News that Wesfarmers has disposed of Homebase to Hilco for a nominal £1, just two years after it bounded into the UK market, came as no surprise.

The Australian conglomerate was an irresponsible custodian, stripping out lines that Homebase customers loved most and getting rid of the management in a wholesale clear-out.

The arrogance with which it set out on its UK venture, and lack of knowledge of the market, drove a relatively healthy retailer virtually into the ground.

Sales and profits plunged as customers – put off by the state some Homebase stores were left in, its new hard-DIY offer and the unknown Bunnings brand in 24 locations – turned their backs on the business.

Wesfarmers said today that it expects to book a loss of up to £230m upon divestment of its “poorly executed” and “disappointing” acquisition. But they were not the only ones to suffer – staff feared for their futures amid the chaos.

Now there is some new hope for the future of Homebase, its 250 stores and 11,500 employees as it comes under the control of retail restructuring expert Hilco, which bought HMV out of administration in 2013 and restored its fortunes.

Nevertheless, some question whether enough equity remains in the Homebase brand for Hilco to get it back on track. Has too much damage been done to salvage the once-loved DIY specialist?

Bunnings uk balloon

‘The chaos is over’

While Hilco is yet to lift the lid on its plans for Homebase, its track record – despite some controversies – would suggest that it sees the retailer as salvageable.

In the case of HMV, despite the conviction of many that the music retailer was a dead duck, Hilco gave it a new lease of life – it won Hilco a ‘turnaround of the decade’ accolade for its work. 

Hilco scaled back HMV’s operations from over 250 stores to around 127 today. With its vastly reduced store footprint and focus on events, it has returned as a frontrunner of physical music sales, buoyed by a resurgence of vinyl.

HMV: The cloud with the silver lining? 

According to data from Retail Week Prospect, HMV has reported falling sales in the two years to 2016. However, it still appears to be outperforming the entertainment sector and is continuing to build market share in most of its key product categories.

The new incarnation of HMV is a much leaner organisation. While all stores are said to be trading profitability – no doubt benefiting from the lease renegotiations undertaken by Hilco – it had not yet fully benefited from that and remained substantially loss-making at the pre-tax level in 2016.

Nevertheless, the retailer is succeeding in creating a sense of community, for instance through its reward scheme as well as in-store events and signings that have proven to be hugely popular. This has not only driven footfall into the stores but also helps to create a point of differentiation with the grocers and online retailers.

HMV operated without an ecommerce operation for two years under Hilco but in June 2015 it relaunched, and has been working hard to attract customers back to its online site – although this is putting it in direct competition with the might of Amazon, which is currently still the market leader in the entertainment sector.

But, by using stores to drive multichannel experiences, convenience and a sense of community, HMV can still score a coup against Amazon.

Now that a Homebase deal has been struck, although the details are still to emerge, perhaps it too will soon be whistling a happier tune.

The change of ownership has sent a powerful signal, one person closely connected with the situation tells Retail Week. “The chaos is over,” he says.

Hilco is understood to have been impressed by the work done by Damian McGloughlin, the former B&Q trading director who joined Bunnings UK at the turn of this year. Hilco will back his plans and he will be Homebase chief executive.

“There’s a proper retailer in there,” the source said. “Damian is a good guy. People are already seeing changes in the stores. It’s good, old-fashioned retailing.”

Now there is likely to be a continued refocus on basics such as store operations, ranging and pricing as turnaround is pursued.

Alongside McGloughlin are former Tesco executive Andy Coleman, Homebase’s chief financial officer, and chief operating officer David Haydon. 

That is good news for the retailer, which suffered at the hands of the former all-Australian management team with limited experience of the UK market.

Restoring customer appeal

TCC Global insights director Bryan Roberts believes there’s an opportunity for Homebase to be returned to its former glory. 

“There’s a strong degree of fondness for what it used to be. If Hilco can take Homebase back to its softer DIY roots, which originally set it apart from other DIY firms, it stands a chance of winning back the customers that abandoned it,” he says. 

Under the former ownership of Home Retail Group, 51% of Homebase’s shoppers were women, many of whom were attracted to its homewares offer as well as its Habitat, Argos and Laura Ashley concessions.

Retail Week understands that Homebase may now attempt to strike a deal with Habitat’s new owner Sainsbury’s in order to bring the offer back to its stores.  

And Roberts believes that other concession candidates, such as Dunelm, could potentially take space too. 

He says that if stores, which “started to resemble jumble sales”, can be fixed, and with the right people in charge, “Homebase could flourish”.

“One of the yawning chasms Wesfarmers had was lack of insight and customer understanding,” he adds, flagging that marketing will need to be stepped up to remind people what Homebase is all about.

Future of the Homebase estate

One Retail Week source thought that, for Hilco to revive Homebase, it might either need to conduct some sort of process such as a CVA, and strip out costs, to offload underperforming stores and simplify the proposition. 

Although 24 shops have received significant investment under Wesfarmer’s ownership as it converted select branches to the Bunnings fascia, Homebase still has many unloved stores in undesirable locations which Hilco will need to address.

Reports have suggested that Hilco may look to axe up to 60 stores through a restructuring, which would trigger job losses. 

However, talk of a CVA is speculative, and it is possible there will be no such process.

The sort of businesses Hilco gets involved in are typically troubled, so credit insurance is a relatively minor issue. It is understood that Hilco intends to invest up to £75m in Homebase.

“Unlike some of the other firms to have done CVAs this year, there’s a strong underlying business there that has just suffered at the hand of poor execution”

TCC Global insights director Bryan Roberts

Roberts doubts the likelihood of a CVA.

He says that, while Hilco proved with HMV that it’s essential to get rid of underperforming stores, there would be “little to gain from closing too many”. 

“Strong coverage will be needed to win the customers back,” he argues. “Unlike some of the other firms to have done CVAs this year, there’s a strong underlying business there that has just suffered at the hand of poor execution.”

Homebase had lost its credit insurance and one source – who is more cynical about the chances of Homebase’s revival and dubs it “a total basket case” – believes that problem must be addressed.

The stream of brands Wesfarmers brought with it from Australia, with which it had long-term relationships, are now likely to be turned off. Hilco and Homebase management will need to re-establish old links with suppliers and convince credit insurers to support them at the start of this next chapter.

“The business will need to rely on expensive agents, having lost access to its global direct sourcing,” the source says.

A new chapter for Homebase?

While nobody doubts McGloughlin’s DIY credentials will prove invaluable, he nevertheless remains an inexperienced chief executive with no prior experience of delivering a turnaround, particularly on this scale.

He was upbeat today, however, and said that the deal with Hilco marks “an exciting new chapter for Homebase”.

He maintained: “With Hilco’s support we have the commitment of an experienced partner, substantial additional capital, stability for the business and the opportunity to reinvigorate a brand that has been a mainstay of UK retail for over 40 years.”

Global Data retail research director Patrick O’Brien says that backing out of the UK may be “the only sensible decision” Wesfarmers has made during the “two-year debacle” of its ownership, paving the way for yet another fresh start at Homebase. 

The hope must be that, in a few years’ time, Hilco wins another award for an outstanding turnaround after Bunnings failed to provide much-needed sizzle.