Once the greatest retail behemoth Australia has ever seen, Bunnings is now sputtering along, according to the latest financial results from Australian conglomerate Wesfarmers.
The West Australia-based owner of Bunnings, Priceline, Kmart, Target and various natural gas extraction facilities reported its financial results to the market on Thursday. The market reacted in disgust, as the next chart shows. Wesfarmers’ stock price fell about 4% per cent.
The reason was certainly not Kmart, which posted another astonishing burst in revenue. Instead, it was probably Bunnings, which has turned from growth to stasis, even as a Senate inquiry prepares to drag it backwards through a blackberry bush.
The great green giant of Australian hardware is certainly not at risk of failure. This is the retail chain that killed Masters, a rival-slash-imitator launched by Woolworths Group. Bunnings is not dying. But it’s no longer the beating heart of the Wesfarmers enterprise.
The results tell the story. Bunnings’ revenue rose by a meagre 2.3%, below inflation. And its earnings before tax grew by 0.9%. (Think of earnings as profit, but for a business sub-unit rather than for the company overall). These are not scintillating results in a country where the population is growing by more than 2% a year and the price of everything is rising by 4%.
Bunnings is a victim of the economy overall. The rate at which we are building homes has stalled, as the next chart shows. The cost of building anything is through the roof, the economy has very little spare capacity, and what little capacity there is has been absorbed by government infrastructure projects.
New homes are as scarce as hen’s teeth. And that means fewer trips to Bunnings.
The trouble in hardware paradise comes as the Australian Senate select committee on supermarket prices has demanded Bunnings executives return to Canberra to be hauled over the coals.
“We’re looking anti-competition, at pressure and influence on suppliers and treatment of smaller guys,” Nationals Senator Ross Cadell told the media.
The committee presented its supposed final report in April, throwing the cat among the pigeons for supermarkets. Now it’s back, apparently, this time to take on non-supermarket retailers, including Bunnings, but also Amazon.
Bunnings’ pricing strategy is famously clever, and their celebrated price match guarantee (“find the same matched item and we’ll beat it by 10%”) is carefully ring-fenced by selling certain items you can’t easily find elsewhere. When you’re as big as Bunnings, you can get a supplier to make you a special version of something.
The famous price match guarantee allows Bunnings to burnish its “credentials” as a low-cost retailer. And they are in no doubt about how important those credentials are.
“As household budgets remained under pressure, consumer sales growth was supported by Bunnings strong value credentials, with bulk pack quantities, own brand products, and entry-level ranges all performing strongly,” Wesfarmers CFO Anthony Gianotti told investors on Thursday.
Bunnings talks the talk on lowest prices, and to be fair it often walks the walk. But its margins look healthy. Bunnings reports margins on its earnings before tax (excluding property) of 11.9%. Now, accounting comparisons between industries can be fraught — but that margin appears comfy compared to the supermarket company Wesfarmers divested a few years ago. Coles’ margins on its earnings before tax were 5.2% in the last financial year. Another example, JB Hi-Fi, reported margins on its earnings before tax of 7.43%.
I’ve always wondered if Bunnings’ slogan, “lowest prices are just the beginning”, is a promise of how Bunnings would run its strategy. Come into the market with guns blazing, and establish an amazing reputation for cheapness, at the beginning. Destroy the competition. Then go up from there. It certainly wouldn’t be unheard of.
It will be very interesting to see what they have to say on their pricing and sourcing strategies at the Senate inquiry later this year.
