While both large and small Australian retailers have been thoroughly battered by the pandemic, forced to shut stores and switch their business online, Bunnings has largely thrived, with its sales jumping nearly 20 per cent for the first five months of the year.
Bunnings, an ‘institution’
Since March, Bunnings has continually been in the spotlight. First, as customers lamented the loss of the sausage sizzle, then as thousands flocked to its stores, seeking retail refuge at one of the few locations open during Australia’s first shutdown.
As masks were made mandatory in Melbourne in July, the chain was swept into focus again as the infamous ‘Bunnings Karen’ confronted workers over having to wear a mask in-store. Finally, its closure in Melbourne, despite pleas by Wesfarmers chief executive Rob Scott for an exemption, was a stark reminder of the pandemic’s severity.
This focus, along with its close alignment to the country’s housing market, has helped Bunnings gain a bellwether status for national consumer confidence, Contact Asset Management portfolio manager and Wesfarmers shareholder Tom Millner says.
“It is an institution and it would underpin a weekend for many Australians,” he says. “You know where products are, you know they’re going to have them and you know the price won’t fluctuate or change.
“The footprint of an Australian house has always been with a garden or a backyard … the environment we live in bodes well for Bunnings.”
Oerlemans agrees and says the stores also play an important role in the communities they operate in, with the funds raised from the famed weekly sausage sizzle a staple for many community groups around the country. In 2019, Bunnings helped raise nearly $50 million through its fundraising activities.
“Hardware stores are all about creativity or doing those weekend projects. It’s social, it’s very relaxing, and it’s an enjoyable thing to do,” he said.
“And to pick up a sausage sandwich on the way, that just adds to the whole experience.”
Recent figures from the Australian Bureau of Statistics show an increase in expenditure on hardware, building and gardening supplies during the country’s lockdown, peaking at $2.12 billion in May.
Earnings in focus
But behind the company’s status as an Australian institution lies, perhaps unsurprisingly, a set of strong business fundamentals.
Parent company Wesfarmers owns Bunnings along with a clutch of other prominent retail chains, including Target, Kmart and Officeworks. After its demerger of Coles in 2018, the hardware chain is now the business’ key earner, making up about 55 per cent of the conglomerate’s earnings. It generated $1.62 billion in earnings before interest and tax last year, on revenue of $13.2 billion.
For the 2020 financial year, analysts are tipping double-digit growth in both measures. That would bring Bunnings’ percentage of Wesfarmers total earnings to about 65 per cent, firmly cementing the company as the most important part of Wesfarmers’ portfolio and the driving force behind the retailer’s hefty dividends.
A spin-off of Bunnings used to be canvassed by investors before Wesfarmers’ offloaded supermarket retailer Coles instead. Shareholders are now keen for Wesfarmers to hang on to Bunnings and position it for continued growth.
‘The timing was excellent’
Wesfarmers acquired Bunnings more than 25 years ago in 1994, initially attracted to the company’s timber and logging business rather than its small number of hardware stores. However, it was the retail locations that became the driving force behind the business.
“The timing was excellent in the scheme of Australia’s hardware industry,” Angus Gluskie, managing director at longstanding Wesfarmers shareholder White Funds says.
“The industry was previously fragmented, it wasn’t professionalised, and Wesfarmers has taken that industry from fragmentation into one dominated by Bunnings with a notable lack of other competitors.”
Limited competition is one of the primary reasons investors and market watchers are keen on the hardware powerhouse, with only Metcash-owned Mitre 10 challenging Bunnings in the big-box space. Fresh attempts to tussle with Bunnings, such as Woolworths’ Masters chain, have also failed.
Its unparalleled market position has also helped Bunnings entrench its position among consumers, with the business regularly topping lists of the country’s “most-trusted” brands. Its marketing, with chatty TV ads and a familiar “lowest prices” slogan, also plays a role.
“There’s a lot of brand trust with Bunnings,” JP Morgan analyst Shaun Cousins says. “And COVID-19 is a time where retailers are enhancing their reputation with consumers.
“Looking at the way Bunnings staff performed with that video of the lady with the masks, I think Bunnings has enhanced its reputation quite a bit during COVID.”
Too big to grow
But love from customers doesn’t mean Bunnings hasn’t avoided some major missteps in recent years, most prominently its disastrous attempt at an expansion into the UK market, which cost Wesfarmers more than $700 million. The business was later sold for a single British pound.
The move was a scorch mark on Bunnings’ largely unblemished record and has likely scared management off considering any further international expansion in the near term.
“It put the knocker on any overseas expansion,” Gluskie says. “They picked a market they thought had a good fit for them, they had a go at it and it failed badly.”
Bunnings occupies a unique place in Australians’ psyches.
Mike Schneider, Bunnings managing director
This has led to concerns among some investors that Wesfarmers may struggle to grow Bunnings in the years ahead, with fears it has saturated the market with little room for significant store expansion.
To counter this, Bunnings has switched its focus towards other segments of the hardware industry, hoping to increase its business-to-business customers through an expansion of its trades segment.
In April, despite concerns from the competition regulator, Bunnings completed its acquisition of specialist tools retailer Adelaide Tools in an effort to get a leg up with trade customers.
Bunnings is also looking to improve its online sales, with the company admitting it was slow to establish an online channel, which launched only this year.
“They’ve made a lot of progress [in trade and online] in the last six months,” Cousins says. “They could have been a bit earlier, but they’ve chased fast.”
“Bunnings has the ability to expand the number of categories and the size of the categories it operates in, with a lot of market share headroom.”
As of Wednesday, Bunnings shoppers in Victoria face a six-week wait until stores reopen, and an even longer wait until sausage sizzles are back on the menu. For now, they’ll have to do with online orders and home-fried snags.
But in other parts of the country, the Bunnings Barometer may be improving its rating, with stores trading close to normal in Queensland, South Australia and New South Wales, with some even firing up the barbecues again, Oerlemans says.
And while a return to actual normality may feel a long ways off, the importance of the red and green warehouse to Australians is not lost on its management.
“Bunnings occupies a unique place in Australians’ psyches,” managing director Mike Schneider told The Age and The Sydney Morning Herald. “Australians see Bunnings as their own local store, there’s a strong parochialism. Our stores are such an important part of the community.”
Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.