Keen followers of retail conglomerate Wesfarmers Ltd (ASX: WES) will no doubt be aware of the following facts.
- The Bunnings Home Improvement business contributed earnings before interest and tax (EBIT) of $760 million to the group for the six months ending 31 December 2015. This made it the second-largest contributor to EBIT (the Coles business was the largest with $945 million).
- In January this year, Wesfarmers announced the strategic acquisition of UK home improvement and garden retailer Homebase for approximately $705 million which will act as a launch pad for the Bunnings brand into the UK market.
Growth potential
Admittedly, Bunnings has enjoyed an early mover advantage domestically which has allowed the group to grow to be a powerful leader within the Australian home improvement sector.
While it's difficult at this point to forecast what market share may be achievable for Bunnings in the UK, given the significantly larger economy of the UK, a case could be reasonably made for the UK region to one day contribute earnings of a similar scale to those in Australia.
Of course, this growth strategy is not without risks as anyone who has been following Woolworths Limited's (ASX: WOW) attempt to muscle into the Australian home improvement sector with its Masters brand will be well aware!
Here are a few key statistics worth considering:
- The home improvement and garden market in the UK is 1.6 times larger than Australia
- The UK population is 2.8 times greater than Australia
- There is a similar rate of home ownership in the UK
- The market is highly fragmented with the top two players having less than a 15% market share
- The Homebase business comprises a portfolio of 265 stores which is a similar number of stores to Bunnings' Australian network
Despite the similar number of stores within the UK marketplace and the larger market size opportunity, Homebase's sales and EBIT are significantly lower than Bunnings.
Should Wesfarmers be successful in expanding its UK Bunnings business, the additional earnings could be significant and have a meaningful impact on the value that the market ascribes to its shares in the future.
