The Wesfarmers Ltd (ASX: WES) share price is currently in the red by 0.4% at the time of writing.
It comes as the S&P/ASX 200 Index (ASX: XJO) is also slightly down by 0.12%.
Wesfarmers’ decline comes amid increased competition in the home improvement space. The conglomerate owns several different businesses, but Bunnings is the key profit generator for the company.
In the FY22 half-year result, Bunnings generated $1.26 billion of earnings before tax (EBT). This is a significant portion of the overall $1.78 billion EBT generated by Wesfarmers in the first six months of the financial year.
Bunnings is also growing its earnings with other brands including Tool Kit Depot and Beaumont Tiles.
However, a new challenger is looking to take some of that home improvement market.
The Build to challenge Bunnings
Temple & Webster Group Ltd (ASX: TPW) has been talking about its plan to challenge in the home improvement segment for a while. But now it has launched a new website – thebuild.com.au – for home renovators to buy everything they want for DIY, renovation, and home improvement.
Obviously, this is exactly the market that Bunnings operates in.
Temple & Webster wants The Build to be a place consumers can find a large range, experience great customer service, and access a source of practical advice and inspiration.
Temple & Webster’s plan is to bring its “expertise in e-commerce and the home” to make The Build Australia’s ‘first-stop shop’ for renovating and redecorating. Its initial range features more than 20,000 products across 39 categories.
The company believes the market opportunity is “significant” with a total addressable market of around $16 billion. Temple & Webster also pointed out that this category is “underpenetrated” with respect to online adoption. Only 4% is online. The UK online penetration rate is 25% and growing.
Temple & Webster will invest around $10 million in FY22 and FY23 for growth of The Build. It’s expected to make a ‘material’ revenue contribution and be earnings before interest, tax, depreciation and amortisation (EBITDA) positive in FY26. The long-term profit margin profile is expected to be better than furniture and homewares.
Will Temple & Webster be successful to challenge Bunnings?
Only time will tell whether Temple & Webster will be able to take a sizeable market share in the sector. Also, growth of The Build may not mean a loss of earnings or market share for Bunnings. It remains to be seen what the long-term impact on the Wesfarmers share price will be.
However, it’s not the first time that a business has tried to challenge Bunnings. Several years ago, Woolworths Group Ltd (ASX: WOW) and Lowe’s tried to muscle into the sector with its Masters chain. But that business eventually closed after mounting losses.
Metcash Limited (ASX: MTS) is another business in the home improvement sector. It has three businesses – Total Tools, Home Timer & Hardware, and Mitre 10.
Wesfarmers has proven that it’s hard to dislodge the biggest player in the hardware sector. The business tried to expand Bunnings into the UK after buying the UK and Irish hardware business Homebase, but it decided to exit after not gaining traction.
It blamed problems arising from poor execution as well as the deterioration of the economic environment in the retail sector in the UK.