Australia's home improvement industry has completed its opening moves in response to the new market that has emerged since 2011. What we will see in 2015/16 is the beginning of the middle game, where strategic responses will become more important than the set-pieces we have seen so far.
Australia's three major home improvement retailers will hold strategy briefings over the next two months. Home Timber and Hardware Group (HTHG) revealed much of its strategic focus at its annual show in early March 2015.
This is a good time to review the strategies being pursued by the main groups in the industry. There are four defined strategy groups: Bunnings, Masters Home Improvement (Masters), the trade-focused Mitre 10 and Home Timber and Hardware Group (HTHG), and independent retailers.
To give the strategy of each of these groups a label, they would be (respectively) vertical, horizontal, business-to-business service-oriented, and precision market fit.
While Bunnings isn't vertically integrated in the classic sense, in that it doesn't own its supply sources, it is heavily focused on its supply chain as a driver of its business.
It could be said that for Bunnings, its individual retail outlets work as the best possible expression of its supply-chain dynamics. It works hard to get the right product at the right price. Once that is done, the task of the store is to make those products available with as little fuss as possible. Marketing is largely about notifying its customers about the great deals on offer.
In the coming financial year of 2015/16, the main challenge facing Bunnings will be finding the growth necessary to justify its expenditure in vastly expanding its retail space over the past five years.
The respected Citigroup retail analyst Craig Woolford has clarified some of the nature of this challenge. His analysis indicates that Bunnings may have developed too much retail space for its current market reach. The unneeded infrastructure will exert a drag on earnings, which inhibits future growth, as well as making earnings more vulnerable to a market downturn.
This doesn't mean Bunnings was necessarily wrong to expand. A major driver behind the floor space expansion was the need to inhibit the development of Masters as a competitor. This strategy has worked, but it came at a cost.
Basically, if a competent company is willing to lose $900 million to enter the market in which your company has a major interest, it is going to have an effect. The contribution of Mr Woolford's work is to make plain the exact locus of that cost effect on Bunnings.
Store expansion can be seen as something we might call proximity-based marketing -- people are more inclined to use a home improvement store that is close by. As a strategy, it promotes expansion inside an already defined market -- you are not necessarily attracting different sorts of people, but rather more of the same sorts of people who regularly visit your store.
Further, as the stores have themselves not evolved in this process, the nature of the retail sales made has not changed, either.
For Bunnings to achieve reasonable growth it needs to not only expand within its established markets, but to also gain access to adjacent markets as well. That is always tricky, but it is especially difficult for Bunnings because it has spent a decade fine-tuning its marketing and retail approach to its current, quite specific market.
Kitchens provide a good example of this. HNN has written in the past about how much we respect the main kitchen supplier for Bunnings, Kaboodle, and its approach to the market.
What Kaboodle has done is to take a narrow kitchen category -- basic and inexpensive -- and rev that category right up to the redline. In doing so, it has enabled many Australians to obtain a satisfying and stylish kitchen on a very limited budget.
In the coming financial year it is likely the kitchen category that is just above Kaboodle's will prove to be at least as profitable. We could think about the Kaboodle offering as being "unbelievable value". The offering immediately above that is something like "surprisingly affordable luxury".
To explain why Bunnings could experience some difficulties in entering that market, we are providing some snaps below taken at Bunnings stores on a Saturday morning between 10am and 12noon.
They show one of Kaboodle's real achievements, which is an attractive compact display of many of its kitchen styles -- a great marketing tool. However, as shown in these pictures, these marketing units do not always get displayed to their best advantage.
We do not intend these pictures to be critical in any way of Bunnings. We are not saying Bunnings or its store managers have made any kind of "mistake" at all here. These scenes are typical all over Bunnings stores, and are a result of the company doing restocking during its normal dayshift -- a practice that helps directly to reduce costs.
It is our impression that Bunnings customers actually like this kind of disorder. It gives the store a buzzy, market-like feel, and makes them feel comfortable and involved.
However, if you are trying to sell kitchens to people in the "surprisingly affordable luxury" segment, these kinds of displays are a complete buzz-kill. No matter what the price, it will not be possible for them to relate to the product and make a purchase. It is something, for example, that you just would never see at IKEA.
Putting the picture together
The standard riposte that Bunnings makes to analyses such as that put forward by Mr Woolford is that the company currently controls only 17% of a $45 billion market, and that there is thus -- to use a phrase from the managing director of Bunnings, John Gillam -- "lots of runway" in home improvement retail for expansion.
There is some truth to the claim. The essence of Mr Woolford's work, however, is that Bunnings' move to further expand its retail floor space is not the most effective -- perhaps not even an effective -- way of accessing that "runway".
Most of the $37 billion of the home improvement market Bunnings doesn't control is not in the products the company sells or the markets it currently reaches. To gain access to those markets it needs to actually evolve the stores themselves. More floor space selling the same products to the same markets does not address the problem.
The process of evolution is difficult, complex and intense. Bunnings may have capabilities in that area, but these are not currently especially on display.
This is just one example of the types of challenges Bunnings will face over the coming financial year. Almost every expansion into adjacent markets features a similar problem. It is going to be really fascinating to watch how Bunnings develops strategies to overcome these difficulties.
Not to mention seeing if Bunnings has developed an e-commerce strategy for 2015/16.
An article on Mr Woolford's analysis is available:Fairfax Media
Early signs from Masters indicate that it will most likely be pursuing a horizontal strategy. James Aylen, general manager of the HTHG described the model store that Masters will be opening in Sydney in April 2015 as operating on a "stores-within-store" design, which is a classic configuration of a horizontal offering.
The vertical Bunnings strategy relies in large part on economies of scale to make it viable -- selling lots in a narrow range. A horizontal strategy relies on economies of scope -- selling fewer of each of a wide range of items, resulting in a larger overall sale.
In horizontal retail strategies, the retail outlet represents much more than the end point of an efficient supply-chain. It is a highly complex, competent tool that effectively promotes multiple, cross-line purchases. This model also relies heavily on advertising as a key part of the strategy.
While this model overcomes the very difficulties that Bunnings faces in terms of expansion into new product lines, it can suffer from one problem that Bunnings has never had: a lack of clear market definition.
This is the primary task facing Masters in the coming financial year: it needs to establish an identity. Hopefully, the stores-within-store format will help it to do this, if it is backed up with adequate advertising.
Beyond that, HNN really can't say much about Masters at the moment. As with Woolworths in general, it is very much a "wait and see" situation. Hopefully the company's strategy briefing will reveal more detail concerning future plans.
Mitre 10 & HTHG: Business-to-business service-oriented
Mr Aylen of HTHG has offered the clearest description of this strategy. He stated simply that there were customers who valued service, and those who did not, and that most tradies fell into the former category, and were thus a prime target market for HTHG.
It seems fairly evident that not only HTHG is heading in this direction, as Mitre 10 is ramping up its efforts to appeal even more to tradies as well. On the surface it is a fairly typical strategy of defining the target market as being other businesses rather than consumers.
One of the difficulties with the way both Mitre 10 and HTHG seem to be approaching this market is that it is seen as being more of a defensive than an active market-seeking activity.
The semi-independents that dominate these groups often seem to have a sense of having been "hard done by", as they have watched many of their homeowner customers gravitate towards Bunnings and other large retailers.
In 2015/16 we can expect to see that attitude begin to shift as these retailers more fully commit to the new realities. As this change occurs, attention will move to how to really get the most out of the tradie market.
One thing to consider is what "service" really comes down to, and what its true value is in relation to doing business. Many retailers seem to think it is largely a social capability, and that tradies would rather buy things from "friends" than from the more corporate sales force of other retailers.
However, what "service" really comes down to for many tradie businesspeople is the reduction or even elimination of some kinds of risk. Building especially, and the trades in general, are actually very risky occupations for all kinds of reasons.
There is the risk involved in actually doing the task itself, for example. This depends often on being able to adapt to unexpected situations that crop up while the job is in process.
Weather can completely wreck the best managed plans of any construction project manager. Accidents happen. Machinery breaks down. And, perhaps worst of all, sometimes people don't pay, or they don't pay on time.
A good relationship with a supplier for a tradie means that there can be a reduction in risk. That can translate directly not only into better peace-of-mind, but also more dollars in their pocket.
If there is a maximum amount of risk that is tolerable in any one job, then having the supply-based risk reduced means it makes more sense to take other risks, and thus expose a business to more potential for profits.
It is notable that US-based retailers use a variety of tools to help gain and maintain their trade customers. This includes special credit arrangements, the ability for tradespeople to "warehouse" orders for a time at their stores, and freely offered planning and business financial advice.
It will be interesting to see if Mitre 10 or HTHG manage to develop this kind of more active strategy.
Independents: Precision market fit
One of the more interesting statements HNN heard at the HTHG show came from Mark Hunter, the CEO of Spot-On Lasers and Tools when he was speaking about his product-line market strategy. In part he said:
Because we are the largest importer [of laser tools] in this country, our range is so diverse, going well beyond 80 products, so what we do is to customise those products for position points. We can actually give every retailer their little bit of autonomy, so they actually can have a point where they are making generous margins.
This is a concept HNN has heard from a range of importers and product developers, though Mr Hunter states it very concisely. Where larger retailers present customers with a wide range of products, independents are increasingly seeking out just the "right" products, some of them a little unique.
This approach satisfies those customers who are really looking for inside information on their purchases, rather than buying strictly on price or features. Will the product last, will it perform well, can it be repaired or serviced, is it the latest technology -- all these issues are concerns for them.
Aside from tradies, customers in this category include prosumers and homeowners who see home maintenance as important, but seek to reduce any and all frustrations and difficulties associated with it.
In this sense, some independent retailers are evolving into speciality shops where, while service remains important, expertise and personal advice are just as essential.
While FY 2015/16 promises to be a very interesting and exciting year for the home improvement retail industry, HNN believes it will end up being something of a preliminary to more major shifts in 2016/17.
We expect to see the market for smart home products develop momentum during that period, and with it a more technological focus develop as well.
Until next time,
You can contact me directly via email firstname.lastname@example.org or Twitter @HNN_Australia
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