that tradies perform maintenance and construction tasks as setting a kind of "gold standard" that they are expected to aspire to. This means that in setting out to achieve a DIY task they frequently have to learn complex systems to achieve their goals.

If we look at the actual building products that are being developed for DIY consumers, however, we can clearly see that there is a strong tendency to find ways to make it easier for consumers to achieve their goals without having to go through an extensive learning process.

One area where this is very clear is in paints, where we are beginning to see a strong shift away from highlighting the durability and scuff protection of wall paints, to highlighting the ease of application of the paint. Consumers have now come to expect premium paint will last for some time. Their main anxiety is now focused on whether they will be able, with their limited skills, to produce a reasonable finish.

It seems possible that we will see a similar shift in consumer buying habits as regards power tools in the near future. Already some brands -- most notably Positec's Worx -- have started to make tools that are unlikely to suit tradies, but which do make sense for consumers.

To cite two examples of the kind of design considerations that consumers have, consider tool organisation. A typical consumer situation is to find the main tool, but not be able to locate a particular bit or other accessory. On-tool storage for these accessories is a great boon to the consumer, but not highly regarded by the average tradie, who probably has a very well-organised tool box.

Consider also the problem of tool storage itself. As more Australians move into multi-dwelling accommodation, with less floor space and often cramped storage, the size of tools and the amount of space they consume has become a growing concern. Again, not something a tradie thinks that much about.

One reason this area has not been effectively explored by independent retailers is that most of them have moved their business increasingly towards trade retail in an effort to find areas where they do not directly compete with Bunnings.

Many independent retailers would really benefit from considering what moves they could take to directly boost their consumer retail efforts. A good place to start is to simply acknowledge that many consumers will just never have anything like good DIY skills, but still want to achieve some basic DIY tasks. How can retailers help them out, without insisting they become "junior tradies"?

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

Each of the top three home improvement retailers has "called out" one of their New South Wales (NSW) stores as being on the leading edge of store development. HNN decided to take a mini-road trip and visit each of these.

The managing director of Bunnings, John Gillam, nominated its Alexandria store at the last Wesfarmers' Strategy Briefing Day in mid-May 2015 as a good indicator of the company's impact in trade sales. The managing director of Masters Home Improvement, Matt Tyson, has pointed to the store at Rouse Hill as a launch pad for many of the retailer's "Masters 2.0" ideas. The CEO of Mitre 10, Mark Laidlaw, has suggested the Sunlite Mitre 10 store in Paddington represents the best of what the company's Sapphire concept has to offer.

Each of these stores is, to some extent, experimental. The Bunnings store in Alexandria is partly about the trade business, but also the value and impact of very large store sizes. The Masters at Rouse Hill today is about how the retailer can continue to explore and develop its new store formats. Paddington's Sunlite Mitre 10 is about bringing the Sapphire concept to smaller stores, and evaluating their impact in inner urban communities.

Bunnings Alexandria

At the investor day in mid-May 2015 an investment analyst asked Mr Gillam whether Bunnings needed to focus more on trade sales. Mr Gillam replied by suggesting the analyst should show up at the Alexandria store at 6:30am to see the tradie trucks lining up to get in. His point being, what Bunnings is doing currently to encourage tradie business is working.

The HNN team did try to get to the Alexandria store by 6:30am, but we only made it by 7:30. Even that late (for tradies) we can verify that there was considerable tradie traffic, which continued (at a slower rate) up until when HNN left at 9:00am.

>http://hnn.bz/bunnings-trade-area-8-45.jpg}Trade area 8:45 am}http://hnn.bz/bunnings-trade-area-8-45.jpg

The Alexandria store is thought to be the largest hardware/home improvement store in Australia, at 20,000 square metres of floorspace. (To give some perspective on this, the IKEA store located at Tempe in Sydney NSW is close to 40,000 square metres, and is the largest IKEA store in the southern hemisphere. Most Masters stores are around 14,000 square metres in floor size.)

>http://hnn.bz/bunnings-big-above.jpg}View from the upper floor}http://hnn.bz/bunnings-big-above.jpg

The slightly startling conclusion HNN came to during our store visit was that there is something about this size of store that seems quite "natural" to Bunnings. That may be in part due to the store being built over two floors (more cost effective in this inner urban suburb). At the single-floor Epping store we kept noticing how big the store was, and we also enjoyed some of the spectacular use of the space. At Alexandria the use of space is more utilitarian, which makes the size less noticeable.

HNN didn't realise how much an impact the Alexandria store had on us until later in the day when we stopped by the Bunnings at Marsden Park in NSW. This is another good Bunnings store, with some creative use of displays and good team members on the floor. However after our experience of the Alexandria store it seemed at first (unfairly) quite average.

The meaning behind what Mr Gillam said at the strategy briefing also became more clear to HNN. With the expanded size, Bunnings can stock that one size extra, above the standard consumer lines, moving it more into the trade area. For example, in lawnmowers Bunnings Alexandria has the Toro Timemaster. This is a self-propelled, 70kg lawnmower, featuring a 76cm wide cutting path, made possible through the use of two rotating blade sets. While Toro does seem to market this to consumers with big lawns, it is really also an ideal tradie tool for simple landscapers - and one they might not have previously considered.

>http://hnn.bz/toro-timemaster-mower.jpg}Toro Timemaster mower}http://hnn.bz/toro-timemaster-mower.jpg

Another area of this kind of category expansion is with ladders, with the Alexandria store offering a wide selection of industrial-grade ladders. There are likely a lot more finely detailed expansions and additions as well.

That said, HNN could also see some examples where Bunnings applied solutions more common in "normal" 14,000 square meter stores that might not be the best answer in these expanded stores. For example, in the display of items such as laminated wood flooring, the Alexandria uses the same "high-set" display that is common to most Bunnings stores. The only stores that currently do not use this are the evolving compact urban stores, such as the one in Collingwood, Victoria, right on the north-eastern outskirts of the central city area. This instead uses a much more accessible low-set flooring display.

It is likely the high-set display is used as it facilitates keeping adequate stock on the floor, with ample room under each item displayed. In the mid-format urban stores, less stock may be needed due to lower volumes, and restocking in a smaller format is easier to manage, so a low-set display can work. It might be possible to add depth to the low-set display, solving the stocking problem, and making better use of the space in the store.

The only other area we noted was that the use of the view from the upper floor to the lower floor was not made use of for promotional purposes. It's not unusual to see department stores with similar above-floor views use simple merchandising displays such as extra-large price banners.

These are, however, just quibbles.

Bunnings' future?

Given the success of the Alexandria store, is it possible that what we are seeing here is the first step on the way to the second wave of Bunnings' expansion? Over the past six years Bunnings has built itself out geographically. What we could see beginning in another couple of years is the expansion of regionally strategic stores to this new, very large format. These large stores could become the anchor stores in the Bunnings network, offering an expanded range of products.

>http://hnn.bz/bunnings-decking-tools.jpg}Decking and tools displayed at Bunnings}http://hnn.bz/bunnings-decking-tools.jpg

*Masters Rouse Hill

The story of the Masters store at Rouse Hill is one that has been told before. This is the store that Mr Tyson used to test out the "Masters 2.0" concept . Stores built to this new format have a claimed 30% improvement in sales revenues over "Masters 1.0" stores. There are also encouraging signs, the company says, that Masters 1.0 refitted to 2.0 deliver much improved performance as well.

Rouse Hill was used for this development for a number of reasons. One of the main reasons seems to be that it is relatively convenient to get to by car from the Woolworths headquarters at Bella Vista. That way Mr Tyson could be more personally involved in what went on there.

Perhaps more importantly, Rouse Hill is itself something of a unique real estate and social development. Put together by Lend Lease and the GPT Group in the early 2000s, the development sought to provide a form of planned but commercially-driven development. Michael Duffy, writing in Fairfax Media, described it like this in early 2008, as the first stage of the project was opened for sale:

The new Rouse Hill Town Centre opened last week. It's not really a city but it is enormous, particularly striking because it is still surrounded by fields, like something just created in the computer game SimCity. Unusually in the history of Sydney's expansion, the town centre has been created before the town. It's a real centre, containing not just shops, cafes and cinemas, but streets and a town square surrounded by apartments, offices and civic facilities. It's owned and managed by a private company, the GPT Group, but there has been considerable input from state and local government.

Its basic goals included:

There was also considerable input by Landcom in association with government bodies to lessen its environmental impact and improve its sustainability credentials. This included:

Part of what inspired this kind of development was the range of problems experienced in the development of land just to the south of Rouse Hill, at Kelleyville. In that area ad hoc development led to problems with basic resources such as roads and schools. The commercially-driven Rouse Hill sought to overcome those problems by comprehensive development planning through a privately-owned company that was responsive to governmental oversight.

It has attracted a fairly homogenous social group in terms of age and income. A statistical breakdown based on census data from 2011 shows the following:

Country of origin

69.4% of people living in the suburb of Rouse Hill were born in Australia. The other top responses for country of birth were 3.8% Philippines, 3.3% England, 2.0% New Zealand, 1.9% South Africa, 1.5% India, 0.9% China , 0.7% Egypt.

Marriage

63.0% of people are married, 25.7% have never married and 6.4% are divorced and 2.9% are separated.

Employment

65.3% of the people living in Rouse Hill over the age of 15 and who identify as being in the labour force are employed full time, 25.5% are working on a part time basis. Rouse Hill has an unemployment rate of 4.2%.

The main occupations of people living in Rouse Hill are 22.7% Professionals, 17.7% Clerical & administrative workers, 16.5% Managers, 14.3% Technicians & trades workers, 9.7% Sales workers, 7.4% Community & personal service workers, 5.2% Labourers, 5.0% Machinery operators & drivers, 1.4% Occupation inadequately described/Not stated.

The main industries people from Rouse Hill work in are 11.9% Retail trade, 9.9% Construction, 9.4% Manufacturing, 9.3% Health care and social assistance, 7.9% Professional, scientific and technical services, 7.2% Education and training, 7.1% Wholesale trade, 6.1% Public administration and safety, 5.2% Financial and insurance services.

Income

Australian Taxation Office records from 2013 indicate there were 23,005 people of employable age earned an annual average salary of $65,428 for a total group income of $1,505,168,405 a year. The actual average salary of people who were earning a wage is estimated to have been $75,074.

What Rouse Hill provided Masters with was a concentration of the demographic that would be the target market for its Masters 2.0 format. It was, and is, an ideal place to trial its new store concepts.

What is Masters 2.0?

The first Masters format had something of an industrial feel to it, and suffered a number of deficiencies in its product ranging. With the arrival of Mr Tyson in early 2014, that began to evolve to better match both the market that was available, and to find ways to work around the dominate position of Bunnings, rather than trying to tackle it head-on.

What evolved - and is still evolving - is an approach that seeks to provide an effective resources for "real" hardware supplies, but to include more "home improvement" products, such large white good appliances, as well as home decor items like cushions and wall art.

Key to this new - and still developing - strategy is a high-end brand approach to market segmentation. As Bunnings has a dominant position in low- to mid-range brands, as well as high-regard "tradie" brands, Masters is actively positioning itself at other points in the spectrum.

In power tools, for example, Bunnings has Makita, the DeWalt 18-volt line, and - the perfect Bunnings brand - the very wide-spectrum of Ryobi products. The counter that Masters has developed relatively recently to this is the Triton range of utilitarian power-tools, supplemented with the Stanley FatMax tools for prosumers. This is topped off with both Panasonic and Hilti tools. In-between the very high end and the prosumer tools, Masters has a range of brands, including some Bosch Blue and Hitachi.

Similar patterns can be seen throughout the Masters 2.0 ranging. Bunnings has the excellent Kaboodle kitchen products. Masters has its Principal kitchens, supplemented with a wide range of fittings from Hafaele, and so on.

The Rouse Hill store

The main question we wanted to answer by visiting the Rouse Hill store was: "What's new?" We found three potential areas where Masters seems to be refining its offer.

The first is in power-tools, where we seem to be seeing an increasing emphasis on the Triton range of tools. These seem to have largely supplanted the 909 range of tools, though specific 909 tools - such as mitre saws - are still available. While there have been some Stanley FatMax tools in the past, these have also had their presence increased.

>http://hnn.bz/triton-display-marsden.jpg}Triton display at Masters}http://hnn.bz/triton-display-marsden.jpg

HNN also thinks that Masters is evolving its small appliances strategy as well. We've seen over the past six months racks of small microwave ovens from a range of suppliers appear in Masters stores. As far as we could tell this was not the case for the Rouse Hill store. Instead it offered for sale large quantities of a single microwave oven from Sharp at a very attractive price-point. This could be the beginning of a comprehensive strategy for a range of small appliances.

>http://hnn.bz/ sharp-microwave-stack.jpg}Stack of microwaves}http://hnn.bz/ sharp-microwave-stack.jpg

This small appliance strategy also seems to be part of a super discount strategy by Masters. Where in the past the retailer has provided mid-aisle drop-pallets of competitively priced goods (a major strategy by Bunnings), it seems to be moving away from that to providing large islands of attractively priced products in key locations in the store.

>http://hnn.bz/discount-display.jpg}Discount display at Masters}http://hnn.bz/discount-display.jpg

The most intriguing development HNN saw, present in both the Rouse Hill store and the Masters store at Marsden Park, was an addition to the paint department. Along with the standard paint counter, Masters seems to be developing a specialised project planning space. At the moment this consists of a single, stand-up table, with a second small table and chairs for children.

This could be the first signs of Masters considering the development of some kind of in-store project centre, where customers could take time and get inspiration for the design of their homes. That would certainly be a highly interesting development.

>http://hnn.bz/hafele-pantry-8.jpg}Hafele's excellent display of pantry fittings}http://hnn.bz/hafele-pantry-8.jpg

Sunlite Mitre 10 Paddington

After HNN's review of the Mitre 10's Sapphire concept store in Ballarat, some people on Mitre 10's management team suggested we should take a look at the other significant Sapphire store in the network, the Sunlite Mitre 10 store on Oxford Street in Sydney's Paddington area.

>http://hnn.bz/mitre10paddington.JPG}Sunlite Mitre 10 Paddington}http://hnn.bz/mitre10paddington.JPG

Unfortunately, after visiting this store, we find ourselves having to pretty much repeat what we have already said about the Ballarat Sapphire store.

It is perhaps best to first of all go over what exactly the Sapphire store concept is. The idea would seem to parallel what Metcash is doing with its IGA brand by introducing what it has called its "Diamond" store program. This program takes the better-managed and well-located IGA stores and helps to transform them into retail outlets capable of competing with the Coles and Woolworths supermarkets.

It is a clever strategy, because by improving these individual stores, Metcash helps to improve the overall brand image of IGA. Also, this program gives Metcash a little leverage of the independently-owned IGA stores. Those who are willing to adhere closely to Metcash's guidance on how their stores are run are rewarded with membership in the Diamond program.

Sapphire has some of the same ambitions with the Mitre 10 hardware stores. The basic design concepts greatly improve the amenity of the stores, making them more accessible, and enhancing their overall presence. Where it does seem to miss a bit, however, is that it is almost totally concerned with store amenity to the exclusion of all else.

Mitre 10 does also have what seems to be a separate program of promoting a "store-within-store" concept. Companies such as STIHL chainsaws and Beaumont Tiles open the equivalent of mini-franchises inside larger Mitre 10 stores. The connection between this development and Sapphire does not seem evident, as neither of the two Sapphire stores HNN has visited seemed to have had anything that was store-within-store.

The point is that in developing a new wave of stores, improving amenity alone is not likely to be enough. With its Diamond store program, not only is the store amenity improved, but also the store supply chain (with a particular emphasis on fresh products). Sapphire is really just a slightly improved way of selling the same product lines that all Mitre 10 stores sell. As such, it is difficult to see how this development qualifies for the description Mitre 10 gives it as the "store of the future".

That said, the Sunlite Mitre 10 store in Paddington is a really lovely little store. It has some clever features, such as a mezzanine level between the main levels, which provides some very good merchandising options. It is a super-clean store, and the staff there, even in HNN's brief contact, were great. The store was busy and active, with people dropping in constantly the whole time we were there.

>http://hnn.bz/mezz-patio-furniture.jpg}Mitre 10 mezzanine level outdoor furniture}http://hnn.bz/mezz-patio-furniture.jpg

There is little doubt that if a Mitre 10 store like this was in the neighbourhood of any HNN staff member, it would rapidly become a favourite place to drop by for a range of purchases. It is a great little store. It's lovely. We are sure it will be very successful. But it seems unlikely that this is a prototype of the store of the future.

The possible future

What would a store of the future look like? HNN thinks that if anyone is really developing a good urban format store, it is probably Bunnings. We've been increasingly impressed by Bunnings at Collingwood in Victoria. This purpose-built store has a range of intriguing design features. Overall it is amazing both how the store manages to fit so much product in, and also how carefully tailored that product is.

We can see this store's story in just one single feature that, had Mitre 10 incorporated this into its Sapphire design would have been a great advancement.

Recently Bunnings Collingwood has added to its power-tool displays specially formatted "Special Orders" brochures. As the photographs illustrate, these enable customers to easily browse through additional tool ranges not present in the store, and order these in, through the Special Orders desk that is present in every Bunnings store.

>http://hnn.bz/bunnings-special-orders.jpg}At Bunnings in Collingwood, Victoria, special orders brochures displayed with tools}http://hnn.bz/bunnings-special-orders.jpg

From the store amenity viewpoint, this is a simple addition. The brochures are well-designed, simple to use and very accessible.

That is, however, a very small part of the story. What rests behind those simple brochures is an entire complex supply-chain network. This identifies the tools that should be featured, provides the images and brochure copy, designs the brochure display mechanism, prints and distributes the brochures, accepts orders from the brochure through the special orders desk, prices the product appropriately, sources the product, and distributes the product to the stores or directly to the customer.

Simple frontend brochure, substantial backend infrastructure. What gets delivered, in the end, is what is sometimes referred to in digital retailing as the "endless aisle". The size of the store matters less, as it has become partly also a gateway into a much larger range of products.

To relate this directly to the Sunlite Mitre 10 Sapphire store at Paddington, NSW: in the limited space of the store it does a good job of displaying a narrow range of power-tools. These are mostly the Positec brand Rockwell, as well as some Bosch green products. Those products match well with the usually less-intensive DIY of an inner-urban area.

Using something like the Special Orders system of Bunnings, the store offer the entire range of Makita products Mitre 10 sells. While HNN was in the store, at 10:am on a Monday morning, there were definitely quite a few tradies visiting, around 10 or 12. Using that kind of backend system, it would be a simple matter for the friendly and helpful staff at the store to develop a solid secondary market.

And that might really be something towards the store of the future.

Until next time,

Betty

PS. We would also like to give a shout out to a friend from the industry (our own "Deep Throat") who made it possible for a number of stories to be included in this issue. Thanks again.

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Woolworths Limited has released its results for the first quarter of its FY 2015/16. The company reported that, excluding petrol sales (due to material changes), overall sales grew by 0.75% when compared with the previous corresponding period (pcp), which is the first quarter of FY 2014/15. Sales were $14,417 million, as compared to $14,309 million in the pcp.

The Masters Home Improvement division reported sales growth of 23.5%, with sales totalling $294 million. Home Timber and Hardware reported a 17.1% increases in sales, contributing $274 million.

>http://hnn.bz/WOW-2016-Q1-revenues.png}Woolworths sales revenues for first quarter 2015/16}http://hnn.bz/WOW-2016-Q1-revenues.png

Sales for Woolworths' Australian food and liquor division grew by just 0.4%, coming in at $11,064 million. Its New Zealand operations reported growth of 3.9% in NZD, which translated to 2.4% growth in AUD.

General merchandise, which is largely the company's Big W retail operation, fell by 7.9% over the pcp, delivering $975 million for the quarter.

Profit forecast

In the press release accompanying the results, Woolworths indicated it expected its profit for its first half of FY 2015/16 to decline as compared to the first half of FY 2014/15.

The net profit after tax (NPAT) range for the half currently underway is forecast to be between $900 million and $1,000 million. In the first half of FY 2014/15, Woolworths reported NPAT of 1,384.1 million. This represented an increase of 4.7% over the NPAT for the first half of FY 2013/14.

The revised forecast for profit in the current first half indicates a fall in profit of between 27.8% and 35.0% compared to the previous first half.

The Woolworths press released quoted the recently appointed chairman of the Woolworths' board, Gordon Cairns, as commenting on the forecast by saying:

The Board and management are focused on making the best long-term decisions across all our businesses. There will be short-term consequences, but we are confident that the decisions we are taking are necessary to realise the immense potential of the Group for our shareholders.

Home improvement division

The company reported that it had opened four new Masters stores during the quarter, and retrofitted one store in Victoria to the new, "Masters 2.0" format. There are now 62 Masters stores.

The company continues to forecast that it will have more than 30 of its Masters stores operating in the new format by the end of FY 2015/16. It also continues to report that sales in the new format stores are 30% better than sales in comparable stores in the previous format.

Home Timber and Hardware grew its sales largely through acquisitions during the quarter.

Analysts conference call

Interim Woolworths CEO, Grant O'Brien, who resigned in mid-June 2015, managed the results presentation. The company has previously announced that it will attempt to introduce a new CEO by its annual general meeting at the end of November 2015.

There were four question asked by various analysts that related directly to the Masters business.

Woolworths' relationship with Lowe's

Phillip Kimber of analysts Evans & Partners asked a question that related to the control exerted by Woolworths' one-third joint venture partner in Masters, US-based Lowe's Home Improvement:

Masters is obviously getting a lot of press and it was pleasing to see that the sales per store on an annualised basis I think was up this quarter versus last quarter. So it looks like there might be a little bit of stabilisation which is great. But there has been a lot of talk about your partner [Lowe's] and the put option which you talk about in the annual report.

I was just wondering the other way around, what is Woolworths' ability to be able to change the business without Lowe's approval?...Nobody knows what Lowe's decision is going to be, but are Woolworths able to, for example, exit the business without Lowe's? Are Lowe's able to stop that?

Mr O'Brien responded:

Thanks Phil. Look, in relation to the home improvement business, obviously we have got a joint-venture partner in Lowe's, and they are a partner, a very good partner, a supportive partner, and we haven't seen a change in that, and we don't expect a change in that.

We work very closely together to both promote this business and guide the business and provide the resources and support and give it what it needs. We are pleased with the progress of the newly reformatted stores, but in respect to any decisions that are taken in relation to the home improvement business these are done in concert with the Lowe's guys, and I don't see that changing at this point.

Masters' progress to profit

Analyst Grant Saligari of Credit Suisse asked for some indication of how Masters sees itself improving to the extent it would actually become profitable.

If I could, just one on Masters. You continue with a fairly steady statement around the newer stores doing materially better sales than the preceding stores. I actually struggle to reconcile that, but even if we take that as a given, what is the path to get to an acceptable situation, an acceptable outcome. Because I think even with where you are tracking at the moment that doesn't get you to a profitable position, and so, where to from here with that business?

The managing director of Woolworths' home improvement division, Matt Tyson, responded:

We did call out back at the last result we were encouraged by the new format stores. They continue to trade strongly, the 2015 stores greater than 30% ahead of the rest of the estate. But I think we were very clear when we said that we recognise there is much more to do. We need to see those new stores as they mature, increase their sales density. We are encouraged so far, but we need to see much better performance from those stores as they mature.

As you know, we have started the process of revamping stores, we have completed one more in the quarter. The early signs from those stores are encouraging. Again, we recognise that many of those stores have been open for three years, and the perception in the market for those stores is probably not where we want it to be, and it will take time for the sales density in those existing stores to come up to that level. It is work in progress, but we are working very hard to take some of the elements to take some of the elements of that 2.0 proposition and get it back into the estate.

I will give you one example. During the quarter we rolled back 2000 lines from those new stores back into the existing estate. Again, all aimed at fixing some of the underlying issues in the business.

Mr Tyson's ongoing role at Woolworths

Analyst Craig Stafford of UBS Investment Bank asked for a comment on the ongoing press speculation about Mr Tyson's continued role at its hardware division:

There has been some press speculation about your future with Masters. I am just wondering if you can provide some comments to us on that.

Mr Tyson replied:

Cool, Craig. Thanks for the question. I don't think there is any surprise. I'm no "Spring chicken", and actually the journey we are on for Masters is a journey that will take some time. But I actually fully intend to be engaged with this business on that journey for some time.

It is worth clarifying that when Mr Tyson says "I don't think there is any surprise", he is commenting on the speculation in the press. He is saying that, as a person over 60 years in age, the press can be expected to speculate on his continued career from time to time.

Further clarification of Mr Tyson's ongoing role

Analyst David Errington of Merrill Lynch felt there was more to be explored in Mr Tyson's answer to Mr Stafford's question:

To Matt, he basically said he is no "Spring chicken", and I can certainly relate to that. But he said that he would be "engaged" in the business in some format. What does that mean - "engaged"? ... What's "engaged" mean? Does that mean he is stepping back a little bit from being CEO?

And the second question I would like to ask is in this earnings guidance for first half, there has been questions around it, but in that number, is Masters expected to go backwards, first half 2016 on first half 2015 on that number?

Mr O'Brien made an immediate effort to clarify further what Mr Tyson had stated:

I don't want to try to pick apart what Matt said, except that he is no "Spring chicken", and he will be fully involved in the business as he said for some time to come.

Mr Errington sought to make the language as concrete as possible, and so asked:

Is that as the leader, is that as the boss, Grant? I mean that is a pretty important distinction?

Mr O'Brien made his answer as clear as possible:

Yes, as the managing director of the business, David, yes.

Mr O'Brien further responded that profit numbers for Masters were not available.

In relation to the outlook from a profit point of view for Masters, we don't break that out.

Analysis

The first thing to comment on is the speculation around Mr Tyson leaving his role at Woolworths. It should be quite clear from the partial transcript above that in no way did either Mr Tyson or Mr O'Brien so much as hint that the former would be leaving anytime soon.

The future of Masters

There has been a good deal of speculation about the future of Masters in the Australian press. While no one can say for certain what direction a new CEO operating under a new chairman will choose to take Masters in, it does seem unlikely there will be a major shift in direction before May 2016.

Making changes this close to the Christmas/Summer holidays would not help Masters' position in any way. Woolworths' annual general meeting may see the announcement of a new CEO, but it is likely that appointment will not commence in any real sense until late January 2016 at the earliest.

Thus the first half FY 2015/16 report might provide some general guidance on direction, but any definitive changes will likely be announced in May 2016, potentially at another Woolworths "Investors' Day" gathering.

There are two main influences that are likely to help determine Masters' future. The first is, simply, how Masters performs over the remaining nine months of 2015/16. One of the hidden points in what Mr Tyson has to say is that time should bring a degree of natural improvement with its passing.

The new format stores should "mature", and create a more widespread customer base. Newly refitted stores may also show better results, as customers discover a store they might not have felt was very good has now improved. Added to that is the slowed, but continuing build-out of Masters' store network.

The second influence will be the performance of Woolworths' food business. The "crisis" that afflicts Masters is really only happening because earnings and profits have fallen significantly at Woolworths' supermarkets.

In looking at the supermarkets, there appear to have been problems with both the overall strategy and the execution. Strategically, what Woolworths did not entirely understand was the degree of shift between two major "buying incentives": convenience and price. The company missed the increasing importance of price.

Instead, it invested in building more stores to increase convenience, while Wesfarmers/Coles invested in less expensive refurbishments and price.

In terms of execution, perhaps the best indication of what happened is a question/comment offered by the financial analyst Craig Woolford of Citibank at the results announcement for the first half of FY 2014/15:

My other question is fairly high level. I think businesses as large as Woolworth are typically fairly slow moving. How can we be sure that this isn't a more deep-seated problem? And the reason I ask that question is that for a couple of years now the Supermarket business has delivered on an earnings outcome with flat COD to CODB percentage which implies significant cost savings already. And it's not clear where they've actually come from.

There's no cost saving program being called out. These are large, hundreds of millions of dollars of savings that the company has made. So it feels like staffing levels has been cut back progressively over a fairly lengthy timeframe, rather than just being a problem in the recent period. So I'd be interested in your views about how significant the investment needs to be, given the reduction in costs seems to have been going on for some time already.

As HNN pointed out at the time, Mr O'Brien either didn't quite catch the criticism in Mr Woolford's comment, or perhaps chose not to hear it. Back in February 2015 he responded:

It has, Craig. You're right and you will have heard me say before that it's part of our DNA. The ability for Woolworths to remove cost is not something that's happened in the last couple of years. It's been something that has been a feature of this business for the last 20 that I've been involved in anyway. And not just in big programs like Refresh and Mercury. It's something that's done every day and explains part of the reason why the business has been able to provide such profitable growth over the years. You're right.

They're big numbers, because of the scale of business. But it's the scale of the business that provides the opportunities to find efficiencies in every corner and we've never gone looking in one place, such as labour, to use your example. I said quite specifically a moment ago about how big a prize something like shrinkage is in a business like ours. It's a massive number and a massive opportunity therefore to become more efficient. And you don't have to become too much more efficient to drive significant savings that you can then invest back into the business.

So for us, what we're signalling more than anything else is we're stepping that up. It's not that we're starting it. We're stepping it up and I've been really at pains today to talk about the fact that the majority of this comes from above store locations so that we can actually invest back into store. And again, what we've been talking about in respect of the uses of this investment, it's not just price. It's about labour in stores. And we've already acted to increase our labour in stores during this month and there's more investment made into the stores in areas of value to the customer and areas that are going to improve our presentation to customers.

So my simple answer to that is cost of doing business reduction in the form of efficiency is in our DNA. And our ability to do that rather than be a question is evidenced, I think, in how this business has been run for the last 20 years.

The full transcript of the Woolworths results announcement for first half 2014/15 is available on SeekingAlpha at:

In retrospect, Mr O'Brien's is not quite the best answer to Mr Woolford's comment, perhaps. Subsequent events indicate that Mr Woolford may have been right, and that the cost savings announced in prior years resulted more from reductions in service rather than genuine efficiency gains. These reductions have damaged the brand to such an extent that considerable investment is now required to restore it.

To make matters worse, the ongoing investment in refurbishments by Coles has enabled it to experiment and develop better store layouts. Thus the new standard that Woolworths needs to reach in its own refurbishments is that of stores such as the Coles at Coburg in Melbourne's north, which features a vastly expanded range of fresh produce and other retail innovations.

Added to this is the development of new format stores by German-based discount supermarket Aldi. This new format more directly challenges the main supermarkets.

The result of all this is that it is very unlikely much good news will be coming from Woolworths before calendar 2017.

But is it the right strategy?

Mr Tyson has been very careful in the past to point out that he and Woolworths do not see themselves as having "nailed" the exact right strategy, but rather see it as a developing process that delivers what Mr Tyson refers to as "learnings".

As it currently stands, two related problems are evident in this strategy. The first is that it is a very expensive strategy, and the second is that the funds to fully execute the strategy are not available.

A good example of what is meant by this can be found in power tools. The range of tools that Masters offers is something of a patchwork that needs to fit around pre-existing arrangements by suppliers with Bunnings and other retailers. Thus, for example, Masters sells DeWalt 14.4-volt cordless tools, but not DeWalt 18-volt tools.

To overcome this problem, Masters has entered into an exclusive arrangement with Triton Tools. This is a good move, but it comes with a problem: how are consumers to evaluate Triton as a brand? While it has a good reputation in some specific areas - especially for routers - its reputation for areas such as, say, cordless hammer drills, is unknown.

To develop that reputation some kind of more aggressive marketing and branding would be needed. That costs money to do, money which Masters at this stage simply does not have. This means the strategy will likely work to some extent, and continue to improve over time, but slowly.

It may well be, therefore, that Masters' survival will end up depending less on how good its long-term strategies may be, and more on whether it can successfully develop several low-cost, effective strategies to get it through to Christmas 2016.

The problem with this is that it means Masters needs to think "outside the big-box". That's something that, based on the immediate past, neither Masters nor Woolworths have proved to be especially adept at.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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While the main business press continues to talk up the possibility of Lowe's Home Improvement exiting from its arrangement with Woolworths to fund Masters Home Improvement, HNN has gone on the road again.

This time we decided we would use the recent opening of the latest Masters store in Cranbourne (VIC) to take a look at how far the company has come in its retail design.

What better way to do that than to compare the most recent store with the very first one? So after we had taken a good look at Cranbourne, we set off for the Masters store at Braybrook (VIC).

Masters Home Improvement - Cranbourne

The Cranbourne store is the first one HNN has visited that was conceived from the beginning to make use of what Masters calls its "2.0" format.

First impressions of the store are of a very well-lighted, bright, pleasant space, albeit one that still has a few rough edges, as HNN visits on opening day. It is also a very colourful store. A common feature of many displays is to provide different coloured versions of a single item in quantity.

>http://hnn.bz/Mstr-Cran-buckets.jpg}Coloured buckets in a shelf display}http://hnn.bz/Mstr-Cran-buckets.jpg

Another element that only came clearly into focus as the HNN team was leaving the Cranbourne store was that over half the staff were actually women in the age range of between 25 years and 45 years. This really added to the refreshing, welcoming feel of the store - something genuinely 21st Century.

Design elements

Many of the design elements that HNN has written about previously that appeared in the retro-fitted Northland Masters store are present in this store. However they have often been tweaked a little.

The light section was very well designed. Lights that were designed for outdoor use are displayed against a faux-brick background.

>http://hnn.bz/Mstr-Cran-wall-lights.jpg}Wall lights displayed against brick background}http://hnn.bz/Mstr-Cran-wall-lights.jpg

The approach to the lighting section makes good use of end caps, and overall lighting.

>http://hnn.bz/Mstr-Cran-lightpods.jpg}Lighting endcaps}http://hnn.bz/Mstr-Cran-lightpods.jpg

Ceiling fans are displayed on a "false" ceiling of perforated metal - which is quite common across Masters stores. In this case a two-tier approach is used to fit in more fans.

>http://hnn.bz/Mstr-Cran-fans.jpg}Fans displayed two-tiered on false ceiling}http://hnn.bz/Mstr-Cran-fans.jpg

Good use of pictures in background of fan display.

>http://hnn.bz/Mstr-Cran-fan-background.jpg}Picture in background of fan display}http://hnn.bz/Mstr-Cran-fan-background.jpg

Clear graphic quality in this layout of floating shelf elements.

>http://hnn.bz/Mstr-Cran-float-shelf.jpg}Floating shelf display}http://hnn.bz/Mstr-Cran-float-shelf.jpg

Much better than the "wall of cushions" approach at even revised Masters stores, this creates an approachable display.

>http://hnn.bz/Mstr-Cran-Cushions.jpg}Cushion display}http://hnn.bz/Mstr-Cran-Cushions.jpg

The kitchen consulting cubbies are very much like those at Northland, with only the addition of a 25cm pane of frosted glass along the top of the wall to provide more privacy.

>http://hnn.bz/Mstr-Cran-Kitchen-Consult.jpg}Kitchen consulting areas}http://hnn.bz/Mstr-Cran-Kitchen-Consult.jpg

The kitchen appliance display units use multiple shelves to provide display space for a range of stove tops.

>http://hnn.bz/Mstr-Cran-tiered-stove-tops.jpg}Stove top displays}http://hnn.bz/Mstr-Cran-tiered-stove-tops.jpg

Paint area features a simulator to show how much different lighting can affect paint colours.

>http://hnn.bz/Mstr-Cran-Light-Simul.jpg}Lighting simulator}http://hnn.bz/Mstr-Cran-Light-Simul.jpg

Much improved display of microwaves over most Masters stores.

>http://hnn.bz/Mstr-Cran-MWaves.jpg}Microwaves on display}http://hnn.bz/Mstr-Cran-MWaves.jpg

Excellent way to display premium furniture - in the entrance atrium. HNN saw several groups of people actually sitting down and using the furniture.

>http://hnn.bz/Mstr-Cran-Prem-Furn.jpg}Furniture display in entrance atrium}http://hnn.bz/Mstr-Cran-Prem-Furn.jpg

Strategic elements

In addition to some good design elements, the store also offered some real insights into Masters' future strategies.

Premium brand strategy

The first thing HNN became clearly aware of was that Masters is definitely going to pursue a premium brand strategy. This makes sense of some of the brands it has pursued, such as Honda and Panasonic. One clear piece of evidence of this are the "brand banners" the Cranbourne store is flying:

>http://hnn.bz/Mstr-Cran-Banners-all.jpg}Brand banners}http://hnn.bz/Mstr-Cran-Banners-all.jpg

Storage

Masters is definitely making a big play into the storage area. This incorporates both a major "garage" storage area at the front of the store (this is likely a seasonal area), and a comprehensive wardrobe storage area at the back of the store.

>http://hnn.bz/Mstr-Cran-garage-01.jpg}Garage storage area} http://hnn.bz/Mstr-Cran-garage-01.jpg

Cute display of Hills Hoist.

>http://hnn.bz/Mstr-Cran-hills-hoist.jpg}Hills Hoist display}http://hnn.bz/Mstr-Cran-hills-hoist.jpg

Comprehensive display of indoor storage.

>http://hnn.bz/Mstr-Cran-wardrobe01.jpg}Wardrobes}http://hnn.bz/Mstr-Cran-wardrobe01.jpg

>http://hnn.bz/Mstr-Cran-wardrobe02.jpg}Wardrobes}http://hnn.bz/Mstr-Cran-wardrobe02.jpg

>http://hnn.bz/Mstr-Cran-wardrobe03.jpg}Wardrobes}http://hnn.bz/Mstr-Cran-wardrobe03.jpg

Masters Home Improvement - Braybrook

Braybrook was the first Masters store to open, in early May, 2011. It took HNN some time to really come to terms with the Braybrook store. It was actually difficult to see how this store and the Cranbourne could belong to the same retail chain.

The overall impression was one of a very industrial place, and the dominant colour seemed to be brown - the brown of goods still uncartoned.

For example, there was this discounted settee - on display but still wrapped in its cardboard.

>http://hnn.bz/Mstr-Bray-settee.jpg}Settee}http://hnn.bz/Mstr-Bray-settee.jpg

More boxes.

>http://hnn.bz/Mstr-Bray-boxes.jpg}Boxes}http://hnn.bz/Mstr-Bray-boxes.jpg

And even more boxes.

>http://hnn.bz/Mstr-Bray-boxes-2.jpg}Boxes}http://hnn.bz/Mstr-Bray-boxes-2.jpg

The fabled McDonald's at the Braybrook store:

>http://hnn.bz/Mstr-Bray-McD.jpg}McDonald's instore} http://hnn.bz/Mstr-Bray-McD.jpg

Evolution

It's an unfair comparison, of course. The real issue this raises is, however, can Masters/Woolworths afford to retrofit all the stores that would need to be changed? Are these stores, given their locations, even necessarily worth this kind of retrofit?

What is clear, whatever does happen with Masters in its uncertain future, is that its new stores represent an achievement. The managing director of Masters Home Improvement, Matt Tyson, and his able team, are to be congratulated for what has obviously been some very hard, and very thoughtful work. They have developed a new and welcome concept for hardware retail in Australia.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

Smaller hardware retailers have been hard hit by the ongoing expansion of Bunnings and the entry of Masters Home Improvement into the market. Mitre 10, however, while experiencing some setbacks from increased competition, is also battling with continued under-investment.

Its parent company, Metcash, is struggling to bring its IGA grocery network, to which it is a wholesale supplier, into the 21st Century. Its resources have been drained by the need to implement store refurbishments and finance price cuts in product lines. As a result there has been precious little left to invest in its hardware operations.

While Mitre 10 has done well under the circumstances, it is not doing all that well in market terms, and this seems set to continue. Though some analysts suggest Metcash may be able to stage a recovery, the odds would seem slightly against this. Facing an uncertain future, Mitre 10 is trying to find new ways to grow its business further, but this is proving a very tough challenge.

Performing in adverse circumstances

While Metcash does not disclose much in the way of information about Mitre 10 operations costs, it has been possible to observe a number of circumstances that indicated some under-investment in the hardware operation. In particular, during 2014 there was a lack of original content in TV commercials - overcome through some clever recycling of older material - and fewer ads during peak seasons.

Fortunately, a strength of the hardware wholesaler/retailer's management team, led by its managing director, Mark Laidlaw, is making clear, bold decisions, with a long-term outlook. This has led it to sponsor Channel Nine's reality renovation show "The Block".

Mitre 10's key decision was to make the show's star, Scott Cam, its principal media representative. Mr Cam continues to successfully represent the best of the "tradie's" spirit: clever, competent, a bit quirky, with a biting sense of humour, frankly spoken, but also genuine.

The sponsorship may be expensive, but it has gained Mitre 10 close to equal brand recognition with Bunnings and Masters Home Improvement. That is a considerable achievement, especially given its apparently shrinking media spend.

Investor Day

On 29 September 2015 Metcash held an "Investors' Day". According to Metcash, this event would not feature the release of any new financial information, but only commentary on operational matters.

That turned out to not be entirely the case, as Metcash did release for the first time (as far as HNN can determine) sales figures for Mitre 10 over the past five years. Previously, most of these figures were available only as a composite including Metcash's automotive operations (which were sold in May 2015).

The following graph shows these figures, and the calculated growth rate for the past four years:

>http://hnn.bz/mitre10SalesRevenueTo2015.png}Mitre 10 Sales Revenue} http://hnn.bz/mitre10SalesRevenueTo2015.png

While these numbers appear quite positive on the surface, the truth is that the last two years have marked a difficult time for Mitre 10. Faced with dwindling resources and investment, the company has continued to produce acceptable, though not great, results.

This includes the decent revenue growth noted above, but also borderline growth in performance metrics such as like-for-like (comp) sales.

In FY 2014/15, for example, Mitre 10 produced 3.3% growth in like-for-like sales. Inflation during the period ran at around 2.2%. Retail sales for the hardware category for 2014/15 as contrasted with FY 2013/14 rose by 9.6%, according to Australian Bureau of Statistics figures.

It is also worth bearing in mind this data from Roy Morgan, which indicates some of the effect Masters Home Improvement has had on Mitre 10 in recent years:

>http://hnn.bz/royMorganHomeImprovement.png}Store visits} http://hnn.bz/royMorganHomeImprovement.png

Mitre 10 strategies

Mr Laidlaw took the opportunity of the Investors' Day to outline some of the future strategies Mitre 10 will be pursuing. While the overall goals that were mentioned are broadly inline with those outlined in the December 2014 half-year report, the 2015 Strategy Day, and the May 2015 full-year report, there were some changes in emphasis.

General mention was made of efforts to expand private label offerings and to improve "core ranging" based on input from shopping data. Digital/online was also discussed, including the relaunched website offering "click and collect", the "Mighty Rewards" loyalty scheme, and Tradies Online, designed to aid the "disorganised tradie".

For logistics, Mitre 10 is continuing its efforts regarding direct sourcing of product from Asia, and improving its warehouse management system.

The main focus, however, was on what Mitre 10 terms "Retail & Trade Excellence". The three main features of this were E-Learning, Store-in-Store offers, and Mitre 10's "Sapphire" store concept.

E-learning is built on systems that were acquired with some of Metcash's (now divested) automotive operations. This extends an opportunity to Mitre 10 members to train-up staff in customer service through the use of online tools.

The store-in-store concept is something Mitre 10 has been trialling during 2014 and 2015. A narrow range of distributors including Stihl chainsaws, Beaumont Tiles, and Weber barbecues are involved.

Mr Laidlaw appears to have given the most attention to the Sapphire store concept, which was originally launched in 2014. To date, only four stores have been upgraded to Sapphire status, but Mr Laidlaw announced plans to upgrade a further 10 stores over the coming year.

The end goal is to upgrade the company's top 50 stores. According to a slide used in the presentation, Mitre 10 is claiming the Sapphire upgrade will improve average sales revenue by 15% in each store.

Given the apparent importance of the Sapphire concept to Mitre 10's future, HNN decided to take a visit to the original Sapphire store in the group, the Gay's Mitre 10 in Sebastopol, just outside of the Victorian city of Ballarat.

Gay's Mitre 10 Sapphire

The first thing that needs to be said is that just about everyone reading this would really enjoy having a hardware store like the Gay & Co Mitre 10 in their neighbourhood. It's a great store. It is clean, well-designed, and has one of those pleasant, attentive, engaged staffs that you really only ever find at independent stores.

>http://hnn.bz/Gay-m10-floor-painting.jpg}Impression of Gay's Mitre 10 floor}http://hnn.bz/Gay-m10-floor-painting.jpg

The range is not as wide as that in a big-box retailer, but what is there is carefully selected and well-displayed. In fact there are a few innovations in display that the big box retailers could learn from.

>http://hnn.bz/Gay-m10-floor2-painting.jpg}Impression of Gay's Mitre 10 floor} http://hnn.bz/Gay-m10-floor2-painting.jpg

However, much of what the Sapphire format has to offer is now very familiar from big box retailers everywhere.

The power-tools are neatly display on wall racks. Benches display the bigger tools such as mitre saws in order of complexity, size and expense. You can pick the tools up, and see how they fit your hand, how heavy they are, how easy it is to access key features.

There is a small "vignette" of a bathroom, complete with shower and sink. A row of sink cabinets provide a good demonstration of their features. There are stacked sliding drawers to let you see a further range of sinks.

>http://hnn.bz/gay-m10-bathroom-sketch.jpg}Sketch of bathroom vignette} http://hnn.bz/gay-m10-bathroom-sketch.jpg

The design of the paint counter really is very good, and geared - unlike that of most big box stores - towards discussion and consideration of the paints, with a table and chairs located close by.

In particular, the display of outdoor entertaining gear, such as furniture and barbecues, is really excellent. The store has a wooden decking material laid down, and that helps to set context and create atmosphere when looking at the furniture.

>http://hnn.bz/gay-m10-outdoorfurn-painting.jpg}Impression of outdoor furniture} http://hnn.bz/gay-m10-outdoorfurn-painting.jpg

Yes, it is good. But is this format enough to drive Mitre 10 forward, and out of its current stagnation?

Probably not.

This is, of course, the first Sapphire-style store to be launched, and no doubt the format has been improved on.

The fact is, though, that the level of amenity in home improvement stores over the past two to three years has accelerated very rapidly. Not only that, but it is continuing to accelerate, and will develop still further over the next two years. There has been really serious money, really serious thought and experience put into these developments.

HNN believes this development has gone way beyond anything seen in any other retail sector in Australia - certainly way beyond what supermarkets are currently doing.

In light of this, Mitre 10 cannot, quite simply, hope to compete with Bunnings and Masters based on amenity.

Competitive cutting edge

It seems likely to HNN that Mitre 10 could find better ways to increase its competitive edge. The key to this may lay in what really makes Mitre 10 so unique. Not necessarily the community focus and so forth, but actually the mix of commerce. Because Mitre 10, according to what it tells us, is 50% trade sales.

The overall market forecast for Australia and much of the rest of the developed world is that the fastest growing sector is in Do It For Me (DIFM). As the overall market is growing, DIY will grow as well, but it will be outpaced by DIFM.

There are a number of reasons for the growth DIFM. The standard and complexity of home designs have both increased. Demands on time, both from work and family seem to keep increasing. As people move into higher density housing, any kind of renovation work becomes more disruptive.

The one factor that holds back DIFM in Australia is simply that dealing with tradies remains difficult. Standards of work vary, price depends on how much time you have to get enough quotes and to negotiate. It is a common story to have a job half done, and then not see the tradie for another week, as they go off to start a different job.

We've seen the growth of some online services to help ease the situation. In Australia there is Home Improvement Pages (hipages.com), which offers a way for clients to get quote from tradies. In the US there are a growing number of such services, offered by everyone from Amazon to smaller online businesses. Then there are sites such as Porch and Houzz that offer indirect means of finding the best professionals for a job.

This is really the market where Mitre 10 could excel. The company knows its main customers, the tradies, like no other retailer does. It could expand into services that hooked up tradies with clients, it could guarantee some kind of price structure, and help to maintain quality standards.

The other alternative

But Mitre 10 is unlikely to go down that path. It would be a bold business move, and while the team at Mitre 10 might be up for it, Metcash would not be able to make that kind of investment.

What is likely to happen? For some time now HNN has been suggesting that the most likely final outcome is for Metcash to divest Mitre 10.

Those who disagree with this analysis tend to miss one principal element of such a deal: what would Mitre 10 really be worth to a competitor?

Imagine, for example, if every single Masters warehouse store had its trade centre rebranded as Mitre 10, run by Mitre 10 management. In many ways, the experienced staff and management skills of Mitre 10 would be worth the investment itself. Add to that the well-established brand and the commercial relationships, and the acquisition price that would be paid just keeps climbing.

When we first suggested it back in mid-2014, it seemed like a slightly unlikely idea. But over the past six months it has become almost a commonplace with investment analysts - who also see a possible private equity takeover of all of Metcash as being quite likely.

Given the lack of willingness to invest in the business, HNN would have to say that at this stage divestment might be the best thing for the hardware industry. We just cannot see Metcash giving Mitre 10 the support it really deservers over the next two to three years.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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HNN believes that over the next three to four years some areas of the home improvement market will tend towards segmentation.

This will be driven in part by technology, as cohesive systems of devices, making use of Internet of Things (IoT) and other technologies, move customers more towards buying brands than single devices. Examples of this are cordless (battery-powered) tools and "connected home" systems.

Another force driving segmentation will be an increase in the use of services (the "do it for me" development), coupled with the desire that these services produce a guaranteed and "safe" outcome.

We've seen this spread in the US market, where Amazon and other companies are helping to brand and certify the services of what amount to individual trade businesses acting as sub-contractors. You don't contract a tradie to perform a widescreen TV installation, you add the installation as a service to the purchase of the TV.

What we want to focus on here is a new and interesting force driving segmentation. This is the rise in the importance and influence of what we can call "end-market" segments.

To get a better grip on these end-market segments, and understand why an unsegmented approach does not work as well with them, we need to first better understand unsegmented marketing itself, and why it has been such a success in Australia over the past ten years.

The success of the unsegmented

At HNN we began thinking seriously about unsegmented markets after listening to a rather forceful statement by the managing director of the Wesfarmers-owned Bunnings, John Gillam. At the Wesfarmers Strategy Day in May 2015, the well-known CitiBank retail analyst Craig Woolford was pressing Mr Gillam on Bunnings' approach to some segmented markets. Mr Gillam responded:

The delineation down into micros is relevant I think if you are only selling toilets, or only selling lighting. But we are thinking of everything, we look at all the opportunities and every bay has something that is suitable for light commercial as well as households, and for this use or that use, entry-level, or a higher quality product.

When Mr Woolford continued to press him on the issue, Mr Gillam extended his comments further:

If you have any doubt about our ability to be commercially relevant I would encourage you to go ... to [the Bunnings store at] Alexandria at 6:30AM, and sit and watch for an hour, and consider if you ever want to ask that question again.

That's the only thing I can say. We are not going to start breaking out market share, we never have. When we sat down with the ACCC to talk about Bunnings plus BBC we talked about the market by the same definitions we are talking about it now. It's how we think, it's how we believe, it's helped us make our decisions, it's how we drive our business.

We've built competencies across direct marketing skills, across relationship marketing skills, and mass marketing skills that allow us to play across heavy and light and into consumer - and all three in any particular way. We are able to be a necessity or discretionary provider into consumer or into commercial. And that gives us plenty of ways to cut the cloth, trim the sails, whichever analogy you like, and find better outcomes in trading today and to position our business for growth.

We have not allowed ourselves to fall for the trap of being too narrow in our thinking, by narrowing around a share of something - we think of everything. If we see someone using lots of a product we stock that we've never sold to them, we think 'Why aren't they buying that from us? What are we missing?' We find our way [to a solution]. Sometimes it is one little product, or just a connection - and you are away. It is a very exciting part of how we grow our business.

That is very clear, very forceful, and virtually an anthem for the unsegmented approach to some markets. Marketing in this situation isn't really about persuading, it is about pure communication. The product itself needs to be so appealing, at such a good price point, that it sells itself. All it needs is that the communication about its availability is made clearly in a catalogue, an email, or through simple advertising.

The Kingfisher approach

To develop these ideas just one step further, we can take a look at the unsegmented strategy being used by UK-based European home improvement retailer Kingfisher.

As Kingfisher goes forward with a process to narrow down the SKUs it carries, it divides products into one of three categories: Unique, core essential and complementary.

Unique consists of products that need a degree of variety and customisation, such as bathroom storage, shower and bath fittings, basins, and so forth. Core essential products are those that have some variance, but which are largely the same everywhere, such as toilet seats and waterproofing bath sealant. Complementary products include things like bathroom accessories - soap dishes and so forth.

These three categories are less about markets and market response, and much more about supply. The question that is being asked is: "How much commonality is there to these products?"

If there is a great deal of commonality, as in a product such as a toilet seat, this means that Kingfisher can order at huge scale, and use that scale to drive the price way down - at the same time delivering itself a good margin.

What does that low price do? First of all, the price itself actually unsegments the market. A customer has come in with the intention of buying an $80 toilet seat. But here is a toilet seat for under $20, which delivers 90% of what they want.

This kind of purchase then has a flow-on effect. The customer has just saved $60, so why not find a better toilet roll holder, or a little shelf that can hold a flower vase? And if those items are also provided at low prices, DIY itself becomes more attractive, because the value proposition has improved.

Comparing unsegmented and segmented approaches

It is helpful to take a look at a slightly segmented and an unsegmented approach to a single product area.

On one weekend in September 2015 both Bunnings and Masters Home Improvement had a special deal on low-end mitre circular saws. The Bunnings deal included one of its cheaper saws, along with a small, sturdy table mount. It retailed for $99.

The Masters offer was quite similar, except that the saw was of better quality, and so was the mount offered with the saw. It provided a roller feeder mechanism, which would make handling longer planks of wood easier. This retailed for $198.

Of the two offers, in terms of sheer value, it is likely the Masters offer was the better deal, and the one with the deeper discount. In terms of appeal, however, it is pretty certain that the Bunnings offer was the more appealing.

The Masters offer was really segmented in two different ways. Firstly, though it offered more, it also had a narrower appeal. Not everyone has a need to handle longer planks of wood, and those who do so occasionally can rig up something to make it possible.

Secondly, the pricing of the Masters offer would have the effect of making this more of a discretionary purchase than a necessity purchase.

To summarise this: the disadvantage of market segmentation is that while a segmented offer can say "YES!" to some segments, it almost always is going to say "no" to others.

An unsegmented offer is able to say "yes" to many segments, and "maybe" to most of the others. A segmented offer's success is judged by the intensity of the response from a narrow range of customers. An unsegmented offer's success is based on the breadth of its appeal.

In most cases, an unsegmented offer is driven by cost/supply-chain potential. A segmented offer is usually driven by design/capability options.

When segmentation does work

There are, however, certain specific conditions where segmentation will tend to outperform an unsegmented approach. One of the most common, and a growing one in the Australian market, is where it is necessary to target one or the other extreme end of a market, its endpoints.

To see how this works, we can refer to some diagrams. Figure 1 is an illustration of the width of appeal of something like a toilet seat. This is a basic household commodity, and it is almost completely unsegmented.

>http://hnn.bz/toiletSeatAppealMap.png}Toilet seat appeal map}http://hnn.bz/toiletSeatAppealMap.png

Figure 2 is the appeal map for a surprisingly popular tool, the Hitachi 3.6V Cordless Driver Drill DB3DL2(HL) sold by Masters. This drill has over 100 reviews on the Masters website, and is rated at over four out of five stars.

While it is a single function tool, that function (driving screws) is very common, and the tool is developed to not only make this easy to do, but to also accommodate a wide range of applications, from installing locks, to driving the fiddly, delicate screws a gunsmith uses.

>http://hnn.bz/hitachiDriverAppealMap.png}Hitachi driver appeal map}http://hnn.bz/hitachiDriverAppealMap.png

Figure 3 is the appeal map for a tool that at first would seem to be very like the Hitachi driver in many regards, but actually is entirely different in appeal terms. The Ozito CDL-1200 drill driver is really a substitute tool - it is a "stand-in" for a fully-featured drill. It cleverly provides only the very core features of a cordless drill, and thus delivers just enough at a very good price.

>http://hnn.bz/ozitoDrillAppealMap.png}Ozito drill appeal map}http://hnn.bz/ozitoDrillAppealMap.png

Figure 4 is a product that you will likely never see at a hardware store. It is a Certa branded 18-volt cordless circular saw, with a 136mm blade capable of cutting to a depth of 38mm, and 29mm at a 45 degree bevel. It does have lithium-ion batteries, but these are only 1.3 amp. It is sold directly from the Kogan website.

>http://hnn.bz/certaSawAppealMap.png}Certa saw appeal map}http://hnn.bz/certaSawAppealMap.png

Generally speaking, it is a bit pathetic. However, the bare saw costs only $36 (including free shipping). One battery and a charger would cost an additional $45. You could instead buy a drill kit, with a drill, two batteries and a charger for $78, for a total cost of $113, though with shipping on the drill that becomes around $125.

As the appeal map indicates, even light DIYers would likely find this a less than satisfactory tool. It would be incapable of cutting a 45 degree bevel in a dressed 2x4, for example.

However, it is one that is popular with hobbyists and craft workers. That's because its function is not about cutting up large planks of wood, or doing any kind of cabinet work. It is really a very enabling tool for people who would struggle to, say, cut a plank of wood with a handsaw. As such it doesn't improve on or provide better performance. It makes new things possible.

Where all the other products we have profiled appeal fairly strongly to at least three types of customers, this tool appeals to just one. This is because its market is at one end of the range of customers. It is an endpoint.

As such, it really cannot be supported by unsegmented marketing. It would require a segmented approach that sought to extract maximum value from only this narrow market range. Without that approach, it simply would not earn the space it consumed in the shop display.

Why does this matter?

For many retailers today, the craft/hobby market does not really seem like that great a market to be in anyway. Typically it is a market of under-powered tools that are under-utilised and so have a low replacement turnover.

However, if we look to the US, we can see that this is a strong and growing market there, and there is similar growth just starting in the UK market as well. A large number of blogs are devoted to the craft approach, which largely involves taking discarded furniture and finding unique ways to repurpose it. This area is just starting to break into dedicated US lifestyle TV channels in a big way this year.

For the Australian market, HNN expects it will not have much influence during the 2015 Christmas season, but will have some influence by the end of 2016. It is likely to take off in 2017, and produce a strong market at that time.

Perhaps more importantly, it is likely to act as a "gatekeeper" market. Through this kind of craft work, predominately women in families will build relationships with specific home improvement stores, and are likely to influence larger family purchases to take place at these stores.

How will Australian retailers cope?

The most likely way that Australian retailers will cope with an increase in segmented areas of the market is to develop a specific brand approach to segments. For example, where power tools today are largely sold unsegmented, offering a variety of price/quality/features/range-width, one specific brand of power tools may be offered that caters to the need of craft/hobbyist customers.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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This past Saturday evening found the usually lively crew at HNN mildly yet persistently depressed.

We had set off on Saturday morning on a "road trip". Our task: to visit nine Masters Home Improvement stores in and around Melbourne and its environs over two days. Our purpose: to find out, through "boots on the ground" observation, what really is going on with the Woolworths-owned big-box home improvement chain.

Our motivation would be clear to anyone who has been following this story. Ever since the announcement of Woolworths' recent troubles - highlighted by a loss of $245 million during FY 2014/15 at Masters - and the resultant resignations of the company's CEO and chairman of the board, the fate of Masters has been a much-discussed topic.

Many financial analysts, such as David Errington at Merrill Lynch, as well as fund managers, such as Hamish Douglass of Magellan Financial Group, have openly called for Woolworths to shut Masters down as soon as it can.

It is a distraction, they say, and a waste of money. Most significantly, in their opinion it simply can't compete with the home improvement industry behemoth, the Wesfarmers-owned Bunnings, run by its managing director John Gillam at the head of an able management team.

In the end all this speculation about Masters comes down to this one, single issue: can the Masters stores become effective and compete directly with Bunnings?

You can't answer that question sitting at a desk looking at spreadsheets. You need to get out there, see what is happening in a number of stores, and draw your conclusions from that.

So, the road trip. It began with this sense of depression and concern over the fate of Masters. It ended, however, with a strong sense that the managing director for home improvement at Woolworths, Matt Tyson, is on the right track, and that Masters might deserve more of a future than the analysts suggest.

The bad news

The first day of our road trip took us on a loop from Melbourne's inner suburbs out East then down South, covering an area of rapid expansion and housing growth over the past six years. We stopped at six Masters stores in operation, and one (at Cranbourne) which will open soon.

We also stopped in to assess any Bunnings stores that were located close to the Masters stores, to do a comparison.

As the morning wore on into early afternoon, and we went into store after store to assess layout, design, product lines, product display, store presentation, staff, traffic and customer response, we found the mood in the car getting increasingly sombre.

In general terms we had found most of the Masters stores we visited to be underwhelming, and some to be quite disappointing. There weren't (with maybe one exception) any "bad" stores as such, but we really didn't find anything breathtaking, either. In particular, we kept running into little "innovations" that Masters had added, many of which just didn't really work.

Displays

For example, Masters at many stores had installed a display area for doors that extended over two levels. A door style would be shown at ground level, then another door was positioned on the racking immediately above it. This just seems odd.

>http://hnn.bz/doors-masters2_sketch.jpg}Sketch of door display at Masters}http://hnn.bz/doors-masters2_sketch.jpg

A number of displays, in fact, tried to make use of the height of the Masters warehouse stores to display goods. For example, this display of wood flooring:

>http://hnn.bz/MastersFlooringHighDisplay.jpg}High set display of wood flooring at Masters}http://hnn.bz/MastersFlooringHighDisplay.jpg

Unless you are around two metres tall, trying to get a good idea of how that flooring looks is very difficult.

Another not-so-good innovation was the use of "fake walls" in a free-standing display to showcase windows and doors.

>http://hnn.bz/MastersFreestandingDoors3_sketch.jpg}Freestanding door display}http://hnn.bz/MastersFreestandingDoors3_sketch.jpg

It looks like it should work, but somehow it just doesn't really. That is particularly the case when, as one store did, the display was left marked and dirty - along with a wrapped pallet and a stocking ladder left parked there during the day.

>http://hnn.bz/sthMorangDoorDisplay_sketch.jpg}Store display with "authentic" stocking pallet look}http://hnn.bz/sthMorangDoorDisplay_sketch.jpg

Bathroom and kitchen displays

The same "looks like it should work, but it doesn't" effect also applies to the use of bathroom settings. Where the idea of these settings seems to have been to create "vignettes" (to use the US-based retailer Lowe's Home Improvement term), scenes that look a little like actual rooms, the effect tends more to being some floor stock with fake walls around it.

>http://hnn.bz/MastersBathroomDisplay.jpg}Masters bathroom display}http://hnn.bz/MastersBathroomDisplay.jpg

While in general the kitchen displays at Masters are among their better features, there are some of these displays that end up looking cheap. The HNN team spent something like 20 minutes in one store, trying to work out what was wrong to achieve this effect, but we're still not sure.

>http://hnn.bz/MastersCheapKitchenLook_sketch.jpg}Somehow this kitchen looks cheap}http://hnn.bz/MastersCheapKitchenLook_sketch.jpg

There is a similar problem with the conference areas available for people considering a kitchen installation. When you bear in mind that frequently this means spending over $15,000, something better than an open table might be called for.

>http://hnn.bz/MastersKitchenConference_sketch.jpg}Kitchen conference area}http://hnn.bz/MastersKitchenConference_sketch.jpg

Finally, while it is always great to see retailers experimenting with new products, sometimes the poor display of such a product can end up making this a negative move. At one of the Masters more ex-urban, regional stores, they evidently are experimenting with the sale of microwave ovens - which is a great idea. It could be done a little better, however.

>http://hnn.bz/MastersMicrowaves_sketch.jpg}Microwaves on display at Masters}http://hnn.bz/MastersMicrowaves_sketch.jpg

This is how IKEA displays its microwaves for sale:

>http://hnn.bz/IKEA-microwaves-1.jpg}IKEA microwave display}http://hnn.bz/IKEA-microwaves-1.jpg

>http://hnn.bz/IKEA-microwaves-2.jpg}IKEA microwave display}http://hnn.bz/IKEA-microwaves-2.jpg

The slightly worse news

Probably one of HNN's most disappointing experiences was the visit to the Masters store in Box Hill. This had some of the aspects of the new store design which Masters sometimes calls "Masters 2.0".

In particular, the power tool display area had been improved by moving the tools groups by brand into vertical bays along the sides of the tool area, though some tool brands were displayed in the open area.

>http://hnn.bz/MastersNewToolBay.jpg}Tool bays at Masters Box Hill}http://hnn.bz/MastersNewToolBay.jpg

Overall, while the retrofit probably improved the Box Hill store to some extent, it really wasn't enough to lift it much above the rest of the stores.

The even worse news

As HNN travelled from one Masters store to the next, we also dropped in on the Bunnings stores many of them had been paired with. If we weren't impressed by much of what we saw in Masters, we were impressed by a range of things at Bunnings.

For example, take this display parked out in the entrance to a Bunnings store:

>http://hnn.bz/BunningsCatalogComp.jpg}Other stores' catalogues out the front of a Bunnings}http://hnn.bz/BunningsCatalogComp.jpg

The store manager has picked up catalogues - probably distributed in that area - and added orange stickers which list the (lower) prices for the items at Bunnings.

That really represented the kind of attitude HNN felt in the Bunnings stores. Where Masters seemed at times cool and distant, Bunnings was really willing to "get in there", to compete, to provide service, to have contact with the customers.

That's leaving aside what Bunnings does with its products and pricing. Time and again, Bunnings manages to catch that place in the market where function and price match up.

However, even with all of this, through repeated visits to the Bunnings stores we could see some problems. There was a real struggle in some Bunnings retail spaces to represent bathroom products well.

In the larger stores, kitchen supplier Kaboodle had been provided with more space to display its wares, and while these displays were better than the small displays, they still didn't seem to quite "get there".

Then HNN visited the Bunnings stores at Carrum Downs and Keysborough. That changed our minds.

In Carrum Downs we saw the first Kaboodle displays that seemed to really work well, such as this one:

>http://hnn.bz/BunningsKitchenCarrumDowns.jpg}Kaboodle kitchen in Bunnings Carrum Downs}http://hnn.bz/BunningsKitchenCarrumDowns.jpg

There was also an interesting counter for customers to sit at and use the online kitchen design tools.

>http://hnn.bz/BunningsDesignCounter.jpg}Counter for customers to use design tools}http://hnn.bz/BunningsDesignCounter.jpg

As it turned out, that was only the beginning. When we reached the Bunnings store at Keysborough, HNN saw some really interesting store design concepts, such as this "wall of taps" plumbing display:

>http://hnn.bz/BunningsWallOfTaps.jpg}Bunnings plumbing display, Keysborough}http://hnn.bz/BunningsWallOfTaps.jpg

This was a really comprehensive display, that had been thoroughly designed and planned. It made looking for a new tap fun and interesting.

This store also stepped up the display of Kaboodle kitchens one notch above that of the Carrum Downs store:

>http://hnn.bz/BunningsKitchenKeysborough.jpg}Kaboodle kitchen display Keysborough}http://hnn.bz/BunningsKitchenKeysborough.jpg

The kitchens looked really refined and well made. One of the best features of the kitchen display was how the various component choices were also set out:

>http://hnn.bz/KaboodleKitchenComponents.jpg}Easily accessed display of kitchen components}http://hnn.bz/KaboodleKitchenComponents.jpg

Bunnings versus Masters

As we drove home that evening, and called each other up to chat about we had seen that day, we discussed how we could possibly write the story. What we were seeing develop, at the end of the first day, was much more a Bunnings story than it was a Masters story.

What HNN thinks happened with Masters was that in 2010 Woolworths set in place a risky strategy based on three simple principles. The first was that it would develop stores that would be better than the average Bunnings. The second was that it would then locate these stores close to Bunnings stores. The third was that it would scale that growth as rapidly as it could.

The difficulty Masters ran into was that while its initial stores might have been better than the average Bunnings store back in 2011 when it launched, Bunnings didn't sit still. Even as Bunnings has built out its store fleet over the past four years, it has managed to improve the store design, the execution by staff, and its merchandising - all while keeping prices very low.

One of the main features of this Masters strategy was that there was little room for testing and development, and almost no way for the home improvement retailer to accommodate failure in any one of these three aspects.

With most of the stores not coming up as equal to Bunnings stores, it now cannot reposition them further away from Bunnings. With the reduction in investment, its early plans for scale, which resulted in it building wherever it could, now means it has an unbalanced store network.

The only way out, the only way it can make the business work, is to come up with a store that is either better than Bunnings, or shifts the Masters market position so that it is no longer in direct competition. That is really the task that Mr Tyson and his team faces.

The turnaround

If we had been a little depressed the night before, on the following Sunday morning HNN was despondent. We set off anyway, heading for our first store visit of the morning. This was to the Masters store at Northland, to the North-East of Melbourne's CBD.

What we saw there rapidly changed our minds about the potential for Masters future.

Northland is one of the stores where Masters has done a much more complete retrofit of its developing new format for stores. What it represented was not a set of neat solutions that solved every problem, but it really showed, over and again, that Masters has developed the one thing it needs more than anything else: a really good feedback loop.

There were two things HNN noticed immediately. The first was the absence of many of the "innovations" that we had found less than useful in other stores. The door display is back to being a normal door display. The fake wall window displays are gone. The in-store displays rely less on building up, and give more of a normal view of products.

The second thing we noticed, which gave us real hope, was that Masters has begun to vary its aisle width. At most of the stores we had visited, the aisle width had been constant throughout the store, set at a quite wide two metres or so.

In the Northland store, some of the aisles were set at around 1.6 metres width. In areas such as fastener aisles, the narrower width makes it easier to find things, as well as (importantly) conserving space for other displays.

As we continued to walk through the store, we kept finding things that indicated Masters had been hard at work developing better solutions. Here are a few we saw.

Power tool display

While the Northland store used the same branded vertical bays as the Box Hill store, these were better organised, and backed up by a much better centre display of mixed and branded power tools.

>http://hnn.bz/M-N-powertool-display.jpg}Power tool display in Northland Masters store}http://hnn.bz/M-N-powertool-display.jpg

>http://hnn.bz/M-N-powertool-display-centre.jpg}Northland Masters centre tool display}http://hnn.bz/M-N-powertool-display-centre.jpg

It is difficult to describe how good this display is. Someone who really knows their power tools has been through this display, and organised things very well.

Bathroom displays

The bathroom displays were joyful, colourful, and evoked a sense of fun. For example, a run of small sinks and taps in different colours:

>http://hnn.bz/M-N-sinks-taps.jpg}Colourful sinks and taps at Masters Northland}http://hnn.bz/M-N-sinks-taps.jpg

The bathroom vignettes were also much better organised and more inviting:

>http://hnn.bz/M-N-bathroom-display.jpg}Masters Northland bathroom vignette}http://hnn.bz/M-N-bathroom-display.jpg

The display of taps came up to the same standard we saw at Bunnings, but with a little more organisation:

>http://hnn.bz/M-N-tapDisplay.jpg}Masters Northland tap display}http://hnn.bz/M-N-tapDisplay.jpg

Kitchens

Great work has been done on the kitchen displays as well. This is an example of a really luxe treatment:

>http://hnn.bz/M-N-kitchen-display.jpg}Luxury kitchen display}http://hnn.bz/M-N-kitchen-display.jpg

Kitchen sinks are displayed in functional ranks, making it much easier to "try" and select the one that suits:

>http://hnn.bz/M-N-kitchen-sinks.jpg}Masters Northland kitchen sink display}http://hnn.bz/M-N-kitchen-sinks.jpg

Perhaps HNN's favourite feature in the kitchen area: a set of four nooks designed for sitting down with customers to discuss their kitchen plans:

>http://hnn.bz/M-N-kitchen-conference-nooks.jpg}Masters Northland kitchen conference nooks}http://hnn.bz/M-N-kitchen-conference-nooks.jpg

Appliances

The Northland store provides custom bays for a range of brands:

>http://hnn.bz/M-N-appliance-bay.jpg}Masters Northland appliance bay}http://hnn.bz/M-N-appliance-bay.jpg

>http://hnn.bz/M-N-appliance-bay-2.jpg}Masters Northland appliance bay}http://hnn.bz/M-N-appliance-bay-2.jpg

Mr Tyson is telling the truth

As we reflected on our experiences of most of the Masters stores, and the Northland store, one of our main conclusions was that Mr Tyson is very much telling the truth. When he speaks, as he has done, at investor conferences about the need to go slowly, and the need for further development, he is not making excuses, he's actually pointing out something that is true.

Masters still needs to develop its concepts further. That might be a little disappointing to some, but the real victory here is that the organisation has come up with the skills and processes it needs to develop.

Equally, Mr Tyson is also telling the truth when he says that Masters has a "line of sight" to profitability. Looking at even just the retrofitted design, it is possible to see that Masters is likely getting the 30% increase in revenue he has described. It is also easy to see that there are yet more gains to be made.

The difficulty that Woolworths faces with Masters, then, isn't about the competency of the organisation, and especially - as even investment analysts freely admit - the competency of Mr Tyson and his management team. What Mr Tyson is representing clearly both to Woolworths itself and to the general community is that this transformation of Masters will take time, and needs to proceed at its own pace.

The problem that comes with this is really the legacy of the past. Masters set off in the wrong direction for three years or so, and invested a lot of money in that wrong direction. Even if it is going in the right direction now, it is a legitimate question to ask if the correction has happened a bit too late.

In regard to that question, things at the moment seem quite evenly balanced. However, in HNN's view, that is only the way they seem. HNN believes that an additional factor that needs to be considered in weighing the fate of Masters is the role its one-third US owner, Lowe's Home Improvement, can play.

HNN has always been of the opinion that, in seeing Masters as in part an effort to rein in Wesfarmers' expansion in home improvement, Woolworths' goal has been to eventually turn over a majority share of the business to Lowe's.

Thus the real goal could be holding to break-even for two or three years, with the expectation that if it does so, Lowe's might acquire from Woolworths at least an additional one-third share. That would relieve Woolworths both of a capital burden and the need to administer the day-to-day running of the business.

Break-even as a goal is lot less difficult to reach than a suitable rate of return on equity. That is enough to tip the scales firmly in favour of continuing investment in Masters over the next three to four years.

You can download the PDF version (Home Improvement Weekly) of the e-newsletter at the following link:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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In many ways, it may make sense for Woolworths to simply cut Masters Home Improvement loose at this stage of the game.

Its cumulative losses are likely to exceed one billion dollars in the next 18 months. More than that, there seems to be an inability to really grasp the numbers on the part of Woolworths.

The new format Masters stores - dubbed "Masters 2.0" - are said to lift retail sales by more than 30% (of an average store). Journalists and the financial analyst David Errington of Merrill Lynch have made the point that, while impressive, this 30% gain would not lift Master's operations into profitability.

The new format is set to be rolled out to half the Masters stores over the next 10 months. So Masters' achievement by the end of FY 2015/16 will be that half its stores are losing money more slowly than the other half.

It was less than two years ago when Woolworths stated in its annual report that Masters would be at breakeven in FY 2015/16. Given Masters' loss of nearly a quarter of a billion dollars in FY 2015/16, you would have to be an optimist to think breakeven is possible by FY 2018/19.

However, we all know that ending Masters is an unlikely outcome - anymore than Wesfarmers' Bunnings is likely to slow down its current build-out efforts. That's just not how retailers think.

The current Masters' attitude, which is all about coaxing improvement out of mediocre assets, needs to go. The real question today is whether, with a clearer, profit-driven strategy in place, and obstacles such as intrusive, daily micro-management removed, Masters' current managing director, Matt Tyson, will be able to develop and adopt better strategies.

Core strategies

Designed at its inception as a way to hobble Bunnings, Masters has instead found itself hobbled by that strategy. With business development aimed at damaging a competitor rather than getting the best profits, it's not at all surprising the result has been persistent losses.

Pursuing a Bunnings-focused strategy meant Woolworths management gave Masters the nearly impossible task of carving out a share of markets already dominated by Bunnings.

For a start-up retailer to go up directly against Bunnings in terms of products and locations made little sense. In facing such a dominant player in the market, the strategy should have been to go around Bunnings, to find markets that were under-serviced.

Following this plan today might mean transforming Masters from its focus on building and DIY to a focus on customers who want to transform their living spaces. The appeal of the new retail situation is moved from the "how" of doing interior decoration and renovation, to the "what", the results, the project, the goal.

The store network

The other part of Masters that needs urgent fixing is its store network. In developing the current Masters store network, the potential for full or partial failure was not taken into account. Masters was permitted to build out a lopsided store network that could only really work if it were completed with up to 90 stores. As the company will likely end up with fewer than 65 stores (this year), the resulting network is lopsided.

The network is so concentrated in some areas that, according to Mr Tyson, some degree of store cannibalisation (intra-company, inter-store competition) has resulted. Other, profitable areas, especially in New South Wales, have very few stores. For a loss-making operation with a limited number of stores all this represents very poor planning.

HNN estimates that between four and seven of the Masters stores will continue to under-perform for the next four years at least, due to their poor locations. In the end, between cannibalisation concerns and bad siting, that means that between eight and ten Masters stores should be shut down over the next 12 months.

Online

For a retailer operating under physical store restraints, looking to online sales seems an obvious move. It is also the one area where Masters could be said to be clearly ahead of Bunnings, as it offers full online retail.

Such an online strategy is already common in the UK, with Kingfisher's Screwfix expanding rapidly online, as well as the Home Retail Group's HomeBase and Argos operations. In the US, Home Depot has all but ceased its physical store build-out in favour of boosting online activities.

Equally, this is the area that is Mr Tyson's biggest vulnerability. He lacks experience in, and possibly understanding of, this type of technology. Masters does have a good technical and design team working on its website, but the signs of under-investment are everywhere to be seen.

One solution would be to appoint someone to work alongside Mr Tyson as the dedicated e-commerce CEO for Masters.

Analysis

Will Woolworths be able to make the necessary changes to Masters in time? That will depend on whom the company picks as its CEO, but in general it seems somewhat unlikely. It is unlikely we will know much more until February 2016, and only see more complete planning in May 2016. Meanwhile the losses at Masters will continue to accumulate.

For independent hardware retailers in Australia there is something of a dilemma about the prospects of Masters. Will they be better off if Masters fails and closes, or if Masters succeeds?

If it fails, there will be less competition for the market and, theoretically, more scope for their own operations. However, such a failure would also mean that Bunnings would be able to expand at an even higher rate.

Is it better to look at a future where Bunnings has a 22% share of the market, and Masters a 10% share, or where there is only Bunnings but it has a 27% share?

The case for suppliers is far more individual. For those with a Bunnings contract, a bigger Bunnings might seem best, but it could create an unhealthy over-reliance. For those without a Bunnings contract, it largely depends on their chances to get a Masters contract, or if others will get a Masters contract, and thus open up new markets in independents for them.

All this really is a great pity. Had Masters set out from the start to just be a profitable company, it would likely be close to working by now. The problem with imagining a nemesis is that sometimes you end up accidentally creating one.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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It is interesting listening to some of the voices that are getting raised as various Australian cities debate the issue of ultra-small CBD apartments.

If you speak to people who have lived extensively overseas, especially when they were students, it's not uncommon that they will have a tale or two about living in very small spaces.

For most of them, it doesn't seem to have been an issue, mainly because the apartment space was not used for much more than sleeping, reading, and the occasional meal when they couldn't be bothered going out. They had the whole city literally at their doorstop, after all.

Some tiny apartments, like this one in the Cairo Building in Carlton (Melbourne), seem really sweet and liveable. Of course it has benefitted from the care and attention of Architecture Architecture director Michael Roper, the apartment's owner.

>http://hnn.bz/cairoBuildingAprt.png}Apartment in Cairo Building in Carlton, Melbourne}http://architectureau.com/articles/cairo-apartment/

There is a short essay about these apartments on the website Assemble Papers as well:

Reading through these pieces and a few others got me to thinking about this movement that has taken over part of the Australian community to live small rather than live big. I suppose that indirectly I am a part of that movement, though it has been more accidental than anything else.

My place is not particularly small, but it's not big either. It is small enough that if I want to buy anything larger than a shoebox, I need to work out what I can do without to find a place for it. To give a concrete example for those who never have lived small, I don't dare buy super-discount 12-roll packs of toilet paper, because there simply isn't any place to put them - unless it is in the hallway.

One thing that you get used to quite quickly when you live small is that much of the time you need to "make do" - that is, repurpose things either meant for bigger places, or not meant for dwellings at all. About the only real exception to that constant repurposing is items I buy from IKEA.

The role of power tools

A good example of this kind of repurposing would be power tools. Again, it's probably hard to explain to anyone with a vast garage to store things in, but the available storage for tools comes down to three-quarters of one shelf in a broom closet, plus a toolbox that is kept in a wooden storage box on the balcony.

Relatively recently we've seen the development of more and better 12v rechargeable tools, and my partner and I have been looking these over to see what would suit us and our fairly limited DIY needs.

One of the curious things you discover quite quickly is that many of these tools are actually designed for professionals rather then DIY. It's been an interesting exercise mapping these pro tools onto more simple needs.

TTI's Milwaukee brand, for example, has a very wide range of 12V tools, with some really exotic variants, such as a one-hand band saw, for cutting metal pipes, as well as the usual drill/driver. There is also the TTI AEG drill/driver set that Bunnings sells, which we've used in the past - it has one of the best handgrips we've found.

In the end, though, we found ourselves purchasing a set of Makita 12v tools - not because they were actually all the very best, but because Makita offered one tool we found we really wanted. That's the Makita 10.8V cordless 85mm circular saw. While it's not big enough to cut through, say, a dressed 2x4, it's perfect for both the 19mm pine we use on some projects, as well as cutting plywood and MDF.

>http://hnn.bz/makita85mm.jpg}The Makita 85mm cordless saw}http://hnn.bz/makita85mm.jpg

One of the best things was that we could fit the drill/driver set, the circular saw and a small (corded) palm sander into the same space previously taken up by just a drill and an orbital sander.

It will be interesting to see whether, as living small becomes a more understood trend, hardware retailers and tool manufacturers find ways to cater directly to this market.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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The well-respected hardware retailer John Dalhsen has chosen to air some of his opinions about the current state of the Australian home improvement market to Fairfax Media. Mr Dahlsen is the owner of one of Australia's largest independent hardware retailers, JC Dahlsen, and is a former chairman of Woolworths, and a former director of the ANZ Bank.

Mr Dahlsen has been quite outspoken about his concerns over concentration in a number of Australian markets, including banks and supermarkets. Crikey has an informative summary of his opinions on banks:

His comments on the home improvement industry appeared in an article published on 13 August 2015. It's unlikely the timing of this is entirely accidental. The company results for FY 2014/15 will be released by both Wesfarmers (owner of Bunnings) and Woolworths (owner of Masters Home Improvement) before the end of August 2015.

It is a little difficult to determine in the Fairfax article written by Sue Mitchell what are Mr Dahlsen's expressed opinions, and what has been added and adduced by the journalist. Overall, the article contains some apparent self-contradictions, as well as some unclear calculations.

At the heart of what Mr Dahlsen has to say, however, is a genuine and heartfelt concern that is felt by many independent hardware retailers in Australia. It is one that bears real consideration.

The point-by-point

To just look at the individual points expressed in the article (some of which belong to Mr Dahlsen):

The apparent contradiction in these statements is that Mr Dahlsen is reported as being concerned about the demise of small retailers due to market concentration, but equally distressed that Masters did not succeed. It would seem quite likely that if Masters did succeed, and did gain larger market share, that small retailers would have suffered even more.

The reason why the contradiction is more apparent than actual is that Mr Dahlsen's real point is about the concentration of market power held by Bunnings. His concern (as we interpret it) is that in some cases this enables Bunnings to act in a way that approaches the control of a monopoly.

That is his own, personal experience, as he states he felt forced to sell a number of his consumer-focused retail stores, or face an impossible competitive situation with Bunnings.

We will come back to this important point, but first let's go through some of the points above.

The size of the hardware market

One of the better sources for determining the size of the hardware market is the statistics produced by the Australian Bureau of Statistics (ABS). HNN would suggest that the category that best reflects the overall potential of the home improvement market is labelled by the ABS: "household goods retailer". This is what is included in that category:

Of these categories, the only two where Bunnings does not have some kind of significant presence would be manchester (ANZSIC 4214), and computers (ANZSIC 4222).

IBISWorld suggests the revenue from manchester is worth $2 billion. IBISWorld suggests revenue from combined sales of computers and software is worth $5 billion. To be generous, let's say the (computer) hardware sales (to which 4222 refers) are worth $4 billion. Thus the two categories combined would be worth $6 billion.

For FY 2014/15 total retail turnover in household goods was $49.65 billion. That would leave $43.65 billion as the market share of Bunnings. Just to be extra sure, let's deduct a further 5% from that number, to cover other categories that Bunnings will not participate in.

That gives us a potential market size of $41.47 billion. Given Bunnings' projected revenue of $9.5 billion, that would give the company an overall market share of 23%.

While that is a considerable market share, it's far less than the over 30% number quoted in the article, and is more likely to reflect the reality.

The paint market

It is difficult to discuss the degree of market concentration in the paint market, as these numbers are hard to find. However, we can start by saying that the figure of 40% provided by Mr Dahlsen would likely refer only to the consumer end of the paint market.

As the CEO of DuluxGroup, Patrick Houlihan, has been at pains to point out in his last several results announcements, sales of trade paints through Bunnings accounts for less than 2% of top-line revenues.

It is worth noting that whatever grip Bunnings has on the paint market has just as much to do with the performance of the Australian Dulux paint brand, with which the company has a close business relationship. As Mr Houlihan has also pointed out, this is the result of a careful development of that brand over the past 20 years.

Misleading the ACCC

This is actually a quite intricate area to look at. It is doubtful that anyone really thinks Bunnings' actions are intended to directly deceive the ACCC - after all, that organisation has access to lots of data the public never sees.

What is really meant is that by proposing a large potential market figure, the public will be persuaded that Bunnings does not have such a large market share, and thus not place pressure on the ACCC to investigate the competitiveness of the industry.

There may be a small degree of validity to that claim. However, the real reason why the managing director of Bunnings, John Gillam, is quick to highlight the size of the market - the length of the "runway", as he sometimes calls it - has to do with the financial analysis of Bunnings' performance.

One of the ongoing concerns of analysts is that Bunnings will simply run out of market room. That "market room" doesn't refer directly to the overall size of each market, but rather to the proportion of the market that it is economical for Bunnings to capture.

It is increasingly vital for Bunnings to expand into adjacent markets because it is more cost effective for the company to capture revenue from these newer markets than it is for Bunnings to capture more of existing markets.

Bunnings and monopoly power

Monopoly power in any market really relies on two separate factors. The first, obviously, is the size and reach of the major participant in that market. The second, less obviously, is the degree of consolidation in the market outside of the major participant.

It seems fairly clear that independent hardware retailers in Australia have not really formulated effective representation for themselves, not even on a state level, let alone a national one. It is difficult to really know what to say about this. The retailers (and the suppliers) are a lovely rowdy bunch when they are together, not shy to express an opinion, but they seem to have difficulty forming an effective, united front.

For example, it's hard to imagine independent retailers being able to get together to formulate and support a national campaign to promote their style of business.

It would seem, then, that much of the apparent monopoly power Bunnings might possess in some circumstances has not so much been gained by that company, but rather ceded to it by its natural competitors.

The decline of the independents

That said, it is also evident that independent hardware retailers are coming under increasing pressure. The real rate of the decline of the independents is difficult to assess.

Based on ABS numbers, for example, the rate of decline in the number of businesses with under $2 million per annum in revenue who identify themselves as primarily hardware and building supplies retailers from July 2012 to June 2014 is 5.8% for Australia overall.

That's not a low number, but it is equally not all that high. To gain perspective on what it might mean, you need to look at how that number plays out against the performance of the hardware retail industry as represented by the retail turnover, on a state-by-state basis.

In the graph below, the percentage increase in retail turnover for the period July 2012 to June 2014 is graphed against the percentage decline in the number of hardware retailers with under $2 million in revenue.

>http://hnn.bz/retailerNumsToTurnover.png}Retailer numbers versus retailer revenue}http://hnn.bz/retailerNumsToTurnover.png

For most states, even as revenue increases, so does the percentage of retailers dropping out. This would seem to be a very clear indication of the degree of consolidation taking place for independent hardware retailers. (Note that the turnover has not been adjusted for inflation.)

HNN has also explored this is in a previous editorial.

Why it might not matter

From the perspective of retailers competing with Bunnings as a retailer, the company can appear close to invulnerable. However, it is important to remember that it operates as part of the publicly-owned Wesfarmers.

As part of a public entity, the pressure on Bunnings is not just to produce profits, but to produce annual growth on those profits - annual growth that meets forecast expectations.

While Bunnings' expanded size is working well for it in current market conditions, any increase in fixed costs makes a company more vulnerable during a downturn in the overall economy or its own specific market.

Working against Bunnings as well is that it and its parent Wesfarmers could not be described as an organisation entirely comfortable with technology. Bunnings is one of the few major retailers in Australia to not yet offer e-commerce. Other Wesfarmers divisions do, particularly Coles and Target, but there would seem to be few indications of integration of these operations.

This is one area where Woolworths, with recent acquisitions and partnerships, is doing better than Wesfarmers. For the moment, it is not much of an advantage, but it could prove to be on in two or three years time.

It is important to remember that while the version of Masters conceived by departing Woolworths managing director Grant O'Brien has failed, that doesn't mean this particular enterprise will not continue.

Perhaps most importantly, the consumer end of the home improvement market has begun to change in some radical ways. Up until recently, what was at the core of it was the "tradie ideal" - a fascination with the process and technique of home improvement.

For the coming generation, this makes less sense. There is more interest in simply completing projects as quickly and effectively as possible, with a minimum of fuss.

To put that in some kind of perspective, think about what happens when JB Hi-Fi, in its HOME operations, starts selling Bosch or AEG power tools. To past generations, buying a drill from an electronics store would be anathema, but to today's generations this makes a lot of sense.

Equally, of course, Bunnings is a very well-run company - even John Dahlsen describes it in the interview article as "a brilliant business, probably the best of its kind in the world". It may be equal to most of these challenges. But it will not be easy.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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What is it about kitchens? Of all the rooms in the house, the kitchen is perhaps the most unusual. In particular this sense of its "specialness" has been steadily growing over the past decade.

We could go so far as saying Australian kitchen is something of a "pioneer" room. It is the place where home-owners - who are (mostly) quite conventional and cautious - are willing to lash out and experiment a bit.

For example, it's the one room of the house where you can regularly expect to find built-in, complex pre-fabricated components used with great flair. That's not something that could be said of other rooms with a similar utility function, such as bathrooms and laundries.

It is also, surprisingly, the room with the most technology per square metre in most houses. It can include a stove, oven, refrigerator, freezer, microwave oven, dishwasher, garbage disposal, water treatment system, and a wide range of appliances from the humble hand-mixer to complex all-in-one food preparation devices.

It is possible that over the next five to six years we will see some of the pre-fab assembly techniques of the kitchen migrate to other rooms, especially as more technology makes it way into houses.

What is more certain is that over the next two to three years we will see the online marketing techniques used for promoting kitchens become more common across a wider range of sales areas.

Of all the online kitchen marketers at the moment, there is little doubt that IKEA is the most advanced. By taking a look at what IKEA is doing with kitchen marketing online today, we can catch a glimpse of what marketing everything from power-tools to outdoor furniture will look like in a year or two.

IKEA + kitchen: made for each other

As a company that specialises in pre-fabricated, self-assembly products, the rise of the pre-fab kitchen has been something of a boon for IKEA. There is little doubt that the company's expectations for this line of business have contributed to its plans to expand quite radically in the Australian market, including the addition of full online e-commerce by 2017.

The Australian home improvement industry should be in no doubt that this will be an aggressive move by IKEA. At a guess, it will be seeking a further 10% share of the home kitchen market by 2018/19. That share is going to come directly from existing suppliers, such as Kaboodle and Hafele.

IKEA brings to the table a number of telling advantages. It has full vertical integration, from design to manufacture to distribution to the sales floor. This extends beyond cabinetry to appliances as well, including stovetops, ovens, microwaves, and rangehoods. It also includes sinks, plumbing, cooking utensils and other accessories.

Until recently, IKEA's weak point has been distribution, with only a limited number of large stores available for consumers to shop at. IKEA has recently announced plans not only for its e-commerce launch, but also for the launch of a larger number of small-format stores, along with more large stores.

It is currently building distribution centres and other infrastructure to make this expansion possible.

The end goal for the company is to increase its current estimated Australian turnover of $1.4 billion a year to $2.0 billion a year by 2020/21.

Backing this up has been the launch of a revised kitchen system, known as Metod in Australia and Europe. The core selling points of Metod are price/value and the ability to truly customise the kitchen beyond basics such as different cabinet door designs, into deep functionality changes.

Metod is a track/frame system, easing some installation concerns so that professionals are more likely to get it right, and bringing more of the assembly within range of a competent DIYer.

>http://hnn.bz/ikeaTrack.jpg}The track system of IKEA Metod}http://hnn.bz/ikeaTrack.jpg

As though this isn't enough, IKEA's prime expertise, honed through its main distribution base in Europe, is enabling home-owners to make better use of confined spaces.

With inner-city, very small apartments becoming an increasingly important market over the next decade, it has an automatic expansion market ready. It is also a market which most of Australia's home improvement retailers don't really know how to access.

It is also worth noting some of the negatives that attach to IKEA kitchens as well. The materials and durability are not the equivalent of high-end kitchens, installation of any kitchen remains a difficult task (fitting something that wants to be square into non-square spaces), and there have been persistent problems reported with IKEA's supply chain and post-sales customer service.

IKEA's online marketing

One of the major factors that will contribute to IKEA's expansion plans in Australia is the comprehensive online marketing presence it has managed to build. This goes back eight or nine years, but has become particularly strong over the past four to five years.

These marketing efforts are not necessarily coordinated, but they do cluster together to create a phenomenal online presence. They encompass the following areas:

Let's examine each of these areas.

Videos

While various kitchen brands have some kind of TV advertising creative, what makes the IKEA version unique is that it is tuned for the web.

Starting with the most recent examples first, this is IKEA's latest video ad for kitchens:

This is the "making of" video:

What makes this effective for the web? First of all there is the length which, at 90 seconds is too long for anything other than a very expensive TV ad. Second, there is the depth and amount of detail in the ad itself: it's designed to be watched more than once, to be stopped, rewound, clipped, shared.

Of course, what is really exceptional about this as a web ad is the amount of time, effort and expense that has gone into it. Setting up a film set in the middle of the Jaguar Rescue Center in Costa Rica didn't come cheap, you can be sure of that. But IKEA is willing to make the investment.

This is the second of this kind of expensive, detailed web-oriented ad that IKEA has made for kitchens. The earlier one, also developed by UK agency Mother doesn't have an exotic locale, but it is highly complex:

This is slightly more TV than web, though it is a little long at 60 seconds. It is designed to work across both media, offering an instant punch, as well as a reward for more careful watching.

While these two ads do indicate a creative departure by IKEA, they build on a long creative process that has been underway previously. This is a kitchen ad from 2011, that has different thematic concerns, but a similar approach:

Even more interesting, however, are some of the more technically involved ads that IKEA has produced.

For example, there is this ad which employs Adobe's Flash coding to provide some interactivity. The code takes some time to load.

To view the video, hover the mouse cursor over the clip, and hold down the left mouse button to play. When the button is released the video freezes. The idea is to allow the viewer to record details, or just take a longer look at the IKEA products.

>http://hnn.bz/IkeaDreamKitchen.png}Ikea dream kitchen}http://www.ikea.com/ms/en_US/rooms_ideas/ckl/default.html

In another video ad, IKEA has taken interactivity one step further by enabling the viewer to choose the viewpoint from which the video is viewed:

Blogs

Once a highlight of life on the web, blogs have tended to retreat into the background as people employ social media to establish a more equal peer-to-peer relationship with followers and friends.

However, IKEA has managed to use both blogs and blog-like content to great effect in recent years.

One of the more outstanding examples of this is what IKEA did with the most recent Federal Australian election, offering two kitchen designs, the ABBUTT and the RUDDIK:

>http://www.ikea.com/ms/en_AU/img/vitality/custom/2014_election/IKEA_election_kitchen_ruddik.jpg}IKEA gets political}http://www.ikea.com/ms/en_AU/campaigns/2014/election.html?cid=au|em|20130826|text|catalogue|3

It is a difficult trick to pull off, making equal fun of both sides of a political divide, but IKEA managed to pull it off.

Other blog activities have included taking well-known Australian design bloggers and getting them involved in the design of IKEA kitchens. In this video of design blogger Katrina Chambers, she shows three ways in which to use IKEA products to create fun kitchens:

IKEA has a more formal company blog presence as well. Even this blog, which has the usual tips and tricks for interior design, offers a form of interactivity. Users register with the site, then upload images of their own rooms and home.

Perhaps the biggest surprise, however, is that the blog isn't run by the usual bored interns, but rather by professional writers who work to develop content.

>http://hnn.bz/ikeaShareSpace.png}The IKEA Share Space Blog}http://www.theshare-space.com/AboutTheBloggers/

Image-sharing

The biggest internet phenomenon over the past three years has been the rise of image-sharing sites such as Houzz and Pinterest. While Pinterest is very general, Houzz is dedicated to sharing exterior and interior images of people's homes. IKEA has a considerable presence on both sites.

Here, for example, is a sub-site to Houzz that is dedicated to Metod kitchen design:

IKEA has a similar presence on Pinterest:

Social media

In general, it could be said that IKEA uses social media with the same caution most businesses have learned to employ. However at times it has broken out and found inventive ways to get value from the format.

In particular, Forsman & Bodenfors were employed to help launch a new IKEA outlet in Malmo, Sweden, and found a creative way to use Facebook. They started up an account for the store's manager, then used this to post photographs of IKEA furniture. The first person to "tag" an item inside each of those photographs would then receive that item for free.

As the video explains this created a great deal of interest and good will, with the "competition" being shared across multiple formats by friends.

Websites

One of the areas of unprecedented success for IKEA (though, in this case, it has been a bit slow to appreciate it) has been the way IKEA has been taken up by a "hacker" community, that uses IKEA furniture as the basis for a great deal of creative DIY.

One of the main sites that provides a focus for this activity is ikeahackers.net, which is run by a Malaysian woman. In 2014 IKEA was silly enough to send the website a "cease and desist" letter regarding the site's use of the IKEA name in its URL. However, within a very short time, IKEA worked to put things right, and eventually ended up supporting the site instead.

As a result the site remains vibrant and interesting, filled with great ideas about how IKEA furniture can be repurposed. One of the great stories from the website is the PAX room, which won its Hack of the Year for 2014:

The IkeaHacker site is only the very tip of a great deal of hacking activity, however. Just about every "life ideas" website and quite a few individual bloggers offer all kinds of advice on repurposing and re-using IKEA components in novel ways.

Super compressor is one of the best sites for this kind of advice:

Analysis

At the moment when it comes to marketing on the internet, most home improvement businesses have their attention firmly fixed on elements such as digital advertising and their own commercial websites, with a little bit of social media thrown in. While these means of promotion might be somewhat effective, they are never really going to be enough.

The approach of most home improvement companies to the internet has two problems with it: a reluctance to really invest in this medium, and a lack of understanding of how to handle the informality of the medium.

What IKEA has really done, and what makes it so effective online, is that it has managed to cast aside some of its corporate persona, and to relate more directly to people. Even when it does make a mistake, as it did with IkeaHackers, it manages to correct its actions quickly enough so that its overall reputation is not too badly affected.

One of HNN's purposes in assembling this portrait of IKEA's online activities was to make a key point about online promotion: unlike many other forms of promotion, including TV and print, promotional content on the internet has a very long life.

It's not forever, but content will remain somewhat effective for four or five years after its initial creation. Items such as the Abbott/Rudd IKEA kitchen ads will date, but they are familiar and engaging.

For home improvement retailers and suppliers, the test of whether they are doing enough with their online presence might simply be this: is there someone in the organisation who knows exactly what is currently out there on the internet and how it is being received?

That would provide a basis for future planning, for knowing what direction that content needs to go in, and how to best build a solid basis of content for the future.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

While retailers as diverse as David Jones and Target have come to pursue online retail avidly, Australian home improvement retailers remain reluctant to invest in this area.

The general sense in the industry is that e-commerce continues to be a little "iffy". At the core of this "iffyness" is a sense that investment in online retail is not going to pay off - or at least not pay off as much as investment in other areas might.

There is certainly support for this view. Technologies have improved, but standards have also risen, so website development and deployment costs remain high. Also, online retail isn't just about the website. There are issues of procurement, supply, picking, shipping, handling returns, and so on. It requires a big investment in attention, time and capital.

Why, though, when faced with these same issues and decisions, is it so much easier for most retailers to say "yes" to e-commerce, while home improvement retailers usually say "maybe" instead? Is it a timing issue? Does it relate to the slow pace of the economic recovery? Housing price concerns?

HNN believes that there are solid reasons for this reluctance. E-commerce really is different for home improvement. The core difference is that the market is not at the same stage of development compared to other forms of retail. This means that in developing e-commerce operations, home improvement retailers face different and more difficult tasks.

In terms of the jargon that describes the spread of new technologies through a market, the task for home improvement retailers is to develop the market from early adopters to include what is called the "early majority".

The market development task for most other retailers is easier. They seek to develop their market from an existing early majority base to include the significant "late majority" market as well.

Market expansion

When we speak of categories such as early adopters, or early and late majorities, we are drawing on the work of Everett M. Rogers, whose book "Diffusion of Innovations", first published in 1962 (with a fifth edition in 2003), remains highly influential. The core diagram that emerged from that work is this one:

>http://hnn.bz/diffusionBasicGraph.png}Diffusion of Innovations graph}http://hnn.bz/diffusionBasicGraph.png

Prof. Rogers suggests that this diagram illustrates the pathway the diffusion of new technologies/ideas takes through a social system. It's worth briefly looking at the five categories outlined in the diagram:

Understanding gaps

This diagram was further developed by the US-based business analyst Geoffrey A. Moore. In the 1990s Mr Moore wrote the first edition of a book entitled "Crossing the Chasm" (CtC), which has gone on to become something of a classic in the tech industry. At the core of CtC is this diagram:

>http://hnn.bz/stdChasmDiag.jpg}Standard crossing chasm diagram}http://hnn.bz/stdChasmDiag.jpg

Though similar to the diagram of Prof. Rogers, the significant change is in the addition of the two gaps, between the early and late majorities (the orange line), and between the early adopters and the early majority (the thick red line).

These gaps represent transitional phases that new technologies need to bridge in order to expand their available markets. Each gap requires its own approach.

Crossing gaps

One common misperception of marketers is that these adoption categories apply to each consumer for everything they do. In fact, a single consumer will likely be in different categories for different retail experiences.

Early majority to late majority

For example, we could say that when it comes to the purchase of music online, this innovation has reached well into the late majority category (hence the sharp reduction in physical stores selling music CDs).

Selling books online, however, is less advanced, and is probably still in the early majority category. Thus there are many consumers who will buy music online, but prefer physical books purchased from bookstores.

The task that faces an online retailer of books in this situation is not to convince this potential market that e-commerce is useful. Instead it is about persuading them that the experience and result of buying books online will come close to that of buying books in a bookstore.

On Amazon and other sites, books can be previewed directly online. A great deal of attention is paid to curation, providing a range of books the shopper can browse through.

This kind of facilitation is what enables online retailers to expand their appeal from the early majority to the late majority. It is about reassurance, familiarity and "safety".

Early adopter to early majority

Consider a very different example: marketing eyeglasses to consumers. Back in 2008, that kind of purchase would be way outside the comfort zone of most online consumers.

The company that worked out how to do this was Warby Parker in the US. The idea that helped that company succeed was actually quite simple: they enabled consumers to try on up to five pairs of glasses for free over five days before making a purchase, or simply returning all the frames. The company paid for everything, including the return postage.

One reason why this worked, of course, is that as an online store, Warby Parker could offer a much wider range of eyeglass frames than any optometrist could. It's simply quite difficult to not find something that's suitable among these choices.

The marketing phrase we would use to describe what happened here is "Warby Parker took online eyeglass buying into the mainstream". But how, exactly?

In part it is about the convenience, being able to "live with" a choice for a few days before making a decision. At the heart of what Warby Parker did, however, was trust, and the establishment of a relationship.

This is a theme that is echoed in CtC. It appears initially in the foreword to the book, written by Regis McKenna. Mr McKenna was one of the leaders of marketing in Silicon Valley. For example, his agency was the one to which the fledgling Apple Computer turned for advice when it first began. He writes:

If we step back from this chasm problem, we can see it as an instance of the larger problem of how the marketplace can cope with change in general. For both the customer and the vendor, continually changing products and services challenge their institution's ability to absorb and make use of the new elements. What can marketing do to buffer these shocks?

Fundamentally, marketing must refocus away from selling product and toward creating relationship. Relationship buffers the shock of change.

It is certainly a technique which Apple has used successfully.

Relationship building

If building relationships is the task, how do home improvement retailers go about achieving this online?

Website

One place to start is fairly evidently with the website itself. An example of a website that goes out of its way to foster relationships is that of Home Depot. A typical product webpage includes the following:

The review section is especially prominent, headlined with these graphics:

>http://hnn.bz/HomeDepotReviewSection.png}Review section of Home Depot product listing}http://hnn.bz/HomeDepotReviewSection.png

Delivery

As it turns out, for home improvement e-commerce, managing delivery options is one of the keys to building customer relationships, and getting customers to commit to buying.

HNN's recent article on the talk by the senior vice-president of online for Home Depot, Kevin Hofmann, at the Goldman Sachs Sixth Annual dotCommerce Day describes some of how Home Depot views delivery:

Home Depot goes far beyond just providing a cheap option for getting product to customers' homes. It provides comprehensive services that guarantee a two-hour delivery window, and includes early delivery on weekends.

As Mr Hofmann points out, these services do come at a cost to the customer, but they are quite willing to pay this cost, as they benefit from the convenience.

Structural problems

Lurking underneath these considerations there is, however, a somewhat larger problem, which applies to the bigger retailers in the home improvement industry. It is somewhat marked that there appears to be very little crossover in terms of technology usage between the different divisions of Woolworths, Wesfarmers and Metcash.

For example, the e-commerce systems that have been developed for supermarkets by Woolworths and the Coles division of Wesfarmers are quite advanced, including features such as GPS-based tracking of orders for customers.

One would think that, as each of these conglomerates have multiple retail divisions, each of which has moved or will shortly move into e-commerce, that it would make sense for them to have a dedicated technology/online division to deliver these services. There would certainly also be advantages in featuring products from other divisions on each division's website.

Conclusion

The e-commerce challenge, even in this brief outline, can be seen to be a tough one. It really does make sense that retailers which do not have either the capital, the personnel resources, or the executive expertise might pull back from e-commerce, or fall back on building a "minimum" we presence.

However, what should equally be borne in mind is that e-commerce is something of a two-way street. That is to say that in the development of the relationship with customers needed to make e-commerce work, not only e-commerce benefits, but the entire retail organisation as well.

It is HNN's belief that it was similar conclusion which led Home Depot to pursue its breakaway strategy of seeking to expand only online, at the expense of its expansion of physical floorspace.

You could almost say that, regarded in this light, e-commerce is not so much an objective to be achieved, but more a natural outcome of the work to transform from the transactional model of the 20th Century to the relational model of the 21st.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

Masters has come in for a lot of criticism over the past year, much of it deserved. Now that it stands to lose its primary corporate champion, outgoing Woolworths CEO Grant O'Brien, its fate seems to hang in the balance.

Of course, part of what has happened is that Woolworths has sneezed, and Masters has come down with pneumonia. Paul Simons, who led Woolworths from 1974 to 1994, is reported by Richard Gluyas writing in The Australian as describing Woolworths' fall from grace like this:

I was in the merchant navy and it's a bit like watching a sinking ship. But the situation is retrievable. After all, they're not losing money; they're just losing respect.

Mr Simons sees a number of cultural failings in the modern Woolworths, including a lack of contact with market realities, and the huge pay disparity between executives and line workers.

That said, there is a sense among investment analysts and others that Woolworths will manage to recover its previous status as a good company and a good investment. As Jemima Whyte and Sue Mitchell writing in the Australian Financial Review put it:

Investors are confident Woolies will restore its blue-chip status, and although many believe it represents value, at the moment they are waiting to see what a new CEO will do.

The article quotes Alphinity Investment Management fund manager Bruce Smith as saying:

It's the biggest operator in a not very competitive industry that's essential for people - the potential is still there for it to be a massively profitable company again.

In an earlier AFR article, Sue Mitchell quotes an uncharacteristically upbeat assessment of Woolworth's future by Bank of America Merrill Lynch senior analyst David Errington. He has changed his price target for the company from $24 to $40. Mr Errington explains this move:

The basis of the change is our increased confidence toward Woolworths changing its strategic direction and management structure. The company has significant upside - it needs to find the right strategy.

The real Masters story

While Masters is being portrayed in much of the general press as a big mistake that was hopeless from the start, it is a much more complex story than that. Most commentators are looking for the sources of failure in the wrong places.

While there are a range of reasons and causes as to why Masters has not done well, there is one, single factor that has contributed more than any other.

That factor is the home improvement retailer's obsession with scale. In particular scaling up its store numbers as fast as possible.

It seems a somewhat evident fact that if you can't do something well in half a dozen stores, expanding that to 60 stores is not going to improve the situation.

Scale was used by Woolworths in a number of ways in its business planning. It was necessary, in the main, so as to provide some force behind Masters' competition with rival home improvement chain Bunnings.

Scale was also used to excuse current failings with future possibilities. For example, at one results announcement an investment analyst criticised Masters' very poor advertising for the past months, especially around events such as Father's Day.

The answer Woolworths gave was that advertising would be better developed when Masters achieved the scale necessary to generate a return on ads.

The task, though, was not to sit around waiting until another two dozen stores were built. The task was to develop advertising that would work in the current context of the business, so as to make it successful.

This is still a "live" issue. If Masters is to continue in any form into the future, it is a key issue it must tackle. Until it does, it will not be able to make progress.

But more about that later. Let's look at what is happening immediately with Masters. There are the usual three choices facing any incoming CEO: shut it down/sell it, shrink it down/combine it, or continue with its development.

First, to understand those options, we need to get a clear view of Masters as it is today, and how it developed.

What Masters got right

Whatever you think, there were a few things that Masters did get right.

Timing

The primary thing that Masters did get right was its market timing. There has been a steady and ongoing growth in the retail market for home improvement products.

Many commentators look at the turnover, earnings before interest and taxation (EBIT), and profit numbers that Bunnings - Masters' main rival in the Australian market - has been able to produce, and decide that Masters has had little if any impact on the market.

That might not be the case. The sales that Masters has reported have had to come from somewhere, and that "somewhere" is most likely from Bunnings' market share. It's just that the overall growth in the market concealed any impact (and actually rendered it irrelevant).

Partnerships

The potential of the partnership with US-based big-box retailer Lowe's Home Improvement could have been very good for the company. Lowe's is renowned - in its most recent incarnation - for high levels of customer service, a savvy approach to the profession (trade) market, and strong supply-chain resources.

Market concept

While this remains an item of dispute, the idea of approaching the Australian home improvement market with stores that featured a higher amenity level made sense. This could have provided a telling market differentiation from Bunnings.

What Masters got wrong

We'll touch on the highlights.

Confusing supermarkets and home improvement

Home improvement retail was not seen simply as an end in itself - a profitable business that it made sense to get into. Instead, it became an element in the "turf war" between Woolworths and Wesfarmers.

Thinking real estate was an answer

In line with the above point, Woolworths equated building more stores in the best possible position with success. It seemed to confuse the goals and ambitions that might work for its established supermarket business, with those required for a fledgling home improvement business.

Under-investment in staff

The best hint as to how under-invested in staff Masters has been at times is revealed in a legal case published on Austlii, Joseph Ciampa v Master Home Improvements (WorkCover) [2015] VMC 3 (17 February 2015).

HNN makes no comment whatsoever on the case itself, or the nature of the case. The sole item of interest is what it seems to reveal about staffing issues at Masters stores in late 2013 and early 2014.

The summary of the case as provided by Austlii is as follows:

Psychiatric injury alleged to have arisen out of or in course of employment as a result of being; "overworked, bullied and harassed by management" - causation -

employer conducted investigations and suspended worker as a consequence of two incidents on 10 September 2013 and 9 January 2014 - "management action" - s 82 (2A) relied on - management action taken on reasonable grounds and in a reasonable manner. Claim dismissed.

The claim was dismissed, which means Masters Home Improvement was not held liable.

This is one quote from that case:

Mr Ciampa gave evidence that when he became manager of the garden department in 2013 he was contracted to work 40 hours per week, Sunday to Thursday, but "did way more" because of the volume of work as the garden department was the biggest part of the store and accounted for 40% of its turnover. He said that by September 2013, he was run down and felt exhausted because in the previous eight weeks he was required to manage not only his department consisting of 11 staff but also two other departments and he was preparing for the Spring launch.

Elsewhere, Mr Ciampa goes into further details of his employment:

Mr Ciampa gave evidence that he continued to be extremely busy, regularly worked through lunch and attended on his days off and continued to manage his 11 team members. He also said that he was required to open the store at 6 a.m. two to three days a week or earlier if tradesmen were attending. He said it was not unusual for him to still be at work at 5.30 p.m. or 7 p.m. on occasions.

Commenting on the evidence presented in the case, the presiding magistrate, S. Garnett, did indicate that he had difficulty in accepting all of it. However, he also indicated he found Mr Ciampa credible as regards the evidence relating to staffing issues:

I do accept the evidence given by Mr Ciampa that he was under stress in his role as department manager due to staffing issues. I accept that he was frustrated by the lack of support given to him when he complained of being short staffed and became angry when his requests for assistance were not met by his employer. I accept that he reported his frustrations to management as confirmed by the evidence given by Ms Dagastine and Ms Paras.

The period described is one before Mr Tyson became the CEO of Masters, but it does describe some of the pressures that Masters staff found themselves faced with. It also shows a surprising degree of dedication by staff such as Mr Ciampa, and a real identification with the retailer.

How general this possible understaffing might have been is impossible to tell, nor how long it might have lasted. For a fledgling retail enterprise that wasn't growing all that fast, however, it's the kind of factor that could severely inhibit further growth and market acceptance.

Poor management

This began with relying on management from the US partner Lowe's. As was revealed by a comment by a senior Masters executive, some management projections were based on US models and ignored factors such as having Christmas occur in the middle of the Southern Hemisphere summer.

At the recent Woolworths strategy day in May 2015, the current Masters CEO, Matt Tyson, revealed a bit more about this problem. Asked to describe some of the new talent he had brought into Masters, he described only one position, someone who knew how to package up an attractive offer for customers. As Mr Tyson remarked, that wasn't something Lowe's really had expertise in, as their offer has been established for a decade or more.

One of HNN's staff members remembers conducting an interview with a very senior Masters executive in 2012. One of the questions asked was how the retailer would counter IKEA as a competitor.

The executive just laughed, and indicated this was ridiculous: IKEA wasn't a competitor. This seemed to indicate a real lack of market awareness at the senior level. Masters today does formally acknowledge IKEA as a competitor.

The future of Masters

There are three basic options Woolworths can follow as regards Masters.

Shut/sell

While this is the option that much of the general press seems to think is likely, on a more thorough analysis it seems the least provident. In either case, the company would not realise much value on the residual assets in the current market.

That said, over a year ago HNN mentioned that it seemed possible Mitre 10 and Woolworths would end up combining forces. That's a thought that's now been picked up by others, including the AFR. As an item in its "StreetTalk" column of 18 June 2015 states:

The combined entity would also provide greater buying power with suppliers and provide critical mass. Metcash has about 5.1 per cent of the market and Masters about 8.1 per cent. Bringing the businesses together could create a serious rival for Bunnings and the merged group could concentrate on one brand.

Shrink/combine

An incoming CEO could pick 10 or 12 of the better-performing Masters stores, and then move these over to the other home improvement operation of Woolworths, the Home Timber and Hardware Group. This would still leave a large amount of assets to be disposed, but would help Woolworths benefit from both the tangible and intangible assets.

Continue development

This remains the most likely option for Woolworths to follow with Masters. However, if it is going to continue, it will need to change the business.

After the Woolworths strategy day, HNN commented that there were at least six stores in the existing Masters network that needed to be shut down. If Woolworths really set about changing the business, it should consider closing 10 to 12 stores - basically any store that cannot reach its full potential by the end of calendar 2017.

Such a scaling back would have a number of positive outcomes. It would take stores which will continue to be drain on resources off the books. It would also make available a deeper and perhaps improved pool of staff to take up positions at retail locations.

Of course, this means abandoning the drive towards scale - at least for now. Woolworths should require Masters to reach breakeven with a limited network of less than 60 stores. Until it achieves that, future expansion plans should be put on hold.

The bigger picture

We seem to be reaching a moment when the forces that drive retail may be changing. This isn't the first time that scale has come up as something that doesn't really convey much of an advantage.

For example, in comparing the two major home improvement chains in the US, Home Depot and Lowe's, the investment website Seeking Alpha found that Home Depot had better numbers, but a lower share price than Lowe's based on price to earnings ratios. In commenting on why Lowe's trails Home Depot in areas such as gross margin, Seeking Alpha commented:

Again, this difference is most likely related to online sales and inventory turns. It's unlikely that scale can solve for this problem. Typically, scale would help with gross margins as the larger purchaser would receive some form of bulk discount.

Over the past fifteen years or so, scale has been a key element for retailers seeking to reduce prices. Much of that has to do, indirectly, with the operations of the supply chains that link Australian markets with low product cost regions, such as China. As those production sources continue to grow and evolve, scale will begin to have less of an effect on wholesale costs.

It's possible that such a change will alter the way the Australian home improvement market works. In that case we may see competition shift from direct price comparisons to more complex areas.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Earlier this year Veronique Laury, the CEO of European home improvement big box conglomerate Kingfisher, introduced some new ideas to the industry. She did so most clearly in her presentation at Kingfisher's report on its performance for 2014.

One of the most interesting parts of what she had to say occurred in her discussion of what she saw as the market forces at work that would affect the home improvement industry in the future. She presented a list of seven main points:

One of the unique features of this list, and the way in which Ms Laury presented it, is that all of these points are less about "disruption" than they are about new cohesions.

For the most part, we tend to see "modernity" and "modern changes" as being alienating, and tending towards some kind of social dysfunction. It's the teenager who would rather play video games than come to the table for dinner, or the twenty-somethings glued to their mobile phone screens at a social event.

Ms Laury's is a more mature and experienced view, and it is based on both statistical and personal research she has conducted. At the time she delivered her remarks, she had recently returned from a tour of much of the "Kingfisher World", spread out across Western and Middle Europe.

It is worthwhile, as we all begin to engage with the task of looking at forecasts for the next 12 months, to think about each of these points, and consider how they will affect the home improvement retail market in Australia over the next several years.

Convergence of customer needs

If you walk into a Bunnings, a Masters, a Home Depot, a Homebase or a B&Q store anywhere in the world, you are going to have a surprising similar experience. Many, if not most of the brands of goods on display will be familiar, their method of display will be similar, and even the pricing, allowing for currency fluctuations, will seem understandable.

Sizes of things, and specific technical aspects to building materials will differ, of course, and you won't find that many snow-blowers for sale in Darwin, but there is a surprising degree of similarity.

One consequence of this is that people are becoming increasingly cosmopolitan, without even realising this. Customers accept goods and designs from all over the world without being unduly concerned about their origins.

This has brought about a number of opportunities and some difficulties that go with them. For example, getting to design a product for a global community is a fantastic opportunity - buy how do you really go about doing it?

The answer seems to reside, typically, in discovering what is most fundamental to some kind of human interaction, then working out ways to tap into those fundamentals. IKEA furniture, for example, has some aesthetic characteristics, but is very appealing on a practical level. It constant addresses key issues such as space, comfort and ease of use.

The job of the retailer when faced with products of this nature has some difficulties. The retail experience becomes something that is as much about contextualisation as anything else, presenting products to customers in a way that they can make sense of them.

Demographic changes

The major demographic changes are taking place at either end of the age spectrum. Younger people, many of whom have lived for longer with their parents than previous generations, are beginning to form households, just as older people are seeking ways to evolve their lives so that they can grow old at home.

Population pyramids which map these changes are a good way to grasp what is going on:

>http://hnn.bz/popPyramidAust.png}Australian population pyramids} http://hnn.bz/popPyramidAust.png

Further details at:

In these diagrams you can clearly see the progress of the baby boomer generation as it ages.

One of the best references to this kind of demographic change, complete with animated graphs, is found at the Australian Bureau of Statistics (ABS):

One of the overwhelming trends to emerge is the increase in single-person households, which occurs at both ends of the spectrum. As women live longer on average, there is set to be an increase in elderly women living alone.

At the same time, as younger people delay marriage until later in life, the percentage of young people living alone is also set to increase.

Urbanisation

The attraction of the inner-urban life continues to increase for young people. Just as previous generations fled the cramped and noisy conditions of the inner-city for the space and freedom of suburbs, so the younger generation are migrating back, in search of the mysterious energy of cities.

As such, this trend intersects with the demographic trends outlined above, and can be represented in a similar manner.

>http://www.abs.gov.au/Ausstats/abs@.nsf/a866861f12e106e0ca256a38002791fa/151aa7593b394934ca2573210018da4a/Body/0.38A8!OpenElement&FieldElemFormat=gif}3235.0 - Population by Age and Sex, Regions of Australia, 2013}http://www.abs.gov.au/Ausstats/abs@.nsf/mf/3235.0

In contrast to the population numbers pyramid, the age/geography distribution bulges towards the bottom in term of those who live in the capital cities.

Internet penetration

According to the ABS, in 2012/13 83% of Australian households had access to the internet, up from 79% in 2010/11. Around 77% of all households had access via a broadband connection. Around 80% made some use of the internet everyday.

Households with internet access, by state/territory, 2010/11 and 2012/13

>http://www.abs.gov.au/ausstats/abs@.nsf/95553f4ed9b60a374a2568030012e707/d0dd505f12749281ca257c89000e3f5e/Body/0.119C!OpenElement&FieldElemFormat=gif}ABS data on internet access}http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/8146.0Chapter12012-13

While there is a bit of an age drop in internet usage, it is surprisingly consistent up to people aged 55 years.

Internet users, by age group(a), 2012-13

>http://www.abs.gov.au/ausstats/abs@.nsf/95553f4ed9b60a374a2568030012e707/de28ab7779067aacca257c89000e3f98/Body/0.388!OpenElement&FieldElemFormat=gif}Internet usage by age}http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/8146.0Chapter32012-13

What is perhaps most surprising about these statistics is the degree to which internet usage remains confined to day-to-day browsing, buying, researching and networking.

Increasing energy costs

For many people all around the world, including Australia, the rising cost of energy has become a major concern. One expression of this has been the take up of solar energy panels for households.

>http://hnn.bz/solarEngeryAdoptionAust.png}Solar energy adoption in Australia}http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/4602.0.55.001Media%20Release1Mar%202014?opendocument&tabname=Summary&prodno=4602.0.55.001&issue=Mar%202014&num=&view=

Equally important are trends towards energy conservation through insulation and intelligent construction used for buildings.

Another coming trend in this area is Home Energy Management Systems. These are intelligent, programmable systems that can do everything from shutting the blinds automatically on a hot day, to communicating with energy providers so as to coordinate energy usage with energy availability.

>http://reneweconomy.com.au/wp-content/uploads/2015/05/Eddy-energy-tool-590x393.jpg}CSIRO has developed energy management systems}http://reneweconomy.com.au/2015/csiro-rolls-out-remote-energy-monitoring-technology-20772

Increasing regulatory requirements

Australia's Housing Industry Association (HIA) highlighted increasing regulatory requirements as one factor contributing to insolvency in the construction industry. The discussion forms part of the HIA's submission to the Australian Senate Economic References Committee's Inquiry into Insolvency in the Construction Industry.

In part the submission states:

2.7 Similarly there is a large red tape and regulation burden imposed on the industry.

2.8 The average small business builder/principal contractor spends significant hours each week attending to paperwork and compliance obligations arising from regulatory requirements including business, income and payroll tax compliance, training regulations that apply to apprentice employees, workplace health and safety management, occupational licensing and state-based home building laws and requirements.

The HIA submission also cites a document from the OECD:

in general the adverse impact of regulations on SMEs can be particularly harmful. This is because SMEs are less equipped to deal with problems arising from regulations since they have less capacity than larger firms to navigate through the complexities of regulatory and bureaucratic networks. SMEs are more likely to be hampered by regulations because their strength stems from their flexibility...

Furthermore, due to its "fixed cost" nature, the cost burden of regulation is larger for small firms than for larger firms: i.e. administrative costs entailed in compliance have a disproportionate effect on small firms. In many cases compliance is based on an initial fixed, standard cost for all firms, irrespective of size, followed by a sliding scale, related to increasing size. This means that average compliance costs per employee are much higher for small firms.

Sharing

The rise of the sharing economy is something that most can no longer ignore. Services such as Uber for replacing taxis, and Air BnB for replacing hotels have entered the mainstream, and become profitable, well-run businesses.

The main feature of the sharing economy that many commentators have missed is that it is not just about people who are willing to share what they have with others out of a responsible sense of community. It is just as much about individuals really understanding what is meant by asset utilisation.

Cars and homes, for example, are two of the most expensive purchases that anyone makes. Both Uber and Air BnB offer the means to better utilise these assets by on-selling the excess capacity over personal needs they represent.

The flip side of that is better capital utilisatation by customers. Instead of having to spend big on a hotel room for the entire nine hours it will be used, seven of them asleep, visitors can rent a couch or a tiny bedroom for the night at a fraction of the cost.

And Uber has demonstrated that the regulatory requirements around taxi services are largely useless, and do little but drive up the costs of getting around.

The issue for retailers, of course, is that they tend to make some of their income from the inefficiency of asset utilisation. Or at least they think they do. In fact, the profits to be made from better asset utilisation are quite high.

A good example of exploring better asset utilisation services for customers comes from the European power tool company Hilti. To quote from a paper by the Boston Consulting Group, entitled "Using Business Model Innovation to Reinvent the Core":

Hilti, whose core business is tool manufacturing, picked up on these unaddressed pain points. In response, it shifted from selling tools to selling a tool management service aimed at alleviating the burden on contractors so they could focus on getting the job done. Hilti now leases tools to contractors, guarantees availability of the right tool at the right time, and automatically upgrades customer fleets with the latest equipment. It also provides theft insurance. Its service is accompanied by a new revenue and operating model. Many contractors, who in the past had purchased a small share of their tools from each competitor, dramatically increased their share of business with Hilti in order to obtain the full benefits of the company's tool-management service.

Hilti's success depended on possessing a deep understanding of how the customer uses tools and what causes them frustration. Based on this understanding, the company expanded its view of the role it could play in delivering value to customers. This was a shift from a purely product-based mind-set to one that also included supporting services and solutions.

Boston Consulting Group

What this discussion also introduces is one of the major challenges in making the sharing economy work: de-scaling. The Hilti model works because it is designed to operate at scale - in fact, it solves some major problems created by scale.

But for the sharing economy to work, it's necessary to find ways of making models that work well at scale, work just as well in micro-situations. These are precisely the problems that both Uber and Air BnB solve.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Metcash, Australia's third force in supermarket retail - and arguably, through Mitre 10, the second force in home improvement retail - is set to report its 2014/15 results on 15 June 2015.

After reporting half-year results in early December 2014, where it indicated its turnaround strategy would take 18 months instead of the originally forecast 12 months, the Metcash share price plummeted. Currently, the company's shares are worth about half their average value in 2014.

Consequently, the upcoming full-year report will be closely watched. One crucial element of the reporting will be whether the company has managed to reach its group earnings before interest and taxation (EBIT) guidance of between $315 million and $330 million. Missing by reporting EBIT below $300 million would have strong market consequences.

Should another share price fall similar to that in December 2014 occur, the company could become a viable takeover target. In an apparent effort to fend off those concerns, and to provide needed operating and investment capital, Metcash has begun to investigate the divestment of some of its businesses.

Key questions

There are a number of key questions that need to be answered to understand what is happening with Metcash, and the consequences for Mitre 10.

Metcash's problems break down into two groups: the structural difficulties in the Metcash Food and Grocery (MFG) business, and problems with the change program initiated in March 2014 to overcome those difficulties.

Structural problems

MFG is built on a model similar to that of Mitre 10: a loose alliance of independent stores operating mainly under the IGA banner.

In terms of background issues, IGA faces competition from a wide range of supermarkets. Coles and Woolworths are facing off in a price/quality competition, and discount chain Aldi continues to undercut the market in key areas. IGA has proved to be an easy target in these circumstances.

The company structure makes it difficult for it to respond to severe competitive pressures such as these.

Transformational problems

Metcash CEO Ian Morrice announced an ambitious transformation scheme in March of 2014. HNN summarised the details of the scheme at the time of its release in this diagram:

>http://hnn.bz/metcashChart.png}Metcash plan from 2014}http://hnn.bz/metcashChart.png

HNN suggested at the time of its release that it would seem more likely this scheme would require two years to be realised, rather than the single year Metcash had projected.

Six months after the launch of the scheme, while presenting the results for the first half of 2014/15, Mr Morrice indicated that the scheme would take 18 months, rather than 12 to complete. This and other disappointing news saw the Metcash share price fall steeply.

There are also a number of strategic problems with the plan itself. As HNN suggested in March 2014:

Taken at face value as a recovery vehicle for the struggling grocery, liquor, convenience store, home improvement and automotive supplies retail conglomerate, it is unlikely to work. Using six "growth levers" delivered in three stages, the end result would be a much better company, but one which still trailed Woolworths and Coles.

The plan might deliver a Metcash that is competitive with the Woolworths and Coles of 2013, but it seems not to account for current and future developments.

The current situation

Writing in the Australian Financial Review on 1 June 2015, Fairfax business columnist Adele Ferguson has provided an overview of the current status of Metcash. Commenting on the transformation plan Metcash began in 2014, Ms Ferguson writes:

The Australian Financial Review spoke to a range of IGA supermarkets. One of the bigger players had seen some positive results, two smaller operators were confident that the strategy would boost sales but a few others were worried about their bottom line.

She quotes CLSA analyst David Thomas as saying in a report:

We believe the transformation programme is too little, too late and that the independent chains will struggle to keep pace with competitors.

David Errington, a senior analyst with Merrill Lynch, has indicated that the overall margin at IGA declined in 2015. Ms Ferguson also provides some results from a CLSA survey that indicates IGA stores have lost some ground in terms of customer perception, but gained ground for their range and quality of fresh food, as well as location.

Divestment

In May 2015 Metcash employed CitiGroup to investigate the viability of the divestment of its automotive division, which is closely tied to Mitre 10. Such a divestment would provide the company with more operating capital, and guard against a sharp share price fall, which could make Metcash an easy target for a takeover.

The exploration of divestment has included seeking responses from private equity firms, as well as considering a separate listing of the operations on the ASX.

One of the companies that has expressed interest in Metcash's automotive assets is the Burson Group. Burson listed on the ASX in April 2015 at an opening price of $1.82 per share. Through May 2015 it has sold at an average price above $3.00 per share.

With earnings of an estimated $250 million for FY 2014/15, the automotive operations could raise as much as $450 million in an initial public offering, Credit Suisse has predicted. Metcash's automotive brands include Autobarn, Autopro, ABS and Midas.

Talks with private equity firms are said to have been used to test the waters about a potential takeover of all of Metcash by private equity. The rumours indicate that interest in such a market buyout would be quite weak.

While there have been some rumours that divestment of Mitre 10 would also be a possibility, it seems likely these can be discounted at this stage.

Mitre 10 performance

Metcash's hardware operations have managed to continue to produce decent growth, despite what some would see as under investment by the parent company. For the first half of 2014/15 Mitre 10 reported overall revenue growth of 16%, built on like-for-like (comparable) store sales growth of 3.9%.

Growth in earnings before interest and taxation (EBIT) was lower, at 5.7% for the combined hardware/automotive operations.

Growth has been driven by clever marketing, and the pursuit of the "tradie" market, while effectively remaining in-touch with the consumer market as well.

However, it has been evident for some time that Mitre 10 is operating under certain restraints. The MFG business is sucking up any spare capital, and Mitre 10 has not been able to pursue some market growth strategies that would have benefited its operations in the medium term.

For example, while its overall advertising has been good, it would seem to have had some tight restrictions on seasonal promotions, such as Father's Day.

What to expect

It is worth pointing out that much of the criticism directed at the board of Woolworths for that company's less successful operations could apply to the board of Metcash as well. Of the seven directors outside of Mr Morrice himself, only one - Mick McMahon - has direct retail experience. This would seem to preclude much in the way of board-driven initiatives.

(Mr Mahon is seen as the person responsible for turning around Skilled Group from 2010 to 2014. Before that he worked with Coles Express immediately prior to its acquisition by Wesfarmers.)

To summarise Metcash's current condition, it has undertaken a slow and expensive transformation process to head towards a goal of doubtful value. Either it should have set more modest goals that could be fully achieved within two years at most, or it should have set itself higher goals that would be worth the effort it is currently exerting.

Such goals might include a re-envisioning of what a neighbourhood grocery store might offer. As an example, neighbourhood stores such as the 7-Eleven franchise in the US see themselves now as being as much about service provision (in areas such as banking) as they do the sale of physical goods.

As for Mitre 10 itself, HNN remains sceptical that it has found the best place for itself in the market as part of Metcash. While we accept that Metcash is unlikely to divest itself of this division in 2015/16, it seems possible that it may go ahead with such a divestment in 2016/17.

By that time Metcash is likely to need further capital, either to continue its current project, or to help launch itself in a new strategic direction.

Mitre 10 has a very good executive team, understands marketing, and has worked hard to establish its niche in the market. It would reward more active investment.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Respect was one of the more surprising outcomes from the Woolworths Investor Day briefing held on 6 May 2015. Specifically, increased respect for the managing director of Woolworths, Grant O'Brien.

The O'Brien who emerged at the Investor Day reminded one of a boxer who has been knocked down early in the fourth round, but has come back, and is determined to fight his corner. The biggest surprise that gradually emerged throughout the course of that day was that Mr O'Brien was determined to fight clean.

There were no excuses offered. No external or formerly internal parties were blamed for what had happened at the company. Mr O'Brien, in fact, went out of his way to ensure that the new team he had appointed to roles at the supermarkets and Big W were not held responsible for the past. That was a burden only he himself would accept. And this was not done with any bravado, but rather with a set determination.

O'Brien fights back

In the announcement of results for the first half of Woolworths' 2014/15 financial year, Mr O'Brien revealed several slightly shocking changes of direction. The previous head of supermarkets, Tjeerd Jegen, had resigned from the company.

Targets were lowered for the supermarket division, as the company sought to find funds to reinvest in that business. The former head of the liquor division, Brad Banducci, along with the head of Woolworths' New Zealand supermarkets, Dave Chambers, would replace Mr Jegen. Further details, we were told, would be upcoming at the announced Strategy Day.

What resulted was an event that ran to nearly six and a half hours in its recorded version. The leaders of the supermarket, Big W, liquor and, of course, home improvement divisions all had their time on stage, as well as some of the people responsible for the back end operations.

Home improvement

The managing director of Masters Home Improvement (Masters), Matt Tyson, did reveal quite a lot about the future plans for Masters, and provided some insights into its past as well.

At the heart of the plans for Masters is what the company is calling "Masters 2.0", the roll-out of the new format store that has been pioneered at Rouse Hill and elsewhere. The promise of the new format is that it will deliver the sales per square metre and the margins needed to lift Masters into profitability - though that is more than two years away.

Elsewhere HNN has probed more deeply into what he had to say. We have summarised this in a brief article that mentions the highlights, and we've also provided a PDF version of a longer analysis readers can download.

The results for Woolworths' third quarter 2014/15, which were part of the event, are covered in a separate article.

One of the core issues that did emerge was that, while at the prior announcement for the half-year 2014/15 results Mr O'Brien suggested Masters was somewhat sequestered from the rest of the company, this is evidently no longer the case.

Investment in Masters has been cut in half over the next three years, from $1.2 billion to $600 million. The allocation of capital expenditure (capex) has increased sharply for the supermarkets and liquor business, from the former 50% of the total to as much as 67%.

Not that Woolworths is backing away from Masters. David Errington, the senior retail analyst at Merrill Lynch in Australia, played a consistent role throughout the day of presenting a very strong case that Woolworths needed to focus more on shareholder value. In doing so, through intelligent and well-researched questioning, he helped to clarify a wide range of issues.

At the very end of the day, Mr Errington presented the case for closing Masters:

Can you cut Masters? What would it take for you to say "Enough's enough". It's costing the company too much. It's costing too big a distraction. And the same for Big W.... You have some outstanding businesses, but you are being brought down because of this millstone around your neck called "Masters". And all due respect to Matt [Tyson] and the team, but it has been tough - that's polite. And Big W has been tough. Why don't you just cut them? Because in terms of generating returns to shareholders, that would give you an enormous kick-up to shareholder return, if you were to make those tough decisions.

Mr O'Brien replied:

We are committed to Masters. That doesn't mean that we are committed no matter what, but that's not what we've said, either. We said very clearly in July and August [2014] that we reviewed the business, and that there were four key things that we were going to work on that would provide the level of sales intensity in the business that we needed to get the line of sight to profit.

Now, Matt [Tyson] has been really careful today, and rightly so, and I'm not going to contradict what he said, but what we've seen in the new stores is really encouraging. I'm not going to do anything over the course of the next while until we see the results of that....

It is a really big market, whether you measure it at $30 billion or $45 billion, it is a very profitable market, it is a fast-growing market, all of those things are attractive, and it is therefore a genuine growth engine for us. But we are not going to blindly continue with something that doesn't work. We will have 22% of our fleet [the Masters stores] by the end of this financial year in the new format.... We want to see the results of that.

I'm committed to it. Not just me, we are committed to it. We think Matt and his team are doing a fantastic job. It's tough. There is a really big competitor out there that is making it hard. But it was never about knocking them out. This is a very fragmented business that we have the opportunity to consolidate. I think with the new format it is more focused on that than it has been before.

Deeper difficulties

While a number of likely culprits - such as low rates of supermarket store refurbishments - were mentioned, it seems likely that Woolworths' problems are quite deep-seated. In the words of Stephen Bartholomeusz, writing in the Business Spectator:

When a supermarket operator as sophisticated as Woolworths admits to significant issues of price-competitiveness, on-shelf availability and customer service and says it will take three years and a very substantial reinvestment in price to turn things around, it is an admission of fundamental and quite basic failings.

Most of these substantial difficulties seem to relate to Woolworths really understanding what becoming more customer-centric might mean. Take, for example, this chart which appeared on one of the Woolworths slides:

>http://hnn.bz/WoolworthsStrategyFoodSpend.png}Woolworths slide 21: Customer spend}http://hnn.bz/WoolworthsStrategyFoodSpend.png

The issue with this slide is that it appears Woolworths believes this is a description of its customer base. It isn't. It's actually a rough description of ranging segments.

Customer segments today are far more nuanced that this diagram illustrates. To give one example, there is an interesting study out of the Queensland University of Technology, published in 2012 entitled, "Toward a shopping typology of primary male grocery shoppers".

This suggests that male grocery shoppers can be divided into four main segments: Convenience/busy, Equitable, Apathetic and Economic/budget. The first group, it turns out, are high-margin shoppers, as they tend not to price check, and are most concerned with rapidity of shopping, which they usually perform at the end of the business day.

The reality revealed by this and other studies is that the categories of budget, mainstream and premium mentioned in the diagram no longer typify individuals, they typify the passing moods and attitudes of all shoppers.

The fear is that Mr O'Brien will not be able to drive changes deep enough into the big corporation that Woolworths has become. The changes mentioned so far seem to be about taking the existing corporate structure and redirecting it towards enhanced goals.

The real task may involve making changes to the corporate structure itself. This may prove difficult.

The remaining question: what really happened?

The question of exactly what caused Mr O'Brien to embark on his own private study of Woolworths at the start of this calendar year and so uncover many of these problems remains something of a mystery.

Mr O'Brien attempted to provide answers to this question three times during the Strategy Day: first in his opening remarks, then when indirectly responding to an analyst's question, and, finally, during the question session at the very end of the day.

The one detail that Mr O'Brien did let slip was that, at least when it came to looking at the out-of-stock performance numbers, he was seeing those metrics for one particular time of the day.

What this might indicate was that somehow the metrics he was viewing had been to some extent (to use an American expression) "juiced". That is, that some managers, even potentially quite senior managers, might have been managing their part of the company so that they delivered good statistics, which hid an underlying erosion of other key aspects of the business.

For example, if the metrics on stocking were set to be measured at 2pm every day, the stocking levels would assure that measure was met, even though regular out-of-stocks might occur as early as 6pm later in the day.

If that were the case - and HNN has no verifiable information that it is, this is purely inference and speculation - no doubt whoever was responsible would have been sanctioned in some way by the company.

A tough fight, but a good one

As we said at the beginning, while HNN might continue to have some concerns about the Masters business, and Woolworths overall, this was, without doubt, a really impressive performance by Mr O'Brien.

HNN would not be willing to say that Mr O'Brien won the day with the kind of knock-out punch he might have wanted. But we would say that, in the end, he might just have scraped home on points.

The full report

To read the full report on the Masters Home Improvement part of the Investor Day, please click on the image or link below to download the HNN Special Report PDF.

>http://hnn.bz/HNN-WOW-Masters-InvDay-2015.jpg}Link to report PDF}http://hnn.bz:8080/fullView?articleIndex=0313925276590

Download link

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

In the past, bigger shows were always more exciting. There is no doubt that the National Hardware Show (NHS) in Las Vegas has been bigger than ever this May 2015. But more exciting? Probably not.

That is not to gainsay in any way the obvious success of the NHS. Yet what really drives excitement at events such as this are the inventions, the developments, the possibilities that new things can bring to the market. That wasn't lacking from the NHS, but it also wasn't as present as it could have been.

This really has nothing to do with how the NHS is organised or marketed. In the end, the best the show can do is to accurately reflect the market, and that is what it did this year. It's just that the market today is not only cautious, it seems extra-cautious.

As "qualitative easing" - low interest rates - is faded out in the US economy, there are fears it will be a bumpy transition back to "normal" market forces. For example, the consequent upward valuation of the US dollar is already affecting the earnings of the large, diversified companies in the hardware industry.

The China factor

One prominent feature of the NHS was the large presence of Asian suppliers, particularly those from China. The "International Sourcing" area had over 700 booths.

This consisted, for the most part, of small booths lined up in the back section of one of the halls, each occupied by one or two usually bored-looking Chinese people, with some token goods racked up on the wall behind them.

On a fairly cursory inspection (there were just too many booths to be thorough) it would seem there was not a lot of creativity going on in the goods on offer. What was really being represented here was raw productive power, the ability to turn out OK goods at a low price.

There is nothing wrong with that, of course. In fact, with some better promotion of this area, the NHS could turn into a prime place for people seeking a Chinese factory to manufacture a known product. That would be a very valuable service, and it seems likely the organisers of the NHS might have that as one of their future goals.

Where is the invention?

Elsewhere, the NHS really went out of its way to help promote companies that had new, innovative products. There were 105 tiny booths offered in the "Inventors' Spotlight" area of the show.

There was also a special set of long tables where new inventive products could be displayed, and Amazon sponsored a large display of new products out in one of the show's foyers.

While we saw some very clever things in all these areas, there was little that really captured the imagination, or seemed to really represent hard-core invention.

There were some specific areas of consumer demand that seemed to encourage inventors. There must have been, for example, more than 10 different systems for cleaning leaves from gutters and keeping gutters leaf-free. Evidently this is something of a "pain point" for many home owners.

Another area of much invention was just about anything to do with pizzas. While I suspect we may be on the downslope of pizza-at-home category sales, it continues to grow in terms of products on offer.

One upwardly trending category is for containers that help to grow plants either indoors or in very confined spaces. We must have seen over a dozen new products in this area.

The real deal

The one real exception HNN found to this lack of inspiration was in a small booth along one wall of a display area. It featured a tool called the Side Track Saw Table. This was invented by Mel Koresh, who was manning that stand.

Mel is a familiar type of person to both Americans and Australians. Tall, thin, a little laconic, after you've spoken with him for a minute or so, you know two things about Mel: he's a hard but smart worker, and he's one of those really balanced, quiet people you often find working in construction.

Mel ran his own construction company (mostly siding) for some years, but had to close it down during the GFC, when, he tells us, work just completely dried up for a time. The Side Track Saw Table seems to be the product of that down period.

The Side Track is a jig that simplifies the process of cutting cladding such as weatherboards. A DeWalt cordless saw attaches to a lateral beam. The beam is easily positioned via ratchet (click) positioning.

It folds up to a compact size, so it can be easily transported in a car boot, is lightweight, making it easy to carry anywhere on a construction site - including up onto scaffolding, make it less necessary to have one person dedicated to cutting on a job. Cuts of over 500mm can be made.

As Mel explained the idea of the Side Track grew out of his own daily work. He had built a number of temporary jigs, and could see the need for something more developed and easier to use.

One organisation where he has sold the Side Track is to Habitat for Humanity. As they use amateur volunteers to build houses, the Side Track helps reduce the workload and a number of errors that get made.

It's an honest piece of work.

Anti-invention

There other forces at work at shows such as the NHS. Some of them we might label as "anti-invention".

Most of us are aware that it is fairly common practice for big-box retailers and others to invite designers and manufacturers to these shows, where they seek out products that can be easily copied - with enough variation to make them "unique".

This kind of creative copying has been going on for several hundred years, and is part of the background of modern commerce. While a certain level of this kind of sharing is a good thing, when it reaches extremes, it can begin to inhibit true invention.

That's because copying provides a second-mover advantage. Companies that invest in developing products have to recoup that expenditure by amortising the costs as part of the margin on the product.

Companies that copy a design have much lower development costs, and can therefore charge less for the product that has been copied.

Patents provide some protection, but the costs of obtaining a patent add to the development costs (and therefore increase risk), helping to dampen development. There is also the process of patent enforcement itself, which can be expensive, and, when dealing with countries that have little tradition of intellectual property, often of little effect.

The inventive cliff

Aside from these anti-inventive forces at work, there also does seem to be something we could call the "inventive cliff" at work. At the top of the cliff is the industry as we know it today, with the kinds of products we know.

At the bottom of that cliff are radically new kinds of products that make better use of high technology. The question is: when do you jump?

Companies are really struggling with this upcoming transition. Moving from low-tech to hi-tech is going to make some of them a lot of money - but it all depends on the timing.

For example, this year, 2015, was definitely not the "year of the smart home" at the NHS. It seems pretty likely that that will happen, sometime in the next five years - but which year?

This caution and difficulty in knowing how far to go is not limited to the products shown at the NHS, but to the technological underpinnings of the show itself. The NHS did come out with an OK mobile app this year, but the possibilities of what could be done are dazzling.

What if, for example, every booth at the show were equipped with a simple $15 webcam? Imagine being able to do a virtual tour of the show by clicking on a floor map.

Or supposing, in terms of the vast numbers of Chinese booths, that a designer could electronically submit a request for specific expertise, and gain an immediate response from those booths?

Or if the problem of translation between languages were solved by having a Skype-based service where a pool of translators could participate in a conversation at the click of a mouse?

Not that HNN intends any of this as a criticism. One sign of a good show is that you don't leave disappointed, but eager to explore more of the potential in the format and the event.

In that sense, the 2015 National Hardware Show in Las Vegas certainly did one thing better than most shows: it made us hungry for more.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Various news media have reported on the "Home Improvement Industry Market Report 2014" (HIIMR) produced by DGC Advisory. According to these media reports, HIIMR states that the number of independent hardware stores has fallen from 18,251 in 2012 to 15,948 in 2014. This is a decline of 12.6%.

Further declines are predicted. These have been directly related, by these same reports, to the expansion in retail floor space by Bunnings and Masters Home Improvement.

Probing publicly available statistics, HNN has come to a somewhat different conclusion. We've based our work on a statistical series from the Australian Bureau of Statistics known as 81650: Counts of Australian Businesses.

We've reproduced what seem to be the key numbers from that ABS series in the graph that accompanies this editorial. We intend to publish a more systematic analysis of these numbers - and other factors - over the next few weeks. This will look at individual states and territories, which reveal wide variations.

To summarise what we've found so far: while the statistics we've looked at would certainly support the notion of the consolidation of the hardware retail industry, they also indicate this is occurring at a somewhat slower pace than that suggested in news reports about the HIIMR.

Problems regarding the HIIMR

The subhead would be more accurate if it read "problems with the reporting of the HIIMR". As is often the case, when non-specialist journalists try to report about the home improvement industry, they seem to run into a number of confusions.

That said, the HIIMR seemed particularly confusing to them. One journalist wrote:

The figures show the number of independent hardware stores has fallen from 18,251 in 2012 to 15,948, with the number of independents set to collapse further to just 9,756 in 2014.

From what we can glean from other news sources, the HIIRM actually states that the number of stores have declined from 18,251 in 2012 to 15,948 in 2014, with a predicted further decline to 9,756 by 2024.

Equally odd is this statement from another journalist:

An estimated 37 Home Timber stores have gone out of business or have transferred to other buying groups such as Mitre 10 or Natbuild, (the National Building Suppliers Group), which is now the largest buying group with about 400 members.

This probably came as a slight surprise to Natbuild, though it is, of course, one of Australia's top buying groups. According to Natbuild's website:

With 32 long-established members, more than 140 major trade outlets nationwide, and over $1.4 billion in trade sales, Natbuild is Australia's preferred channel to the trade market.

To be kind, the author might have been using the 400 number to refer to Mitre 10. By this measure, it would still not be the largest buying group, as HBT has over 500 members.

None of the reports seem to actually identify exactly how the number of current "stores" - 15,948 - has been determined. The ABS statistics are quite clear that there were around 5,600 hardware retail businesses operating in Australia in June 2014. The near-16,000 number that has been quoted may take in additional businesses that are hardware-related, or it may be the number refers to actual retail outlets rather than businesses.

Not that this really matters. HNN is sure the HIIRM is a document the clients of DGC Advisory will find useful. HNN's concern is to explore the perspective offered by the ABS into the fluctuations in business numbers in the hardware industry.

What the numbers say

It is certainly true that the ABS statistics support the suggestion that the overall number of hardware retail businesses is in decline. However, in terms of the overall business, this decline seems to be closer to 5% than 12%.

Also, while many reports have pointed to the decline of the "traditional" family-run business, these are not in such bad shape, according to the numbers.

One sector that has been much harder hit are the smaller retailers which employ fewer than 20 people. Store numbers in this area have fallen by close to 7%.

It is also true that as measures such as overall retail turnover and the value of building work done in Australia appear quite robust, what we are seeing is not an industry collapsing, but rather one that is consolidating.

The numbers do also, however, hint a little at some of the direction in which this consolidation may be heading.

The churn

While consolidation is certainly taking place, what has slowed it down somewhat is the number of new entrants into hardware. As the graph indicates, while in FY 2013/14 some 547 businesses chose to exit the industry, another 478 started up.

While not definitive, this kind of statistic could indicate that it is not a matter of retailers deserting the industry in droves, but rather different kinds of retailers entering the industry.

What the statistics may be hinting at is that just as we've seen radical transformation at the big end of home improvement retail, we are likely to see some transformation at the smaller end as well.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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It seems that 2015 has brought a number of surprises to retailers. We're already seeing some major shifts in supermarkets and department stores, as earnings forecasts are lowered and senior staff depart.

While home improvement retail does not seem destined for anything quite so radical this year, there are deep currents at work which are shifting some fundamental aspects of the industry.

We're going to look at two of these: home improvement's move to the mainstream, and the rise of in-store digital services.

Evolving into the mainstream

In the early days of its formation, hardware retail worked to establish itself as a distinct market segment, separate from other retailers. Today the trend has been reversed, as home improvement tries to become more like other forms of retail. There is a simple explanation for this shift: market share.

Current broad estimates of the size of the Australian home improvement market, which typically range from $40 billion to $50 billion, take in a wide spread of retail opportunities.

We've already seen home improvement retailers expand successfully into areas that once seemed the domain of specialty stores, such as home lighting and outdoor furniture. Given the need for growth, this type of expansion is set to continue.

Each of these expansions has come with a subtle development of the in-store retail environment. For example, lighting needs to be displayed in an open shelf system where comparisons can easily be made between products, while outdoor furniture needs floorspace to show fully assembled "vignettes" of possible arrangements.

The end result is that home improvement stores have been subtly morphing into something a little closer to department stores, a transition that is set to continue.

One of the hotspots at the moment for this kind of transition is in the whitegoods area. Masters Home Improvement has already developed display areas for large kitchen and laundry appliances that are similar in style to displays at Harvey Norman, The Good Guys, and another new entry in this segment, JB Hi-Fi Home.

There are similar moves underway in the US. Perennial hardware retailer Sears runs franchise operations known as Sears Home Appliance Showroom and Sears Appliance & Hardware Store. These are to receive a considerable refresh, with a relaunch in late April 2015. The new layout will include three kitchen vignettes, and feature more well-known brands.

At the moment in Australia it would seem as though Masters has taken the lead in this kind of transformation - its entire store concept is, after all, built on the idea of formulating a new approach to home improvement shopping.

One possibility, however, is that a similar kind of transition is being planned at Bunnings as well. In a recent very interesting analysis, the respected Citi analyst Craig Woolford has pointed out that, on a per-customer ratio basis, the retail floor space Bunnings is developing will exceed that of major big-box retailers in the US.

>http://hnn.bz/Craig-Woolford.jpg}Craig Woolford's analysis as reported in Fairfax Media}http://www.smh.com.au/business/retail/bunnings-growth-at-risk-as-market-reaches-saturation-citigroup-20150311-13zpxn.html

One "solution" to this apparent saturation of floor space is to expand market reach beyond standard home improvement products. The more market segments that are covered, the greater the potential retail dollar return per square metre of floor space.

One possibility that would enable this expansion would be the creation of what would effectively be Bunnings retail outlet sub-brands.

The rationale behind the expansion of the Bunnings network of stores was that many purchases are made on the basis of proximity marketing. To put that more simply, few people would be willing to drive 25 minutes to buy one bucket, so more stores means more consumers will be attracted for minor purchases.

However, more people will travel farther for major purchases, such as a refrigerator. Bunnings might be planning to introduce retail outlets that have strong product specialisations, such as, for example, kitchen/appliances, bathrooms/plumbing, and outdoor/gardening.

The sub-brands would be distributed through the store network, so that consumers would have a Bunnings close by for everyday purchases, and a specialty Bunnings within reasonable driving range for larger purchases.

There would be some complex benefits that arose from such an arrangement, many in the area of network effects. A good article to read on network effects is a classic from S. J. Liebowitz of the Management School at the University of Texas, entitled "Network Effects (Externalities)".

In-store digital services

The separation of "digital" from "online" services has been growing in strength in the retail sector over the past two to three years.

Online refers to digital services that are delivered over the internet with the goal of facilitating e-commerce. Pure digital refers to general services that are delivered both over the internet and directly in-store to aid customers in buying products.

The Lowe's approach: associates same as customers

More recently, this definition of digital has been expanded beyond customers to include services provided to retail staff, including customer-facing retail staff. Speaking at the US music and technology conference South by South-West (SXSW) held in Austin, Texas this March, Sean Bartlett, Lowe's director of digital experience, explained how the big box home improvement retailer went about providing these digital services.

One of the major points Mr Bartlett made was how much time and attention Lowe's devotes to the systems it has established for its sales associates.

Lowe's has over 40,000 iPhones in the hands of associates in its stores. The software developed for those internal processes goes through the same development and testing as the software for customer-facing applications. His key phrase in regards to this was:

We treat the associates just like the customer.

The features that are included on the associate software include:

Perhaps the most important aspect of the associate app, however, is its ability to tie together the associates at Lowe's with individual customers. One of the key goals to this recording and surfacing of information is almost a slogan for Lowe's digital efforts: the customer never has to start over again.

To facilitate this kind of continuity, the app enables associates to:

The beacon question

This session at SXSW also briefly delved into the world of iBeacons and other in-store devices that could help to improve the customer experience. A particularly wry take on iBeacons was provided by Daniel Gutwein, who is the director of retail analytics at Intel Corporation:

I had a conversation with someone who was putting BLE [Bluetooth Low Energy] beacons out in their stores, and I asked them "Why?" They said "Because we want to be able to send messages to our customers who are walking buy." So I asked them "What customers ever asked you could you please bombard me with messages when I'm walking by?"

...

Then there was someone else who came out with a beacon technology that would tell you when you are close to your favourite store. I said to him "Dude, it's my favourite store, so I already know where it is."

...

You really have to understand what is the business problem you are trying to solve by doing some of these technologies.

Lowe's Innovation Labs

In a separate event at SXSW, the head of Lowe's Innovation Labs, Kyle Nel, outlined some of the processes the lab uses to help it explore the future. Daniel Harvey, director of experience design, Sapient Nitro described what Mr Nel had to say:

The agency and client gather in workshops to ideate three possible futures. Working with a science fiction writer on staff (or with one of a hundred possible author-partners) they then create content depicting a world and a customer journey wherein that possible future is the new normal. Rather than whipping that up into a lovingly crafted PowerPoint deck that goes nowhere, they create graphic novels as one possible deliverable.

Thinking along these lines has helped Lowe's to develop one of the world's first customer service robots, and its "holographic" design studio, which helps customers better visualise interior designs.

Conclusion

Of course, HNN did not put these two elements together accidentally, and we do see them as having a great deal to do with each other. If it is true that home improvement retail is moving towards joining up with more mainstream retail, then it is likely that in-store digital services will play an important role in helping that happen.

One of the keys to this does seem to be what Lowe's captures in its notion of "the customer should never have to start over".

Enabling customers to move from one sales associate to the next, and even from one store to the next, is important in making the retail experience as pleasant as possible.

Being able to share information, and for the store information available to the customer and sales associate to be in sync, is an important step in making sure customers perceive the retailer as being on their side, offering help and assistance, and not an opposing force that must be overcome.

In a world where what customers want more than anything else is a solution to their problems that they can understand and follow, the notion of "let's do this together" is a very powerful one.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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For nearly the past year Masters Home Improvement (Masters) has been, to put it nicely, quiescent. Given the struggles of its parent company, Woolworths, questions have been raised if it is really a sustainable business.

Masters' strategy seems to have been more "duck and cover" than anything else recently. The managing director of Masters, Matt Tyson, appears at quarterly earnings conferences, but says nothing.

The red ink keeps getting redder. Many of its retail operations fail to impress. Its marketing efforts are lacklustre. Store expansion has slowed.

Yet HNN believes none of this is accidental, or the result of neglect. Indeed, anyone who thinks Masters is down and out hasn't yet understood just how wily Mr Tyson can be.

Much of the underlying, real strategy can be discerned in a single, apparently throw-away line repeated constantly by both Mr Tyson and Grant O'Brien, the managing director of Masters parent company Woolworths. Masters, they both tell us, is a startup.

Given the copious losses by Masters so far, it is tempting to think this is just another diversion, among many.

In fact, Mr Tyson's reference to Masters as a startup is likely a very exact one. If we probe deeper into this we can discern something of both Masters' current strategy, and its strategies to come.

It is a line of thought that leads us directly to the significance and potential of Masters' upcoming Rouse Hill retail outlet.

Masters as a startup

Home improvement retail is similar to, but also very different from supermarket retail. Shortly after the UK-based Mr Tyson arrived in his new position, he understood that, for Woolworths, home improvement was a radical new venture, and not an extension of existing business processes.

This meant that Woolworths needed to take the business back to basics and virtually start over. However, this development had to take place in the context of work already completed. Mr Tyson needed to find a way to evolve a new business from inside the shell of what was essentially a poorly managed, near-failed enterprise.

Nowhere was the previous waste of resources more evident than in Masters' real estate choices. Many of the existing Masters stores were in poor locations that would require significant expenditure before they would return a real profit.

Wisely, Mr Tyson cut back on future expansion, lessening expenditure, and also enabling Masters to be more choosy about where and what it built.

He also put in place a series of interim strategies. Financial analysts had criticised Masters' poor marketing, particularly the inconsistency of its campaigns. But Masters launched a single, consistent campaign that, while it was quite bland, was inexpensive and did the job of keeping the Masters name in front of the public.

A similar set of interim strategies went into managing the Masters stores themselves. As near as HNN can tell, stores were triaged into one of three tiers. Stores that were in reasonable locations received good management and careful consideration of stocking. Stores in less promising areas seem to have been maintained to standards, but not managed quite so effectively.

The third tier consisted of new stores that had been previously planned and occupied good locations, such as in Adelaide's airport district. These received a revamped and re-imagined layout that improved on prior Masters stores.

Meanwhile, concealed from public view, the real activity in terms of strategy was taking place on another, fourth tier of stores. This represents the real startup that Mr Tyson has been working on, the home improvement Phoenix set to rise from the ashes of the first stage mistakes.

The road to Rouse Hill

In late April or early May 2015 Masters will open a new store concept at the Sydney Business Park near Rouse Hill. Few details of this store have yet emerged. The most significant comment came from James Aylen, general manager of Woolworths' Home Timber and Hardware Group, who described the concept as being "store within store".

It is HNN's belief that the Rouse Hill store is something much more than just Masters' most advanced retail space -- though that would be enough in itself. One of the features of the Rouse Hill location is that it is an absolute hotbed of retail competition -- we think of it as the equivalent of a retail cage-fight.

There is Masters. There is Bunnings. There is also Costco. And if that's not enough, there is an IKEA outlet as well.

What this really is likely to be is a testbed store for Masters. In this environment the company will be able to test out new ideas with direct competition every day, as well as closely watching to see how the competition responds to its own initiatives.

But let's take a look at what we are likely to see in this store.

Store within store

The end retail model that Masters seems set to implement is store within store (sws). This would be unique to the home improvement retail industry in Australia, though variants on it have been tried elsewhere, including the UK and the US.

While sws seems simple, it is actually a quite complex retail strategy. The basics are that a retail store leases out floorspace to (usually) a supplier/manufacturer of a product. It is then responsible for most aspects of selling the product, including supplying staff, product, customer service, setting pricing, and so forth.

The two core factors at work in making a choice between sws and normal retail are the issue of the margin, and the issue of efficiencies.

In normal retail, margin is extracted at least twice (supplier and retailer) and often three times (supplier, agency, retailer). In sws margin is extracted only once, by the manufacturer.

In the sws situation the supplier/manufacturer is directly facing the consumer, and thus able to directly adjust margin/volume to achieve the optimum setting, with the added advantage of a far wider range of settings than in normal retail.

A number of efficiencies also occur in sws. The retailer is no longer concerned about the financial implications of inventory, and inventory concerns are minor for the supplier/manufacturer.

The supplier no longer has to train people who then pass on their knowledge to retailers -- it has a direct relationship to the customer.

Substitutability, return on customer service and traffic

A number of interesting analyses of this system have been published. One of the best, simply entitled "Store-Within-a-Store" by two US-based academics, Kinshuk Jerath and Z. John Zhang, was published in the Journal of Marketing Research in 2010.

A draft version of the paper can be obtained as a pdf online at:

It is an interesting paper because it contrasts sws with "normal" retail, and a mixed sws and normal retail system. These contrasts are driven by considerations of game theory (and the interesting mathematics that goes with that). Beyond the abstract content, however, there are some very useful practical conclusions drawn.

In particular, the authors propose that there are three main forces at work in determining the viability of the sws model. These are: the substitutability of a product (how unique it is in the market); the effect that customer service has on sales of the product; and the degree to which offering the product improves overall store traffic.

In terms of the first two elements, the paper's basic modelling conclusions are summarised in the following graph:

>http://hnn.bz/storeInStoreComparison.png}Comparison of retail models}http://hnn.bz/storeInStoreComparison.png

While there are a number of subtleties to this graph, what it clearly communicates is that products with a higher degree of uniqueness (less substitutability) are more suited to the sws system.

One of the main reasons for this is that in commodified, easily substituted products, the degree of competition at the wholesale level is higher than at the retail level. This can lead to high levels of margin on consumer purchases, and the retailer will be better off taking advantage of these directly.

In terms of return on service (a measure of the extent service contributes to sales revenues), sws is most suitable for products that have a moderate to high requirement. The reason for this is similar the one for substitutability.

If a product responds well to the provision of high levels of service, there is likely a potential to boost margins substantially. The retailer is better off taking direct advantage of these margins.

Traffic is very straightforward. If including a product on a sws basis improves store traffic, then this is a good thing for the store as a whole. More traffic means not only more sales and more revenue, but also increases general demand, which should lead to higher margins.

Effects on inter-store competition

Given the store's situation in Rouse Hill, and Masters' overall difficulties in facing down Bunnings, the other big question that needs to be answered is whether sws is effective in dealing with competition.

The conclusion of the paper's authors is that it is, overwhelmingly so. The three factors that are mainly considered are the degree to which one store's products can substitute for the other store's, the general substitutability of the product and the return on service.

Where the inter-store substitutability is high, the in-store product substitutability low, and the return on service high, sws is strongly indicated.

What we can expect at Masters

If we presume that some of these conclusions form the basis of how Masters will implement sws in Rouse Hill, it is possible for us to look at some ranges of products and imagine how these might be presented.

Paint

Paint is probably the easiest category to look at on a sws basis. It would be a simple transition for Valspar to begin to sell its paint on a sws basis inside Masters.

Valspar already has staff trained in customer service working in Australia. Its in-store sales presentation platform is already extensive enough that it could easily convert this to a full in-store offering.

Power tools

In keeping with the analysis above, it is likely that Masters would continue to sell its 909 and Wesco house-branded tools, as these represent the highly substitutable, commodity-end of the market, where the company could benefit from better wholesale margins.

In the areas above that, it is likely to adopt a staggered, tiered approach to products, with different brands given access to a particular price/quality niche exclusively.

Kitchens

Kitchens, like paint, should be relatively easy to convert to a sws sales model. One change might be the introduction of more than one kitchen supplier, with the product lines geared towards different markets.

Appliances

This will probably be one of the trickier areas to convert to sws. The tension will be between treating it in the same way power tools are likely to be treated, offering a tiered brand niche to each supplier, or allowing direct competition between brands.

Competition with Bunnings

Will this strategy help Masters take the fight to Bunnings? It is difficult to say. Certainly there are good competitive advantages in the sws model.

Where Bunnings is expert at getting suppliers to reduce prices, the sws model effectively provides a direct incentive for suppliers/manufacturers to accept low prices if it makes sense in the market.

In economic terms, you would say that what would happen would be a conflict between Bunnings' economies of scale, and Masters' economies of scope. But one thing is for sure: it is going to take a real lot of scope for Masters to begin to dent what scale provides to Bunnings.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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Australia's home improvement industry has completed its opening moves in response to the new market that has emerged since 2011. What we will see in 2015/16 is the beginning of the middle game, where strategic responses will become more important than the set-pieces we have seen so far.

Australia's three major home improvement retailers will hold strategy briefings over the next two months. Home Timber and Hardware Group (HTHG) revealed much of its strategic focus at its annual show in early March 2015.

This is a good time to review the strategies being pursued by the main groups in the industry. There are four defined strategy groups: Bunnings, Masters Home Improvement (Masters), the trade-focused Mitre 10 and Home Timber and Hardware Group (HTHG), and independent retailers.

To give the strategy of each of these groups a label, they would be (respectively) vertical, horizontal, business-to-business service-oriented, and precision market fit.

Bunnings: Vertical

While Bunnings isn't vertically integrated in the classic sense, in that it doesn't own its supply sources, it is heavily focused on its supply chain as a driver of its business.

It could be said that for Bunnings, its individual retail outlets work as the best possible expression of its supply-chain dynamics. It works hard to get the right product at the right price. Once that is done, the task of the store is to make those products available with as little fuss as possible. Marketing is largely about notifying its customers about the great deals on offer.

Challenges

In the coming financial year of 2015/16, the main challenge facing Bunnings will be finding the growth necessary to justify its expenditure in vastly expanding its retail space over the past five years.

The respected Citigroup retail analyst Craig Woolford has clarified some of the nature of this challenge. His analysis indicates that Bunnings may have developed too much retail space for its current market reach. The unneeded infrastructure will exert a drag on earnings, which inhibits future growth, as well as making earnings more vulnerable to a market downturn.

This doesn't mean Bunnings was necessarily wrong to expand. A major driver behind the floor space expansion was the need to inhibit the development of Masters as a competitor. This strategy has worked, but it came at a cost.

Basically, if a competent company is willing to lose $900 million to enter the market in which your company has a major interest, it is going to have an effect. The contribution of Mr Woolford's work is to make plain the exact locus of that cost effect on Bunnings.

Finding growth

Store expansion can be seen as something we might call proximity-based marketing -- people are more inclined to use a home improvement store that is close by. As a strategy, it promotes expansion inside an already defined market -- you are not necessarily attracting different sorts of people, but rather more of the same sorts of people who regularly visit your store.

Further, as the stores have themselves not evolved in this process, the nature of the retail sales made has not changed, either.

For Bunnings to achieve reasonable growth it needs to not only expand within its established markets, but to also gain access to adjacent markets as well. That is always tricky, but it is especially difficult for Bunnings because it has spent a decade fine-tuning its marketing and retail approach to its current, quite specific market.

An example

Kitchens provide a good example of this. HNN has written in the past about how much we respect the main kitchen supplier for Bunnings, Kaboodle, and its approach to the market.

What Kaboodle has done is to take a narrow kitchen category -- basic and inexpensive -- and rev that category right up to the redline. In doing so, it has enabled many Australians to obtain a satisfying and stylish kitchen on a very limited budget.

In the coming financial year it is likely the kitchen category that is just above Kaboodle's will prove to be at least as profitable. We could think about the Kaboodle offering as being "unbelievable value". The offering immediately above that is something like "surprisingly affordable luxury".

To explain why Bunnings could experience some difficulties in entering that market, we are providing some snaps below taken at Bunnings stores on a Saturday morning between 10am and 12noon.

They show one of Kaboodle's real achievements, which is an attractive compact display of many of its kitchen styles -- a great marketing tool. However, as shown in these pictures, these marketing units do not always get displayed to their best advantage.

>http://hnn.bz/bunningsKitchenDisplay01.jpg_s}A Kaboodle kitchen display in a Bunnings store}http://hnn.bz/bunningsKitchenDisplay01.jpg

>http://hnn.bz/bunningsKitchenDisplay02.jpg_s}A Kaboodle kitchen display in a Bunnings store}http://hnn.bz/bunningsKitchenDisplay02.jpg

>http://hnn.bz/bunningsKitchenDisplay03.jpg_s}A Kaboodle kitchen display in a Bunnings store}http://hnn.bz/bunningsKitchenDisplay03.jpg

We do not intend these pictures to be critical in any way of Bunnings. We are not saying Bunnings or its store managers have made any kind of "mistake" at all here. These scenes are typical all over Bunnings stores, and are a result of the company doing restocking during its normal dayshift -- a practice that helps directly to reduce costs.

It is our impression that Bunnings customers actually like this kind of disorder. It gives the store a buzzy, market-like feel, and makes them feel comfortable and involved.

However, if you are trying to sell kitchens to people in the "surprisingly affordable luxury" segment, these kinds of displays are a complete buzz-kill. No matter what the price, it will not be possible for them to relate to the product and make a purchase. It is something, for example, that you just would never see at IKEA.

Putting the picture together

The standard riposte that Bunnings makes to analyses such as that put forward by Mr Woolford is that the company currently controls only 17% of a $45 billion market, and that there is thus -- to use a phrase from the managing director of Bunnings, John Gillam -- "lots of runway" in home improvement retail for expansion.

There is some truth to the claim. The essence of Mr Woolford's work, however, is that Bunnings' move to further expand its retail floor space is not the most effective -- perhaps not even an effective -- way of accessing that "runway".

Most of the $37 billion of the home improvement market Bunnings doesn't control is not in the products the company sells or the markets it currently reaches. To gain access to those markets it needs to actually evolve the stores themselves. More floor space selling the same products to the same markets does not address the problem.

The process of evolution is difficult, complex and intense. Bunnings may have capabilities in that area, but these are not currently especially on display.

This is just one example of the types of challenges Bunnings will face over the coming financial year. Almost every expansion into adjacent markets features a similar problem. It is going to be really fascinating to watch how Bunnings develops strategies to overcome these difficulties.

Not to mention seeing if Bunnings has developed an e-commerce strategy for 2015/16.

An article on Mr Woolford's analysis is available:

Masters: Horizontal

Early signs from Masters indicate that it will most likely be pursuing a horizontal strategy. James Aylen, general manager of the HTHG described the model store that Masters will be opening in Sydney in April 2015 as operating on a "stores-within-store" design, which is a classic configuration of a horizontal offering.

The vertical Bunnings strategy relies in large part on economies of scale to make it viable -- selling lots in a narrow range. A horizontal strategy relies on economies of scope -- selling fewer of each of a wide range of items, resulting in a larger overall sale.

In horizontal retail strategies, the retail outlet represents much more than the end point of an efficient supply-chain. It is a highly complex, competent tool that effectively promotes multiple, cross-line purchases. This model also relies heavily on advertising as a key part of the strategy.

While this model overcomes the very difficulties that Bunnings faces in terms of expansion into new product lines, it can suffer from one problem that Bunnings has never had: a lack of clear market definition.

This is the primary task facing Masters in the coming financial year: it needs to establish an identity. Hopefully, the stores-within-store format will help it to do this, if it is backed up with adequate advertising.

Beyond that, HNN really can't say much about Masters at the moment. As with Woolworths in general, it is very much a "wait and see" situation. Hopefully the company's strategy briefing will reveal more detail concerning future plans.

Mitre 10 & HTHG: Business-to-business service-oriented

Mr Aylen of HTHG has offered the clearest description of this strategy. He stated simply that there were customers who valued service, and those who did not, and that most tradies fell into the former category, and were thus a prime target market for HTHG.

It seems fairly evident that not only HTHG is heading in this direction, as Mitre 10 is ramping up its efforts to appeal even more to tradies as well. On the surface it is a fairly typical strategy of defining the target market as being other businesses rather than consumers.

One of the difficulties with the way both Mitre 10 and HTHG seem to be approaching this market is that it is seen as being more of a defensive than an active market-seeking activity.

The semi-independents that dominate these groups often seem to have a sense of having been "hard done by", as they have watched many of their homeowner customers gravitate towards Bunnings and other large retailers.

In 2015/16 we can expect to see that attitude begin to shift as these retailers more fully commit to the new realities. As this change occurs, attention will move to how to really get the most out of the tradie market.

One thing to consider is what "service" really comes down to, and what its true value is in relation to doing business. Many retailers seem to think it is largely a social capability, and that tradies would rather buy things from "friends" than from the more corporate sales force of other retailers.

However, what "service" really comes down to for many tradie businesspeople is the reduction or even elimination of some kinds of risk. Building especially, and the trades in general, are actually very risky occupations for all kinds of reasons.

There is the risk involved in actually doing the task itself, for example. This depends often on being able to adapt to unexpected situations that crop up while the job is in process.

Weather can completely wreck the best managed plans of any construction project manager. Accidents happen. Machinery breaks down. And, perhaps worst of all, sometimes people don't pay, or they don't pay on time.

A good relationship with a supplier for a tradie means that there can be a reduction in risk. That can translate directly not only into better peace-of-mind, but also more dollars in their pocket.

If there is a maximum amount of risk that is tolerable in any one job, then having the supply-based risk reduced means it makes more sense to take other risks, and thus expose a business to more potential for profits.

It is notable that US-based retailers use a variety of tools to help gain and maintain their trade customers. This includes special credit arrangements, the ability for tradespeople to "warehouse" orders for a time at their stores, and freely offered planning and business financial advice.

It will be interesting to see if Mitre 10 or HTHG manage to develop this kind of more active strategy.

Independents: Precision market fit

One of the more interesting statements HNN heard at the HTHG show came from Mark Hunter, the CEO of Spot-On Lasers and Tools when he was speaking about his product-line market strategy. In part he said:

Because we are the largest importer [of laser tools] in this country, our range is so diverse, going well beyond 80 products, so what we do is to customise those products for position points. We can actually give every retailer their little bit of autonomy, so they actually can have a point where they are making generous margins.

This is a concept HNN has heard from a range of importers and product developers, though Mr Hunter states it very concisely. Where larger retailers present customers with a wide range of products, independents are increasingly seeking out just the "right" products, some of them a little unique.

This approach satisfies those customers who are really looking for inside information on their purchases, rather than buying strictly on price or features. Will the product last, will it perform well, can it be repaired or serviced, is it the latest technology -- all these issues are concerns for them.

Aside from tradies, customers in this category include prosumers and homeowners who see home maintenance as important, but seek to reduce any and all frustrations and difficulties associated with it.

In this sense, some independent retailers are evolving into speciality shops where, while service remains important, expertise and personal advice are just as essential.

Summary

While FY 2015/16 promises to be a very interesting and exciting year for the home improvement retail industry, HNN believes it will end up being something of a preliminary to more major shifts in 2016/17.

We expect to see the market for smart home products develop momentum during that period, and with it a more technological focus develop as well.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

One of the best Australian home improvement retail print advertisements HNN has seen over the past year is Kaboodle's recently launched ad for kitchens.

A version of this appears in the March 2015 Australian House & Garden magazine, on pages 178-9.

It is worth noting because much of home improvement retail advertising -- including some other ads by Bunnings suppliers -- might be generously described as "lacklustre".

Not only is this a good ad, but it also indicates something about Bunnings' strategy, and the challenges Australia's leading big box home improvement retailer faces in growing the kitchen category.

This ad displays a clever understanding of a specific target market. What Kaboodle manages to resist playing to is established strengths -- low cost, value for money -- and instead highlight a different and more nuanced strength: accessibility.

Conception

While at first the conception seems familiar and evident -- an ad that could appear to be editorial -- what is going on here is far more subtle.

What the ad achieves is to signal its intention to communicate in a manner that makes use of several editorial "tools". These tools are:

Narrative

The narrative is effectively and economically established by the key paragraph on the left page:

After a recent "tree" change and having a whole lot more space to work with, Ben and Petra decided that their new kitchen really needed to be the true heart of the home.

This is very clever. It establishes the following elements:

Even if the reader is not directly engaged in this kind of renovation, it is something that is easily understood, and very easy to empathise with. It is aspirational -- not in financial, money terms, but rather in quality of life terms.

Before and after

While the overall ad carries an apparent "department" label of "before and after", the designer has cleverly moved this into the background. A series of three black and white images on the left side take up about 8% of the overall area of the ad, depicting the kitchen "before".

These are overlaid with two small images of the "after" -- and, of course, there is the entire right page of the ad illustrating the new kitchen.

This helps to establish accessibility. The narrative is not about a couple moving into a house which has an adequate kitchen, where they simply "cannot bear those cabinet handles, darling". The pre-existing kitchen isn't terrible, either, it just looks a little old-fashioned and basic.

Interview format

The interview "he says, she says" format is ideal for Kaboodle's communication. Not only does it enable the ad to engage both men and women, it enables the advertiser to communicate a great deal of information in a friendly, easy-to-read format. Some of what gets communicated includes:

If you think how clunky and unappealing that information would normally be, you can see just how well the interview format has been used.

Design

There are a number of small, very clever touches to the design, most of which relate to improving the ad's crisp clarity, and at the same time softening its overall effect.

For example, the text of the opening paragraph quoted above is set in a relatively large font, but that font has been subtly "screened" -- printed with a grid-pattern. This reduces the stark black to something closer to a grey.

On the left page, there is a subtle cross-hatching pattern behind the text. This also softens the otherwise harsh white of the page background, making the page more welcoming.

Perhaps the most bold decision in the design is that, even though the couple who built the kitchen are featured prominently, they are not pictured. This might seem like a lost opportunity, but in fact it avoids the possibility of alienation through using the "wrong" person. (And, of course, it also saves on costs.)

The photograph

The photograph on the right page is just as clever. An entire, largish kitchen is featured, but the picture shows only two complete cabinet handles, and two half-handles in the background. That is important, because Kaboodle is an inexpensive brand, and the hardware is one place where this clearly shows.

In fact, the picture is so well conceived that the cabinets attract little attention. The eye focuses instead on the kitchen counters and the attractive windowed space at the back of the kitchen.

To just how clever the picture is, you need only compare it to a very slightly different photograph of the same kitchen. First the original photo:

>http://hnn.bz/adKitchenPhoto.jpg}The ad photo}http://hnn.bz/adKitchenPhoto.jpg

And then another photo from the Kaboodle website:

>http://hnn.bz/kaboodleNonAdPhoto.jpg}The non-ad photo}http://hnn.bz/kaboodleNonAdPhoto.jpg

The angle on the second photo is just slightly higher, and the crop is much wider. The result is a much more ordinary looking kitchen.

The target market

As HNN mentioned last week in its description of changes to the kitchen market, the "sweet spot" has moved from the top of the basic segment to the bottom of the middle segment. In many ways this ad represents an attempt by Kaboodle to extend its brand up into that middle market.

Specifically it is targeted at people who have moved to a larger, potentially better dwelling, perhaps taking a considerable financial commitment in so doing. The kitchen needs to be replaced, but they cannot afford the $15,000 or so it would take to do that normally.

Kaboodle's message in this ad is that it can provide an effective alternative in such a situation. It can be self-installed, and stylish enough to at least get by through the next four or five years.

But not the best

As cleverly conceived as this ad is, it still does not match up to some of the best work by kitchen makers such as IKEA. For example:

>http://hnn.bz/ikeaKitchenPlanB.jpg}A Canadian IKEA kitchen ad}http://hnn.bz/ikeaKitchenPlanB.jpg

And also:

>http://hnn.bz/ikeaKitchenWeanChinese.jpg}Brooklyn never had it so good}http://hnn.bz/ikeaKitchenWeanChinese.jpg

The difference is really one of confidence. Kaboodle knows it is stretching its appeal to its very limits, while IKEA is quite comfortable moving into more stylish environments.

The problems of moving upscale

It's a great effort, and Kaboodle deserves both recognition and market response for it. However it also points out how deep some of the problems are that Bunnings faces in the evolving kitchen market.

Using clever advertising like this, the market for Kaboodle can be broadened, but that will only go so far. Beyond that point, some kind of new brand presence must be established. Even if sourcing such a new brand is possible, how will it be positioned both in Bunnings own marketing, and in the physical stores?

Perhaps most important of all, how will Bunnings customers react to this kind of market segmentation?

Before signing off, just a reminder that this issue of HNN includes expanded coverage of Bunnings Earnings Results FY2015H1 in PDF format to download. To access this special report, click here to the following links:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

Recent developments in technology have tended to favour big retailers over small.

Spreadsheets, accounting packages and point of sale systems have benefited everyone. There is no small business equivalent, however, to the logistics and supply chain management systems that power supermarkets and the big box home improvement retailers.

It's a gap that is steadily widening. Big data analytics, for example, enables big retailers to gain even more of a lead. They can now use the wealth of transaction data they gather every day to drive predictive supply and marketing models.

These pressures were part of what has encouraged HNN to consider some ways of closing the technology gap between big and small retailers.

Out of those considerations has arisen the design of a smartphone-based app. This is a "white label" mobile app for independent home improvement retailers. It is called "white label" because it consists of an unbranded app that can be easily customised to show the branding of any retailer.

Through developing the app HNN can eliminate upfront app development costs for retailers. By centralising the backend systems for the app into one shared system, the app can be provided to retailers as a service for a very reasonable monthly fee.

We see this app as the first step towards enabling a more inter-connected and mutually supportive network for independent home improvement retailers.

The app relationship

The most interesting insight HNN has gained over its past year of retail app exploration is that apps work differently for small, independent retailers than they do for major, big-box retailers.

For big-box retailers, apps are all about establishing customer loyalty. The app's "job" is to help take casual, infrequent customers and turn them into regular, frequent customers.

For the independent retailer, the app is all about enhancing the relationship with existing loyal customers. It's about helping customers who have a retailer they think of as "their" hardware store to spend more at that store, and get more from the experience.

App functions

In choosing functions for the app, HNN was very much guided by one requirement: there should be no need for system integration.

It would be great if we could integrate the app into a retailer's POS systems, for example. However those integrations are tricky, complex and difficult. HNN decided instead to stop short of that point, and keep everything simple and easy.

The following are some (but not all) of the features that are being incorporated into the app.

Catalogue/Special Offers

Print catalogues delivered through the mail have been a mainstay of home improvement retailing for over 20 years. The app-enabled catalogue is the next step up from this.

Using the systems HNN is developing, formatting the catalogue is quite easy. Retailers can either have the catalogue designed, and then upload a pdf file, or they can use the app management console (more about that later) to design their own catalogue pages. These pages are based on three possible templates: one emphasises price, the other the product picture, and a third balances these.

How does the customer find out about the catalogue? There are two ways.

Firstly, when a new catalogue is added, a notification message is generated, that goes out to the customers to inform them there is new content in the app.

Secondly, the app uses location-aware services to prompt customers when they are in proximity to the store. At those times, the home page of their mobile phone will display an advertisement from the retailer, which links to the catalogue.

One very good use for this location-based advertisement is to offer discount coupons on products. It's a great trigger to promote sales.

Wish Lists/Offers

Wish lists enable customers to compile lists of items they might want to purchase at a later date. Customers can add items to a wish list in two ways. The first is to simply snap a picture of the item using the app, then add their own description.

The second involves using quick-response codes (QRCs). QRCs are those odd little graphics that smartphones can scan (they're really just a form of two-dimensional barcode - standard barcodes are one-dimensional). If the product has a QRC on the shelf where it sits, simply scanning that code loads all the product details into a wish list.

Where does the retailer get the QRC from? Well, this feature integrates with the catalogue feature. If a product has been added to a catalogue, then a QRC is automatically generated for it. It's a simple matter to print the QRCs out on labels and place them on the product display for easy scanning.

What's more, once customers add a product using a QRC to a wish list, they are presumed to be "following" that product. This means the retailer can send them notifications about that product. The two kinds of notifications are about an immediate change in price, or a future change of price.

What might turn out to be one of the best features of wish lists is what HNN calls its "offer" function. Once customers have built a wish list for a project, they can tap a button and have that sent to the retailer as an offer request.

The retailer can then review the items on the list, and either offer to provide a discount on the overall purchase, or to include a "bonus item" to sweeten the deal. Retailers can set a minimum price limit, such as $500 or $1000, which the wish list has to reach before it become eligible for the offer process.

Retailers also have the ability to review all of their customers' wish lists, unless the customer has specifically marked a list as "private". This could be invaluable information for tracking product demand, and gaining a better understanding of the market.

Projects

Projects are sort of like "guided" wish lists, with a little bit of project management added. These are templates for a range of common renovation tasks, including:

Each template breaks down the renovation tasks into its parts, and them enables customers to add references to the items they need for each part. It ends up as a hierarchical set of wish-lists arranged in the order each part needs to be completed.

As with standard wish lists, the customer can submit these to the retailer as an offer, either individually, or the project as a whole.

Tradies-link

Finding reliable tradies remains one of the barriers people face in setting out on renovations. The HNN app will provide easy links to tradies so that customers find this task easier.

They will be able to submit simple descriptions of the work to be done, or provide photographs and other links to help increase the accuracy of the quote.

To achieve this, HNN is currently in negotiations with several suppliers who already provide this service. This section of the app will likely link directly into those services.

The app will also enable customers to rank tradies they have used, so that other customers can make an informed choice. The ranking will be a five-star system based on timeliness, cost and quality of work. Only the star rankings will be shown, not any commentary.

Tutorials and reviews

The online video provider YouTube is awash with videos on every conceivable home improvement situation and need. The difficulty is sorting out which are reliable and which are not.

HNN will provide a channel on the app which will curate this content, making the best videos easy to find, and playing them directly in the app. This will provide customers with some of the best content in an easy-to-use package.

App management

At the heart of the retailer's experience of the app is the management console (MC). The MC is a website that provide administration functions for the app.

The MC enables the retailer to set up and control advertising, build catalogues and send notifications to the app. This is also where offers based on wish lists appear (there is an email notification as well).

The MC also enables the retailer to access most customer data, except where the customer has marked areas as "private". Wish lists, for example, can be reviewed on a person-by-person basis, or all wish lists can be searched for key words to follow trends.

The costs

One thing HNN discovered during its year of app exploration was that, while it was important to make sure the "dollar" cost of an app was very reasonable, it was just as important to ensure the time and involvement cost of retail management was kept as low as possible.

For most retailers, this engagement cost is as important, if not more so, than financial costs.

The requirements of costs as we have come to understand them come down to this:

Additional sources of revenue

Retailers have all kinds of access and information that many other businesses would themselves like access to. It seemed to HNN that we could use these "retail valuables" to subsidise the price of the app.

One of these subsidies we've already mentioned: Tradie-link. The service providers HNN is dealing with typically charge trade businesses to list. HNN is negotiating that an additional fee be charged to list on the retail app, with HNN and the provider then splitting that fee.

Another source of revenue will be product advertising in the app from major suppliers and manufacturers. As we are concerned about conflicts -- what if the product is something the retailer doesn't stock? -- retailers will be able to opt-out from any advertising. They would have to agree to a minimum amount, but there will be enough options this should not be a problem.

The app fees

While we are still modelling this product, we now believe we will be able to offer it for a fee of less than $60 per month. That is all-inclusive of the app itself, the backend systems and support. The only additional fee is for the initial setup of the app at a retailer. This includes the retailer's store branding, other customisations, and initial training.

Development cycle

At the moment, the original app is set to have a soft release in the latter half of 2015. HNN expects it will likely be updated three or four times during its first year of release. The initial app will be for iOS devices only. An Android version is scheduled for release in February 2016.

>http://hnn.bz/appDevSchedule.png}The app development schedule}http://hnn.bz/appDevSchedule.png

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

The home improvement industry has made significant investments in tool development over the past 15 years. In return, it has received excellent results.

Cordless, precision laser technology, and new cost efficiencies have revolutionised the market. There are at least five other strong contributions. More great developments are on the horizon.

Even so, there are some market sectors that are not receiving the attention they deserve. This is the result of shifts that have taken place in the market over the past six to seven years.

Perhaps the most important emerging consumer segment is casual/beginner DIYers. In the past this segment consisted of low-spending, single-task consumers often looking for a single quick fix. Today this segment is dominated by consumers with a set of specific objectives: I need new kitchen cupboards, I need to refurbish the bathroom, I need to update my son's/daughter's bedroom.

If we were to sum up this market, it would be that they are looking for something better and more custom than IKEA, but at a close to IKEA cost.

There are three reasons why this market matters as much as it does. First, as the overall level of DIY skills is declining in the Australian community, beginners must be nurtured into becoming the next generation of experienced consumers.

Second, helping out beginners is probably one of the few good opportunities left for retailers (and brands) to truly establish loyalty in consumers.

Thirdly, this market is currently being undersold. Customers in this segment are walking out the store door after spending $100 to $150, when they should be spending $400 to $500. What's more, as consumers they will get far better value from spending the $400 than the $100.

Start with tools

Tools are a good place to start in looking at the needs of this market. The transition from quick fixes to a lengthy project often begins with the purchase of a "serious" tool.

However, the way this segment looks at tools is quite different to that of other segments. To generalise, where other segments look at what a tool can do, its functions and capabilities, this segment looks at what they can do with a particular tool.

We've identified three types of tool that would benefit from further development and attention, on both the supplier and the retailer level.

1. Easy to use tools

Most toolmakers will claim - often with good justification - that they spend a lot of time and effort making their tools easy to use.

The question that needs to get asked is: Easy to use for whom? Not only do toolmakers not always take into consideration the needs of a neophyte, but sometimes the "easy to use" features they introduce for advanced users can make tools more difficult to use for beginners.

For example, it is possible to optimise hammers to be lighter and deliver the same force per blow as much heavier hammers. Less weight definitely makes a hammer easier to use - for experienced users. Usually such changes make the hammer more difficult to use for beginners.

Power tools for beginners

In last week's editorial we mentioned some of the interesting brand implications of the inexpensive power mitre saws that both Bunnings and Masters sell.

One of the interesting things that emerged was that, while the purchasers and users of those saws thought they were very good for the money, they explicitly mentioned that they were probably not good for beginners.

This wasn't due to any fault with the saws, but rather because the saws lacked a laser guidance system. As experienced users, the reviewers knew how useful those systems can be.

Both Bunnings and Masters do sell power mitre saws with laser guides which on discount cost around $120. What is interesting is that in those stores - as in most home improvement stores - there is a lack of clear guidance for what beginners/casual DIYers should buy.

It is a kind of guidance that, in today's retail environment, is usually supplied by brands or sub-brands. At the moment there are very few in-store guides to help beginners make these kinds of wise purchasing decisions.

2. Safer tools

In recent years health officials in many states have started issuing press releases before long weekends that warn of the dangers of power tools. No one has collected the exact numbers on injuries just yet, but everyone agrees those numbers are on the increase.

Once that data does get collated through Medicare, you can be sure there will be a push to improve the safety regulations around power tools. It would be a good idea for both tool manufacturers and retailers to get out ahead of that movement.

More than that, for the beginner DIY segment safety is an active concern. There is a good deal less "bravado", and they will freely admit that some aspects of power tools really worry them.

Or, to put that a little differently, safety is actually a good selling point in this market, and something these customers will willingly pay for.

Safety down the product range

One of the ironies of tools is that the high-quality, well-designed tools the professionals and "prosumers" use tend to have extra safety measures built in. The cheaper tools that beginners buy do not - even though the beginners are the users who most need them.

One difficulty is that at the moment, there seems to be no way a consumer looking at a range of power tools receives much guidance as to which tools are safer than others. Not only is there no rating system, but digging up the details takes some work.

As a simple example: Bunnings should be applauded for providing blade braking on even its cheapest mitre power saws, and making this information readily available in its product descriptions online.

Stopping the blade once the power switch is released is a basic and vital function, especially for beginners. Competing products are not clear on this issue.

What this offers is a great branding/promotional opportunity. A simple tag that identifies a tool as being particularly safe would be enough to trigger a sale in many cases. Not only direct sales, either, but gift sales as well.

3. Tools for women

This is a category that is ready to become viable. In the past this category has been misunderstood and abused. Tools with pink handles, for example, were really not ever going to sell well.

One sign of viability is the substantial increase in editorial pages devoted to DIY for women in home interior design magazines. Much of this editorial has moved from pure "craft" projects to more serious DIY. The projects are still simple in nature - low commitment, big results - but many of them require tools such as power drills and power saws.

To fully develop this category, it is necessary to understand both the different design requirements of women, and their unique buying pattern.

Design requirements

A good example of design can women can be found in hammers. Physically, it is true that women tend to have less upper body strength and smaller hands than men. This does not mean, however, that they want to buy little tack hammers and confine themselves to hanging picture frames.

What might appeal would be a hammer that weighed 12oz, but delivered the whack of a 20oz hammer.

And guess what? DeWalt makes just such a hammer. Here's a review from YouTube:

This is really the key to designing tools for the women's market: delivering additional capability, not limiting their uses.

A second requirement for this kind of design to succeed, of course, is that these tools are marketed appropriately, so that women can easily identify them.

As with this case, designing well for women often means little more than designing really well for everyone. Many men would benefit from such a hammer, just as men could also benefit from tools that adapted more easily to hands of different sizes, and that were substantially lighter.

Buying patterns

Men and women begin their buying consideration at the same point, most of the time. They work out what tasks they will need a tool for, then they match those tasks to the tools available.

It is what happens next that is different. Men nearly always find the tool that matches the majority of their needs - then buy one that is one or two notches higher in terms of capability. Women are more inclined to buy the tool that exactly matches their needs.

Also, women are happy to use "community" resources to solve problems. If her power saw isn't big enough to cut through a red gum post she needs for the garden, most women will have not problem in asking a local hardware store to do it for them. They will even feel clever about that solution.

Most men in the same situation feel something like a small sense of defeat. They will wish they had bought a bigger saw in the first place.

Some examples

Choosing examples, especially when it comes to power tools, is always difficult, as there are usually three or four equal options. So the tools I choose here are less a specific endorsement, and more good, well-functioning examples of a type.

AEG 12V drill/driver and impact driver

Probably the first "major" tool a woman will buy is a cordless drill/driver. One of the best "starter kits" for a woman to buy is actually the AEG 12V Kit (BS12CKIT2-402B) which includes a drill/driver and an impact driver.

One of the best features of these units is that their hand grips are very well-designed and can easily accommodate a wide range of hand sizes.

While as a 12V device, they may seem underpowered to some, they are also lightweight - a feature that is enhanced by this kit including two different battery sizes.

The impact driver tool is a very good tool form women, though many might not naturally consider it. It might not be evident, but drill/drivers can require substantial force to get screws going, while the impact driver reduces this stress.

But: just look at the AEG marketing, from YouTube.

The message is geared towards getting men to accept a lower-power device by associating it with construction sites. That really is not appealing to women consumers.

Worx WX423 and WX427 saws

One of the now-common requirements in design magazine DIY articles is some kind of a power saw. Usually a jigsaw is the recommended device - which is a "typical" woman's saw.

While jigsaws are versatile, and well-adapted to craft work as well as structural wood cutting, they are actually a little difficult to use for the latter. Make a good straight cut through even 90mm x 19mm pine can be hard.

Circular saws, of course, make this task much easier, but for someone moving from craft work to structural work, they can really be overkill. They are also typically quite heavy - at least 4kg.

These two saws from Worx are a good size for smaller projects. The WX423 is quite light, at just 1.8kg, but would be pretty much limited to making straight cuts in 19mm pine.

The WX427, however, is much more versatile, offering up to 45 degree bevel cuts and a cut depth of up to 45mm. It also features a laser guide, and at 2.3kg is still light enough for easy handling.

Conclusion

Successfully targeting the beginner market is partly a matter of having the right tools available (and perhaps getting more such tools designed and produced), but it is every bit as much about marketing as well.

While there would be room for dedicated marketing propositions - such as a specific web page for these tools, or even part of a store aisle - just as much can be achieved by adding a marketing overlay on top of existing marketing structures.

While directly labelling some tools as "for the beginner" might be off-putting to more experienced users, it doesn't take much thought to come up with a more acceptable label - such as "StartUp" - to better identify this category. Similarly, it certainly won't hurt sales to develop a "safety tag" that identifies tools with enhanced safety features.

This kind of sub-branding would effectively translate to both in-store and online product identification.

Will it be worth it? Just to summarise the potential benefits:

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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What would happen if Bunnings rebranded all of its Ozito products as a Bunnings home brand? Or, to put that in our retail jargon: why doesn't Bunnings go vertical through own-brands in its lower-price commodity product lines?

Most industry managers and analysts would agree this would likely not be a good move. The reasons for this are surprisingly complex and interesting, and we are going to look into those.

Just as interesting is the possibility that the home improvement market is changing in such a way that own-brands will begin to make more sense - but not at the inexpensive, commoditised level. This possibility - even its necessity - arises in part because of the changes e-commerce is bringing to the market.

Why not cheap, commodity own-brands?

The wisdom of a move to own-brands is a question that often comes up in Australia's home improvement industry. That's not surprising as the top three home improvement retailers are owned by companies dominated by supermarket retail.

In supermarkets, own-brands have staged a comeback over the past decade, with improved quality. As a result young consumers, in particular, find them a good choice.

For supermarkets, own-brands offer better margins, and can help them negotiate lower prices for products made by "competing" brands.

However, most strategists in the home improvement industry would agree that going to own-brands would not be a good move for big-box retailers.

John Gillam, managing director of Bunnings, did address this issue at a quarterly results event. Mr Gillam said that it was better to let the experts design the tools, and for Bunnings to concentrate on selling them. While there is some good sense to that, and it is certainly the right decision, there is a little more going on than Mr Gillam's quick explanation reveals.

Let's consider what happens when a customer buys an Ozito product (or, equally, a 909 product from Masters) and has a problem with it. Perhaps it is something such as a small compound mitre saw, which you can purchase for the astonishing price of just $65 from either Bunnings or Masters.

I'm sure these are great quality saws, but it's possible that maybe one in 5000 or so has an issue. The saw stops working, the customer takes it back to the store, the retail floor manager says "no problem", and gives the customer a brand new saw.

How does this story play out when the customer tells his friends about it? It would probably be something like: "Yeah, the first one I got broke down after about an hour, but Bunnings/Masters was good, replaced it straightaway, and it's been a great little unit since then."

The saw stops working, but the store becomes the hero by fixing the problem. If the saw had carried the store's name, however, the customer would likely hold the retailer responsible for the problem as well as the rapid solution.

The metabrand

When we think of this aspect of the business model Bunnings follows, we could say it is a version of what is sometimes called the "metabrand".

"Metabrand" gets used as a label for a number of things, but in this case it refers to a business model where the retailer develops a well-established brand image, which it then extends to what are the almost "no-brand" products it sells.

There is a good essay by US business writer Kevin Ready that appears in Forbes. Here is how Mr Ready describes the metabrand:

Retailers such as Harbor Freight Tools are Meta Brands that offer the advantage of low cost associated with no-name products through a storefront that does have a brand. This branded storefront in turn represents hundreds of unknown manufacturers. These overseas manufacturers are competing against one another behind the scenes for the privilege of producing and shipping products to the U.S. through the storefront.

Stores like Harbor Freight can sift through the problem of finding and demanding good products from no-name manufacturers, and stand as a proxy brand for them in their interactions with you. If consumers have a problem, they can return the goods to their local point of sale: this is accountability.

This is all part of the big change that started in home improvement 20 years ago: the move from an industry where the balance of control over product moved from suppliers to retailers. This constituted a partial shift from a supply-driven system (SDS) to a demand-driven system (DDS).

This movement has not been static, however. It has continued, and the market the industry will face in the near future is likely to have even more DDS features - with the underlying demand coming more directly from consumers.

The importance of the review

If you look at the web pages for the cheap mitre saws mentioned above on the Bunnings and Masters websites, you will find they are nearly identical - except for one, single detail. The Bunnings site does not feature any customer reviews, and the Masters site has two.

These are the texts (verbatim) of the Masters reviews:

Good honest budget/entry level saw: 5 stars

Review text:

This is a great addition to the garage. I purchased it out of curiocity [sic] just to see how bad it actually was. I was really surprised as i paid less than $50 for it you can actually use it. It is a no frills unit as its price indicates. I believe if you are a the kind of person that just tinkers around or is a weekend warrior then it is sufficent [sic]. I have started using this more and more and am still suprised [sic] as to how far from my initial expectation it is. You will need to be accustomed to using a saw or practice as it does require the user to use their eye and initiative as it is a no frills unit.

Pleasantly surprised: 4 stars

Review text:

I needed a lightweight drop saw to do a couple of small decking jobs and found that this unit had no problems cutting through 90mm hardwood merbau boards, although it only just manages to cut 90mm decking boards at 45 degrees. Easy to use , no frills , and seems more powerful than it's 1400 watts suggests.

At first glance, despite the four and five stars, these reviews do not seem that positive. What they both basically say is "I bought this thinking it would be really crappy, but it was cheap. It turned out to not be as crappy as I thought it would be."

Not a ringing endorsement, but a very authentic one. Also, look at all the additional information that is supplied. The potential buyer finds out that:

The thing to understand is this: these reviews easily have the equivalent effect of brand awareness. They are that important to purchasers. The Harvard Business Review has a very informative and interesting paper about this online:

This is an indicator of the final step in the process of moving from SDS to DDS: direct participation by consumers that helps to immediately shapes the market.

The opportunity that emerges from these changes, in the area of own-brand products, is the development of more premium lines of products.

On the face of it, going up against brands such as Makita, Dewalt, AEG and Bosch would seem ill-advised: they have had decades to establish their premium brand status. Yet the power of promotional tools such as reviews, which only retailers can wield effectively, could make this more possible.

To give an example of one possible area: there is a $340 flat spot in the pricing of compound mitre saws at Bunnings (and elsewhere) between a $459 AEG and a "trade" quality Bosch at $799.

Other influences of e-commerce

It is not just through the power of reviews that e-commerce is changing the way home improvement retailers do their business.

At the moment, if you want to buy a low-cost drill press, the least expensive model from Bunnings is $99. At Masters the cheapest drill press is $118 (it has a laser line generator).

SuperCheap Auto is offering a drill press for $94.95. Through eBay, with free in-store pickup.

Of course, there is a question about whether SuperCheap Auto has established an adequate metabrand. Would most consumers really trust the company to replace a defective power tool? (I'm sure they would; this isn't about what's factual, but about DIY customer perception.)

That seems like a major drawback - until you think about it. SuperCheap Auto is selling the power tools through eBay, where, if you pay with PayPal, you receive additional consumer protections.

That's right - SuperCheap Auto is leveraging eBay/PayPal as a metabrand to guarantee the transaction.

As more effective means of distributing goods ordered online are established - some likely by Wesfarmers, Woolworths and (especially) Metcash - this kind of disruptive activity is likely to pick up. It is unlikely to "ruin" the low-cost commodity power tool market for big-box retailers, but it will have an impact.

The shift

Several forces - the increasing influence of e-commerce on all business models, diminishing margins in low-cost tools due to increased brand competition, and the ongoing increase in demand-side influence - look like they could, over the next three years, reset the home improvement market, much as it was reset 20 years ago.

The big question is whether the current market leaders, in Australia, the US and Europe, will be able to adapt to these changes, or will be disrupted into having less overall relevance.

Strategic planners and managers need to ask themselves is whether their decisions are based on current and future market realities, or are simply a blind repetition of established business culture.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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As we look ahead at the next two to three years, what are the most likely disruptors we will face in the home improvement industry?

The disruptors from the recent past have mostly been indirect consequences of advances in logistics, and the opening up of the Chinese industrial manufacturing markets for export.

In the future, however, we are as likely to see disruptors emerge on the consumer demand side as we are on the supply side.

Beware the other online retailers

While a lot of attention has focused on Amazon and a few other online retailers, home improvement retailers seem totally unaware of one of the major online operators in the Asia-Pacific region, Lazada.

Lazada operates in Indonesia, Vietnam, Thailand, Singapore, Philippines, Malaysia and China/Hong Kong. Launched in March 2012, Lazada has grown rapidly and now employs 3,000 people across Southeast Asia. Total daily site visits are claimed to be two million. Lazada also claims to have the largest Facebook presence in Southeast Asia, with over nine million followers.

One reason it has been successful is that Lazada has tailored its offerings to its individual markets. For example, it has launched the LZD fashion label, with clothes made to fit the specific body types common throughout Southeast Asia.

Currently Lazada offers a wide range of products in the home improvement area, including power tools from SKIL and Bosch. Its general approach is to target the emerging middle class in developing economies, offering them products at good prices that would be difficult to obtain through other channels.

Origins

Lazada was founded by German company Rocket Internet. In early December 2014 Lazada raised 200 million euros of funding, mainly from Singapore investment company Temasek. Other investors include Kinnevik and Verlinvest.

Parent company Rocket Internet listed on the Frankfurt stock exchange in October 2014, the biggest initial public offering (IPO) in Europe since 2000. The listing currently values the company at around US$8 billion, with over US$1 billion raised through the IPO.

Lazada is held by Rocket Internet through BigCommerce. Rocket Internet holds a direct stake of 51.6% in BigCommerce. BigCommerce in turn holds a stake of 50.9% in Lazada. Rocket Internet also holds 0.5% of Lazada directly.

Net revenues for Lazada in 2013 are stated as 56.8 million euros. The company operated at a net loss of 51.8 million euros for 2013.

The company launched seven startups in 2014, and has indicated it will launch 10 more in 2015.

While there has been no specific announcement of plans to expand Lazada into Australia, this would seem a possible move over the next two or three years. Rocket Internet has already backed some Australian enterprises, most recently Ridesurfing, a ride-sharing service based out of Pyrmont in Sydney.

Sharing economy

While the so-called "sharing economy" received its initial boost in the dark days of the GFC, there are signs that it continues to grow steadily in the background, and may one day soon burst out as a major mainstream movement.

In terms of sharing that will directly affect the home improvement industry, Peerby is a new intriguing service that helps to enable neighbourhood sharing of tools and other items.

Originally started (in Amsterdam) with the intent of helping people to "hire out" the tools they owned to neighbours for a fee, the company soon discovered that its prospective customers actually liked to loan tools for free. Instead it shifted to being a service that enabled such loans, but obtains revenue from insuring the tools that are loaned.

The nature of the disruption to the home improvement industry is quite unclear. A first impression might be that enabling this kind of exchange would limit the number of tools sold, and thus result in a drop in demand.

However, the effect might actually be to reduce some sales of cheaper tools while actually enhancing sales of better quality, more expensive tools. One reason why cheap power tools sell as well as they do is that the home handyman/DIYer will only get a limited amount of use from each tool.

If you use a power mitre saw only every two or three months, buying a $70 model makes a lot of sense. It's not going to be a great saw, but with such moderate use it will likely last five years or so.

In a power tool sharing economy, you will (as you can with the online community tools Peerby offers) be able to check in your neighbourhood to see what is available. As a consequence you might realise you can do without a number of tools, such as a chainsaw and a posthole digger.

Instead, so as to better participate in the sharing economy, you might spend $350 on a better sliding mitre saw. Your neighbours will be inclined to borrow this from you, so you will feel you are contributing.

A single borrowing "pod" at Peerby is about 25 addresses, so the equation might work out that where previously perhaps five or six power mitre saws would be sold, only two would now be purchased. The dollar value of those saws would likely be slightly lower than multiple cheaper saws, but the end margin they delivered would likely be higher.

There would also be secondary effects. Having a ready resource of good quality tools is likely to make doing a number of projects that little bit easier, which could encourage people to do more projects.

Better retailing systems

Walk down the aisles of any hardware/home improvement store, big or small, and you will spot a number of areas which have changed very little over the past 20 years.

Fasteners

Perhaps the single most evident area is in fasteners. Many of us will be old enough to remember our fathers going into hardware stores and buying a pound of nails, which would be weighed out on something like a grocer's scale, and delivered wrapped in a small brown paper bag, which the nails would then try to poke their way out of.

That changed to pre-packaged goods, which made it a little easier for retailers to offer a wide range of fasteners, and made the process of buying them mostly self-service.

However, since then the number and type of fasteners has created a bewildering complexity. Not only are there multiple sizes, types, and purposes for fasteners, but we have the added confusion of mixed metric and Imperial measures.

In virtually every hardware store you visit you will see one or two bewildered people making their way through a long aisle with perhaps several thousand fastener choices, trying to find something that will work for them.

Without doubt HNN is not the first group of people to see various solutions to this problem. For example, some form of computerised distribution, where the type of fastener could be selected on a touch screen, then delivered in its own box by a robotic selection system.

Not only would systems such as this make it easier for customers to find what they need, they would also take up much less valuable shelf space.

Probably before this kind of system comes to fruition, there will be disruption from online fastener distributors. As the need for fasteners is often quite immediate, this will likely only take off when the ability to deliver same-day orders in metropolitan areas becomes more common.

Amazon and other e-commerce pioneers are working to solve these problems today, so we can probably expect better solutions within two years.

Paint

The last great advance in paint retail sales (outside of the consistently good development work on paint techniques and formulas driven by the manufacturers themselves) was the development of reliable and accurate systems for mixing consistent colours. However, many of the aspects of paint sales have remained unchanged for 50 years or more.

In particular, there is the use of small and large containers in which the paint is pre-packaged for the average consumer. Is this really necessary? What if paint were instead delivered to home improvement stores in sealed bulk storage containers?

Retailers would be able to pump out the amount of paint a consumer wanted, and a computerised system could work out the correct colour mix for the weight of paint.

This mixed paint could be distributed in returnable, re-usable containers. At the end of the paint job, instead of storing half-finished tins of paint for later disposable, the consumer could return the container and the paint remnants for processing and re-use.

This would not just be more environmentally friendly and convenient, it could also bring a bit more rationality to the paint pricing system. There is nothing worse, at the moment, than needing something like 6.5litres of paint for a project.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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To take care of some basic business first, we have released a special "Holiday Edition" of HNN eNews. We thought we could get one last newsletter to subscribers before the holidays if we sent it out a little early this week.

We will be pausing the regular eNews delivery for the next two weeks. The next full edition of eNews will be delivered on 5 January 2015. It will be a bumper issue.

Readers

We would really like to thank all of our subscribers to the newsletter. When you subscribe to the newsletter you directly indicate your support for what we are doing, and we are grateful for that weekly boost you give us.

We are very happy to have so many people reading the website every day, and using our iPad app to access our content.

We also appreciate the growing number of people accessing our stories through HNN's social media channels such as LinkedIn, Twitter and Google +.

Sponsors

We've been blessed with some of the best sponsors we could have hoped for. We would like to thank the companies that have financially supported us this year through advertising and other forms of support. Mecca Consulting was the first company to come on board, followed by Spot-On, ITW and Globel Industries. Recently HBT has joined us as well.

Sincere thanks to Mark Gledhill; Mark and Cate Hunter; Jason Wheatley, Chris Gobel and Tim Starkey.

There are numerous others who have endorsed HNN and encouraged us along the way. We are thankful of their support too.

The year ahead

We think 2015 is going to be a very interesting year. It will be the first year when we really begin to see how the Masters, Bunnings and Mitre 10 strategies are going to play out as they develop. As a consequence of that, we'll probably start to see some fundamental changes for independent retailers as well.

HNN also believes that by the third calendar quarter of 2015 we will see more attention towards technology, including e-commerce and in-store interaction with customers. We hope to provide extended and useful coverage of these areas as they develop.

HNN has a number of products waiting to be launched. We will soon be coming out with a new-look website, with improvements for those who read the site on desktop PCs.

We're also making some changes to the way in which content is organised, so that the site can function better as a reference site for the home improvement industry, a place where you can quickly find and check details such as statistics, companies and people.

We will shortly be launching iPhone and Android phone apps for the site, as well as improving our current iPad app.

In addition, we will be producing a weekly podcast which will provide some colour and commentary of events that have happened over the week. Later in the year, we will add a short video newscast, as more information is becoming available in that format.

HNN has worked hard this past year to improve our coverage of company news, statistics and strategic analysis. We hope in the coming year to continue to improve in those areas, but also to add more direct, in-the-field coverage of the industry, through more direct contact with more home improvement retailers, suppliers, as well as industry consultants and analysts.

Thanks to you all once again for your support this past year. From all of us at the Hardware News Network (Betty, Ray and Scott), we wish you all a happy, joyful and relaxing holiday season.

See you in the new year,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

To receive a daily dose of HNN, download the free HNNBrowser app from the Apple store:

A major concern for home improvement retail in 2015 will be the property market. Are we currently in a "bubble", which will "burst" during the coming year? How will this affect sales volume in, say, April and May 2015?

These short-term projections are vital to business planning, but they tend to mask some of the deeper concerns about the market link between property values and home improvement. While it is true that a strong property market is good for home improvement, this is only part of the story.

In this editorial I want to touch on two aspects of the relationship between the property market and home improvement retailers. Firstly, I want to take a look at the coming year, and see what we can do about predicting what will happen.

Secondly, I want to look at the underlying forces shaping the Australian property market and how these might be re-shaped to yield a more rational situation that would be better for home improvement retail.

The Australian property market in 2015

At the moment there is a grand debate between those who are see house prices rising, and those who see them falling sharply over the next year.

The pessimists

The pessimists see the steady rise in house prices in some Australian markets - notably Sydney and Melbourne, the two largest cities - as presaging a "bubble", with its inevitable consequences, a "bursting" of the bubble resulting in a rapid decline in house prices. This side points to defining factors such as the historically high prices, the inability for the economy to support such prices based on measures such as wages, and the likelihood of an increase in base interest rates by the Reserve Bank of Australia, resulting in high mortgage rates.

The thinking of this side of the debate is very much in evidence in a commentary article written by Peter Martin, the economics editor for The Age newspaper:

We are forever being told that past performance is no guarantee of future returns, but we don't believe it. So when we see house prices rising we act as if we have seen a sign that they are going to keep rising. Even as the drivers turn against house prices (real incomes are falling) we keep buying because others are buying in the expectation they will keep climbing.

The optimists

The optimists see whatever "bubble" indicators there may be as clearly confined to the capital cities, and believe that local market factors will take care of any excessive exuberance. They also point to ongoing constant demand factors, including population growth through continued migration, as continuing to place demand pressure on property markets.

In addition, many believe (a little paradoxically) that the economy remains so weak due to both external factors (such as the Chinese economy) and internal political factors that the RBA, if it does raise interest rates, will only do so late in the year, and at a relatively low level.

An example of this general view can be found in the survey of economists conducted by finder.com.au. For example, this is a remark attributed to Melissa Brown of Accounting and Taxation Advantage:

A period of stability is needed. Aussie Dollar is still high and other than the property market still potentially overheating in some areas, this isn't enough to raise rates. With a growing demand for property by SMSF [self-managed superannuation funds], I can only see a continued climb in house prices.

HNN's view

In attempting to analyse this situation, one of the first things we did was to take our standard statistics for the housing market, and graph out the statistics for the full span offered by the numbers from the Australian Bureau of Statistics.

This graph looks at the number of dwellings constructed and the value of those dwellings, as well as the number of dwelling building applications. Rather than looking at the raw numbers, we look at them on the basis of the year ending in the current statistical month (in this case September), and graph the percentage change over the prior year.

The one change we did make for this graph was a phasic shift to the approval numbers, moving them one-year into the future. In this way the approvals more closely match the market they predict. Here is the graph:

>http://hnn.bz/editorialHousingStatsGraph.png}Graph of ABS housing statistics}http://hnn.bz/editorialHousingStatsGraph.png

We would like to tell you that one glance at the graph gave us an instant "ah-hah" moment. Unfortunately it did not.

What the pattern seems to reveal is that the housing market is currently in a highly unusual state. About the closest match from a previous period would be 1993, after a strong slump in housing prices, when the market was beginning to recover.

HNN agrees with the 19% of economists in the finder.com.au survey who see the RBA increasing interest rates in the second calendar quarter of 2015. We also see house prices remaining relatively stable, with the Australia-wide growth rate around 1% higher than the rate of inflation.

The property market and home improvement

The current wisdom is that high property prices benefit home improvement. The high prices act as an incentive to people to construct more buildings. They also encourage people to do more renovation and repair on their homes.

This is to some extent quite true. Home improvement sales volumes increase as more houses are built and more renovations commence. However, the increase in home improvement sales revenue is proportionate to the number of projects, and not the value of homes sold.

To illustrate that point, this is a graph from a very good paper published by the RBA on the property market from 2000 to 2010:

>http://hnn.bz/Yates_construction_housePrice.png}Real increase in construction costs}http://hnn.bz/Yates_construction_housePrice.png

This graph is published in the report entitled "Housing in Australia in the 2000s: On the Agenda Too Late?", written by Dr Judy Yates of the School of Economics at the University of Sydney. She describes the meaning of the graph:

This shows the increasing divergence between the price of established houses (which includes land) and the construction cost of new dwellings (which excludes land). Some of the increase in both dwelling prices and construction costs reflects increased costs associated with larger dwellings and higher quality construction (resulting from higher demand for housing services from a more affluent population), but the increasing differential is driven by increasing land costs.

What we can extrapolate from this graph is that it is not the home improvement retailers that really benefit from a volatile and active property market. Instead it is the real estate agents, and some speculators.

In fact, it is quite likely that higher housing prices, beyond a certain point, act to inhibit the performance of home improvement retail. Money that could have been spent making a house better is instead sucked up by deposit and subsequent mortgage payments.

Why have property prices continued to increase?

A phrase that economists such as Dr Yates use to describe an aspect of how markets operate is "the elasticity of supply". This refers to the ability of markets to respond to increased demand, which is often indicated by increased prices. Dismissing some of the reasons commonly given for poor supply of suitable property, Dr Yates points out that:

... if the long-run supply of housing is inelastic because of the inherent scarcity of urban land, then any increase in demand will add to dwelling prices.

Of course, in the Australian context, a scarcity of land seems slightly absurd. Given the vast stretches of sparsely populated land, this kind of scarcity must be, to some extent, artificially created.

The creation of the category of "urban land" that is in scarce supply is one of the consequences of centralisation. This graph, also from Dr Yates' paper illustrates the effect of increasing centralisation on house prices:

>http://hnn.bz/YatesDistanceFromCBDPrice.png}Yates: Distance from CBD and prices}http://hnn.bz/YatesDistanceFromCBDPrice.png

Centralisation has a number of causes. One of the most prominent is simply town planning. Another that is equally as powerful is the creation of a specific market system built around land values.

Getting a mortgage on a tiny terrace house in an inner suburb is typically a fairly simple process. Try getting a mortgage to build a small house on a block of land 150km from the nearest city, and you will find all kinds of obstacles. The terrace house is a known entity to the banks, as it participates in a familiar market. The country house is not. Its future value is very difficult to predict.

Of course, this applies to the owners of property just as much. Even if the terrace house costs a lot, there is a good chance it will eventually prove to be a good investment. The country house could just as likely fail as succeed as an investment.

Ironically, then, it is scarcity itself which creates a market, and therefore aides in the growth of a housing market that can support the construction and sale of dwellings.

As populations have grown, and the attractions of cities have increased, this scarcity has reached proportions where it is now harming the market it helped to create.

Solutions

HNN has already written fairly extensively about one solution that will likely not become widely effective for another decade: telecommuting.

To quickly rehearse the numbers on that: if 40% of the workforce telecommutes one day a week, the net reduction in commuting traffic would be 8%. This would also make it possible for people to live further out from cities.

If people are willing to spend 10 hours a week commuting (an hour each way five days a week), commuting only four days a week would extend the "commuting band" around cities by a further 12km, opening up more land for housing, and moving more finances into remote communities.

The other solution to centralisation would be what is usually called "decentralisation", but which might be better termed more centralisation through more centres. In our terms, it would mean the creation of subsidiary, cheaper land markets.

One form of such decentralisation could be through the creation of what have become known as "Aerotropolises". These are city-like enclaves that grow up around major airports. Areas such as Melbourne's Tullamarine could be boosted in such a way that it became a viable alternative to the Melbourne CBD for working and living.

In case that sounds far-fetched, moves to do exactly this are already underway at Canberra's airport. According to it the Canberra Airport Master Plan (2014):

Increasingly, businesses are recognising the role of airports as economic drivers for their region and are demanding a presence on or near major airports. These airports, now commonly known as 'Aerotropolis', are emerging worldwide. Cities with emerging Aerotropolis, similar to Canberra, are now being acknowledged to be the most competitive Cities of the 21st Century. Further commercial development in response to this demand and the alternative revenue streams (ie, independent of airlines) it delivers has enabled the Airport to fund major aviation infrastructure developments such as runway and terminal upgrades. Commercial land will continue to be put to productive use where commercially possible, considering surrounding land uses and transport linkages, by incorporating a wide range of activities including office and retail.

Conclusions

The second-generation of hardware stores, which opened the way to DIY activities, were born out of the creation of "suburban" life, which, the real estate brochures declared, combined the best elements of city and country living.

The third generation of hardware stores was created by the super-suburbs that sprang up on the outskirts of the first generation suburbs. These each contained their own unique "centre" of activities and commerce, while they remained clearly in the orbit of the nearest big city. It is these suburbs which helped boost the fortunes of Bunnings and other chain stores.

It seems likely, given property market pressures and other factors, that we will soon find ourselves faced with creating the fourth generation hardware store.

These will be less dependent on "the centre", and more capable of coping with a diverse and geographically widespread clientele.

Let's hope that they also change the general conditions of the market, so that more of the funds people are able to dedicate to their home get spend not on mortgages, but on the "improvements" that the home improvement industry can sell them.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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For most home improvement retailers, the next month is going to be a busy time indeed as the Christmas rush to both get the house fixed up for the festivities and buy presents gets underway. So we thought we would take this chance, rather than waiting, to take a look at what we can expect in the year ahead.

Overall economics

It is likely that 2015 will be the first year when Australia really comes to grips with the kinds of economic adjustments it needs to make. The core economic argument that is only just getting started is whether Australia needs to go down the path of austerity, or if it should instead find productive areas in which to invest.

HNN has covered elsewhere, in some depth, the situation as regards house prices. Generally speaking, while there may be some risks of a mild bubble in the Sydney market, there are positive signs, such as a decline in housing approvals for September 2014 despite ongoing house price rises, that indicate the housing market is aware of the underlying fragility of the current economy.

With a bit of luck, this might bring us the kind of constant, steady growth that the home improvement retail market really needs for retailers to turn in some good results.

Independent retailers

While the next year is likely to be a slightly tougher one for many independent stores, HNN does see the future as bright. The big-box stores will have reached close to their fullest expansion geographically by mid-2015, and they will likely begin further category expansions as the year progresses.

In the longer term, HNN sees various forms of online social interaction coming to benefit independent retailers. This will also be the year when independents start to do a better job of embracing technology.

That will lead to increased efficiencies, which will likely start to show up in 2016, after some of the initial costs have been absorbed.

Big-box retailers

In general, 2015 is going to be the year when we begin to see how the strategies the big-box retailers have adopted play out in the real world.

Bunnings

The coming year will begin to fully test the Bunnings strategy that it can grow its business by expanding geographically, and then expanding into new categories. Without the additional category expansion, it is unlikely the company will be able to maintain its growth numbers.

One intriguing possibility is to think about using some of the strengths of the Target brand to overcome the expansion weaknesses of the Bunnings brand. Bunnings does have one of the best brand reputations in Australia, but that reputation applies to a relatively narrow range of goods.

Imagine the situation where you either have a Target "caboose" store attached to a Bunnings, or a Target area inside a Bunnings Warehouse, fitted out to a higher standard of amenity.

Bunnings could then move all of its "high finish" goods into the Target store/area, including appliances such as vacuum cleaners and dishwashers, outdoor furniture, floor coverings, and so forth. That move would attract a whole new range of customers, which would be demographically adjacent to the current Bunnings customers.

While this seems a little unlikely for a number of reasons, it does mark out some of the task that Bunnings faces in category expansion. It will be very interesting to find out what Bunnings managing director John Gillam has in mind.

One area that is of particular interest is the Bunnings online presence. It does not seem likely that Bunnings can go through to the end of 2015 without developing some form of e-commerce. If it doesn't, we can expect its investors to begin to become a little restless.

Masters

As recent analysis of the Lowe's Home Improvement quarterly results has told us, Masters has continued to lose money, which was both predicted and expected. It is unlikely the operation will come close to break even in 2015, but there is a general expectation that the number will begin to head in the right direction by the end of the year.

One of the major challenges facing Masters is its marketing. This has so far been very lacklustre.

As HNN has covered in the past, its marketing remains closely focused on the store and its retail operations, rather than focusing on the customer. Given its market position and approach, it is vital that Masters finds its way to breakthrough marketing, ditching the rather staid approach that seems inherited from the quite unsuccessful Woolworths grocery marketing.

Mitre 10

One of the oddities of the Australian home improvement retail industry is how dependent it is on the food grocery business. Masters has been kept going by profits from the behemoth Woolworths supermarket operations. Unfortunately Mitre 10 finds itself in the reverse position, with its profits helping to support the faltering IGA and general food businesses of its parent, Metcash.

Metcash has promised something of a "reset" in 2015, but it is very difficult to see how that can possibly happen. IGA is now a victim not only of the expanding competition between Coles and Woolworths, but also of Aldi, which has replaced IGA as the third largest supermarket chain in Australia.

It is likely that at the moment Metcash is underinvesting in Mitre 10. I'm sure Mitre 10 is strong enough to hold out against this through 2015, but if it continues into 2016 it could become a real issue.

It is hard to see how Metcash could plan any kind of a reset without substantial additional capital. One intriguing possibility would be if it decided to spin off its Lucky 7 convenience store operations.

Coles and Woolworths have been jostling each other for some kind of dominance in that area, and it is likely Metcash's close to 200 stores would carry a hefty competitive premium.

This is, of course, pure speculation.

Summary

It is not likely that 2015 will be any kind of a "watershed" year, but it will be the first year when we get a glimpse of what the home improvement retail industry in Australia will be like in the future.

Will Bunnings manage its category expansion? Will Masters have a good Christmas and start heading towards a profit?

Can Mitre 10 continue to do more with less and hold its own in the market?

And will independent retailers break out of old habits and practices to find that they have a legitimate and profitable role in the future?

I would be very interested to hear what you think.

Until next time,

Betty

PS.

I also wanted to take this opportunity to welcome our new subscribers from HBT and its supporters. Great to know an Australian retail group is willing to invest in its digital future.

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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It is becoming increasingly clear that there is a dividing line between retail operations that are going to grow and prosper in the coming years, and those that are approaching EOL (End of Life).

The most stark examples of the latter include major department stores such as Myer and David Jones, as well as Target. The demarcation between works/doesn't work is responsiveness to the customer.

Myer, DJs, Target all seek to "position" the customer where they want them. Brands such as Apple delight customers. Myer's oddly infantilising "find wonderful" advertising campaign is a stark contrast to Apple's advertising which is all about enablement.

It is easy to see the mistakes that other retail sectors make, but the reality is that the home improvement retail sector is also facing a split. At the centre of that split is technology, and the most likely determining fact in that technological area will be home automation systems.

HNN has published an in-depth look at the prospects for retail sales of home automation in the Australian market. It makes a convincing case for the retail potential of home automation systems as a product line.

In short, home automation, through connected thermostats and other devices, will make it possible to reduce peak-load power demand. This will lead to reduced electricity rates for home-owners who link up these systems, fuelling widespread adoption. Such systems have already been trialled in locations such as Los Angeles, using the Google Nest thermostat.

This technology will help spread more general forms of home automation. Think of it as this generation's version of home insulation.

The next question

Should home automation be sold by home improvement retailers?

Of course, most home improvement retailers will sell some home automation equipment. It might just be a few door locks that are smartphone enabled, simple light and powerpoint switches that can be controlled over Bluetooth, and so forth.

But what about entire systems? Which retailers will be seeking to sell complex ranges of controllers, thermostats and switches?

The Lowe's experience

One retailer in the US, Lowe's, has chosen to invest heavily in home automation. Building on systems initially developed by a UK startup, Lowe's has launched its own product line, dubbed "Iris". The unique feature of the Iris products is that they can work with a very broad spectrum of home automation systems - everything from legacy, private network systems to more modern wifi.

In an interview with US business magazine Forbes, Lowe's vice-president for its smart home division, Kevin Meagher, has explained how the retailer sees its role in the market.

We think the opportunity around Internet of Things (IoT) is getting the business model right. There's just some silly business models out there right now. And there's a lot of talk around the problem of standards. There is no problem with standards - it's with us.

Meagher said that if we leave the integration solution to the vendors, they're never going to talk to each other, and they won't open their APIs (application programming interface) for fear the other guy will get control of their devices. He said:

Well, we're neutral. We're Switzerland. We actually realised that we needed to solve that problem for our customers.

While Lowe's will not break out any exact numbers, Meagher suggests that the company's moves to expand its home automation offering speak for themselves. He told Security Systems News in an interview:

All I can say is, we didn't extend to all stores and increase the footprint in all stores because it was going badly.

In mid-2013 home automation systems were offered at 500 stores. Today the systems are on sale at 1500 of the retailer's 1700 stores. In existing stores, the floor space devoted to sales has also increased.

All this comes at a cost, and Lowe's faces many challenges. David Chivers, writing on the Harvard Business Review site, outlined some of these challenges:

A new category means new skills: Suddenly, many of Lowe's 240,000 retail employees must be able to talk software and apps, and know how to connect Iris to all these other products, so the company is training them.

At the same time, with 15 million consumers walking through Lowe's stores every week, Meagher and his team believe that they can - must - play an important role in educating consumers on smart home technology, ease anxiety around standards and reduce customer confusion while providing that unifying product.

If they don't, Lowe's can envision a scenario in which customers would buy an IoT device from the retailer, then work directly with manufacturers on future services and products - go right to Google for Nest-related products, say.

In Australia

The challenges that face Australian home improvement retailers are every bit as difficult as those experienced by Lowe's in the US. However, there is an additional challenge, and this goes to the heart of the coming demarcation line in retailing here.

Where most US retailers, notably Home Depot and Lowe's, have readily embraced technology in various forms, Australian retailers have not. Their version of Myer's waif in its current advertising campaign is an apparent belief that either technology really isn't such a big deal, just a different way of doing the same thing or, curiously, an apparent attitude that it will all, one day, magically go away.

It could be that attitudes towards home automation systems will draw the line in home improvement retail between those retailers that will thrive five years from today, and those that fall somewhat by the wayside.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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What has been the number one problem for big corporations - as well as smaller businesses - in the 21st Century?

It has not been the various financial crises, regulation, too much or too little competition, the rise of formerly third-world countries as manufacturing powerhouses, technological change, or even straight out plain mis-management.

No. The number one problem has been culture, corporate culture, and the way in which it prevents companies from making the changes they need to make.

Being able to shift corporate culture swiftly can be crucial to survival.

When Apple released its first iPhone, Google and Samsung set about doing the only sensible thing imaginable: copying it. Microsoft's Steve Ballmer laughed at it. Nokia ignored it. Blackberry first ridiculed it, then made very bad "interpretations" of it.

All three of the latter companies subsequently began to fail. They maintained cultures that simply could not adapt to the entry of a new, significant competitor.

Over the past year, something of the downside of rigid corporate culture has been evident at the two companies that are now the biggest paired influence on the Australian home improvement retail industry: Woolworths and Wesfarmers.

The culture lag we're seeing at several Australian companies relates directly to what is typically termed "transparency": how much of the internal numbers and plans of an organisation are surfaced for public consumption.

The Woolworths misstatement

The first place where we saw issues of transparency emerge was in the difficulties Woolworths experienced reporting the performance of its Masters Home Improvement business through 2013/14. As the Masters' numbers continued to veer downwards from the optimistic predictions of some years before, Woolworths' management came under increasing pressure.

This led to the managing director of Woolworths, Grant O'Brien, telling investment analysts that he would let them know if anything major happened that would reset expectations.

At the results briefing for third quarter 2013/14, an analyst asked Mr O'Brien if such a reset in expectations had occurred. He responded with a single, very emphatic word: "No".

Shortly afterwards Woolworths had to reverse that "no". Masters had lost more than estimated, and was set to continue those losses. It turned out that the "no" had reflected something less than the complete truth.

The paint move

It didn't take long for Masters, under the leadership of managing director Matt Tyson, to begin to fight back. One of the clearest signs of this kind of comeback is something Masters recently did with paint pricing, which attracted a certain amount of media attention, with the respected Fairfax Media journalist Malcolm Maiden writing an entire column on the subject.

The Masters move was to release four-litre tins of pre-tinted low-sheen paint in its mid-low range for $20. There is a difference of opinion as to whether Bunnings was selling equivalent paint at a higher price or not, but in any event it moved quickly to offer the same size of its tintable "Spring" range for $17.50.

What is interesting about this face-off is an apparent market presumption (on the part of some retailers) that the tintable paint is inherently more valuable than the pre-tinted paint.

For most DIY purposes, it likely is. But this paint is, as Mr Maiden points out in his article, "bond-back" paint. It's the colour painters use on apartments that will be leased out.

From the perspective of tradespeople doing a quick freshen-up refurbishment of an apartment, the Masters paint may actually deliver better value.

To get the Bunnings paint they need to get the paint, figure out which particular colour of off-white (from about 10) they should get, then wait to get it mixed. If they need more paint later, they not only need to remember the exact colour name ("Orchard Dawn Friesian Cream White Fusion"), but also hope that whoever mixes the paint gets it right - something they will likely only confirm after the paint dries.

With Masters, it is just a question of popping into the store and picking up the tins of paint. That is already pretty good, but it gets better when you add into that mix the fact that Masters offers "click and collect": purchasing the paint online on its web site, picking it up later.

The main tradie on the job buys the paint online then dispatches an apprentice, P-plates flapping, to hand over the paperwork and pick up the paint. Not only less time spent, but the least expense in terms of whose time is used to do the pickup. And little chance of things going wrong.

To further add to this situation, the Bunnings paint is available (according to its website) in four-litre and ten-litre sizes only. The Masters paint is available in a 15-litre size as well.

The price on the four-litre Bunnings paint is $17.50, but it is $39.90 for the ten-litre size, only a match for the Masters price of $60 for the 15-litre size, the same price per litre as the Bunnings ten-litre size.

In a very subtle way, integrating a variety of features, with close attention to what the market might actually want, Masters is offering this paint product in a way that adds significant value, yet costs it nothing to do so. It's a clear differentiation.

It is also a very clever pricing/product strategy.

The Wesfarmers continuation

It was this strategy that at the most recent results release for Wesfarmers (first quarter 2014/15) pushed the company into something of an echo of the Woolworths miscommunication. One analyst asked the Wesfarmers executives about the impact of this recent Masters paint strategy on Bunnings' performance in that category.

The managing director of Wesfarmers, Richard Goyder, replied:

Yeah, I don't think we will give category information. As I said earlier Bunnings has had growth across all key categories.

And added later:

We think we've got real range authority in paint, and we think that has been borne out in the way the business is performing.

Neither of these replies actually answers the question in any way, of course.

In looking at this exchange, it's probably better to think of it as an exchange of signals, rather than answer and response. What signal was the analyst sending to Wesfarmers, and what signal did he receive back?

What the analyst is signalling

While HNN would not want to impute intention to an analyst, we can say that the net effect of the question asked is to see whether Wesfarmers is willing to acknowledge Masters as a major competitor and to discuss its effect on the company, and the steps Bunnings will take to counter any moves by Masters.

What Wesfarmers is signalling back

The overt response from Wesfarmers essentially indicates that Masters has and will continue to have negligible or no effect on Bunnings revenue. The less-overt response is that Wesfarmers and Bunnings are not going to discuss anything to do with their strategy as regards Masters.

The result

The end result is that the analyst has, intentionally or not, placed Wesfarmers in a minor version of the same clinch Woolworths found itself earlier in 2014. This question sets up further questions that can be asked at the half-year results, which will, of course, include the all-important Christmas sales numbers.

If Bunnings misses its expected growth by as little as a single percentage point, while Masters reports significant growth, this guidance by Wesfarmers could be seen as being a somewhat less than completely accurate.

The benefits of transparency

It is difficult to see, in both the Woolworths and the Wesfarmers examples, what the downside to a greater degree of transparency would be. In both cases, the companies do not seem to be working from a carefully thought-through, well-planned strategy with the goal of maximising shareholder value.

It was fairly evident that, short of a retail miracle, Masters was not going to meet expectations. It seems equally evident that in some areas Bunnings will experience some strong competition from Masters, which will likely cause it to change strategies in response.

What makes this example particularly strong is that Wesfarmers really should have expected such a question. Anyone following the media coverage would know this was a hot topic.

Wesfarmers is a company with EBIT of over $4.1 billion in 2013/14. It really should be well-prepared for obvious analyst questions at a results release.

Denying events that seem quite evident, or holding back information on areas that are highly germane to investment analysts is probably not going to do much for shareholder value. It seems more like a throwback to 1990s corporate culture than something looking ahead to 2020s culture.

Until next time,

Betty

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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In many ways, the 2014 edition of Channel Nine's epic "reality" home improvement series The Block echoed something of the state of the home improvement retail industry itself. In a commercial/ratings sense, it did quite well, but it also gave some strong indications of not quite knowing what it was about.

This was also reflected in what seemed a relatively weak use of the medium for promoting home improvement stores. While Mitre 10 continued to have a good presence, it might have been a little blunted by lack of an adequate budget, and one or two poor advertising choices (in particular a paint ad).

Metcash, Mitre 10's owner, continues to struggle as its IGA supermarkets battle it out against Woolworths, Coles and now Aldi as well, so the possible financial restraints are understandable, if unfortunate.

The only real home improvement "winner" was The Good Guys. Without intruding on the TV episodes directly, this company nonetheless managed to present itself as a high-finish, stylish, helpful company, prepared to go the extra mile to help its customers.

The social score

It was evident from the beginning of this series that Channel Nine had received the message about potentially using more people who, to utilise an American expression, looked more like "what Australia really looks like".

Not only was there greater ethnic diversity, but it also featured women who not only would not fit into size 0 short-shorts, but would have no inclination to do so in the first place.

However, there was one almost shocking and persistent social lapse: an almost complete lack of any kind of environmental awareness. It was pretty evident that a project engaged in turning a 1970s office building into a set of six apartments was perhaps never going to be described as "eco-friendly", but there did not seem to be a single concession to environmental awareness.

It seems unlikely that anyone who actually lives in Melbourne did not look at those eight-plus metre high ceilings and know its eventual owners would be condemned either to very high heating bills or chilly rooms for eight months of the year. Insulating the walls really isn't going to do much in those circumstances.

Just to give a single example of the kind of slack thinking employed in terms of environment, every single showerhead in every bathroom wasn't just non-efficient, they seemed designed to blatantly waste as much water as possible. It was amazing.

Added to this were a number of comments that most of the bathrooms really needed to feature twin showerheads to accommodate their residents. (Is everyone showering together, these days?) So much for finding creative and interesting ways to save water.

Hello, Channel Nine? "Global warming" ring a bell at all? "Drought"? Any takers?

The other social score

This preference for "luxe" over conscience tags into another difficulty with this series. There seemed from the start to be a kind of total confusion over who would actually eventually buy the apartments.

The original sense, as far as one could tell, was that potential buyers would be the younger, trendier couples with aspirations to eventually make it into upper-middle class Australia. Think lawyers trying to get on partner track, recently appointed executives who want to make it into the boardroom and perhaps become CEO some day.

If you know anyone who is on that kind of career path, the first thing you know is that they can be utterly remorseless entertainers. They don't so much live in their houses, as use them to establish useful social connections. That means entertaining at home at least 12 times a year, and frequently 15 or more times.

Those people really do not care that much about fancy bedrooms or luxury bathrooms. What they need are "high-end" functioning living-rooms, dining-rooms, outdoor areas and kitchens. Those are the "working" parts of their houses.

Due partly to the order in which the rooms were completed on this series of The Block, the apartments were designed with over-styled bedrooms and bathrooms, and with living-rooms and dining rooms that were essentially a cheap afterthought.

The kitchens were somewhat more functional, but it seems unlikely most of the contestants understood that, with the given market, those fancy ovens would primarily be used by the catering staff, and not as part of creating a homey atmosphere on late Sunday afternoons.

The core reason for this, of course, is that - barring a few top professionals - people largely design spaces for themselves. Thus from the perspective of the contestants most of the design really fell into the category of "blue-collar aspirant" design; ie. those moving beyond their blue collar origins.

There is nothing particularly wrong with this, except that no one who is a blue-collar aspirant is going to drop $1.5 million on an apartment in a repurposed office building in Prahran.

While that kind of confusion is almost acceptable in contestants who are, for much of the time, responding to the conditions of the competition itself, there are fewer excuses for the judges of the competition.

They seemed equally unable to understand the idea that people might want to buy an apartment with a specific purpose in mind. They seemed to think the eventual occupants would be wannabe socialites and, perhaps, members of the more minor aristocracy, who would want to spend time in delicately appointed rooms when serving tea to their contemporaries.

Given this, it is hardly a surprise that the final sale of the apartments was borderline disastrous, with only two of the five apartments exceeding their reserve prices by any significant margin. It seems unlikely that anyone from the declared markets actually showed up as buyers.

The show as industry

One of the better, clear-sighted analyses of the results was provided by The Property Observer:

The most profitable selling market would have been student style - or Gen Y workers - rather than vast luxe given its proximity to Swinburne University with the 6 route tram out front and the railway very close via the Percy Street garage exit...[T]he deep-pocketed baby boomer buyers that are the traditional recent Block apartment auction attendee either understandably didn't turn up or showed suitable reserve and mostly kept their hands in their pockets given the mediocre Prahran location...[P]roperty success is often premised on population trends so those big three bedroom apartments were perhaps oversized for the very obvious Prahran composition of households without children. It sits at around 70% compared to the 50% Melbourne average. Ditto the lone person households category in the last census sat at around 40% of Prahran households compared with the Melbourne 23% average. There were just the 99 households in Prahran with five or more occupants.

Part of what is interesting in this analysis is its dismissal of the "Gen Y workers" as potential purchasers of this kind of apartment. The older Generation Y "workers" would be in their early- to mid- thirties, and some of these would be in this market - as would much of the "mysterious" Generation X.

But the Property Observer - and presumably many others - simply can't help thinking about the whole situation through the eyes of the (still-dominant) baby-boomer generation.

To a large extent, this is a problem that continues to afflict the home improvement retail industry as well. It is not just the question of whether in the demographic stakes the baby-boomers dominate the actual purchasing market, but more whether their values remain dominant.

What retailers - not only in home improvement - are just now beginning to understand, is that the values of younger generations - X, Y, and the Millenials - are now starting to strongly influence the overall culture.

Even baby-boomers themselves are taking some of their attitudes from these other generations. This change is what is really behind, for example, the steady decline of the department stores, the move to higher-density housing, the rise in popularity of inner-city areas.

That market is something that every retailer, especially in home improvement, should consider as an expansion opportunity.

Until next time,

Betty

For any feedback, comments or story tips, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

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When someone goes into a hardware store to buy a hammer, it could be used to tap a nail into the wall of the garage to hang a broom. Or they might be planning to build some kitchen shelves. Or they could be making the first purchase that will lead to the construction of a house extension.

That wide range of uses and consequent wide range of expectations is part of what makes home improvement retail so challenging. It is also what makes defining a career path in hardware difficult. What do you need to know to get ahead? Everything. Where do you go to find out about that? Everywhere.

It is true that much of home improvement retail has to be learned through on-the-job experience. However, increasingly, there is also a need for formal training. For example, as technology continues to become more essential to customer-facing as well as back-office operations, being able to manage software systems is as important as getting physical re-stocking done right.

Understanding how the ERP software connects PoS with the stockroom isn't about memorising a set of keystrokes and mouse-clicks, because all that is going to change every few years.

A path

One of the industry's top goals for the next several years should be to provide a clear career path both for new entrants into the industry, and for people who are seeking ways to "step up" to bigger and broader jobs.

Quite a few promising younger people leave the industry and go elsewhere every year simply because they are unsure what they need to do to get ahead. It is also not uncommon to see experienced veterans overlooked for deserved promotions, just because they lack a few simple qualifications they could obtain in six-months at an after-work course.

At the very least we should be able to say to people: here is the path, and you have travelled about so far along that path. Areas you need to improve in are these and these. To improve in those areas you need to do this and this.

Another aspect of making career paths more defined is that it will make it easier for women to navigate the qualifications successfully. Home improvement still lags other retail sectors when it comes to gender equality. What that means, quite simply, is that we are letting some good people slip through our fingers.

Standards are probably not what the industry needs, but strong guidelines would help. There needs to be interaction with tertiary educational institutes, so that they are at least of aware of what employers look for when they hire.

That is not just for the benefit of young people. In general, the industry really has been somewhat profligate with the available talent. It needs to tighten up, and work harder to meet employee expectations.

It will not only make individual businesses more competitive and efficient. It will also have an impact on the overall health and competitiveness of the home improvement industry.

The real competition is just beginning

That overall competitiveness is important because over the coming five years it is likely that retailers outside of home improvement will become involved in the industry. They will be attracted by the growth prospects: hardware, building and garden suppliers grew by 7.1% in 2013/14, according to the Australian Bureau of Statistics, while many other categories declined.

These brand extensions will involve highly vertically integrated operations, relying on overseas sourcing of materials, fronted by a respected and well-known retail name that middle-class Australians can easily relate to.

Virtually every profitable category in home improvement would be vulnerable to this approach. The aim will be to "take out" the high end of the market, eliminating concerns about price competitiveness.

It will not be surprising to see something like "kitchens by David Jones" emerge, for example. Freedom Furniture is already an entrant in this area.

To paraphrase what the competitive aspect of home improvement will be like in the near future: "Bunnings is just the beginning".

So you need to start thinking about employees the way you think about that hammer. You don't know what you and your team are going to have to face up to over the next decade. And the last thing you are going to want is finding yourself having to drive a six-inch nail with a tack hammer.

HNN is making its own contribution, in a small way, to encourage career development in the industry. We have set up a new section called Careers that will feature the latest appointments, both local and international, a selection of job opportunities, and news involving training, education and knowledge gathering based on experience. I hope you get a chance to discover it yourself. You can go to the Careers section now by clicking onto the image below.

>https://farm4.staticflickr.com/3916/15006459346_a414dc7145_t.jpg}HNN Careers. It's one way up}http://hnn.bz/indices?tag=careers

Until next time,

Betty

For any feedback, comments or story tips, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

While retail operations in Australia have been steadily "internationalising" to the extent that they are within touching distance of retailers in the UK and the US, the media has largely not kept pace.

Despite the disruptive influence of the internet, business reporting in Australia seems locked into a 1990s style "crash and burn" philosophy, where news just isn't news unless it sizzles. Added to this is a lack of any kind of depth to research, poor historical knowledge and frequently an inability to analyse facts.

It remains a mystery how this kind of reporting can continue when there are many fine examples of business reporting in the world, including the Wall Street Journal, the Financial Times, and the business pages of newspapers such as the New York Times and The Guardian.

The past two weeks in particular have given us a couple of examples in the home improvement industry of just how bad some of the reporting is.

Woolworths and Masters

The announcement by Woolworths, several weeks ahead of its formal announcement of performance during 2013/14, that Masters had lost more money than was previously forecast hopefully did not take anyone in the industry by surprise.

That is, except for business journalists at most major media services, who used the "confession" as an opportunity to bash Woolworths in various ways from various different directions.

I'm not going to bother to link to any of these items, because it is likely you have seen them already, and I'm not inclined to lend them any more credence.

In HNN's view, and perhaps in the view of most in the industry, what Woolworths and Masters have done is to confess to some of the troubles they have been having up until recently, and to outline a plan and strategy to do better in the future.

It is a very good plan, and it flies in the face of many of the previous strategies, which indicates a high degree of determination. Far from being some kind of a "back down" or a "last ditch effort", it is reasonable, well-thought through, and will very likely succeed.

In fact, it is just difficult, given the actual circumstances, to see what Woolworths and Masters could have done that would have been any better.

If you want a clear and simple statement of what Masters is up to, I highly recommend watching the video that Woolworths and Masters have obviously gone to some extent to produce, and which is available through YouTube.

n the video the managing director of Masters, Matt Tyson, clearly explains the new strategy. I don't think any other media outlet has spotted this, let alone mentioned it (though I could be wrong). Click below to see it:

>http://hnn.bz/MastersViewTyson.png}Matt Tyson explains the new Masters strategy}https://www.youtube.com/watch?v=wHN5gWJrUgU

To be fair, some reporting was better, such as Sue Mitchell's piece in the Australian Financial Review, which indicated that major shareholders in Woolworths had actually responded positively to the announcement.

In fact, this brings up one of the major points about this area of reporting. If anyone deserves the real credit for exploring this story, and sheeting its consequences home to Woolworths over the past two years, it is actually the financial analysts.

In particular at the most recent conference call on Woolworths quarterly earnings, they really worked hard to bring the reality home to both the Woolworths managing director Grant O'Brien and Mr Tyson. That can't have been easy - analysts much prefer to have cordial relations with the companies they cover. It's just that it was important enough an issue that they were willing to break that cordiality.

Richard Goyder's address at the National Press Club

The second example of poor coverage concerns Richard Goyder's speech at the National Press Club, where he appeared as the chairman of the "B20", a business advisory group to the G20, which is set to meet in Brisbane in November.

Virtually every press report chose to emphasise what were really two very minor points to his speech: his suggestion that Amazon could become a considerable competitive force in Australia, and around eight words or so with which he supported the extension of the GST to personal imports worth less than $1000.

I would be the first to say that I am uneasy with a number of the suggestions made in this speech. However, as I (of course) respect Mr Goyder, I would have welcomed a more public debate about these issues. Instead, the media reported a few side issues of little importance.

I would strongly encourage people to at least glance through the transcript of the speech that has been provided by the B20. At the very least, it offers some clear insights into the business thinking of Mr Goyder, who is an important figure in our industry. Click below to see it:

>http://www.b20australia.info/SiteAssets/b20-logo.png}Transcript of Richard Goyder's speech to the National Press Club, prepared by iSentia}http://www.b20australia.info/Documents/Transcript%20-%20GOYDER%20RICHARD%20TUES%205%20AUGUST%202014.pdf

Better communications

While the above examples are not going to provide the home improvement industry with a lot of confidence when it comes to press relations, the truth is that the industry itself often bears some of the blame for the poor coverage it receives.

Communication with media outlets is not something that can simply be summoned up at will. If you want to get fair and accurate coverage you need to build some kind of a relationship, however slight, with media outlets.

In this day and age you must also be prepared, sadly, to educate the media whenever you want anything understood. You need to provide the industry context, the history of your past actions, how your new actions fit into that context, and how you see these actions affecting the future of your business.

Until next time,

Betty

For any feedback, comments or story tips, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

PS. The HNN team has been on the road recently and one of its first stops was the ITW Proline's offices in Wetherill Park (NSW). We met with Jason Wheatley, national marketing manager - hardware & fasteners. We hope to see some of you in your natural habitats soon. (l-r) Ray Quek, Jason Wheatley and Betty Tanddo

>http://pbs.twimg.com/media/BvCgkKICIAMJ-_l.png}(l-r) Ray Quek (HNN), Jason Wheatley (ITW Proline) and Betty Tanddo (HNN)} https://twitter.com/HNN_Australia/status/500076103772278784

Wesfarmers managing director Richard Goyder addressed the National Press Club (NPC) in Canberra on a chill day in early August. He was speaking as the chairman of the "B20", a group of business leaders assembled to provide guidance to the Group of 20 (G20) national leaders, which is set to assemble in Brisbane this coming November.

Of course, though, Mr Goyder never really stops being the CEO of Wesfarmers, so the speech he gave combined the views of the B20 with those of Wesfarmers. One of the topics he wanted to cover was his concern over potential changes the Government's Harper Competition Review was considering to the Competition and Consumer Act 2010 (CCA), especially Section 46.

That change would alter the standard for misuse of market power from being based on "usage" (it was intentional) to effect (not necessarily intentional). He said:

I think it's ludicrous to contemplate introducing an effects test into the competition act. It would mean that businesses must not take advantage of any market opportunities that they have if it had the effect of likely damaging a competitor, and I'm going to tell you it's very difficult for a business to know before you make these decisions what impact your decisions might have on pricing or opening new stores.

Goyder used the benefits that Bunnings brings to support his argument that competition legislation does not need to change:

So you could - this could lead to the crazy outcome of businesses fearing they may breach the law by behaving competitively, expanding and lowering our prices. An effects test could deter businesses from seeking efficiencies and keeping prices low, and could even restrict the ability of businesses to offer quality in services that have the effect of damaging a rival.

Ultimately, in my view, there's a very serious risk that consumers are made worse off, and if you want an example of that, then think about the benefit Bunnings has bought to communities in this country. But an effects test would mean we'd have to think about every time we open a Bunnings store whether it might have the effect of taking a competitor out, even if that was going to be good for the community as a whole.

The objective of section 46 should not be - is not and should not be to protect individual competitors or small businesses or any class of competitors. It has to be about protecting the lot of consumers.

"It is about protecting the lot of consumers." This is a telling statement, and a useful one. At the centre of this and other debates over competition regulation is the question: what constitutes the "lot of consumers"? Which is another way of asking "what is a market, really?"

This is, of course, where we reach the outer limits of the kind of "bush carpentry" economics used by the CEOs of most large companies. It is functional, and gets the job done - in the short term, at least. It helps them make good boardroom decisions, to forecast and plan.

However it is no real substitute for the kind of cabinet-making that professional, trained economists can produce.

It also harks back to the assumptions of 50 or 60 years ago, the belief in the "sovereign consumer", in "free markets" unaffected by the activities of big companies themselves.

In his 1967 book "The New Industrial State" US economist J.K. Galbraith described how illusory that kind of assumed naive market is. As Galbraith and others have pointed out, the modern enterprise is not built so much on responding to the market as on controlling it through advertising, supply, pricing and other means.

From inside the organisation doing this kind of distorting, of course, it doesn't seem that way. In fact, the market is often seen as being a little recalcitrant, and resistant to change. People insist on buying other business's products, for unfathomable reasons. The sense of the market as it exists outside of the organisation's influence tends to be quite minimal.

It is an interesting topic, but not really worthwhile revisiting. What we can say is that whether the entry of a big box retail outlet into a small community in rural Australia is good or bad depends on the exact circumstances.

To respond that it would result in the reduction in prices to consumers, and therefore must be good, ignores the complexity of the situation. Price is not even an adequate proxy to community well-being, let alone a direct indicator.

If you are interested in reading more about Wesfarmers objections, these can be found here:

>http://www.wesfarmersinsurance.com.au/wp-content/uploads/2013/04/wesfarmers_200x200.jpg}Submission summary to competition policy review.}http://australiancompetitionlaw.org/reports/2014rootbranchSubmissions.html#wesfarmers

The Harper Review has raised some interesting questions about Section 46, summarised in its Issues Paper:

The good the B20 does

While Mr Goyder did get an opportunity to put forward some of the views of Wesfarmers, he did miss out on highlighting more of the good work the B20 has done.

In particular, the B20 has stuck to its guns in advocating the adoption of needed financial reforms, such as Basel III, against the considerable resistance of financial institutions.

The latter would rather we all forgot about that "thing" that happened in 2008 or so (ie. GFC), like it was a party that just got a little out of control. Making sure that doesn't happen is part of the excellent work of the B20.

Until next time,

Betty

For any feedback, comments or story tips, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

Criticism. Australians have a reputation for not really having the most accepting culture when it comes to people or organisations that point out things are not entirely perfect. It's not "all good", all the time.

When it comes to business, this failure to heed the critical can amount to a serious disadvantage. (Not that I'm criticising, mind. Wouldn't dream of it.)

In particular, if things are going OK for a business, offering criticism is frequently met either with bewilderment ("Did you see our last quarterly results?") or open hostility.

It is easy to see the origins of this for Australian business. The economy that Prime Minister Robert Menzies and his Treasurer John McEwan helped to build in the post World War II decades, loosely based on the principals of the "Australian Settlement" (high wages, high tariffs, industrial development, government intervention in industry through direct ownership and polices, and decentralisation), envisaged Australia as a distributive economy, rather than a creative one.

Such an economy is based on "dividing the pie" rather than increasing its size. Optimisation in that situation is all about ensuring everyone gets their fair share, rather than distributing wealth to areas that spur growth.

While in economic terms the Australian Settlement pattern of economic development is today little more than a single glowing ember, it remains a small flame in the national culture.

This means modern Australian businesses face a difficult task. They are forced to respond to the competition offered by global business, while continuing to give lip-service to cultural norms built on the basis of Government support of industry, a support that recent events (ie. Holden Automotive) have emphasised does not exist any longer.

One consequence of this is that some measures that could be used as an aid to improving business end up being blunted and of little effectual use. Whether this is due to a reluctance by businesses themselves to commission data that might indicate their failures, or if companies capable of providing interesting data do not do so as they fear this will mar existing customer relationships, we could not say.

Which brings us to the recent Roy Morgan survey of customer satisfaction with hardware stores. These are the results:

>http://www.roymorgan.com/~/media/Files/Morgan%20Poll/2014/June/Chart1-5619.jpg}Roy Morgan hardware retail customer satisfaction}http://www.roymorgan.com/~/media/Files/Morgan%20Poll/2014/June/Chart1-5619.jpg

The headline numbers on this survey are 92% for True Value, 89% for Home Hardware, 88% for Bunnings, 87% for Mitre 10 and 80% for Masters.

If you read the fine print you will find this is based on a sample of 8,491 for Bunnings; 2001 for Mitre 10; 904 for Masters, 541 for Home Hardware, and 165 for True Value.

So the numbers for the "winner" are based on a sample that is less than 2% of the highest sample group. Effectively the difference between the results for True Value and Home Hardware (3%) comes down to the opinions of 5 people. The difference in the result between Home Hardware and Bunnings (1%) is just the opinions of 6 people. The difference between Bunnings and Mitre 10 (1%) is 85 people.

Leaving aside statistical uncertainties, one needs to question the validity and usefulness of a survey that reports a 5% difference across the top four hardware brands, with three of these separated by only 2%.

The US equivalent of this survey, conducted by J.D. Power, has somewhat strikingly different results. Here is the graph of overall results, scored out of 1000 points:

>http://www.jdpower.com/sites/default/files/resize/legacy_files/pictures/j/jdpower/0383/568dc308ea33557f99eb37a0520f9332x-600x800.jpg}J.D.Powers overall ratings for a hardware store.}http://www.jdpower.com/sites/default/files/resize/legacy_files/pictures/j/jdpower/0383/568dc308ea33557f99eb37a0520f9332x-600x800.jpg

Here is the breakdown of these numbers into categories:

> http://hnn.bz/jdPowerSmall.png}JDPower hardware survey results}http://hnn.bz/jdPowerBig.png

Roy Morgan has done some very good work in hardware retail marketing. In particular their work on personas:

>http://farm4.staticflickr.com/3804/10990601933_e1edfd4c9b_o.png}Roy Morgan personas}http://hnn.bz/fullView?articleIndex=0132842210238

This survey is not up to their usual quality as a contribution. What is really needed here is a deeper survey with more reliable, even sample sizes. It also seems likely that with such even results, the questions being asked are simply not well-tailored to this market. It reminds me of a comedian who described one small town in America as "a place where all the children are above average".

The question that underlies the potential for such a survey is whether the hardware industry has reached a level of maturity where it would reward this kind of feedback, and be able to act on the results.

Until next time,

Betty

For any feedback, comments or story tips, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

All too often when we look at new innovations in the retail sector, such as "omni-channel" or "channel-less" sales systems, we tend to see how these suit the customer, but fail to see the advantages for the retailer.

Adding on internet-based retail facilities can seem like just another one of those costly services that must be offered, such as good air-conditioning in a store, which are necessary but not a direct source of profit. You do it because the competitors are doing it and you don't want to get left behind.

I think this is a little pessimistic. In fact, channel-less retailing, where customers see a retail operation as a blend of its online and physical stores, offers a number of advantages to retailers.

The primary advantage channel-less retail offers to retailers is the ability to encourage the second-sale. This takes advantage of the "golden moment", just after the customer has committed to a purchase by picking up an item in-store, or placed an item in an online shopping cart. They are going to make a financial transaction, and are suddenly open to the option of buying more than one thing. Many scan their memory to see if there is something else they had planned to pick up. Batteries? A new sponge for the mop? A small ladder to replace the old rickety one? Duct tape?

Where Amazon excels

No other retailer on the planet does as well with this situation as Amazon. In fact, Amazon begins selling the second purchase the moment a customer starts looking at any item. Automatically a list appears of items customers who simply looked at a particular item ended up buying. One the customers has committed to the purchase the second list appears, showing a different list of items that customers bought after they had gone ahead and bought that specific item.

Furthermore, these lists are not the same for everyone. Amazon checks a customer's past buying history to work out what he or she is most likely to buy at both pre-purchase and post-purchase moments.

What "big data" is all about

Being able to process customer information and make these predictive suggestions is a major part of what has come to be called "big data" is all about. Most Australian retailers are only at the beginning of implementing systems that provide this kind of analysis.

The fact is that retail in the future is going to depend on this kind of analysis every bit as much as it currently depends on careful supply-chain analysis. A similar investment will be required, and a similar effort at implementation has to be made. Today Coles and Woolworths supermarkets compete on supply-chain metrics. In 2016 Bunnings, Masters and Mitre 10 will compete on big data metrics.

Bringing online in-store

The need to foster the second-sale is one of the driving forces behind the increasing use of in-store smartphone apps. Just two years ago these apps seemed like a good idea, but there were few implementations. Apps such as the Australian StreetHawk offered the capability of alerting customers with notifications when they were near a store - but they required the customer to be actually running the app.

All this began to change when Apple introduced its Passbook services with iOS 6 in 2012. Passbook was the equivalent of an "always on" customer app. When an iPhone wandered into an area defined by a Passbook app its owner had downloaded, the app would activate itself as the background image on the iPhone's screen.

The next step forward came when Apple introduced its iBeacon services in mid-2013. The iBeacon is a proximity location device that works off of Bluetooth Smart (BSmart) technology. Essentially, when an iPhone with a Passbook app gets close to the iBeacon, it can trigger actions on the iPhone. So, a customer approaching a display of paints could have a paint coupon flash up on the screen, for example.

Today, getting these services implemented is as easy as picking up the phone and calling a supplier. As we have already covered in HNN, many of Australia's major shopping malls have done just that, implementing iBeacon technology from the local supplier for US company Estimote, which makes one version of iBeacon technology.

Big data for smaller retailers

All this might seem to be advantageous for big retailers, but less so for small ones. Yet, in fact, it might provide just as many opportunities to small retailers. The reason for this is that to make it all work on a grand scale requires considerable expenditure on custom infrastructure. You need statistical analysis, and some kind of artificial intelligence software to make it all happen for thousands of customers.

For smaller retailers it will be possible to customise the experience of customers on an individual basis. You will be able to sit down with the profiles of your best customers and work out what is likely to increase their expenditure.

The infrastructure

HNN will soon be providing a guide for retailers seeking to set up "loyalty club" systems that rely on in-store WiFi and smartphone applications. Keep an eye out for this, as it will have some surprises attached to it!

Until next time,

Betty

For any feedback or comments, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

Retailers are still struggling to come to terms with the massive changes that have come in the wake of the GFC.

The most recent indication of this is the takeover offer made for Australian department store David Jones by South African controlled Woolworths (unrelated to Australia's Woolworths). As Fairfax Media's Michael Pascoe wrote in the lead paragraphs of his article commenting on the takeover:

You've been told it was the internet, that it was the economy, it was high wages, the government, the consumer, that it was the strong Australian dollar or maybe the weak Australian dollar. It was anything but second-rate management and dull boards that were responsible for Australian retail's poor performance - yet it turns out it was poor management all along. As South Africa's Woolworths joins the push of international shopkeepers into the Australian market with its David Jones takeover bid, it's another indication of outsiders seeing value and opportunity that the locals had missed.

( http://goo.gl/WWBeWU )

DJs is in the news today, but it's likely we'll see a few others burning up the column inches during this year: Harvey Norman, Myer and, possibly Target.

Another nominee for this category is Metcash, which is dominated by its IGA grocery/supermarket business, and also owns Mitre 10. As HNN wrote recently, the outcome of a recent strategic review focused on IGA seems to be an effort by Metcash to duplicate the operations of its two big competitors, Coles and Woolworths. It is difficult to interpret this strategy as anything but an effort to make Metcash more attractive for a takeover by Woolworths.

What makes this so frustrating is that, where Australia 12 years ago suffered from a dearth of good retail management talent, today it really has some of the best retail managers in the world. Today the source of retail problems in most cases isn't the execution, it's the strategies the managers are given.

Mitre 10 is a good example of this. "Tough and hard-working" is the phrase that comes immediately to mind when you think of its managers. What they are given to execute, they execute really well. It is just that much of the time the strategies they are made to follow seem ever so slightly, and yet significantly, off-target.

Not that the strategies are all that bad as strategies. In the environment of eight or nine years ago, they would have worked quite well, one imagines. But Mitre 10 is facing a really big challenge over the next two to three years. Bunnings managing director John Gillam has pushed the accelerator pedal to the floor (maybe even through the floor), and his team is close to flawless in its execution. Masters is expanding rapidly.

However Mitre 10's strategy seems most suited to a company that already has a commanding market share, and is simply working to retain that.

The Block and strategy

An example of this almost good enough strategy is Mitre 10's sponsorship deal with the "reality" TV series, The Block.

Talk about great execution. There are aspects of how Mitre 10 have used The Block to promote its brand that are beyond textbook - anyone interested in how to market home improvement retail should make a close study of this.

The most outstanding thing Mitre 10 has done is to make Scott Cam ("Scotty") into its brand ambassador. It is a superb move. Every time Scotty appears in a shot, or makes a voiceover comment, it immediately is perceived as Mitre 10 talking. Without flashing a logo, or having something annoying and intrusive, the viewers make an immediate association to Mitre 10.

Yet, in the most recent incarnation of the series, Season 8, some distinctive marketing oddities have emerged. First, from a demographic standpoint, this would have to be one of the least diverse group of contestants on any series. They are all white, and all quite young.

Secondly, while there has been a certain amount of treatment of women that verged on misogyny in the past, this series managed to cross some line that drew a number of comments. Marina Go, CEO of Private Media which publishes Crikey among other titles, had this to say:

A female chippie joined The Block last night. Of the hundreds of tradesmen swarming the building site, the producers did everything short of shining a stage light on her to highlight her presence. And then it began. A segment devoted to the fact that there was a female carpenter in the group and ... she was a LEADER. Surely not... A couple of male contestants then proceeded to discuss how great it was to have a female chippie on The Block leading the troupes [sic]. But did the producers have to include the comment that the very idea of it was "a bit hot"? The only male contestant who actually is a tradesman exclaimed that he hadn't really met a female chippie before. And host Scott Cam, another chippie by trade, wanted to know if she was good at being the leader. He actually asked her.

(http://goo.gl/4GgJ7z)

If Ms Go seems a bit highfaluting, there was also this comment from "Reality Raver" who writes a blog all about reality TV:

The Block's blokey humour irritates me but it reached new levels of sexism when they "showcased" a female chippie. There was the slow motion footage and the camera panning up and down. As well as Keith being quite surprised that she was doing a good job. Kyal piped up and said a few of the guys have got their eye on her.

(http://goo.gl/IusH6e)

The third element, after ethnicity and gender, that needs to be mentioned is socio-economic groups. There are no architects, professional designers, or engineers. No banking executives, advertising agency creatives, computer programmers, or even car salespeople.

This point isn't about being "politically correct", it's about good marketing sense. What The Block has done, through these and other choices, is to target a very particular demographic in an excellent way. However, it's not a stretch target. It is basically the same people who are already inclined to visit Mitre 10.

It's a strategy that might have contributed to the ratings success of the show, but that kind of success may not be building the broad customer base Mitre 10 will need to grow. No matter how strong the appeal is, appealing to a single, narrow demographic will not provide long-term stability.

Given the competitive nature of the industry, with both Masters and Bunnings poised to really apply pressure in 2015, it's hard to believe that this is the best possible choice to make, right now. And not making the best possible choice in a market that is getting more competitive every quarter is going to have consequences in the future.

It's true that Mitre 10 faces certain exceptional challenges. The structure of the company means that independent hardware store owners get to have some say in what direction the overall business takes, and sometimes consensus can result in conservative decisions. Also, Metcash's core business is not doing well, so it is unlikely that Mitre 10 can expect any kind of cash injection.

Given the really high quality of the Mitre 10 executives, it seems likely that somewhere in that cadre is some strategic thinking Metcash really needs to pay attention to.

Until next time,

Betty

For any feedback or comments, you can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia

In the age of digital communications, are trade fairs still relevant in the home improvement industry?

I doubt the answer would be to replace all face-to-face communications with digital channels. The industry is full of personable characters who thrive on meeting their customers, especially over an alcoholic beverage. The annual trade events from each retail group are testament to that.

Some of the challenges in visiting trade fairs include the expense of travel and time spent there instead of at the office. As exhibitors, suppliers usually need to consider the number of staff working and transportation of large equipment. Everyone attending needs to apply their own Return On Investment (ROI) to their own time and businesses.

But there's probably room to incorporate online communications too.

Perhaps part, or the entire trade fair can be conducted online. Virtual trade fairs are still a small percentage of the market but the trend is growing fast. Experts believe that by 2015, more than 25% of trade shows will be conducted in virtual environments.

Like online meetings, a virtual trade show can be simple or breathtakingly realistic. The simplest assemble a series of pages, each one a virtual booth for an exhibitor, plus instant messaging so exhibitors and attendees can talk in real time.

The more complex are complete environments like high-level video games. VOIP (voice over internet protocol) can allow exhibitors to talk to attendees, and they can easily email brochures or allow attendees to download them.

Digital platforms such as webinars that are educational presentations are becoming the norm for many businesses. They can easily be part of a trade show today.

While technologies have an increasingly important role in the home improvement industry, they cannot replace the intuition of a highly experienced person. Nevertheless, technology is having a larger impact on back office and supply chain operations, point-of-sale upgrades, marketing and communications through social media, sales channels, loyalty programs and in-store displays/smartphone integration.

If you click on the images below, you can see some of the previous stories we have covered on technologies.

Lowe's mobile initiatives

> http://www.calvinly.com/wp-content/uploads/lowes2.png}Lowe's views it's mobile initiatives as key to drawing online customers into brick and mortar stores}http://hnn.bz/fullView?articleIndex=0133165480728

PoweriSite in mock-up mode

>https://s3.amazonaws.com/ksr/assets/001/230/590/c9a2e7dfb3ff1e3ba039fc7532c9a960_large.JPG}PoweriSite in mock-up mode}http://hnn.bz/fullView?articleIndex=0132868154100

A cloud computing solution for fasteners

>http://insights.sererra.com/Portals/107657/images/iStock_000017716462XSmall.jpg}A cloud computing solution now exists for fastener companies}http://hnn.bz/fullView?articleIndex=0002639

Why HNN?

Today the rate of technology adoption is relatively slow in the home improvement industry. However we believe that it will speed up over the next four years. People forget, but this is something the industry has done two or three times over the past thirty-five years - lag traditional retail, then speed up to come out ahead. In recent history, we have only to look at the emergence of Bunnings and Masters to see how rapidly a radically new model can be adopted, understood by the market, and come to dominate a sector of the industry.

HNN is determined to play a strong and helpful role in this area. In addition to keeping the industry updated daily on the latest new products and systems that are being tested by retailers around the world, we have begun to develop technologies ourselves that can assist retailers.

We strongly believe that technologies should work for your business, and not the other way around.

You can contact me directly via email betty@hnn.bz or Twitter @HNN_Australia.

Until next time,

Betty