100 days to save Homebase

On Tuesday 27th February it will be 100 days to the Wesfarmers Strategy Briefing on Thursday 7th June 2018. The date on which Rob Scott Managing Director will update the Australian Stock Exchange and investors on the outcome of their strategic review of the Homebase business, they acquired in February 2016.

“The strategic review is focused on options to improve the trading performance of Homebase as well as further evaluating the performance of the pilot stores to inform the future plans for BUKI. We will take a disciplined approach to further capital deployment and provide an update on the outcomes of the business review and our plans for a broader conversion to Bunnings at our Strategy Briefing Day in June,” said Mr. Scott.

Wesfarmers objective is simple “The Group is focused on delivering satisfactory returns to shareholders by improving its underperforming businesses, proactively managing its portfolio and investing in value-accretive growth opportunities. We need to address underperformance in our portfolio that is detracting from positive performance in other areas. The Homebase acquisition has been below our expectations which is obviously disappointing. In light of this, a review of BUKI has commenced to identify the actions required to improve shareholder returns”.

Earlier this week, the company announced their poorest set of half-year results for a decade, almost all due to the mounting losses in Homebase. However, there are really no clues in the wording as to where Rob Scott's mind may be on the future of Homebase and in the investor telecom on Wednesday, he once again defended their current position, robustly dismissing exit as being the likely option.

He dismissed the British media for their negative reporting; although closer to home, the feeling amongst both informed media and investors is really no different. If you’d like to see what the Australian Press are saying, click on the link below:-

Can Wesfarmers dig Bunnings out of its UK hole, or is better just to bury it?

Realistically, there are now only two possible outcomes of the review. Either remain in the UK and provide a robust and convincing plan with clear time-lines of when the business will deliver an acceptable level of returns or announce a complete and clean exit from the UK and Ireland.

The stakes are now incredibly high.

Not only is the reputation of the largest company in Australia at stake, so is the reputation of their new Managing Director, only two months into his tenure. Bear in mind this is a company that has only had eight Managing Directors in their 104-year history. Balance that with the income and livelihood of the 12,000 Homebase employees in the UK and Ireland and their families and you can see this is clearly not a decision to be taken lightly.

From what we hear, Scott a dual Olympic rower, who won a silver medal in the 1996 Atlanta Olympics, is a very measured and disciplined individual and his decision to announce the impairment and write-down charges on Homebase two weeks prior to the half year results is an indication that he’s not shy of making tough decisions. But there’s no doubt, this will be the single biggest decision of his Wesfarmers career to date.

In recent statements, the company has been painfully honest regarding the problems with Homebase and the ‘self-induced’ issues created by the management team instigated in early 2016. Using quotes from the various statements issued by Wesfarmers since the beginning of February they have admitted to the following ‘self-induced’ problems :-

• Removal of existing Homebase management team.
• Investment in price and new ranges that have not offset lost sales from discontinued lines.
• Exiting of in-store concessions too early.
• On-going disruption caused by the rapid repositioning of the business, contributing to greater than expected losses.
• Exiting of a whole lot of lines that were really the key purpose for customers coming into Homebase in the first place.
• Inconsistent store standards.
• Underestimating winter demand for a range of items from heaters to cleaning to storage.

In the remainder of this article, we add our own perspective and detail to the self-induced problems identified by Rob Scott and examine what if anything we believe can be done to save Homebase in the next 100 days.

Issue 1 - Removal of Management Team

On 16th April 2016, we reported on Insight DIY that Wesfarmers had axed 149 Homebase staff from their Milton Keynes HQ, just 2 weeks after the entire senior board had been replaced with staff from Bunnings Australia.

Read - Homebase to lose 149 Head Office staff

The speed and arrogance with which the experienced, senior Homebase head office team was exited did little to maintain continuity and build engagement with the remaining staff. What worked in the Homebase business and the category by category trading strategy necessary to keep the business profitable, was lost with the team that departed.

The belief that everything Homebase had done was wrong and everything that Bunnings intended to do was right, permeated from Peter (PJ) Davis and was consistently communicated to staff and suppliers alike. At one particularly memorable conference with the Homebase teams, PJ stood up and asked for a show of hands from the staff who actually regularly bought products from Homebase. The response was less than 10% and the new Bunnings team used this as an example to justify their ‘out with the old and in with the new’ approach to everything they did.

Impact - This particular self-induced error and the loss of a significant amount of category, industry, competitor and seasonal expertise was to have a devastating medium-term impact on the business. For Rob Scott to admit to investors that they got the seasonality wrong in Winter ’17 and didn’t have enough heating, cleaning and storage products in the UK in the winter, is at best embarrassing and at worst retail negligence. It is also a symptom of a very poor understanding of the Homebase business that was still in place 18 months after the acquisition and is directly responsible for the departure of the Australian management team.

Resolution - To be fair to Wesfarmers, the appointment of seasoned industry performers David Haydon and Damian McGloughlin and the removal of the Australian team responsible for the self-induced problems was a good move. However, with only 100 days to save Homebase, we’ll have to wait and see whether the damage has already been done and whether David and Damian have what it takes to turn this business around.

Issue 2 - Change in Pricing Strategy

In the Spring of 2016, the new leadership team began to deal with the long-standing issue of Homebase being the most expensive retailer in the Home Improvement market. Everyone knew this, staff, suppliers and the majority of consumers, the latter who chose to still shop and buy from Homebase, as that was the price paid for a better, more upmarket shopping experience. This contrasted with the functional, male focused warehouses of B&Q and Wickes. My business Insight Retail Group tracks prices across the leading Home Improvement retailers and between April and June 2016 we started to see prices falling in Homebase. In a 12-week period, prices fell by as much as 20% across more than 10,000 lines, effectively bringing the business in-line with B&Q on almost every comparable product and brand.

On 21st June 2016, the company revealed their new strapline Homebase ‘Always Low Prices.

The price reductions were essential to deliver step one of the strategic implementation of Bunnings into the UK and Ireland, as alongside ‘Widest range’ and ‘Best Service’, ‘Lowest Prices’ were the cornerstone of the Bunnings success in Australia and New Zealand.

Impact - In the 5 years prior to the acquisition of Homebase by Wesfarmers, the turnover of the business had been flat with revenue of ￡1.43bn and at no point during that five-year period, had it generated more than ￡23m Operating Profit (1.6%). At the point of the acquisition, year on year turnover at Homebase had declined 3.1% due predominantly to store closures, but like for like sales had increased a positive 5.2% with encouraging growth across the board, particularly in big-ticket Kitchens and Bathrooms. For comparison purposes, over a similar period, B&Q had delivered only a 1.9% increase in like for like sales.

The arrogance that blew away the Homebase management team was applied to the implementation of the Bunnings strategy. The expectation that the reduction in retail prices on over 10,000 lines would lead to a significant increase in sales volumes, quickly disappeared and this self-induced action had a devastating impact on the revenue and profitability of Homebase. We believe it is this factor which is predominantly responsible for the ￡97m loss in just six months that Wesfarmers reported on Wednesday.

Resolution - There’s really only one option, increase retail prices in Homebase and the Bunnings trial stores, probably by more than 10%. We’ve already started to see some evidence of this, with Homebase retail pricing now moving above B&Q for the first time and week on week increases in the 19 Bunnings Warehouse trial stores. However, to stem the growing losses, the move has to be made now. The market leader B&Q is sure to be investing heavily in price driven advertising activity over Easter, which may leave Homebase high and dry - both more expensive and with a poorer shopping experience. The increase in prices may stem the losses, but it’ll do little to rectify the declining footfall and will provide no new reasons for the previously loyal consumers to return to Homebase.

Issue 3 – Removal of concessions and loss of exclusive brands

The decision to exit the concessions came quick and sharp, although in some cases, such as Laura Ashley it took almost nine months to finally exit the in-store concessions from Homebase. In addition to Laura Ashley, the concessions included Habitat, Argos, at one point the online cycling retailer Wiggle (until 2015) and the car washing concessions in the Homebase car parks.

Read – Laura Ashley to close all 22 concessions

Impact - Rent from the concessions delivered a profitable contribution to the Homebase business and we’re reliably informed this was as much as ￡20m-￡25m per annum – interestingly as much as the total profit that the Homebase business generated. As important, it also gave another reason to believe, a reason for a consumer to drive to an out of town Homebase store and make a purchase. Both Laura Ashley and Habitat fitted perfectly with their more affluent female target market and it enhanced and improved the shopping experience.

Resolution - It would be almost impossible to put any form of concession back into Homebase stores now. Home Retail Group on behalf of Argos certainly wouldn’t be interested, nor would any other retailers once they’d done their homework. However, the key point is why would the new team want to put concessions into Homebase anyway, when the ultimate objective is to turn them into Bunnings, where there are no concessions?

Issue 4 – Loss of Kitchen & Bathroom Business

The strategy to deliver a Bunnings model in the UK and Ireland as close as possible to the successful model in Australia, had a significant impact on the Homebase Kitchen and Bathroom business. Kitchens are a less important category to Bunnings in Australia and by copying and pasting that format, approach and space allocation into the UK, the category became marginalized. To be successful in Kitchens a retailer has to have total credibility; customers are going to be spending between ￡5k and ￡20k of their own money and they need to have confidence in the kitchen retailer. This can only be delivered through inspirational showrooms, displaying as many good quality ranges as possible, with knowledgeable, helpful staff and a compelling reason to buy. I just don't think you can successfully sell kitchens like this:-

The loss of the Hygena and other kitchen brands to Home Retail Group, led to the decision to focus on the existing price entry Kit & Kaboodle range from Australia and launch a comparable, good value range for UK consumers. As part of the transition to Always Low Prices, the heavy discounting of Kitchens and Bathrooms that Homebase had become too reliant on (almost like a drug) to drive footfall, ended, as did the interest free and buy now pay later credit deals that PJ felt lacked transparency for consumers. On top of that the decision to close down the kitchen installation business, left Homebase in a very weak position and the decline of their business started almost immediately.

Impact - This misunderstanding of the complexity of the UK kitchen business, the significant cost of change, the inherent risk in changing suppliers and choosing to ignore the needs and motivations of kitchen consumers in the UK and Ireland had a devastating impact on the kitchen and bathroom business. Estimated lost sales were in the region of ￡60m-￡80m per annum, as the transition to the new ranges meant the business effectively declined to nothing. But there’s further hidden damage here in the lost sales of the more profitable associated categories. When a consumer buys a kitchen or bathroom from a retailer, they’re very likely to purchase the associated products needed to complete the project, including the sink, taps, appliances, flooring, lighting, paint, tiles and everything else they might need. Losing the kitchen and bathroom business, probably had a further impact in the region of ￡20-￡30m of sales in associated categories.

Resolution - The new Homebase kitchen offer is already in place, including both the price entry and a better quality ‘Made for you’ Kit & Kaboodle range (only available in Homebase and not the Bunnings trial stores). The range is good quality and competitively priced and if they invest heavily in above the line advertising starting now, I believe Homebase could get back maybe 40%-50% of the business they once had. To achieve more than this will take significant investment in improved store displays, additional kitchen consultants (as many left to join Wickes and Wren when they saw the writing on the wall) and further, consistent above the line investment.

Clearly, they’ve recognized this and this was the Homebase website today:-

Issue 5 – Investment in new ranges

The replacement of the ‘softer’ product ranges in Homebase stores with functional DIY products, including more tools, power tools and storage, many of them from unknown, price entry Australian brands, did little to drive revenue and profitability. In many cases it cannibalised sales of the more profitable, higher value branded lines.

Read – New Bunnings brands hit UK stores in force

Impact - With no consistent in-store locations for the new lines, store staff were simply told ‘find space for them’. Almost overnight, the Homebase stores began to be filled with disorganised secondary displays, full of cheaper products, many displayed in simple cardboard outers. When coupled with the now hand-written pricing point of sale, the stores started to resemble clearance outlets and even worse car-boot sales.

Many comments on social media summed up the way consumers felt:-

Resolution - You can’t simply put the softer ranges back into Homebase stores. The target market has long gone and any effort to encourage them back to store, without the pleasant shopping experience, the broad range of home and kitchenware and the all-important ideas and inspiration would be a further waste of time and effort. 

Saving Homebase in 100 days

With the most important period of the year almost upon us, if the business gets this wrong, then the decision for Rob Scott in June is a simple one; get it right and at least the business has a chance.

With such a significant share of DIY and Gardening business happening in the three-month period 1st March to 31st May, it’s critical that the business clears the shop-floors now and creates a more pleasant shopping experience to even give them a half chance of retaining existing customers and generating some much-needed loyalty. However, even tidying up the Homebase stores is a much bigger job than you may think. It’s not just a case of removing the clutter, every line-plan needs to be revisited to ensure that the store once again looks like a viable retail proposition and not just a clearance outlet.

Even now, the key seasonal locations in store are not delivering the required returns. For example, below is an image of the seasonal area in the Milton Keynes Bunnings Warehouse taken this morning - more BBQ’s and garden furniture than I’ve seen in a decent garden centre in July and it’s currently 4 degrees outside and there’s snow forecast this weekend.

If I was Damian I would be calling a conference with the 100 leading suppliers in the next two weeks, inviting them to attend with their proposals to save the Homebase business. I would outline the challenges, the time-scales and where help was needed the most to turn the business around. I would follow the conference with three days of one to one to meetings between suppliers and the category teams to agree a plan of action to be implemented pre-Easter. The plans should involve the allocation of branded products into all stores at great prices, to replace the rubbish that currently clutters the aisles of most stores and use each stores seasonal area for the best Paint, Power Tool, Tiling and Flooring, Wallpaper, Pressure Washer, Storage and lighting products they can get their hands on.

The supply-base needs Bunnings/Homebase to survive and it needs them to be a strong player. Despite the headlines, the MD’s of these businesses are still prepared to support BUKI, so I recommend they utilise them, with just 100 days to go, I don’t think they have many other options.

Written by Steve Collinge, Managing Director of Insight Retail Group Ltd.

You can contact Steve on [email protected] and follow him on LinkedIn and Twitter.