Wesfarmer’s home improvement division, Bunnings has been the leading hardware supplier in all states of Australia and New Zealand in the past years. Bunnings’ strategic objectives are to provide the widest range of home improvement goods with lowest price. It can be seen as a slight prospector / strong analyzer based on the Miles and Snow’s Adaptive strategies (Miles & Snow 1978).
Bunnings’ core competence is their depth and breadth of stock holdings and brand name recognition designed to cover almost all the needs of people’s everyday life. Bunnings are doing basically well in the strategic implementation process.
From innovation to stuff, from information technology to legal and e-legal, Bunnings are all doing well on those aspects. Some issues also exist due to both external and internal factors. However, on the whole, Bunnings have been implementing the strategies very well.
Wesfarmers originated in 1914 as a Western Australian farmer’s co-operative and now it is one of Australia’s largest public companies, headquartered in Perth, Western Australia. Bunnings is the main part of its home improvement division. Bunnings employ a workforce of 20,000 and operates a network of over 225 stores across Australia and New Zealand and is the leading hardware supply company operating in all states and territories in Australia and on both islands of New Zealand (Bunnings, 2007).
This case study analyzes the external environment of Bunnings using method and then finds out the strength and weakness of Bunnings through the SWOT analysis. It comes up with Bunnings’ strategic objectives and discusses about the key strategies for realizing the objectives. It then comes into details about the strategic implementation process and discovers both the success and problems in it. Bunnings are employing all kinds of strategies to position itself strongly in the market.
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Its external environment is very healthy and helpful for its future development although there are also some threats. However, the opportunities exceed the challenges, Bunnings still have potential for growth in market share and profit in the next years. This essay also deals with the evaluation of Bunnings’ strategies and makes some comment about problems in strategic implementation process. The case study concludes based on the analysis and goes through the main points of the whole essay again.
Households remain highly sensitive to adjustments in rates given current record levels of debt. However, risks remain weighted to the upside (Global insight Australia, 2007).
In trend terms, GDP increased by 1. 2% in the quarter from Mar to June of 2007and Non-farm GDP rose by 1. 4%. GDP per hour worked in the market sector rose by 1. 2% and the Household saving ratio was 0. 1. (Australia Bureau of Statistics, 2007) Bunnings are benefiting from the economic trend and can sustain its competitive advantage of lowest price because of the high sensitivity of households.
Low inflation rates can also create more demand from the customers as disposable income has increased. 2. 1. 3 Social The population of Australia is growing at a rate of 1. 4% per year and officially, by estimation, hit 21 million on the 29th June, 2007. 67. 3% of population is between 15 and 64 years old. From this aspect, Bunnings still have great potential to increase its market share based on the population growing as the home purchase and improvement is part of people’s basic needs. (Wikipidea, 2007) Likewise, people’s living standards are increasing and urging new fashions have brought people into a new era.
Societal trends of entertainment at home mean more people are installing pools, pergolas and outdoor entertaining areas as well as constructing or renewing their houses. People’s ideology about life style will create huge demand for home improvement market. Bunnings will be strongly positioned to benefit from this new potential with its lower price and DIY classes. 2. 1. 4 Environmental The Australian Government Department of the Environment and Water Resources (formerly the Department of the Environment and Heritage) develops and implements national policy, programs and legislation to protect and conserve Australia’s natural environment.
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People are far more aware of the importance of protecting the environment. Bunnings Warehouse chain and the State Governments are working together to encourage local residents to make wiser decisions of their homes and gardens in energy and water savings. (Victorian Litter, 2007) 2. 1. 5 Legal The Australian legal system is well developed and respected. It fosters transparency and favors competition. (Global insight, 2007) From this perspective, Bunnings will still strive in the market as the have in the past with a more developed mature legal system that supports reasonable market competition.
Over the past decade as interest rates remained low Australian households typically spent around forty dollars per week on capital improvements and alterations, directly impacting demand for hardware goods and supplies. This market has allowed Bunnings to grow and capitalise on its significant buying power as a major path to market for suppliers, this in essence rates supplier power as low to medium, however the barriers to entry into this market are also quite low so competition is furious and substitutes of Bunnings are in plentiful supply.
Possible threats to the industry segment come from the softening market for extensions and renovations and more competition for the consumer dollar. Downturns in the housing market through interest rate adjustments will also drive competition up as the ‘Do-it-yourself’ market reduces due to reducing housing affordability. There is also the threat of suppliers going direct to the market especially in niche areas to reclaim some of the margin eroded by Bunnings purchasing power.
It has been identified that environment turbulence in this industry segment is quite low and supply chain agreements are many. Mergers and acquisitions are both an opportunity and a threat to Bunnings as although possibly unable to continue to grow through merger due to ACCC requirements (unlike the real possibility of a merger between Danks and Mitre 10, which would see this group achieve similar purchasing power to Bunnings) this has not stopped Bunnings acquire opposition businesses where available.
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This has been a focus of the group with many mergers and acquisitions over the past decade, as recently as January 2007 Bunnings acquired a Mitre 10 Mega store in north-east Adelaide assisting its growth in the area without the additional start up costs associated with Greenfield sites. The opportunity of Bunnings is as the economy develops, people’s living standards are becoming higher and higher, which in turn creates a high demand for the home improvement goods Bunnings specialises in.
Bunnings has recognized that there needs to be improvements in their supply chain and this is being ratified through a partnership with Oracle who have developed software to assist Bunnings in improving their supply chain path to market. Bunnings also recognize that there is an ability to capture more of the market and they are sourcing some of the opportunities through other various brands such as HouseWorks and the very real possibility of some of the Coles branded product once that merger progresses.
It would appear that Bunnings recognize where their opportunities and threats lay and are actively following strategies that will inevitably lower their overall cost of business. 2. 2 Internal A core competency of Bunnings is their depth and breadth of stock holdings and brand name recognition designed to cover almost all the needs of people’s everyday life. This is one of their greatest strengths as their target segment is the mass-market appealing to a very broad group of consumers.
Other core competencies include cash flow, which has remained strong over the past 3 financials years’ predominately due to the fact that they are in a cash business, which significantly reduces debtor days allowing them to carry the small amount of trade business debt they have. Supplier relationships and purchasing power that offers them the ability to price match and offer their 10% price guarantee if a product is found cheaper elsewhere.
Their supply chain management which has allowed them to grow at their current rate but which is also recognized as needing continuous improvement and their ability to manage their overheads by allowing their property development group manage infrastructure. It would appear that Bunnings strategic competitive advantage is their position of category killer; category killers can be described as a large retail chain store that is dominant in its product or category.
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These stores generally offer an extensive selection of merchandise and because of the discount prices smaller stores struggle to compete. One of the weaknesses of Bunnings is the wide variety of competitors and the price sensitivity of its products especially in the imported, lower end of the market. Price sensitivity comes at a cost to margin and these needs to be managed in a store-by-store basis. Other weaknesses include customer service, although touted as a core pillar of the Bunnings group, customer service is very subjective and this needs to exceed expectations on a regular basis.
Bunnings struggle to capture the high end of the market as they are seen as a low cost provider, therefore it is difficult to introduce high margin, brand name products and reduces their ability to differentiate themselves in the market. Bunnings appear to be in a strong competitive position, which is well placed in the market, their ability to maximise efficiencies by improving internal systems whilst actively focusing externally has enabled them to grow to a position of dominance in a relatively short time.
Bunnings’ vision states that they are ‘Building the Best – Our team makes it happen’ this statement says a lot about the internal environment of Bunnings but this is difficult to measure as there were no statistics on staff turnover rates available however, the stated company ambition is to provide the ‘widest range, lowest price and best service’. This statement is more measurable, in meeting these objectives we would expect to see evidence in the form of share price growth and business growth as market share is expanded, some of this evidence is presented below.
Bunnings expects to capture a bigger share of the market and will be around 15% of the market. It is still opening new stores and is considering ways of lowering costs and improving its product range and service. Bunnings people will still keep a strong customer focus and have all the things in their range that excite people to shop at Bunnings (SMH, 2005) The addition of new profit streams through their existing chain and the groups desire to open 10 – 14 new branches per annum continue to drive the groups profits and sales growth at a rate of 10. % with a 5 year EBITA CAGR ( ) of 12. 6%pa. Each new store involves about $10-$15 million in property development, $2-3 million fitting out, $6-$8 million for stock, and $500,000 induction training for staff and merchandising. Earnings before interest and tax of $528. 4 million were 25. 7 per cent higher. This result included a net $53. 7 million contribution from the sale of property developments in Australia and New Zealand during the year.
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Trading earnings before interest and tax (excluding property, WA Salvage and other non-trading items) were 16. 1 per cent higher than the previous year. Trade sales for the full year grew by 3. 2 per cent on the previous year. Market conditions were mixed, with relatively better results in Queensland, New South Wales and Victoria. Bunnings’ earnings per ordinary share have increased from $138. 2 in 2002 to $235. 6 in 2006. Annual growth of earnings per ordinary share remains at average 22%. Bunnings, 2007) Bunnings vision and ambition separately involve the two sectors that impact on the business that is the internal and external environment, whilst it is difficult to measure compliance in the internal environment we can look at the stated culture of Bunnings to see that they are at least committed to ensuring that the team is a central component of the business success. ‘Climate – it is the climate within Wesfarmers that allows our financial focus to be translated into results.
Our reputation is important so it is vital that we always act ethically and with integrity – this also makes people feel good about themselves and their working environment. We have mutual respect for each other, are open and without politics. We need to be able to take calculated risks and innovate to grow. ’ (http://www. wesfarmers. com. au/people_working. aspx) Within the external environment we can see that the actions mimic the words, the core ambition of Bunnings is being translated to growth store on store, growth in EBIT and share price and dividend growth, so their ambition has been solidly achieved.
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Stake HolderSalienceStrategic Objective ShareholdersDefinitiveContinuous growth in the share price and acceptable return on investment. CustomersDominantLower prices guaranteed, range and service that exceeds expectations. GovernmentsDormantCorporate governance that meets or exceeds legislation. SuppliersDominantSole distributorship deals with dedicated merchandising areas, growth targets, and rebate schemes. CommunitiesDiscretionaryGood corporate governance and citizenship, community involvement, charity work.
This was evidenced when Bunnings teamed up with the Queensland state government to allow Bunnings to provide a ‘one stop shop’ for information on the Home and Garden WaterWise Rebate schemes. This scheme allows end users to gain rebates from the government based on the water saving devices that are used in the home of which Bunnings sells a full range. Other initiatives include: • Plans to re-fit every Bunnings Warehouse store in mainland Australia (excluding stores located in the tropics) with rainwater harvesting systems at a cost of approximately $6 million over two years; A goal of becoming carbon neutral by 2015 or earlier with new programs, including a research partnership with Murdoch University, to accelerate the drive to achieve the goal at a cost of approximately $2 million over two years; • Inviting submissions and offering grants to develop carbon offsetting projects. These new initiatives build on work already undertaken in areas such as timber procurement and plastic bag, energy, waste and water reduction. Bunnings strives to position itself to meet community expectations and needs on climate change.
Bunnings has continued down the path of efficiency by only having three styles of store and the product mix within each of these stores has been streamlined to ensure maximum effectiveness in sales, (e. g. all stock in a type ‘A’ store is the same in type ‘B’ store but a ‘B’ type store has other product ranges and a ‘C’ type has more of ranges again).
Porter’s competitive strategies would place Bunnings strongly in the cost leadership area however Bunnings do successfully differentiate themselves on several levels.
Bunnings purchasing power based on geographical size and turnover places them at number one in the supply to market chain, they make valuable use of vendor managed stock to reduce their inventory burden and the Bunnings Warehouse Property Trust by becoming a tenant to this group who manages the group’s property portfolio which significantly reduces their overhead. The responsible entity, Bunnings Property Management Limited (BPML), has established the following objectives for the Trust: •to provide unitholders with a secure, growing income stream and capital growth; •to protect unitholders’ interests; to add quality properties to the portfolio; and •to distribute all net income each financial year. To achieve these objectives the responsible entity will pursue the following principal strategies: •acquiring properties with long term leases to substantial tenants; •ensuring that properties are well located and the portfolio is geographically diversified •maintaining a prudent interest rate hedging position; and •Operating within an appropriate compliance plan. (Bunnings Warehouse Property Trust, 2007) Purchasing power enables them to be sole distributor for a number of brands, thereby differentiating their product offering to the market.
Bunnings follow a market penetration strategy (http://www. tutor2u. net/business/strategy/ansoff_matrix. htm), which is crafted to ensure that the support strategies are strongly managed. The support of these strategies is evidenced in Bunnings’ company ambition to provide the widest range, lowest price and best service, the widest range is offered based on the support gained from the suppliers, as stated above being a sole distributor for a product allows Bunnings to give the impression of product dominance.
Lowest prices are backed up by the price guarantee offered if a product if found cheaper elsewhere, this strategy is cleverly supported on two fronts. The first is Bunning’s ability to offer loss leaders into the market e. g. a $1. 00 paintbrush, which lessens the customer’s resistance to paying full price for their paint. The second is Bunning’s relationship with its suppliers to re-brand products e. g. The Rover Quickstart is available from Bunning’s but is sold as the Rover Smartstart everywhere else. Obviously there are times where the price guarantee is enforced but the emphasis is to reduce this burden wherever possible.
The best service strategy is based on the assumption that because Bunning’s hires trades people on the shop floor better knowledge is passed onto the customer so if required to Do-It-yourselfers can get expert advice, however very little statistical knowledge is available to see if this does add value to the customer. In assessing Bunnings using the BCG portfolio matrix (http://www. netmba. com/strategy/matrix/bcg/) Bunnings would currently squarely sit as a Star with continuing strong market growth for the business and significant market share. This is evidenced through Bunnings strong internal growth and acquisitions strategies.
Another of Wesfarmers home improvement brands is Western Australian (WA) discount variety store chain, WA Salvage; this brand name has been phased out. It has been replaced by a home wares brand and format, HouseWorks, which will compete in the same market as Ikea and Freedom. There are now three of these ventures in Western Australia. Wesfarmers Bunnings MD, John Gillam, says, “The new chain will still target value-conscious consumers. WA Salvage had been outclassed by Wesfarmers’ national hardware chain, Bunnings, and had struggled to meet the company’s targets”.
Bunnings and Keep Australia Beautiful have hailed the introduction on 15 September of their 10-cent levy on plastic bags as ‘immediate and dramatic’. Bunnings has introduced charges on plastic bags. (Victorian Litter, 2007) Bunnings continues to implement its plastic bag levy designed to combat the environmental impacts of these potentially destructive objects. We estimate that more than 66 million fewer bags have been supplied than would have been issued had it not been for the introduction of the levy in September 2003.
And more than $166,000 has been donated to the Keep Australia Beautiful Council in support of its ‘Clean Site’ program. Stores offer customers more readily recyclable containers as alternative to plastic bags and more than 1. 5 million reusable bags have been sold at cost since this industry-leading initiative came into operation. In addition, Bunnings contributed to the raising of another $3. 2 million for charities and other community organisations through the use of its stores to promote these causes – about half of it as a result of community group sausage sizzles – and the efforts of its employees.
The Continued retail network expansion from new store openings and trade strategy ongoing with the establishment of more large-scale trade distribution centers. 6. 6 Strategy and Structure As part of their on going commitment, 31 stores were upgraded or refreshed this year as part of the ongoing store network refurbishment program. This program brings current building and merchandising standards and renews older parts within the network. Australia Corporate Signage also works for new store design package & Rebranding of Hardwarehouse & BBC Hardware according to “Bunnings” Specifications, such as “the lowest price is just the beginning”. ttp://www. auscorpsignage. com. au/4. html Accessed at 15 Oct, 2007 In addition, the re-branding of the Benchmark store network in New Zealand was substantially advanced. Continuing the network of stand-alone trade distribution sites in Australia which were established to service high-volume builder customers, currently there are 11 in operation. These trade distribution centers help to relieve the store network of high volume delivered-to-site business. This also frees up valuable floor space and allows the store teams to focus on the much sought after trade business.
There is another question, which is “Is this strategy the best means of achieving our objectives”? Also, the strategy is hard to evaluate without submitting the strategy itself. Moreover, the evaluation of strategy could be discussed from some other point of view, whether the strategy is consistent, adds value and is supported throughout the organization. The key strategic implementation issue of innovation typically illuminates the value-adding activity. The projects of helping Breast Cancer Foundations in 2006 is a representative sample to prove that Bunnings stay at the forefront of the market.
The full support of the organization is another issue to discuss in the evaluation. If a strategy is technically correct, the management support and employees are both important to sustain its success. In regards to the staff of Wesfarmers, we have seen their selling skills are continually being lifted by professional education, and they focus on improving staff availability and providing better product and project information. Secondly, the support of information technology could offer a lower cost and efficiency within the supply chain and other business improvement program.
In other words, they are the fundamental elements to implement the strategy directly. In the consistency and compatibility part, it could be argued in three aspects: consistency with the organization’s mission, the internal environment and the external environment. The Continued retail network expansion from new store openings and trade strategy ongoing with the establishment of more large-scale trade distribution centers states that as profitable sales are increased, so the stakeholder’s interests are satisfied though the acceptable return on investment, and, the opened new stores refer to the widest range as well.
On the compatibility with the internal environment aspect, supplier relationships and purchasing power that offers them the ability to price match and offer their 10% price guarantee if a product is found cheaper elsewhere. This capability as a competitive advantage that the others cannot copy is the embodiment of “lowest prices” of the strategy objectives. On the compatibility with the external environment aspect, the strategy of good corporate citizenship would be recognized in the macro environment.
