Where Wesfarmers / Bunnings went wrong in acquiring Homebase
Wesfarmers’ botched acquisition of Homebase coming home to roost, January retail sales figures from the BRC, trading updates from New Look and DFS.
4 minutes to read
- Fairly decent retail sales figures from the BRC for January. Total retail sales grew year-on-year by 1.4% overall and by 0.6% on a like-for-like basis. However, there is an ongoing polarity between food and non-food performance. In the three months to January, food sales grew by 4.1% (+2.9% like-for-like), while non-food sales declined by -0.6% (-1.2% like-for-like).
- ‘Watch list’ retailer New Look underlined its current trading troubles. For the 39 weeks to 23 Dec, it reported an underlying operating loss of £5.1m. EBITDA fell to £43.8m from £153.8m in the same period a year earlier. Revenue was down 6.3% to £1.07bn, with UK like-for-likes sales falling 10.6%. Online sales on its own website were down 15%, but were up 21.9% on third-party e-commerce sites.
- DFS has reported gross sales growth of 4.0% for the 26 weeks ended 27 Jan. However, the headline figure was flattered by the acquisition of Sofology, which completed on 30 Nov. Sofology achieved sales growth of 13% - stripping out this contribution, DFS’ sales were down 3.5%. Over the period four new DFS showrooms were opened in the UK and one in the Netherlands. The business also acquired eight showrooms, the brand and the intellectual property of Multiyork.
Stephen Springham, Head of Retail Research:
If there are two golden rules for internationalising retailers, they are: 1. Develop as comprehensive an understanding of the new market as possible, by whatever means. 2. Be prepared to modify your domestic business model to meet the dictates of the new market, however drastically. In acquiring Homebase, Wesfarmers has spectacularly failed to heed either of these two golden rules.
Less than two years after entering the UK, these shortcomings have already come home to roost. Speaking to investors in Sydney this week, the business itself admitted as much. Wesfarmers said that it expected the UK division of Bunnings to report an underlying loss before tax and interest of £97m for the first half of 2018 and it had taken a £454m write-down on the business (more than the £340m it paid to acquire Homebase in the first case). A review of the business has been implemented and this is likely to result in 20 – 40 store closures. The possibility of pulling the plug completely on the UK has not been ruled out, but there is also the small matter of £1bn+ outstanding lease liabilities. An announcement will be made in June.
Fatally, Wesfarmers didn’t do their homework on the UK. Any local market knowledge disappeared when they dispensed with the whole Homebase senior management team at the earliest opportunity. MD Rob Scott’s admission this week that they “now have a team that understands the UK market” is tantamount to closing the stable door after the horse has bolted.
Bunnings is a highly successful business in its native Australia. The UK is not Australia. As retail markets, the two could scarcely be more different, be that in terms of geography, demography, maturity and competition. A “my way or the highway” approach was never going to work. The decision to re-brand the whole estate as Bunnings was a mistake. The Homebase was (is) a slightly tired brand but is by no means a busted flush – re-invigoration would be far better than total replacement. While the re-branded stores earned plaudits, they could not atone for other strategic shortcomings. The decision to ditch homewares, soft furnishings, kitchen and bathroom fitting services and Laura Ashley and Habitat concessions saw it give up Homebase’s point of differentiation in the market and alienate a large proportion of its non-DIY enthusiast customer base.
At the same time, they thought they had identified a gap at the ‘hard’ end of the market – a gap that is in fact very ably served by both market leader B&Q and ‘hard end’ specialist Wickes. What Bunnings perceived to be ‘disruption’ was actually where the market was 20 years ago – core DIY at everyday low prices, with a limited online strategy. The UK DIY market has evolved away from this basic concept for a reason. Even the garish price-led POS smacks more of the 1970s than the future.
To its credit, Wesfarmers has now held up its hand and admitted that many of the failings were self-induced. But it is difficult to see where it goes from here, without undertaking major (and costly) u-turns on its direction of travel since entering the UK. While there is definitely still value in the legacy Homebase business and brand, it is difficult to identify too many suitors if Wesfarmers did decide to walk away. 19 spankingly refitted Bunnings stores and an ugly tail of 200+ Homebase stores that have decayed dramatically under Wesfarmers’ ownership probably make the business less attractive now than when it was acquired back in 2016.
The third golden rule for internationalising retailers: admitting defeat is better than blind perseverance.