The high profile battle for supremacy in the Home Improvement Market has been fought and won.

A clear Victory to Bunnings against their rival Woolworths inspired rival, Masters. After witnessing the downfall of their newest rival and in addition to the recent announcement from Bunnings Managing Director John Gillam of an improvement in profit by 11.6% to $1.2 billion http://www.wesfarmers.com.au/investor-centre/company-performance-news/asx-announcements , then why isn’t John Gillam is not smiling? Gillam is concerned about the impact the Masters inventory clearance has has on sales and profit.

Bunnings, pricing their way to Victory

Bunnings marketing campaigns are instantly recognizable. They are cheap and cheerful even to the extent of utilizing their own floor staff, yet despite this they make it into the costly prime-time viewing slots. We are the cheapest and we are prepared to pay a fortune to prove it.

Bunnings have long known that lowest price advertising attracts customers. That why it features in its 3 Pillar approach; Best Range, Excellent Service and “Lowest Prices “Guaranteed”. “Find a lower advertised price and we’ll beat it by 10 per cent.”

To make this claim it much be true, right? Well yes but it is not that simple.  The practice of Loss leading, http://www.investopedia.com/terms/l/lossleader.asp , where key product lines have margin sacrificed to attract customers is not new, however the intentions are somewhat misunderstood. The pricing strategy is not solely about attracting those price seeking customers, it is also about maximizing margin on the other products. If the margin on all non-advertised inventory is higher you can extract maximum value out of those other less priced concerned customers. If you are not a price seeker and you are not buying those loss leading advertised products, chances are you may be paying too much.

It also send a warning to all competition that you can’t take our customers away with price. What could Masters, or any other hardware retailer for that matter, do to combat this? If they dropped prices to attract customers,  it likely customers would just take this to Bunnings for even better price. Let’s remember Bunnings already had the foot traffic and Masters were trying to appeal to those masses. Raising prices would likely worsen their predicament.

So why the long face John?

So back to John Gillam and his pricing concerns. The Australian Financial Review called it “easily the largest stock-take sale in Australian history” as Master look to clear $700 million of inventory. In some perverse way, Masters may well now start to take some of that foot traffic from Bunnings after all.  As a result Bunnings pricing policies will come under pressure and potential weigh on the profitability of Bunnings.

Price is the number one driver of profit. An increase in price has no cost and therefore is reflected directly in profit. This is why pricing power is so powerful and yet discounting so dangerous and why Bunnings cannot do much to combat without damaging their profit. The abandonment of their price guarantee is highly unlikely and Bunnings will need to act quick if the impact becomes material to their profit.

What happen next, when the stock is all gone?

Will the low prices on offer have a lasting effect on the market.

We should not discount consumer’s expectations of new price points especially in key product categories. Effectively you have conditioned customers to devalue a said product or brand. But this can only hold true with the existence of viable competition.

This brings us to the long suffering independent retailers and Metcash, Metcash are likely to pick up the independent brands like Thrifty Link and Home Hardware from the previous Danks Group. http://www.afr.com/business/retail/hardware/metcash-gets-accc-approval-to-bid-for-home-timber–hardware-20160720-gqab0h

With this acquisition comes buying power in excess $2 billion and access to a wider range of products, better buying power and potentially lower prices.

Yet somehow it still feels like the Bunnings machine will role on. The impending doom of the fire sales is unfolding as I write. Consumer sentiment is poor with media reports acknowledging that the 10% discounts on offer fall well short of what price seeking consumers were after http://www.dailyadvertiser.com.au/story/4135419/masters-fire-sale-hosed-down-poll/

Will this spark another round of even more aggressive discounting from Masters, probably.

But when all is said and done and the dust settles on one of Australia’s largest corporate gambles, competitors will still be left to ask themselves, ‘What to do about that pesky price guarantee’. I suspect that John Gillam will be smiling once again and lowest prices will just be the beginning.

Posted by Simon Ellis Student ID  #216210226

simonellis74@gmail.com

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Bunnings: the Masters of pricing power

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