On 18 January, Woolworths (ASX: WOW) announced it would exit its failed home improvement joint venture. The very same day Wesfarmers (ASX: WES) flagged Bunnings would buy Homebase in the UK. That phrase with the words 'salt' and 'wound' comes to mind.
It wasn't hard to see Woolworths' Masters would struggle to match Wesfarmers' Bunnings from the very beginning (see Wesfarmers to win hardware battle in 2009). Now some are saying Wesfarmers is making a similar mistake by entering the UK market.
I'm not so sure. Here's why.
First up, Wesfarmers is buying Homebase's existing network of 265 stores. As Bunnings managing director John Gillam said on the conference call: 'A store network of this nature would take us many years to build and be very difficult to replicate'. In contrast, Masters had obvious difficulty acquiring sites and took five years to roll out 62 stores.
Second, there's much less capital at stake. Wesfarmers has paid £340m to acquire Homebase, a price that looks cheap next to the retailer's £1,461m in revenues. Wesfarmers has also made it clear that Homebase is a renovation project. It has set aside another £500m on top of the acquisition cost to test new formats, reposition the merchandise offer and rebrand the existing network to Bunnings.
Wesfarmers' proposed $1.6bn investment in the UK isn't trivial, but nor is it particularly significant for a company with a market capitalisation of $45bn. While Woolworths' Australian home improvement business was never a threat to its core business, the $3.2bn writedown reported recently is significant next to annualised home improvement sales of $2.3bn.
Third – and here's where the ice gets a little thinner – the UK home improvement market looks ripe for disruption. While both Bunnings UK/Homebase and Masters confront a larger competitor, that's where the similarities end.
In Australia, Bunnings is far and away the market leader in home improvement. It commands about 20% of the market – broadly defined – and much more of the 'big box' segment. In the UK, the two largest players – Kingfisher plc's B&Q and Homebase – account for only 15%.
So the UK market is much more fragmented. B&Q is Bunnings' most obvious competitor, with a merchandise offer that is somewhat similar to the Australian chain. But the fragmented nature of the market means Bunnings UK/Homebase might be able to take market share without treading on B&Q's turf – at least initially.
Nevertheless, B&Q's owner Kingfisher had better watch out. The company is obviously doing something right – in 2015 its UK business made operating profits of £276 on sales of £4.6bn. However Kingfisher's business is much less focused than Bunnings.
Kingfisher operates multiple home improvement brands across different market segments in 10 countries (although the UK and France represent almost 80% of sales). In January, new managing director Veronique Laury announced a £800m five-year plan (is there any other kind?).
Laury's aim is to reduce costs, simplify product sourcing, invest in digital and, voilá, profits will soar. But Kingfisher's profit record is somewhat spotty in recent years, so Laury's plan doesn't spring from a position of strength.
Finally, Bunnings is already taking action in the UK. It was handed the keys to Homebase less than two weeks ago, but immediately sacked the entire senior executive team. It sounds harsh but there's a precedent. After Wesfarmers look control of Coles in 2007, it sacked the vast majority of senior managers there too.
Such a ruthless approach clearly has risks but Bunnings is buying a store network rather than an ongoing business. Homebase is underperforming, so why retain the existing management team? Cultural change matters and the management cleanout sends a signal to junior staff: Fail to perform, and you're out.
There are no guarantees of course. Much could yet go wrong with Bunnings' UK expansion. The rebrand in particular could be problematic given the Bunnings brand won't resonate with UK consumers.
Bunnings is doing everything right thus far. It has acquired a store network, it has paid a low price, it has identified a gap in the market, and it's acting quickly. In short, Bunnings is doing everything that Masters didn't.
To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.