Bunnings prepares to open its doors

Almost twelve months to the day, the announcement was made that a relatively unknown Australian conglomerate had acquired the ailing Homebase chain and now Bunnings UK prepares to unveil the first European adaptation of their business to the world. 

For those of you who love a bit of history:-

18^th January 2016 - Sale of Homebase to Wesfarmers confirmed.

26th January 2016 - Wesfarmers investor presentation.

26^th January 2016 - Wesfarmers MD talks about Homebase acquisition.

The first Bunnings-branded Homebase store conversion in St Albans, Hertfordshire opens this weekend for a celebration launch to suppliers, friends and other interested parties, four months later than they originally planned. The official opening day to the public, has now been confirmed as Thursday 2nd February.

Peter Davis, who heads up the UK Team said ‘The St Albans store will be instantly recognisable as a Bunnings to anyone who has ever shopped with us'.He went on to say ‘We're bringing the widest range of home improvement and garden products to the UK market’.

This St.Albans store at approximately 70,000sqft, is less than half that of the average Bunnings warehouse in Australia. This smaller store size, makes it almost impossible for Bunnings to deliver on their key consumer promise of ‘The widest range’. one of the three pillars of their successful strategy down under. Although the new store will hold almost 40% more sku’s than the old Homebase, it will be still be dwarfed by B&Q Warehouses, who currently offer double that product range.

In April last year, we wrote on this subject - Will Bunnings strategy really work in the UK?

Richard Goyder, Wesfarmers MD told the Australian Financial Review ‘The team are excited, they think it looks terrific," but he remains adamant that the new format will not be rolled out, until Bunnings is confident it appeals to British consumers and that conversion of Homebase's entire store portfolio of 260+ stores would depend on whether the new format was a success.

According to company statements last year, Bunnings plans to open at least four conversions over the next few months. We know the second Bunnings will be the store only two miles away from Griffiths Way, located on the Hatfield Road. St.Albans. This store will close for conversion on 12^th February, with a projected opening date of 3^rd April.

"Conversion will depend on how the first handful go – when we're happy with how they go we'll move relatively quickly," Mr Goyder said. "It will take some time because there are 270 stores, but if we need to make tweaks we'll do that before we do a fast rollout."

The questions we are keen to ask Mr Goyder are 'What happens if the trial stores aren't a success?' and 'What are the measures of success?' Bear in mind that in it's last full year of trading (year to 27th February 2016) Homebase generated an operating profit of just £23.5m on sales of £1,433m. Since then, the UK Team have slashed prices by an average of 20% and although some head office costs were reduced, their overall cost base, once you add in the additional store staff they plan to employ, will be virtually unchanged.

See Home Retail Group 2016 results here.

Wesfarmers is keen to ensure that it doesn’t make the same mistake as it’s US competitor Lowes, who along with their Australian partner Woolworths, lost billions of dollars in the disasterous launch of the Masters Home Improvement chain in Australia.

It is understood that the new-format stores will employ more staff and include cafes, children's playgrounds and eventually host sausage sizzles. It's also understood that a Bunnings UK website will be launched shortly, complementing the existing Homebase site.

If the new stores work (and there remains a huge question mark over whether UK consumers will embrace the virtually unknown Bunnings brand), then Wesfarmers have committed to invest £600m over the next few years improving and expanding the Homebase chain.

Mr Goyder is confident Bunnings will eventually achieve an 18% return on capital within three to five years. Many analysts, however, still believe Wesfarmers will struggle to achieve these targets.

"We expect return on capital to improve at Homebase, but believe it will settle at 11% return on invested capital, not the 18% targeted by Wesfarmers because the store sizes and locations will be challenging," Citigroup said in a recent analysis note.

Source: Steve Collinge - MD Insight DIY.

If you want more news on Bunnings and their plans for the UK market, then sign up for our Insight DIY weekly newsletter here.