Shared from the 5/29/2018 The Age Digital Edition eEdition

UK Bunnings mess went off script



Before consigning its costly foray into Britain’s home improvement sector to a footnote in Wesfarmers’ largely illustrious history it is worth trying to understand how it got it so wrong.

It’s certainly something chief executive Rob Scott and his board will be working through given that Wesfarmers hasn’t ruled out another venture in offshore markets in future.

The core reasons for the costly – $1.7 billion – failure of Bunnings in the UK are quite different to those that destroyed Woolworths’ Masters experiment. Masters was a joint venture with Lowe’s, a big North American retailer supposed to bring home improvement expertise and supply arrangements to Woolworths but which failed to recognise that the seasons in Australia are different to those in its home markets.

Masters was a greenfields venture and Woolworths’ ambition meant it scrambled to acquire whatever sites it could as quickly as it could, overpaying for generally less-than-ideal properties.

The inflated property costs relative to Bunnings and a lessdense format that tried to skew towards female customers to differentiate the offer from that of Bunnings meant its stores were higher-cost but lower-volume than their competitors and that the more stores there were in the rapidly expanding network the more the joint venture lost.

Bunnings thought it had learnt from Woolworths failures. Its entry to the UK wasn’t to be a greenfields strategy but the acquisition of an established business to lower the risk.

Homebase was a renovation opportunity. Effectively Bunnings was acquiring 265 well-located stores and a business that turned over about $3 billion but made only $40 million a year. The plan was to eventually reformat and rebadge the network as Bunnings.

While Wesfarmers’ chairman Michael Chaney has been ridiculed for saying the due diligence for the acquisition was the best he had ever seen, Bunnings’ management had spent years studying the UK market and planning for its entry.

The gameplan was simple. Bunnings would acquire the business but leave it largely untouched while opening some pilot Bunnings-branded stores to test various iterations of its Australian format. Only after it had proven a format would it roll it out across the larger chain.

One of the key perceived opportunities within Homebase was the nature of its offering. Under its former owner, Home Retail Group, the response to years of declining sales was to fill its stores with concessions like Laura Ashley and brands it controlled like Habitat and Argos. That produced an odd offer of home improvement and homewares.

However, the original plan was to leave Homebase and the concessions alone and collect the modest profits the business was generating until the pilots had produced something that worked for UK customers. That didn’t happen. Instead the Bunnings UK management, seconded from Australia, couldn’t help themselves.

There was a wholesale clear-out of local management and of the concessions at a speed that alienated the Homebase customer base, which because of the concessions had more of a female skew to it than Bunnings was used to. Adverse weather, Brexit and a deteriorating UK retail environment didn’t help.

Despite encouraging signs within the pilots – some converted Homebase stores were seeing sales uplifts of more than 50 per cent – the unintended damage done to the larger network inevitably meant an abrupt descent into losses. Bunnings UK lost $165 million in the December half, with the outlook deteriorating.

Wesfarmers responded by dumping the expat management it had installed, appointing B&Q’s retail director, Damian McGloughlin, to head up the business. Newly appointed CEO Rob Scott then initiated a strategic review which ended with Friday’s announcement of a sale of the business to private equity group, Hilco Capital.

The Homebase disaster is the second time in two years that Wesfarmers’ ‘‘loose/tight’’ operating model – it devolves enormous operating autonomy to business unit management while maintaining stringent financial controls – has malfunctioned.

The last time was in 2016 when it discovered Target was inflating its earnings with artificial deals – rebates from suppliers brought forward with promises of repayments via higher prices in future financial years.

This time it wasn’t financial or accounting trickery but a failure of a business’ management to stick to the agreed gameplan – and head office’s failure to intervene to ensure that they did.

The fact that there was a contest occurring to be the next CEO last year may have been an element of the explanation for how that could have occurred – the key executives and the board may have been distracted – but perhaps the UK venture shouldn’t have been left within the larger Bunnings division, where the size and success of the parent business would inevitably attract most of the senior management’s attention.

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