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March 20, 2018

Should I stay or should I go? The costly dilemma Bunnings faces over Homebase

Two years after Australian conglomerate Wesfarmers’ acquisition of Homebase, the future looks bleak.

By GlobalData Retail

Two years after Australian conglomerate Wesfarmers’ acquisition of Homebase, the future looks bleak.

Arriving after one of the most catastrophic acquisitions of a UK retailer ever, recently appointed Wesfarmers Managing Director Rob Scott has endured a number of headaches during his three-month tenure, including writing down the value of Homebase by £560m and suffering a £97m underlying loss for the first half of 2018.

Investors, shareholders and competitors are eagerly awaiting the results of a June 2018 strategic review of Wesfarmers’ UK operations, which must provide a clear and actionable plan for the future of the business. But, positioned between an expensive rock and an uncertain, unprofitable hard place, what exactly are Wesfarmers’ options?

Leaving the UK

Halting its UK operations and departing completely is the most likely, and least expensive, option. Recent admittance from Wesfarmers of ‘self-inflicted’ wounds, including the impetuous removal of both knowledgeable Homebase management and sudden shift of product offer, has irreparably damaged and confused consumer’s expectation of Homebase.

Practically, departure would be painful for all involved. JP Morgan estimates the present value of a complete exit at £685m, including £630m in lease exit costs arising from the 255 store network, £117m as a result of the 12,000-strong employee redundancy costs and £88m in trading losses for the remainder of 2018 – offset only by the £150m gained from quick sell of the £300m current inventory.

For the UK consumer, the job losses would continue a familiar story in retail, following recent redundancy announcements by Toys R Us (3,000 jobs), Tesco (1,100), New Look (980) and B&Q (200). And as for the nationwide Homebase store network, it is certain that some of the rapidly-expanding discounters such as B&M and The Range would be interested in a portion of the locations – but with retailers focused on investment in the online channel, supply of big-box, out-of-town locations is definitely outstripping demand.

Remaining in the UK

Despite the strong arguments for leaving, Wesfarmers may decide to surprise everyone and remain unconditionally; after all, Homebase was profitable before the takeover, achieving a respectable £42.2m operating profit on £1.36bn of turnover. Furthermore, the significant capital already spent on rebranding Homebase stores to Bunnings may persuade the decision-makers to remain.

But to remain, and turn the loss-making venture into a profitable one, is no easy task. Despite Bunnings’ dominance of the Australasian DIY market, sweeping aside comparable rival Masters Home Improvement who halted its venture in 2016, the fight will be significantly tougher in the UK. Weather is colder, days are shorter, and reliance on tradespeople is greater; not to mention the competition from market leaders B&Q, nearing completion of its attractive ONE Kingfisher plan, and fast-growing small-box retailers Screwfix and Toolstation.

Improvement whom halted its venture in 2016, the fight will be significantly tougher in the UK. Weather is colder, days are shorter, and reliance on tradespeople is greater; not to mention the competition from market leaders B&Q, nearing completion of its attractive ONE Kingfisher plan, and fast-growing small-box retailers Screwfix and Toolstation.

Keep Bunnings, sell Homebase

Finally, there may be a third option on the table – keep the current Bunnings stores in operation, rebrand a carefully chosen selection of profitable Homebase stores, and sell off the unwanted remains of the network for parts. Wesfarmers has certainly given itself this option, currently attempting to rapidly clear unwanted non-DIY stock from six Homebase locations while continuing to rebrand stores to Bunnings. Furthermore, a recent announcement of a purpose-built Bunnings Warehouse to open in Ashford (Summer 2019) demonstrates that Wesfarmers are still not willing to cave quite as easily as media speculation may suspect. If they are to walk this compromised path, there are numerous issues that must be immediately and simultaneously addressed.

Firstly, the proposition of Bunnings must be crystal clear. Homebase must be sold or be allowed to die, as consumers no longer understand what this brand stands for – a thoroughly unsupportable business model in a time when market share, in every retail market, is at a premium. Secondly, Bunnings must recognise and clear the hurdles of the UK market that are not present in Australia – most notably, product realignment (lowering the product mix of ‘hotter weather’ products BBQs and outdoor furniture) as well as quickly launching a transactional website for Bunnings Warehouse; clearly crucial for both tech-savvy consumers and tradespeople.