Hardware retailing falls under the furniture, houseware, and appliance retailing sector and is expected to earn $10.9 billion after growing by 3.0% during 2010-11.
This is, however, not a record performance level as the industry has only just entered into a recovery phase after taking a significant hit from the global economic downturn. As such, revenue is expected to decline by an annualised 0.7% over the five years through 2010-11.
The global economy greatly affects hardware stores as the industry is influenced by construction activity, exchange rates and foreign investment. In particular, the industry is influenced by new dwelling commencements and alterations to existing dwellings, which are affected by household disposable income. In the five years through 2010-11, revenue growth has been driven by the do-it-yourself (DIY) market and falling prices for hardware and other industry supplies.
From 2007-08 to 2009-10, job security was a concern for many Australians as companies cut their workforce to make up for lost earnings. Subsequently, industry sales slowed considerably as households postponed home renovations due to income shortages. Low sentiment and a decline in home renovations and alterations created little impetus for industry growth. In 2010-11, however, stability in unemployment and sentiment will create a platform for revenue recovery.
The industry has a medium level of concentration, although major industry player Bunnings has a market share more than three times greater than its closest rival, Mitre 10. The key to Bunnings’ success has been the adoption of big-box retailing, which allows it to provide an extensive range of products in one retail location. Woolworths’ entrance into the industry via the takeover of Danks and the support of Lowe’s will cause a heightened level of competition in the industry. Woolworths will be able to use Danks’ existing supply network to go head-to-head with Wesfarmers-owned Bunnings. However, this is likely to further displace independent hardware stores.
Over the next five years, the industry is expected to return to growth, with revenue increasing by an average 3.0% per annum to $12.6 billion in 2015-16. Industry growth over the coming five years will be driven by weaker house prices, which will lead many home owners to spend on extensions and alterations instead of selling. Many larger projects that were postponed during the worst stages of the global slowdown, due to less disposable income and lower consumer confidence, will be started as conditions improve. This will drive demand for industry products
Over the next five years, the industry will continue to be affected by home renovation activity and residential building construction. Demand will also be affected by changes in disposable income, consumer sentiment and unemployment rates, as these factors affect general spending on hardware.
Another major factor affecting this industry will be Woolworths’ entry into the market. Some consumers may continue to purchase hardware directly from manufacturers and wholesalers, thereby bypassing this industry. This may constrain industry demand. Overall, IBISWorld forecasts that this industry will grow at an average annual rate of 3.0% over the next five years, to reach $12.6 billion in 2015-16.
The Australian economy is expected to continue to recover from the economic downturn of 2008-09. A strengthening labour market, as evidenced by a falling unemployment rate, is expected to create job stability and therefore facilitate financial security and consumption growth. IBISWorld forecasts that household consumption expenditure will grow at an average annual rate of 3.5% over the five years through 2015-16. However, growth is expected to be constrained somewhat due to high levels of debt. Household disposable income is forecast to grow due to falling unemployment and rising wages. However, interest rates are already on the rise. Overall, rising incomes are expected to result in greater demand for hardware.
Strong 6.0% year-on-year growth in 2011-12 will help the industry regain some of the value lost during 2008-09 and 2009-10. Much of the growth will be created as house prices begin their cyclical downward trend, resulting in many households turning to renovations and improvement projects rather than selling, driving strong demand for hardware products.
Revenue and profit growth will be limited by the entry of the new players into the industry, as this will lower per unit prices. Bunnings claims to have the lowest prices, but it has had no competition to test its margins. Wholesalers that sell imported goods will benefit from the high value of the Australian dollar, which will make the cost of imported goods relatively less expensive for local buyers.
IBISWorld forecasts that capital expenditure on residential building construction will increase during the next five years, except in 2013-14. A slowdown in construction activity is expected to occur in 2012-13 and 2013-14, due partly to rising interest rates. However, stronger growth is expected in other years, which will boost overall demand for hardware over the five-year period. Growth in home renovations is also expected to boost demand for hardware over the next five years. Additionally, TV programs on DIY and home improvement are expected to return to Australian prime-time TV as disposable income recovers, boosting revenue from DIY-ers.
Population growth and household formation rates will boost long-term demand for hardware. An increase in the population and number of households will lead to greater long-term demand for garden tools and other household items. ABS forecasts that single-person households will grow at a stronger rate than other types of households from 2006 to 2031, due to an ageing population.
In the short term, expansion and development in regional Queensland will promote growth for traditional hardware stores, as trade and construction is their principal market. Later, this will be a target area for the likes of Bunnings, which will try to secure the home and yard improvement markets before they become well-established areas. Another trend that favours the growth of the traditional trade and hardware store is the increasing number of construction material alternatives; traditional hardware stores are recognised as having specialised knowledge and the ability to source products for consumers. The ability to provide more technically specific and specialised products, and having the associated knowledge base, is expected to be the strongest base of growth for traditional hardware stores, like Mitre 10, in the long-term.
Woolworths and its US joint-venture partner, Lowe’s, entered the hardware market in 2010 through the acquisition of Danks, a hardware wholesaler and retailer. Woolworths plans to secure approximately 150 retail sites over the next five years. The company will open its first store in late 2011.
Consequently, IBISWorld forecasts that the number of establishments in the industry will grow at an average annual rate of 2.2% over the five years through 2015-16. Greater demand stemming from building and construction expansion in Queensland is also expected to boost establishment numbers.
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