Merger a likely home improvement fix-it
Report suggests a Lowe’s takeover of Rona could benefit a Canadian industry considered overbuilt
The retail home improvement sector is somewhat overbuilt in Canada and could benefit overall if U.S. retailer Lowe’s takes over Quebecbased Rona Inc., according to an industry study released Friday.
“In the context of the current economic cycle and competitive environment . . . it will be challenging for home improvement retailers in Canada to materially improve their business risk profiles without meaningful consolidation or rationalization,” according to the report, compiled by the global credit-rating agency DBRS.
The report points out that if Lowe’s were to buy Rona, store rationalizations would result in a moderate reduction in industry square footage.
“If there are fewer stores, each player will get a little more money and more sales per square foot,” said Ben Deutsch, assistant vicepresident of consumer, retail and real estate for DBRS.
Lowe’s, the second-largest home improvement retailer in the U.S., made a $1.8-billion proposal to buy struggling Rona this summer but was rebuffed by Rona’s board, management and Quebec politicians.
Rona’s longtime chief executive officer Robert Dutton left the company 10 days ago, following another quarter of weak financial results, and some Rona investors are now pushing the Quebec-based retailer to replace its board.
Square footage in retail home improvement began accelerating with the arrival of The Home Depot in 1994 and the introduction of the big-box store concept in Canada. From the early 2000s through 2007, The Home Depot, Rona, Canadian Tire and Home Hardware, along with Lowe’s — which arrived on the scene in 2007 — pursued aggressive growth strategies.
The economic downturn of 2008 forced them to become more focused and disciplined, but despite that and a modest economic recovery, consumer demand has not re- turned in force — unusual for a sector whose fortunes are typically tied to GDP. “The linkage has been lost a bit,” said Anil Passi, managing director consumer, retail and real estate for DBRS. “I think the consumer looks a little different emerging from this slowdown. They seem to be a little more prudent, not fully confident. They feel risk lies ahead and they’re carrying lots of debt.”
Consumers also haven’t seen a huge job recovery or wage increases. What little increases there have been have been gobbled up by inflation in food and energy prices, increasing the proportion of consumer income being spent on staples, according to the report.
Industry sales have declined by an average of 2 per cent per year for the past three years, according to the report. The authors say the boom in the condo market is also affecting sales.
With the exception of a decline in 2009, absolute housing starts in Canada have remained relatively strong, but the number of multiresidential developments continues to grow as a proportion of overall new housing starts, particularly in urban areas.
“DBRS believes that this trend could be a source of pressure on home improvement retailers over the longer term as they will have to adjust to changes in product demand from the growing number of condominium owners, whose spending on home improvement and repairs is typically lower and more discretionary in nature,” according to the report.