WILL THE SAUSAGE CONTINUE TO SIZZLE?

In January 2016 Bunnings, the dominant DIY retailer in the Australian market, cast its eyes on the UK and acquired over 260 stores that previously traded under the ownership of Homebase for around £350 million. This is a significant step and may ignite this retail sector over the coming years. It plans to replace the Homebase brand and re-brand the stores as Bunnings – a brand that is synonymous with “all things Australian” but unknown to the DIY enthusiast in the UK.

The UK DIY sector, is perhaps more accurately described as the “home improvement and garden” sector and over the past number of years, despite the prolonged recession, has shown evidence of strong growth – always an attractive but necessary feature of potential international expansion opportunities. It is estimated that it is worth under £40 billion as of 2015.

Bunnings, owned by the large Australian corporation, Wesfarmers, holds over 20 per cent of the Australian home improvement and garden sector. It has based its business model on three main platforms.

  • Every-day-low-prices
  • A very wide and deep product range – covering anything from 95 cent buckets through to hard-core building materials and outdoor garden centres
  • Strong customer services: its staff is built around ex-plumbers, builders and horticulturalists, who provide advice and guidance to its customers.

The cornerstone of its model is the “sausage sizzle”. Outside its stores, it sells sausage sandwiches, redolent of the smell of barbeques and the “great outdoors”. This reinforces the desire of Bunnings to tap into and to be seen as part of the local community. All of the sales from the stalls selling these sandwiches goes to local charities.

In terms of its retail formats, it uses an industrial, warehouse-defined image through large shed-like structures. It also operates smaller units in the inner-cities and towns. As well as carrying a wide range of merchandise, most of its larger stores contain a children’s playground, kids craft workshops and classes for adults on a number of activities that are all designed around the theme of home improvement.

It has established an online presence but interestingly does not provide the means for customers to make transactions on this retail channel. The rationale for this approach is based on the belief that the vast distances between distribution points and customers is likely to make delivery and returns an unprofitable exercise. Instead it uses its online channel as a mechanism for providing advice and guidance to its shoppers on a range of topics and activities. For instance it puts up short “how to” video clips on various aspects of home improvement activities.

The UK market, apart from its continued evidence of growth has other attractions. Perhaps the main one is that around 56 per cent of houses and apartments are over fifty years old: thus providing strong requirements for upgrading and improvement. The vagaries of UK weather patterns also ensure that houses are often damaged from storms and from general “wear and tear”.

Why Homebase as the target for acquisition?

This brand in recent years has fallen into the common trap of ending up being “stuck in the middle” and sending confused messages and signals to shoppers in this sector. Is it in the FIY or the home improvements area? In the latter case it appeared to be competing with retailers such as Habitat while in the former it was up against B&Q, the third largest DIY retailer in the world. In summary it was losing focus and its sales and profitability was suffering as a direct consequence. This was graphically evidenced by the closure of 27 stores in the UK during 2015.

However its brand perception appeared to be strong: it still received a high percentage of favourable mentions and positive conversations on the social media platforms. Its overall brand is that of a well-recognised and established brand.

The challenges?

Bunnings will have to grapple with some significant differences between the two brands as it attempts to re-brand in the UK market.

On price for instance, it operates EDLP policies while Homebase has positioned itself at the premium price points. Bunnings carries a far wider range of items while Homecare has focused on home furnishings and its own brands. Bunnings has placed a strong emphasis on customer service and staff expertise. Homecare has not emphasised this element as strongly in its overall business model. Homebase’s opening hours are more restrictive than the case of Bunnings in Australia. These are areas that will feature prominently in a re-vamp and re-branding exercise.

The UK market is more fragmented than in Australia. B&Q and Homebase between them hold around 15 per cent of market share. Wickes, another major player in this sector, has positioned its brand more closely to the DIY “nerds” and the trade.

The planned re-branding and re-vamp exercise will require substantial investment. If initial reports are to be believed, this will see major changes in critical areas of the retail marketing mix: such as customer service, merchandise and store design and layout. It will also take Bunnings directly into a collision with B&Q, a global giant in the sector. On this latter point at least, Bunnings has form. It has successfully fought off competitors such as Masters in the Australian market and is not afraid of direct challenges to established competitors and brands.

The UK housing market continues to stagnate: prices continue to rise and prospective house purchasers are naturally put off by this trend. It has also become increasingly harder to get affordable mortgages from financial providers. This is exacerbated by higher demands placed on the amount of money needed for deposits and the level savings required in order to be considered for loans. As against that, house owners are possibly more likely to develop existing properties rather than purchase new ones. As a result the demand for DIY-related products and services has not declined to any significant extent during this period.

Bunnings may have to consider the possibility that the “big box”, warehouse type operation that works well in Australia many have lesser impact in the UK; where customers may not require the extent of items offered by Bunnings or be prepared to make destination shopping activities, when they are only making minor adjustments or upgrades to their existing properties.

B&Q are also likely to have the patience and more critically, the resources, to engage with Bunnings on lower prices over an extended period of time.

On a more fundamental level are there differences in culture and behaviour between the Australian and UK customers in this retail sector?

Although obviously culturally similar in terms of language, it can be argued that there are fundamental difference between them in terms of behaviour and outlook. The Australian “psyche” is often portrayed as being based on the “great outdoors” and “mate ship”. Many urban dwellers own “uts” (utility vehicles) and think nothing of travelling to stores such as Bunnings and loading up with a range of home furnishing, gardening and DIY products. This is reflected in the wides spaces and aisles in the Bunnings stores, allied to large car-parking facilities and locating just off major highway junctions – to enable ease of access and convenience.

This phenomenon is less obvious in the UK, where many people live in high-density areas and do not have the same penchant for utility trucks or vehicles.

In the UK the arrival of many legal migrants has led to the availability of cheap but skilled tradespeople who are happy to do work on houses for “cash-in-hand”. Instead of home owners grappling with the challenges of DIY, many are happier to pay such workers to do the necessary. This still means that there is a demand for such products but it has the potential to dampen the enthusiasm for travelling to such “big box” units and spending time discovering the joys of DIY. Convenience and “quick fixes” are the order of the day.

Certainly Bunnings will have to give more thought and focus to the smaller, more localised retail trading format as well as creating an online channel that facilitates purchases and transactions.

In summary the Bunnings case presents us with an interesting and substantive example of a very successful retailer attempting to transfer its business model to an international market that superficially has similar cultures and the same language. However there are a number of potential obstacles and challenges it will have to overcome if it is to succeed.

Let’s watch developments over the next couple of years with interest.

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