21 Jan 2019

Why do smart companies take dumb decisions?

In January 2016 Wesfarmers, the Australian retail-to-coal mining conglomerate, acquired Homebase for £340m as a base to build its Australian DIY chain, Bunnings, in the UK. Consistently successful in its home markets, the acquisition was its first step beyond Australia and New Zealand, and an opportunity to show B&Q and the UK how to do it.

Two years later, Wesfarmers sold it for £1 to restructuring specialist Hilco. Losses and other costs will bring its total bill to about £1 billion. The 24 stores that had been converted to the Bunnings brand will revert to the Homebase name, and Hilco is putting the chain into a CVA while it renegotiates with its landlords.

It was an “unbelievable disaster” due to “woeful management decisions, clumsy execution and a misguided perception of the UK market”, said Richard Lim, of consultancy Retail Economics.

Rob Scott, Wesfarmers’ new MD, said the group had taken decisive action to reposition its portfolio of businesses to deliver sustainable earnings growth. The action… “will reposition Wesfarmers for the next decade,” he said.

Despite the scale of the disaster, Wesfarmers are not Aussie rednecks, but a sophisticated group with a reputation for clear sighted strategy, meticulous planning and – until now – an impressive track record. It is why analysts, the investment community and media listened with respect to their plans. B&Q and Wickes looked unassailable, but Wesfarmers were smart guys who had presumably done their homework and were used to winning. So, perhaps Bunnings had a secret sauce we didn’t know about?

What went wrong? It’s a curious paradox that a bunch of very smart people, who individually have an excellent track record of taking decisions, often take disastrously dumb joint decisions.

Scott admitted they’d made mistakes, including sacking the entire Homebase senior management team and about 160 middle managers as soon as they arrived!
He also blamed the decision to dump the large home furnishings business that had been a big draw for Homebase’s legion of female shoppers. Faced with the strength of B&Q, Homebase attracted female shoppers with “personalised mood boards” and attractive displays of cushions, throws and things from brands including Laura Ashley and Habitat. But almost overnight they lost that USP as Bunnings threw out the throws and turned its stores into down-market DIY man-sheds.

Bunnings’ biggest mistake was to assume that what worked in Australia would work in the UK. They were not interested in research or consumer data and so had no understanding of what UK shoppers wanted, says Bryan Roberts at TCC Global. So, they ripped out what made Homebase different and repositioned it by gut feel.

These weren’t mistakes you’d expect Wesfarmers to make. But ‘out of character’ and ‘inexplicable behaviour’ is more common than you might think. Dominant market leaders become accustomed to winning easily and are prone to an arrogance that blinds them to the possibility of being wrong. Large multinationals also struggle to accept that the markets they’re targeting can be fundamentally different from their home market, no matter what the locals say. They believe they know what they need to know, so they skip the research that tells them what they don’t know.

Wesfarmers wants to forget and move on, but what were they thinking? Is this what they’re like behind the strategy smokescreen? When it really mattered, they just didn’t walk the talk.


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