DIY : A lesson in Hubris? – Peter Tichbon – Medium
Today we have news that that Australian DIY giant Bunnings have offloaded Homebase for just £1, only 2 years after completing a £340m takeover. So what went wrong? Is it a salutary example of corporate over-confidence: a belief that everything they touched would turn to gold?
This may well be the case. A reckless assumption that what works in Australia will work here: that they would come to the UK, enter the very competitive UK DIY market and “show us how it’s done”. Well it turns out they woefully misunderstood the market and the consumer. In other words a simple failure of corporate acquisition strategy.
The key underlying thing to consider in an acquisition is “fit”. Whilst you are going to look at the opportunities within the purchase, the price of the transaction and other elements you bring to the business, fit is what helps you make the most of them. Because even the most attractive bargain might not make sense if you don’t have the expertise to do something with it.
Typically fit can be boiled down to two simple dimensions on a “Parenting Matrix” (Goold and Campbell): the feel that the new parent has for the business and the benefits that the parent can bring- knowledge, marketing knowhow etc. Both are DIY businesses, so how could it possibly go wrong? In this case, have Bunnings confused a “Value Trap Business” with a “Heartland Business”?
When looking at an acquisition, the optimum is to find something that is in the “Heartland”: something in which you have expertise and creates value. Where you know the market, understand the opportunities and know how to capitalise on them. With a heartland business you would seek to improve their marketing with your knowledge, as well as find procurement advantage and benefits in streamlining operations and overhead.
On the surface of it, the acquisition of another DIY business makes perfect sense. I mean they are both DIY businesses, right?
One was an Australian DIY business and one was a UK DIY business- and as it turns out, the markets are totally different. What makes Bunnings successful in Australia doesn’t necessarily transfer to the UK- and in fact Bunnings have now admitted that it doesn’t. Added to that, acquiring a business so far from home was always going to make finding overhead benefit a struggle, and with a different market requiring different marketing strategies and and potentially different products, even finding synergies was always going to be tough.
Right from the outset Bunnings had little feel for the UK market, but had the belief that they knew it all. In fact their overconfidence and lack of empathy with the UK business unknowingly left them depending on a high risk strategy of Transformational Innovation: hoping that a proposal totally new to the UK was going to work. After huge investment and plummeting sales they finally worked out that it didn’t, and what they’d actually done is saddled themselves with a “Value Trap” business.
Value trap businesses are exactly that- a trap. They have the appearance of opportunities to add value, but the acquiring business has the lack of feel for the business which may end up causing more harm than good. And when Bunnings have written down almost the entire £340m purchase price, you could argue this is exactly what they did. What Bunnings did is assumed their knowledge of Australian DIY would transfer directly to the UK- they brought in Australian style outlets, brought in an Australian management team, and totally failed to take account of a very different consumer landscape.
Now they have something which they don’t know how to run, and there are only two strategies that will fix the problem: acquire the knowledge and expertise to make the most of your acquisition, or sell it to someone who already has it. In this case, they appear to be going for the second option, but it was a very expensive lesson.
If you are looking to acquire a business, don’t let your success blinker you- what has made you successful won’t necessarily apply to another business. Make sure it’s in the “Heartland”- that you have the feel for for the business and clearly understand the benefits and how you are going to get them.
Get it wrong, and it will be a very expensive lesson.
[Peter Tichbon is a Food and Drink industry Consultant and Interim Senior Manager, with over 15 years senior and board level experience in FMCG in a variety of functions from operations and logistics to sales, field sales, business transformation and General Management. Results driven, he enjoys working in challenging situations where he needs to hit the ground running and rapidly deliver significant improvement, particularly in underperforming businesses.]