Bunnings' venture into the UK market has not started well. Photo/File.
When shoppers showed up to the Bunnings store at St Albans north of London a year ago they were in for a surprise.
The newly-opened Bunnings outlet had taken the place of a Homebase outlet, the UK's second largest home improvement chain, which Bunnings had bought for AS$705 million (NZ$759 million) as it pushed into the UK.
Homebase stores had tried to attract female DIY shoppers with "personalised mood boards" and attractive displays of cushions, throws and other fluffy stuff from brands including Laura Ashley and Habitat.
These were gone and shoppers were presented with a more basic hardware offering in a warehouse format, where tools and tool boxes took pride of place, and special offers at the checkouts included incinerator bins and disposable boiler suits.
There was even the traditional Bunnings sausage sizzle, though it's hard to see the logic in exporting sawdust sausages, half-cooked onions and cottonwool bread rolls to a nation which already has enough terrible food of its own. Certainly, the shoppers didn't like much of the Bunnings offering.
Bunnings owner Wesfarmers last week said it would write down the value of the Bunnings UK operation by AU$1 billion and conducting a "strategic review" that would see it walk away from its first major overseas expansion.
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It hasn't taken long for things to go wrong – Wesfarmers only bought the business two years go.
While there are questions about the quality of the due diligence ahead of the acquisition, there is no doubt Bunning execution has been poor.
It was seeking to replicate the Bunnings brand, which has been hugely successful in Australia and New Zealand. But the UK is a different market to Australia and the arrogance of the Bunnings management made it blind to this.
Wesfarmers brought Bunnings veteran PJ Davis over from Perth to run the show. There is no doubt Davis knew what Aussie hardware buyers were looking for. But it is apparent that he didn't have much idea about what UK buyers wanted.
As soon as Bunnings took control of Homebase they axed the entire Homebase senior management team and about 160 middle managers. These were the people who could have provided local knowledge and guided Wesfarmers about English shoppers' preferences and buying habits.
They made some quick changes to the Homebase stores, bringing them closer to the Bunnings model ahead of their eventual conversion to actual Bunnings outlets. They exited categories such as kitchens, bathrooms and soft goods, and moved away from promotional discount pricing to Bunnings' everyday low pricing regime.
When Bunnings bought Homebase, it was struggling but still profitable, earning AU$52 million the year before the acquisition. But after a year of Wesfarmers ownership, it lost AU$89 million in 2017 and has already lost AU$165 million in the first half of the current financial year.
So far 19 stores have been converted into Bunnings outlets and even there the news is bad. Wesfarmers says the initial pilot programme results were "encouraging" but the rising sales have "moderated" in winter.
Bunnings is an institution in Australia, but unknown in the UK and establishing it as a major and viable brand could take years, particularly as the retailer has no online offering and this is an important part of the UK hardware market.
The non-cash loss of AU$1 billion will put a big dent in this year's profit, but they won't reduce the dividends, which are paid out of cash, and for a business, the size of the Wesfarmers conglomerate isn't too large.
What they will do, however, is make shareholders more nervous about any future overseas expansion plans and potentially make management overly cautious when it comes to other potential expansion opportunities.
If they can't make a go of expanding their most successful business, Bunnings, why would investors have any confidence that they could be expanding in other sectors?
Bunnings' UK expansion brings to mind the disastrous foray into hardware of its rival
Woolworths, when it tried to set up US hardware chain Masters in Australia and ran into similar cultural problems – its JV partner Lowes famously shipped snow shovels to Australia at Christmas.
Woolworths took six years to back out of its ill-fated Masters venture, losing its chairman, its chief executive and more than AU$3 billion along way.
Wesfarmers will announce its decision about Bunnings UK at its strategy day in June and investors won't want to wait nearly as long as Woolworths did.
A year ago, 58 year-old Davis presided over the sausage sizzle at the St Albans store opening and said Bunnings had three years to break even in the UK, and by that measure there is only a year left.
In the wake of the write down, Davis – who started at Bunnings on the shop floor as a 17 year-old –has "retired" and investors are hoping for a quick end to the UK foray.