After Masters Surrender, Is There Anything That Can Derail The Onward March of Bunnings?

Bunning’s Warehouse has been a juggernaut since it emerged from the acquisition and merger of former Howard Smith businesses Hardwarehouse and BBC Hardware and Wesfarmers’ Bunnings business. Its unimpeded growth has been the envy not just of the hardware sector, but also of the broad retail landscape. Masters was intended to be its only true national rival and we all know how that turned out. So having seen off the most well resourced and best-funded local competitor, would it not seem like the sky is now the limit for Bunnings’ ambitions?

Certainly in the short term there is little doubt that Bunnings will continue to see strong domestic sales growth. However, the medium term horizon for the retail business is anything but rosy in my opinion. The hardware sector has seen strong growth in the past decade fuelled by the housing sector. As property prices rose and the renovation boom flourished – boosted by housing investors and the Do-It-Yourself (DIY) revolution enriched by television and magazine programming – Australian consumers and households flocked to Bunnings Warehouse stores in search of projects which transformed their homes and property investment values.

There are now three forces that are gaining momentum and likely to manifest in Bunnings retail trade sales growth peaking in about five years from now. The first is the massive changes sweeping the urban and suburban property landscape. These are resulting in smaller dwellings on smaller plots. Quite simply, the scope for home improvement will shrink for the average consumer in line with average property size.

The second is the economic cycle. We have witnessed a long bull-run and record low interest rates. Combined with investment strategy for private individuals and superannuation planning, returns from property have maintained interest in DIY. If – as many analysts are suggesting – interest rates rise sharply the economic motivation diminishes. We have already seen the big four banks re-price investment loans to cover the international cost of funds and their perceived need to cover risk.

The third is pure demographics. As baby boomers downsize, their properties are being developed into smaller dwellings. Younger generations are struggling to purchase at all and more are renting. Those that do purchase are buying smaller properties. But the more important trend is their motivation to actually do the home improvement projects themselves anyway. While the TV shows rate, younger generations often take a voyeuristic approach to watching them. With many, they feel they work hard to earn the money and prefer to pay someone else to do it properly. They’d rather use their spare time on something that offers them a better return on their discretionary time than a poor attempt at a renovation project. As one prominent advertising campaign says “We fix the projects your husband started”.

This all adds up to a forced refocus of the sector from DIY to DFY and a peak in sales. Bunnings has a fantastic property portfolio that will stand investors in good stead. But the medium term retail prospects will require a shift away from retail to trade and a right-sizing of their retail business in line with the sales opportunity and the right locations and formats to exploit it.