Could Wesfarmers take Bunnings global?

A successful overseas expansion strategy could produce significant shareholder value.

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According to a report by Businessday.com.au, Mr John Gillam, the head of hardware store chain Bunnings — owned by Wesfarmers (ASX: WES) — declared during an address to the Hardware Federation of Australia this week that: “We have no immediate plans to go into a new geography, we are international now [in New Zealand], and we understand that dynamic, but it might be disappointing in a decade’s time if we wouldn’t have gone into a new geography.”

For Wesfarmers shareholders it’s an exciting plan to ponder. Across Australia and New Zealand there are already 210 Bunnings Warehouse stores, 67 Bunnings smaller format stores and 36 Bunnings Trade centres. As of 30 June there were also a further 20 Warehouse stores under construction. While there would still appear to be a good pipeline of store roll-out opportunities for Bunnings in Australia growth will inevitably slow as its market penetration increases.

The Bunnings business is very much the jewel in the crown for the group; the earnings before interest and tax margin were 11.7% and its return on capital is 25.9%. If Bunnings could successfully enter a large, new market and still make these kinds of returns it could provide significant shareholder value into the future.

Foolish takeaway

Of course entering a new market is no easy feat, let alone doing it in a foreign territory! Indeed, Woolworths (ASX: WOW) through its joint venture with the US-based home improvement giant Lowe’s, has found this out, with early start-up losses higher than expected.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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