Wesfarmers Ltd (ASX: WES) is one of the few successful conglomerates to emerge in Australia, with operations spanning supermarkets, office supplies, chemicals, mining and at one time, insurance.

However, arguably the most successful brand in the stable has been the hardware and home improvement stalwart, Bunnings. But Australia is a small market, and there are signs that it might be reaching its upper limit of “big box” hardware stores in the near future.

In addition, Wesfarmers has been under pressure for some time to make use of its huge cash pile, which has seen the company linked with almost every large corporate transaction and block trade that requires a prospective suitor or buyer to have a large chunk of change to fund it.

Taken together, these factors explain why Wesfarmers has taken the bold move of earmarking $700 million for the purchase of British home improvement and tools retailer Homebase.

But the strategy is fraught with risks, and here are three for shareholders in Wesfarmers to be especially wary of.

Number 1: Inbuilt disadvantage

Bunnings is responsible for introducing a category to Australia, the so called “big box” hardware model. This business model relies on large retail spaces that can house huge warehouses. These locations rely on ample car spaces for renovators and tradespeople to easily access the stores. The other major consideration for sites is favourable locations for these stores, as convenience is a valuable advantage.

Bunnings and Wesfarmers know these success factors because the management of these companies learned many of these lessons from a market leader in an offshore market when it first brought the big box concept to Australia. That market leader? B&Q plc, which is the dominant incumbent in Britain for DIY and hardware.

The Homebase / Bunnings business will be entering the British market as a distant second place to this dominant force. The recent lessons of Masters in Australia trying to compete with Bunnings from a weaker competitive position should be burned into the minds of Bunnings’ management. But that disastrous experiment shows that money, a long investment time frame and a seemingly credible strategy are sometimes not enough to displace a dominant rival, or even operate profitably.

Number 2: Translation difficulty

Bunnings is a well-known brand in Australia, and has become part of many of the communities in which it operates. Stores, particularly on weekends, are often focal points for the fundraising efforts of community organisations. This means that organisations like Little Athletics, Rotary and sporting teams from all codes gravitate towards the warehouses, and with them, bring foot traffic and goodwill. The brand building advantages of being so strongly aligned with local organisations are immense.

It is this kind of intangible brand equity that will be hard to replicate in the UK for a number of reasons. The power of that brand equity should not be underestimated, and likely forms a strong plank of the competitive advantage enjoyed by the business in Australia, although it is difficult to assign a value to this advantage in a quantitative manner.

Number 3: Strategy deficiency

In Homebase, Bunnings is not buying a thriving business. Although the business has over 250 stores spread across the UK, it has closed several in recent times due to underperformance, which is a red flag for any shareholder.

In addition, it has had to switch its strategy several times to try and turn around this underperformance, and has moved away from its original core focus of hardware to explore other product lines such as homewares and furnishing.

If this sounds familiar, it is, as Masters has also experimented (unsuccessfully) with different store formats and shifting the retail mix in order to stem the flow of losses. However, the success of Bunnings is undoubtedly underpinned by more traditional hardware and, to a lesser extent, garden ware, which puts it at odds with the recent shift of Homebase towards other product lines.

All of this implies that Bunnings UK will inherit a strategy which it is ill-suited to implementing, or alternatively, it will have to take a writedown of inventory when it switches the Homebase strategy back to a more core hardware focus.

Foolish takeaway

It is lazy analysis to simply conclude that Australian businesses expanding offshore have “a poor track record” and judge Bunnings and Wesfarmers’ foray into the UK accordingly.

However, there are plenty of company and industry specific issues that suggest that replicating the success of Bunnings in Australia halfway across the world will be no easy feat.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.