Wesfarmers: The Conglomerate That Works, and Why Bunnings Is Unbeatable

Conglomerates are supposed to be value-destroying, and Wesfarmers has spent forty years proving that a well-run one is not. The discipline that makes the difference is unglamorous: a hard internal cost of capital, a willingness to sell good businesses when they stop earning it, and divisional autonomy inside a strict capital framework. This article covers how the portfolio works, why Bunnings is so hard to compete with, and where the model is most exposed.

How did a farmers’ cooperative become a conglomerate?

Wesfarmers was founded in 1914 as the Westralian Farmers Cooperative, supplying agricultural inputs and marketing produce for Western Australian farmers. It listed on the stock exchange in 1984 and spent the following decades acquiring and disposing of businesses across fertiliser, coal, insurance, gas, industrial supply and eventually retail.

The defining acquisition was Coles Group in 2007, then the largest takeover in Australian corporate history and widely criticised. Wesfarmers rebuilt the supermarket business over a decade and demerged it in 2018, returning the value to shareholders directly rather than holding a mature, capital-hungry asset. The Coles turnaround is the clearest single demonstration of the model.

What remains is a portfolio deliberately weighted to businesses with strong market positions and returns above the group’s cost of capital. The chairman’s framing is consistent and worth quoting in substance: the benefit of the diversified model is that weakness in one business may be offset by strong performance in others — which in FY2025 meant Bunnings, Kmart, Officeworks and Health all growing while Industrial and Safety declined.

Why is Bunnings so difficult to compete with?

Because it combines a warehouse format, genuine price leadership, a trade business and a service culture in a market too small to support a serious second player. Bunnings serves both do-it-yourself consumers and commercial trade customers through PowerPass, which smooths demand across the housing cycle in a way a purely consumer retailer cannot.

The competitive history is instructive. Woolworths attempted to enter home improvement with Masters in a joint venture with Lowe’s, spent billions, and exited with heavy losses. The failure was not capital; it was that Bunnings had already occupied the price, range and location positions, and a challenger had to be better on all three simultaneously to matter.

Bunnings continues to extend rather than defend. Digital sales have grown to a meaningful share of the total, the marketplace platform has grown at double-digit rates, and a services marketplace connecting customers with tradespeople launched recently. Each extension monetises the same customer relationship without proportionate capital, which is why UBS and others have argued the growth potential is underappreciated.

What makes Kmart work?

A single owned brand and radical simplification. Kmart rebuilt itself around Anko, its own-brand range covering apparel, homewares and general merchandise at sharp, predictable price points, and stripped out the third-party brands and promotional complexity that characterise conventional discount department stores.

The financial result has been consistent outperformance. Kmart Group revenue rose 2.9% to A$11.43 billion in FY2025 with earnings up 9.2% to A$1,046 million, benefiting from customers trading down during cost-of-living pressure and from the integration of Kmart and Target systems and processes.

Owning the brand is what makes the economics work. Because Anko products are designed in-house and sourced directly, Kmart controls specification, cost and margin, and it can price aggressively without negotiating with a brand owner. Anko is also now sold through partners internationally, turning a retail private label into a product business in its own right. The contrast with Woolworths’ Big W — a discount department store without an equivalently distinctive proposition — is stark.

What is WesCEF and why is Wesfarmers in lithium?

WesCEF is the chemicals, energy and fertilisers division, historically a steady industrial business supplying ammonium nitrate to mining customers, LPG, and fertiliser to Western Australian agriculture. It benefits from favourable recontracting in ammonium nitrate when mining activity is strong.

The lithium expansion is a bet on downstream processing. Through the Covalent joint venture, Wesfarmers is developing a lithium hydroxide refinery at Kwinana in Western Australia, taking spodumene concentrate and converting it into battery-grade chemical. Construction reached 95% completion during the first half of FY2025.

It is precisely the kind of investment Australian policy is trying to encourage — moving down the value chain rather than exporting concentrate — and precisely the kind that has proven difficult in practice. Refining lithium is chemically demanding, energy-intensive and dominated by Chinese converters with a substantial cost advantage. Our analysis of Australia’s lithium sector covers why several similar projects have struggled.

How does Wesfarmers allocate capital?

Against a stated return objective, applied consistently, with a willingness to divest. Gross capital expenditure of A$1,147 million in FY2025 was 6.6% higher year on year, driven largely by new store and expansion projects at Bunnings — capital flowing to the division that earns the highest return.

Returns to shareholders are equally deliberate. FY2025 dividends were A$2.06 per share fully franked, up 4%, alongside a A$1.50 per share capital return. Distributing capital rather than accumulating it is the mechanism that prevents a conglomerate from drifting into empire-building, and it is the discipline most conglomerates eventually lose.

The divestment record is what validates the model. Wesfarmers has sold coal, insurance, industrial businesses and ultimately Coles when each stopped clearing its hurdle, and it did so from positions of strength rather than distress. Selling a good business because it no longer earns its capital is far harder culturally than selling a failing one, which is exactly why so few groups manage it.

What are the risks to the model?

Cost inflation is the immediate one. Wesfarmers has flagged that domestic cost pressures — labour, energy and supply chain — are expected to persist, and the divisions are responding with productivity programmes including digitisation and increased use of artificial intelligence. In everyday low price retail, cost growth that outpaces productivity goes straight to margin.

Retail crime has emerged as a genuine operational issue. The group has reported strengthening security in higher-risk locations, expanding de-escalation training and deploying body-worn cameras, and sharing intelligence with peers, governments and police. That is a cost line that did not meaningfully exist a decade ago.

The strategic risk is concentration in the Australian consumer. Almost all group revenue depends on Australian and New Zealand household spending, which is highly sensitive to interest rates and housing. The diversification is across categories, not across economies — and in a genuine domestic downturn, Bunnings, Kmart and Officeworks would all be affected by the same variable at the same time.

How should investors value a conglomerate like this?

By sum of the parts, and then by asking whether the head office adds or subtracts value. The mechanical approach is to value each division at the multiple its listed peers command — hardware retail, discount retail, chemicals — add them, subtract net debt and corporate costs, and compare the total to the market capitalisation.

The head office question is where the analysis becomes judgement. A central team that allocates capital better than the market would, negotiates group-wide procurement, and moves executives between divisions creates genuine value. One that simply holds unrelated assets and adds a cost layer destroys it. Wesfarmers has generally been credited with the former, which is why it has largely avoided the conglomerate discount that afflicts most diversified groups.

The test is the divestment record, not the acquisition record. Any group can buy businesses. A group that consistently sells good assets when they stop earning their cost of capital — coal, insurance, Coles — is demonstrating that its capital discipline is real rather than rhetorical, and that is the single most reliable indicator of whether a conglomerate deserves a premium or a discount.

What happened with Target and why does it matter?

Target was the problem child of the portfolio for years, a mid-market department store squeezed between Kmart below it and specialty retailers above. Wesfarmers ultimately restructured it substantially, converting many stores to Kmart and integrating Target’s systems and processes into the Kmart Group, which contributed to the productivity gains reported in FY2025.

The decision is a good illustration of conglomerate discipline in practice. Rather than continuing to fund a turnaround of a brand with no clear position, the group effectively subordinated it to the division that was working. That is easy to describe and culturally difficult to execute, because it means telling a management team its brand is not the priority.

It also demonstrates the value of owning both formats. A group operating Kmart and Target could convert sites between them based on catchment economics rather than defending a brand for its own sake. A standalone Target would have had no such option, which is one of the few genuinely defensible arguments for conglomerate ownership in retail.

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