How Wesfarmers’ takeover strategy almost sent Homebase ‘down under’

There are few home comforts for Homebase right now. The DIY chain confirmed on August 31 that it will close a further 42 stores later this year, resulting in 1,500 job losses.

The home improvement and garden retailer has already shut 16 stores this year, following its acquisition by restructuring company Hilco Capital, and a proposed Company Voluntary Arrangement (CVA) has now been approved by creditors.

A CVA is essentially an insolvency process enabling retailers to close stores and reduce rents within a wider restructuring plan to cut costs. This represents the continuation of a recent trend for major retailers. Homebase joins other iconic retail brands like Mothercare, BHS, Debenhams and House of Fraser in entering a CVA in recent months.

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It is easy to speak with the benefit of hindsight, but it does seem that the business model pursued by Homebase’s previous owners, the Australian business Wesfarmers, was fundamentally unsuited to the UK.

Flagship product ranges such as designer kitchens, and high-end Habitat and Laura Ashley concessions were dropped altogether, shaving millions of pounds of sales in one go. Wesfarmers’ strategy was to try to compete head on with key competitor B&Q and others such as Wilko, The Range and the supermarkets, rather than to build on Homebase’s strengths and differentiate.

Put simply, it didn’t work. Homebase has lost its reputation as an aspirational home and garden brand, and it hasn’t given customers enough reasons to spend there instead of the others.

On a more granular level, there were also poor product decisions, such as reportedly trying to sell barbecues during one of the coldest Februarys in recent history.

These were basic errors on what products and services to offer to core customers. It may be unfair to say that Wesfarmers tried blindly to import a successful Australian strategy into the UK market, but that’s certainly what it looked like from the outside.

Notably, Hilco now reportedly intends to reinstate the Laura Ashley and Habitat brands to stores, as part of £25m investment into the chain.

What this cautionary tale does demonstrate, as we have seen plenty of times before, is that customers vote with their feet quickly and decisively. Wesfarmers bought Homebase for £340m in 2016. Sales and profitability fell so fast that it was sold for £1 within two years, and is now under a CVA.

As well as closing 42 more stores, Hilco has been able to cut rents on 70 more, including rent reductions of 90 per cent on 18 of those. Homebase’s announcement that this has been necessary because it faced “unsustainable” rental costs may be true, but a business’s costs are only unmanageable compared to its returns. Rival B&M has seen a 25 per cent increase in profits in 2017-18 and opened 47 new sites over the year.

Homebase will be hoping, as chief executive Damian McGloughlin puts it, that this CVA will give it a “platform to turn the business around and return to profitability.” Homebase certainly needs to get back to basics of offering core customers the products and services they actually want.

By Andy Brian, partner and head of retail at law firm Gordons, a modern regional legal practice with a breadth of expertise, providing accessible and complete legal solutions.

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