SM A1 - Bunnings Analysis PDF

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Bunnings Analysis...

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This is a strategic analysis business report for Bunnings Warehouse (Bunnings), a division of Wesfarmers (Corporation). The report consists of four sections. Firstly, the background of the company. Followed by, macro-environment and industry analysis. Lastly, an overall conclusion of the two analyses. Background Bunnings is a leading hardware retailer with over 300 dealing locations across Australia and New Zealand. Established in 1886, Bunnings was owned by Arthur & Robert Bunning until Wesfarmers took over the ownership in 1994. Bunnings specialises in home improvement and outdoor living products that cater to various businesses such as commercial and industrial builders, house construction firms, other hardware retailers and consumers (Chapman 2020a; Kelly 2020a). Bunnings has grown significantly with its strategy to provide a wide range of products at a low cost with the best service. Additionally, Bunnings is home to 44,000 experienced employees who can provide the best recommendations. Bunnings also values sustainability and strives to be environmentally and socially responsible. Their support for causes and communities shows their care for the community and environment which they operate in. This differentiates them from their competitors, building their reputation, making them an elite in the field (Bunnings Warehouse 2018). Bunnings’ revenue has been increasing over the years. In 2019, their assets valued over $5 million and the total revenue earned exceeded $13.1 billion (Wesfarmers 2019). Their biggest competitor, Metcash, only earned $2.1 billion (Metcash Limited 2019). With a steady income and asset value, Bunnings can continue to develop and expand.

Macro-environment Analysis The organisation is affected by various environments which make up the macro-environment. Opportunities or threats for the organisation are created when more than one sector is affected by various environmental factors. To analyse the macro-environment, we would use PESTEL analysis to show how the factors impact (Johnson et al. 2016).

Political Australia’s government has a highly credible commitment to implementing quality probusiness policies. This is seen from the government effectiveness and regulatory quality. The governance index for effectiveness ranged from 1.54 – 1.61, ranking them 92 percentile out 100 for 5 consecutive years. For quality, it ranged from 1.79 – 1.93, ranking 96 – 98 percentile over the years (Worldbank n.d.). (refer to Appendix 1) With higher values, means better governance and ranking among the world. Australia proved to be a stable and consistent country, providing better opportunities for businesses.

Economical Th eh a r d wa r ei n d us t r yh a ss e e nad e c l i n ei nr e v e n u eo v e rt h ep a s t5y e a r s . Be i n gp a r to fa d i s c r e t i o n a r ys p e n di n d u s t r y , c o n s u me r sc a nd e l a yt h e i rs p e n d i n gb a s e do nt h e i rd i s c r e t i o n a r y i n c o me . Th ed e c r e a s ei nd i s c r e t i o n a r yi n c o meh a sl e s s e n e dt hed e ma n do fh a r d wa r ewh i c h c a u s e dan e g a t i v egr o wt ho f1 . 5 %a n d0 . 6 %i nt h er e t a i la n dwh o l e s a l es e c t o r s( Ch a p ma n 2 0 20 c ;Ke l l y2 0 2 0 c ) . Th er e v e n uei se x p e c t e dt od e c l i n ef u r t h e rb y3 . 3 %d u et ot h e i mp l i c a t i o n so fCOVI D1 9( Ch a p ma n2 0 2 0 a ) . Th el o wr e v e n u eg r o wt ho v e rt h ep a s ty e a r sc a n c a u s eat h r e a tt oi n c umbe n tc o mp a n i e sa st h e ymi g h tc e a s et oe x i s t . Ho we v e r , t h ec y c l i c a l e ffe c t swo u l dp r o v i d eah u g eo p p or t u n i t yf o rr e v e n ueg r o wt hi nt hen e x t5y e a r s .

Social Unlike other countries, Australia does not face income inequality but faces wealth inequality due to the rising costs of housing. The increasing property values would impact the most on young and low-income folks as it affects the disposable income left after deducting housing cost. With a lack of disposable income, people are less likely to spend and this poses a threat to the retail industry (Coates & Chivers 2019).

Technological The advancement in technology provides opportunities for the hardware industry. Instead of the usual brick and mortar, companies can provide e-commerce for the convenience of the consumers (Pallant 2018). Companies can also implement contactless payment methods, scan and go systems through various technologies. Not only is it more convenient for the customers, but it is also more hygienic which protects the staff from the ongoing virus.

Environmental Australia, one of the world’s biggest greenhouse gas emitters, has taken measures to ensure that the country works together to reduce the emissions (Goodman 2020). Businesses are required to adhere to the National Greenhouse and Energy Reporting Act 2007 (NGER Act). The companies have to report the level of emission produced by the entity or its subsidiaries (Australian Government 2018). This provides opportunities for companies who show corporate social responsibility as they can provide a better image to gain and retain customers.

Legal The company has to be aware of the legislation applicable to the retail and wholesale trade industry in Australia. The Australian Competition and Consumer Commission (ACCC) enforces Competition and Consumer Act 2010 (CCA) which ensures fair trade and competition between suppliers and retailers, protecting customers (Australian Competition and Consumer Commission 2018). The ACCC also approves and rejects acquisition proposals of independent retailers by larger chains which can affect the competition intensity, creating opportunities and threats (Mitchell 2015). The Australian Consumer Law (ACL) is introduced to protect consumers nationally (Australian Consumer Law n.d.). These legislations provide ease of doing business, creating opportunities.

Industry Analysis Industry analysis uses Porter’s 5-forces model to point out the 5 essential forces. These forces affect the attractiveness of the industry and strategies undertaken by the companies in the industry (Johnson et al. 2016).

Intensity of Rivalry The intensity of rivalry is influenced by the number of competitors offering the similar products/service to the same target market (Johnson et al. 2016). The hardware industry consists of 4 large companies such as Wesfarmers and Metcash Limited. Wesfarmers owns the largest player, Bunnings which contributes 37.8% and 19.6% to the retail and wholesale market share respectively (Chapman 2020d; Kelly 2020d). The rest are smaller enterprises with little market share. Based on the contribution, the concentration is low and medium in the retail and wholesale sector respectively (Chapman 2020b). The CCA prevents firms from aggressively pricing their products or acquiring other firms. Therefore, the overall competition is moderate. The cyclical effects caused the decreasing numbers of small enterprises but would allow for growth in the upcoming years which increases competition.

Threat of Entry Barriers to entry affect the level of competition (Johnson et al. 2016). Although new firms do not require a large amount of capital for start-up, the major issue faced is the competition with chain brands. Big-box stores, like Bunnings, can make use of information technology to lower their purchasing cost through bulk buying, benefitting from the economies of scale (Chapman 2020b). This increases their competitive advantage and thus, increases entry barriers. However, the attractiveness of the government and lack of strong regulation for the industry lowers the barrier (Minifie 2017). Hence, the barriers to entry are moderate causing the threat to be moderate.

Bargaining Power of Buyers As most stores offer similar products, there is little product differentiation. The lack of disposable income due to wealth inequality would cause buyers to adjust their spending, becoming more price-sensitive (Reserve Bank of Australia 2019). Thus, resulting in low switching cost as consumers would switch between brands for the lower-priced items. Hence,

the bargaining power of buyers is high. Firms would use pricing strategies for customer retention.

Bargaining Power of Suppliers To offer an array of products for the consumers, the major companies in the industry would have to purchase from various suppliers. The first tier of suppliers for hardware retailing are hardware wholesalers and for wholesalers, there are 4 manufacturing suppliers: clay brick; nut, bolt, screw and rivet; paint and coating; ceramic (Chapman 2020a; Kelly 2020a). The intensity of rivalry for these industries is medium to high. Since there is a significant number of suppliers, the switching cost is low. Thus, the bargaining power of the suppliers is low.

Threat of Substitutes Substitutes are different products which yield the same benefits in the customer’s point of view (Johnson et al. 2016). As there are no close substitutes in the hardware retail industry, the substitute would come from external competitors. The advancement in technology allows customers to purchase directly from wholesalers and retailers through online sites such as Alibaba or Amazon. Benefitting from direct sales, similar quality products are purchased at a lower cost. However, the ACL does not apply so some might not take the risk to convert to online ordering (Chapman 2020b). Therefore, the threat of substitute is moderate.

Key Forces Affecting Future Industry Profitability and Conclusion

According to Porter’s Diagram, the concerning factor is the high bargaining power of buyers which might pose a threat to the industry’s future profitability. The competing prices of the products in the industry provides an opportunity for buyers to amplify their power. Though entry threats are at a moderate level, existing chain brands like Bunnings don’t have to worry about new firms joining the industry due to the high economies of scale. The low bargaining power of suppliers reduces their purchasing cost to maximise the profits. Overall, the industry is moderately attractive with modest profit potential. From the cyclical effects over the past five years, it is predicted that the future profitability of the industry would grow. Overall Conclusion Overall, it is shown that the factors of the micro-environment would impact the forces. Like the change in technology allowed direct selling which increased the threat of substitutes but is also another method of reaching out to customers through e-commerce. However, the industry is seen suffering from the repercussion of the unexpected pandemic. The low demand has sparked further price competition (Chapman 2020a). Based on the above

analyses, it is evident that Bunnings has attempted to differentiate themselves in various ways through price matching strategies, employee attitude and corporate social responsibility (Bunnings Warehouse 2019)....