Outgoing Wesfarmers MD rejects Bunnings UK “black hole”
Outgoing Wesfarmers managing director Richard Goyder has once again defended the conglomerate’s $740 million investment in taking Bunnings to the UK, rejecting an analyst assertion that the business could turn into a “black hole”.
Wesfarmers booked declining sales from its UK venture (BUKI) on Wednesday morning, with same-store sales decreasing by 11.9 per cent in the first quarter of FY18 amid continued weakness within the Homebase network.
The result added fuel to concerns about Wesfarmers’ broader plans for Bunnings overseas, with Merrill Lynch analyst David Errington, who has been critical of ongoing losses in the UK, asking if management had an exit plan in place to cut its losses if conditions worsen.
Goyder, rejecting Errington’s assertion that BUKI may turn into a multi-billion-dollar blackhole, conceded that finding growth in the UK was going to take longer than expected, but reiterated his view that the market represents a “significant” growth opportunity for Wesfarmers.
“We’ve got to find opportunities to grow, we think this is an opportunity to grow, it will certainly take longer than we would have liked, but we continue to think there’s a significant opportunity for us to grow a profitable business in the UK,” Goyder told investors and analysts on Wednesday.
Bunnings managing director Michael Schneider said the nine stores already converted from Homebase to the Bunnings format were trading well, with learnings from each successive opening being contributed to ongoing improvement in the conversion strategy.
Around $849 million has been invested into BUKI so far, with 243 Homebase stores still to be converted.
Schneider put the continued poor performance of Homebase down to the clearance of discontinued ranges as Wesfarmers continue to position the business to be rebadged.
Durkan sticks to his guns
Elsewhere in the conglomerate’s portfolio, Coles boss John Durkan found himself touting the supermarket’s underlying comparable store sales figure, which he said was just north of one per cent.
That’s in line with the 2017 trend and comparatively better than headline comparable store sales, which with deflation factored in grew by just 0.3 per cent, the slowest rate since 2008.
Supply-side pressures on fresh products drove a more than two-fold increase in food and liquor deflation in Q1 to 2.3 per cent.
Durkan said Coles had spent more on price reductions and service in the last quarter than the $200 million figure he outlined in 2H17 investment at the company’s full year-result in August, but that the majority had gone into product quality, service and digital.
He reiterated his August guidance that Coles’ performance comparable sales performance would likely start to pick-up in the third and fourth quarters as efforts to gain market share in fresh, simplify ranging and improve the circa 800 Coles’ store network sink in with customers.
“We’re tracking in line with what we said a few weeks ago [on comparable sales] and nothing much has changed in the marketplace to change that view,” Durkan said.
“The one thing I did say then [at the full year] and I’ll say again now – assuming nothing dramatic happens in the market…if there’s a whole new level of massive investment from our competitors we have to react to that,” he continued, noting that he still believes the market is “pretty rational”.
Deflation is set to tail off slightly in meat, but Durkan said that’s unlikely to bolster margins in fresh as competitors haven’t responded to easing pressure by lifting prices.
Coles has experienced strong transaction growth, which Durkan said was driven by ongoing investment in-store service.
In convenience, where declining fuel volumes drove weakness, Durkan said he’s focused on ensuring a suitable return for that part of Coles’ operation and is currently undertaking dialogue with its fuel partner.
Kmart price investment coincides with Target decline
Wesfarmers’ discount department store division continues to be a tale of two radically different businesses, with Kmart once again driving growth for the division amid a 6.4 per cent decrease in comparable store sales at Target.
Target failed to find sales growth, despite cycling a 21.9 per cent decrease in comparable store sales in the first quarter of FY17, with department store boss Guy Russo saying there’s more work to be done, particularly on women’s ranges.
Kmart has invested significantly into price in response to Big W’s efforts to revitalise its offer, with Russo responding a question about whether this may have further cannibalised Target’s market position by acknowledging that external activity does have an impact on operations.
Russo did get a bit more specific about the progress of Target’s turnaround, saying that he’s nearly finished SKU reductions (currently just north of 50,000) and is broadly happy with promotional mix (currently 10 – 15 per cent of total sales).
Target’s home and men’s categories exhibited growth in the quarter, but improvement in women’s toys and general merchandise was flagged.
Focus is now turning to fashionability, with an eye on the “better and best” part of his “good, better and best” product strategy – a sign that Target will be refining the higher-end of its offering in the coming months.
Goyder delivers his last quarterly result
Wednesday was the last quarterly earnings result Goyder will deliver as managing director before handing the reigns over to Rob Scott in November, and was also the last time he’ll tussle with Merrill Lynch analyst David Errington on an investor call.
He used the opportunity to call into question reporting quarterly earnings at all, complaining that the short-time frames associated with reporting sales in twelve-week cycles distorts the market.
That decision will be left to Scott, who on Wednesday signalled his support for the move, alongside outlining his expectation that the subdued consumer environment his predecessor called out in August had continued into the first quarter of FY18, with Western Australia in particular struggling with declining population numbers.
Access exclusive analysis, locked news and reports with Inside Retail Weekly. Subscribe today and get our premium print publication delivered to your door every week.
Inside Retail Polls
Retailer Awards entries close this Friday, 8 November. Choose from 11 categories and enter now:… https://t.co/sSrRYp4iWl5 days ago