Bunnings Warehouse has been a raging success in Australia, but whether that success will be mirrored in the United Kingdom is still up for debate.
Wesfarmers Ltd (ASX: WES), which owns Bunnings together with other businesses such as Coles, Kmart, Target and Officeworks, opened its first store in the UK this week in an attempt to replicate its success on Australian soil. This was made possible by the acquisition of Homebase for around $700 million in 2016. Homebase was the second-largest home improvement chain in that country, behind market leader B&Q (which is owned by Kingfisher).
It also announced that it would spend more than $1 billion rolling out the Bunnings brand in the UK and Ireland. Indeed, there is plenty of money to be made if Bunnings can succeed with News.com.au reporting the size of the market to be worth around $63 billion.
In Australia, Bunnings has become the go-to for many tradesmen and other do-it-yourself individuals. Going by the slogan 'where lowest prices are just the beginning', Bunnings' ambition is to provide its customers with a wide range of home improvement and garden products whilst also offering great customer service. It has generated strong growth for Wesfarmers for years – both via new store rollouts and increases in same-store-sales – whilst also staving off deep-pocketed rivals such as Woolworths Limited (ASX: WOW) (which failed dismally with its Masters home improvement chain).
While Wesfarmers' shareholders will be hopeful that Bunnings can replicate its success in the United Kingdom, however, such an outcome is by no means guaranteed.
As mentioned previously, Bunnings will begin life as the underdog to B&Q. Indeed, that fact alone prompted BAML analyst David Errington to compare Wesfarmers' move to the Woolworths' Masters disaster. He has been quoted as saying:
"We were critical towards Woolworths entering the Australian home improvement sector via Masters and we believe Wesfarmers entering the UK market via Homebase will be as equally a compromising decision for Wesfarmers."
It's important to remember that the 'Bunnings' name doesn't carry as much weight in the United Kingdom as it does here in Australia (although it has reportedly tweaked its product range to be more suited to British tastes). Even if it does gain traction, however, there is still a chance that Wesfarmers overpaid for the business as a whole. As reported by News.com.au, Morgan Stanley puts the total cost of the deal at almost $4 billion when taking rebranding and lease commitments into account as well.
Meanwhile, long-time Bunnings boss John Gillham recently quit the business. Although Wesfarmers' CEO Richard Goyder has stated that his departure would not interrupt the international expansion, it could reduce the efficiency and effectiveness by which the transition is made.
Foolish Takeaway
As is the case with any international expansion, there are risks. However, there is also a chance that the Bunnings' UK push could be a great success for the business and for shareholders. Indeed, if Bunnings can become as successful in the United Kingdom as it is in Australia, the deal could prove to add plenty to Wesfarmers' bottom line.
