Bunnings first UK store in St Albans. Photo / news.com.au
Bunnings has hit a snag.
Wesfarmers executives have been forced to defend the dismal performance of the UK and Ireland business, which reported an AU$89 million (NZ$96m) loss in its first full financial year since the acquisition of UK chain Homebase.
While profit at Bunnings Australia and New Zealand increased 10 per cent to AU$1.33 billion (NZ$1.44b), which contributed to Wesfarmers overall group profit of AU$2.87b (NZ$3.1b), the poor UK result raised eyebrows during Thursday's analyst briefing.
Merrill Lynch analyst David Errington described it as a "big loss", and questioned the strategy of moving Homebase stores from a promotional to an everyday low pricing model. "The whole UK market is a promotional market," he said.
"You're going to try to convert the market to non-promotional, that is a real worry.
What's the risk they turn into a real disaster? You guys were pretty aggressive saying [Bunnings UK and Ireland] wasn't going to lose money. Where is this business going to go?"
Bunnings Group managing director Michael Schneider conceded that "there is a risk" but said in 1994, the Australian retail landscape was similarly based on a "high-low" promotional strategy, until Bunnings "came along and introduced EDLP".
"It's going to be a long slog, but what we're seeing in the Bunnings pilots, they're performing well," he said.
"When they see what EDLP is they trust it."
Schneider said with the conversion of the Homebase stores from a bathroom and soft furnishings focus to a core home improvement offering, it would "take some time" for customers to "understand what those stores are there for, irrespective of the pricing framework".
"The opportunity for the Homebase stores is going to be more clarity and consistency in execution," he said. "There's no silver bullet."
Errington hit back, pointing out that in the five years before being acquired by Wesfarmers for AU$700m (NZ$757m) last year, Homebase was profitable. "In the first year it's lost AU$90m (NZ$97.4m)," he said.
"Something you've done going into this business is not right."
Wesfarmers finance director Terry Bowen then stepped in. "The quality of earnings you refer to when we took over, the best way to describe [them] was non-sustainable," he said. "What the business was doing was effectively through concession arrangements selling more and more of the store, indeed moving out into the car park, selling the car park spaces for car washes.
"When we stripped that out, by definition there was a fall in what the business' earnings would otherwise have been. But if you're going to convert something into a long-term business, you're going to pay a price. It would be fair to say that was considered within the acquisition case."
Outgoing Wesfarmers managing director Richard Goyder added that one of his "greatest regrets" leaving was he wouldn't be around to see Bunnings UK and Ireland "achieve what I think it can achieve".
Bunnings opened its first UK pilot store in February with the customary sausage sizzle. Goyder said in a statement that "early indications are that the format is resonating well with customers".
"While significant transition, separation and integration activity was undertaken throughout the year to progress the acquisition agenda, the volume and pace of repositioning Homebase affected store executive and consequently trading performance," he said.
Errington hit back, pointing out that in the five years before being acquired by Wesfarmers for AU$700m (NZ$757.7m) last year, Homebase was profitable. "In the first year it's lost AU$90m (NZ$97m)," he said. "Something you've done going into this business is not right."
Wesfarmers finance director Terry Bowen then stepped in. "The quality of earnings you refer to when we took over, the best way to describe [them] was non-sustainable," he said.
"What the business was doing was effectively through concession arrangements selling more and more of the store, indeed moving out into the car park, selling the car park spaces for car washes.
"When we stripped that out, by definition there was a fall in what the business' earnings would otherwise have been. But if you're going to convert something into a long-term business, you're going to pay a price. It would be fair to say that was considered within the acquisition case."
Outgoing Wesfarmers managing director Richard Goyder added that one of his "greatest regrets" leaving was he wouldn't be around to see Bunnings UK and Ireland "achieve what I think it can achieve".
Bunnings opened its first UK pilot store in February with the customary sausage sizzle. Mr Goyder said in a statement that "early indications are that the format is resonating well with customers".
"While significant transition, separation and integration activity was undertaken throughout the year to progress the acquisition agenda, the volume and pace of repositioning Homebase affected store executive and consequently trading performance," he said.