Great example of how even the most professional management teams can fall into the hubris trap.
Michael Chaney describes to The Age how Wesfarmers burnt a billion dollars on the highly successful Bunnings hardware chain’s expansion into the UK market:
Bunnings Warehouse by Bidgee – Own work, CC BY-SA 3.0, Link
Chaney was the chairman that signed off and despite everything contends he had never seen a more thorough investment analysis than had been undertaken on Bunnings UK.
They had a base case set of projections and a downside case and it all looked very positive at the time according to Chaney.
But a couple of fundamental mistakes were made subsequently after acquisition of Homebase home improvement network of stores including the removal of 150 senior managers.
“One was moving out the senior management and replacing it with our Australian experts and the second was getting rid of a lot of the products and the franchises because they didn’t suit the Bunnings model,” says Chaney.
By way of example the Australian interlopers jettisoned Laura Ashley from the home decorator product line up – and British women voted with their purses.
It was the success of the Australian model and its management that blinded the higher ups inside Wesfarmers to the fact that these guys didn’t know better what the UK customers wanted. Wesfarmers got caught in the hubris trap.
Some years earlier hardware giant Lowes fell into a similar trap in the US. Number-crunchers at head office worked out that they could save a bundle by replacing senior salespeople with more junior, inexperienced staff. The knowledge base of experienced floor staff was decimated. Customer service and sales plummeted. As one manager described it: “we became find-it-yourself instead of do-it-yourself.” Fortunately Lowes were able to correct their mistake and should have learned a valuable lesson but it seems they did not.
Investors should always be on the lookout for the hubris trap. The more successful the company, the more vulnerable they are. Expanding operations away from the home country or state is often a high risk venture, where management may be blind to cultural differences, regulatory pitfalls and an array of new competitors. Expanding into new product lines or services that are outside management’s traditional core expertise may also present traps for the unwary.
Ask Woolworths (Australia) about their Masters hardware venture, Commonwealth Bank about their expansion into financial advice, NAB about their expansion into UK markets, Centro Properties (now Vicinity) and Westfield about their foray into US shopping centers,….. I could go on. It’s a long list.