Obi: DIY chain dares digital transformation – Bauhaus catches up

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Sebastian Gundel: The Obi CEO is massively driving forward the digitalization of the DIY chain

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OBI Group Holding

It's not like there's nothing to celebrate at the Obi headquarters. The Tengelmann subsidiary has just won the German Sustainability Award in the DIY store category, Chief Marketing Officer Christian von Hegel (42) was among the ten finalists for Germany's best brand manager, and Sebastian Gundel (45) celebrated his one-year anniversary as Obi CEO at the end of September. But in Wermelskirchen there is the opposite of party mood.

In mid-November, the DIY giant announced further job cuts, with 150 employees to leave the company. Obi had already cut 150 jobs last year. In addition, the Group has lost its sole market leadership in Germany and is recording a decline in sales of 4 to 5 percent.

"We didn't expect sales growth this year," Gundel said in an interview with manager magazin. Consumer sentiment is weak, and unsustainable sales such as high wholesale discounts have also been cancelled internally. However, Gundel is sticking to Obi's growth strategy: worldwide sales of ten billion euros by 2027. Maybe not until 2028.

The entire home improvement industry is groaning under inflation, declining purchasing power and the resulting consumer frustration. Industry expert Klaus Peter Teipel (60), who runs a management consultancy for DIY stores and regularly collects market data, speaks of an extremely complicated situation. For the industry as a whole, he expects a decline in sales of 3.5 to 4 percent. Last year, the market had grown, but only due to the high price increases, as Teipel explains.

"On the consumer side, there is still pent-up demand due to the pandemic in terms of leisure and travel, which is a priority for people," says Teipel. "Investments in the house and garden can often be postponed, and the lower and middle income groups simply do not have the financial means to do so at the moment."

Online business declines

A difficult environment for the new Obi CEO. Taking up his position in September 2022, Gundel's main task was to strengthen the online business and accelerate the Group's digital transformation. If not him, then who? Gundel, who has been with the company since 2012, is considered a digital expert. Most recently, the PhD economist was head of digital at Obi and was responsible for the development of the heyObi app, which he once called the "heart of our business". He also chats on the OMR podcast and finds Apple's customer service inspiring, both rather atypical for a representative of the home improvement industry.

To ensure that the transformation succeeds, Gundel has also restructured almost the entire Executive Board within a year. Only board member Franz-Peter Tepaß (63) has survived the change of former CEO Sergio Giroldi (68), who was enthroned at the helm of OBI for almost 20 years. "After 20 years, it was time to make changes, and that includes the board," says Gundel about his extensive castling. Last week, Obi announced a prominent appointment. The DIY store operator filled the vacant position of CFO with ex-Galeria boss Miguel Müllenbach (47). He succeeds Oliver Geiling, who left the company at the end of July for personal reasons after 15 years as CFO.

But even with a new line-up, digital transformation remains a more than challenging task. For a long time, the online business had led a niche existence at Obi. The DIY chain generated sales of 2021.4 billion euros in Germany in 22, with the e-commerce business contributing 437 million euros, according to the Cologne-based EHI Retail Institute. At the same time, its much smaller competitor Hornbach had already generated 476 million euros in online sales. In the past fiscal year, Obi's online business in Germany collapsed, with a 15 percent decline in sales, while total sales remained stable. The situation is similar for many competitors and also in other industries.

After the online boom triggered by the pandemic, e-commerce sales are leveling off again. But its competitor Bauhaus shows that growth is definitely possible: online sales rose from 259 million euros to 441 million euros. That's a whopping 70 percent increase. Although Bauhaus comes from a significantly lower level, which puts the high growth rate into perspective somewhat, the competitor has now passed Obi digitally.

Loss of sole market leadership

And Bauhaus is on a par in terms of total sales in Germany. For years, Obi was the market leader, but last year both DIY store chains turned over around 4.4 billion euros. So, is Obi dropping off more than the competition?

Industry expert Teipel says: "Even against the current backdrop, where the entire industry is weakening, so-called project construction stores such as those run by Bauhaus or Hornbach are showing better performance." A decisive factor is therefore the different clientele: "The proportion of blue overalls at Bauhaus is significantly higher than at Obi." The professional customers, as Teipel calls them, ensure more reliable and higher sales. "Bauhaus has a turnover of 2300 to 2400 euros per square metre of sales space, while Obi has a turnover of 1600 euros."

"Of course that annoys me," Gundel replies when asked about the loss of market leadership. "But we have enough topics in the pipeline to regain pole position."

The greatest opportunity – but also the greatest challenge – lies in the dovetailing of brick-and-mortar retail and the digital world. Obi employs 43,000 people worldwide, operates 645 locations, 349 of which are in Germany. On average, a store sells around 40,000 products. "The technological transformation is challenging," says Gundel. "Obi is more than 50 years old, we design and build new systems, and on the other hand, we have a lot of legacy systems." Establishing connectivity takes time and money. "For this reason, we are also investing in technology in the double-digit million range." He has further increased the tech budgets for 2024 - and there are over 100 more employees working in the technology sector today than in 2022.

Gundel is therefore sticking to the digital transformation process despite the turbulence. "Crises like the current ones are also opportunities and help to create awareness, even within an organization, that a transformation is necessary," he says.

The heyObi app is to be the driver of sales and transformation. Launched in 2020, around six million people have now created an account in the app. No other DIY chain has access to customer data of this magnitude and possibilities for individualizing its offerings. Obi has also long since left the competition behind on social media. A competitor's innovation manager raves about the digital ecosystem Obi has created.

Because the heyObi app is intended to be more than just a shopping app. Users can see which shelf in the store their desired product is, get digital advice and resume the consultation at a later date in the store, get tips on how to care for the garden and, of course, shop online. "When I started at Obi, customers came into the store 5 to 7 times a year, and we have 50 contacts per year via the app," says Gundel. "Customer contacts are gold for the future."

"DIY store and not a tech company"

Customers who shop both online and brick-and-mortar spend around 1000 euros at Obi, if they only shop in brick-and-mortar stores, it is 450 euros – and only online 250 euros, reports Gundel. However, the proportion of customers who shop both stationary and online is still in the single-digit percentage range.

If you ask around in the markets, you will hear the following sentences from the salesman's mouth: "We are a DIY store and not a tech company." And: "Even now, we often have too few employees on the sales floor, and then we are supposed to advise customers digitally as well?"

Gundel points to employee satisfaction, but also says: "Of course, it doesn't feel good for store employees when sales go down, and it's obviously a big change in the way they work when they sell on the shelf via smartphone." He wants to "take the employees along in the transformation process" so that they see it as an opportunity. Many digitalization projects served to support the markets. They are intended to simplify work on the sales floor. After all, the core business should remain the markets in the future.

New profit drivers and franchise expansion

For Gundel, the transformation is a balancing act. He has to deliver results quickly, but many things only roll out gradually. You can already buy photovoltaic systems online from Obi, and from the second quarter of next year also in the markets. The new product group is expected to contribute 15 million euros to sales this year. Gundel also wants to expand its retail media business. Obi is already one of the leading brands in this field. The new product classes are intended to ensure growth and increase profitability, because "no one buys the third grill and second pool".

New profit drivers are urgently sought. Cost-cutting and efficiency measures have increased profitability, says Gundel. "In 2023, we will meet and probably even exceed our targets on the earnings side." They do not want to comment on concrete figures.

Under Gundel, Obi has gained two new franchise partners for the first time in 16 years. Other markets are to follow and help to achieve the growth targets. After all, 2024 is also likely to be challenging. "We should not rely on the market growing again in the coming year and consumers feeling a sense of consumer mood again," says Gundel.

Industry expert Teipel also expects another difficult year. However, he sees one lever: the pricing policy. "I can only advise DIY stores not to stay above the retail level in terms of price, but significantly below," says Teipel. "Consumers need to be motivated to come back to DIY stores. In the past two years, prices have risen by 16 and 17 percent in nominal terms."

However, there is another decisive factor that the drivers of Obi, Bauhaus and Co. do not have in their hands: the price increase for package holidays. If this were to exceed 15 percent, more Germans could stay at home during the holidays, says expert Teipel.

And if you're on holiday on the balcony or in the garden instead of on Mallorca, you at least want to make yourself comfortable there - and head for the hardware store.