Independent hardware stores hang in there despite big-box campaign, UBS report reveals

Independent hardware stores can remain viable despite the ongoing rollout of Woolworths’ new Masters chain and an aggressive expansion plan from Bunnings, a new report from broker UBS claims.

However, the sector faces key challenges as it battles a downturn in housing and construction.

Retail experts, such as Retail Doctor Group managing director Brian Walker, say smaller retailers need to focus on customer service rather than range.

“The role of independent retailers in the face of big-box environments is challenging,” he says.

“But there are things they can do, including increasing their branding. Branding increases buying power.”

The UBS report comes just days after the competition regulator rejected a plan from Woolworths to buy a chain of three hardware stores in the Victorian city of Ballarat, saying it would reduce competition.

And by the 2017 financial year, the big-box hardware market is only expected to control a 25% share, well below the 75% seen in the United States.

The report says the $42 billion Australian home improvement market has had a compound annual growth rate of about 4% from 1984 to 2010.

Despite this consistent growth, the report claims weakness in housing activity and “household formation” means the industry will only see “benign growth” of 1.9% per year through 2015.

Since its last report, Masters has opened 21 stores, but UBS claims revenue has fallen short of the $30-40 million per store budget. It says an EBIT margin of 8.5% is needed rather than 7.3% to see Woolworths’ expected return.

The report says Bunnings and Mitre 10 are best placed to ride out a period of slow growth.

“With Masters likely needing to adopt a less aggressive pricing policy to meet ROIC hurdles and the more conservative independent market holding share, a step down in industry margins is now unlikely in our view, although pressure will remain.”

UBS expects Bunnings to lift its market share from 15% to 19%, while Masters will hold just 6% of all sales by 2017. Mitre 10 will maintain a 4% share, although UBS says this can improve if it partners up with different providers and smaller companies.

Overall, independent retailers will see their share shrink to just 71% from 81%, but UBS says this is still well above the share seen in the United States – and notes there is viability here.

“Provided the independents within the hardware sector evolve their sales mix, we believe there is valid argument for their sustainability.”

The case for independent hardware retailers seems to have been strengthened by the ACCC blocking Woolworths from acquiring an independent retailer.

Brian Walker says this is true, but companies still have to increase their visibility and reach out with new customer service options.

“Businesses need to be aware of themselves as a brand. They can focus strongly in the community, supporting the community, sponsoring the local footy team and so on.”

“They also have to make sure service is exemplary and is a differentiator. They should add some value the big players can’t – tool sharpening, for instance.”

“They simply need to be aware of themselves. Build databases, communicate with customers, and work with local tradespeople.”