Why Kmart is opening up a furniture showroom and taking on IKEA

Retail giant Kmart is setting up its first physical showroom for furniture and homewares as it seeks a bigger slice of a $35 billion market, with Rob Scott, the chief executive of its parent company Wesfarmers, saying bricks-and-mortar outlets remain critical despite growth in online commerce.

Wesfarmers, which also owns Officeworks and Bunnings, is navigating a changing retail environment as more shoppers rely on artificial intelligence and purchase online.

Speaking to this masthead during Wesfarmers’ strategy day in Sydney on Wednesday, Scott says he remains optimistic about continuing to grow Kmart’s bricks-and-mortar stores. The company’s new “K Home” concept, which is opening in Melbourne’s Box Hill South, is but the latest addition.

The 3800-square-metre trial store, which was first announced last week, will be a standalone furniture and homewares store that Scott says is the company’s answer to the limited space available to showcase and “bring to life” its home products in existing Kmart stores.

“We’ve been developing the furniture category for a number of years now, but we’ve only been selling it online because there are limitations for us to effectively display the furniture within a Kmart shop,” he says, noting there are also retail zoning rules in some areas that ban retailers from selling bulky goods such as furniture alongside general products such as clothes.

Moving into furniture retailing will bring Kmart, a strong performer for Wesfarmers, into closer competition with Swedish furniture giant IKEA.

In an ASX announcement, Wesfarmers said it now had a 12 per cent share of the market for furniture and homewares, which is estimated at a total of $35 billion.

Kmart’s popular Anko brand has been a key driver in the firm’s success since becoming the store’s own brand in 2019 and will feature heavily in the new K Home store, alongside other selected furniture and storage products within a space designed for curated displays.

If the trial K Home store generates good customer traffic, sales growth and delivers a profitable outcome, Scott says a second store would be on the cards.

Wesfarmers may be doubling down on its physical store presence, but the company is also focusing on integrating AI into its operations and customer experience.

Scott expects Australians to ramp up their use of the technology for shopping.

“It’s still early days, but you know what is interesting is that Australians are actually fast adopters of technology,” he says. “A lot of the data we’re seeing with large language models, whether it’s Gemini or Open AI, show that Australians are very avid users of this technology.”

For example, a few weeks ago, shortly after Bunnings introduced “Buddy” – a way for customers to search for product information and DIY advice in a conversational way – the firm found about 50,000 customers a week were using the tool.

Scott says this has changed the way people look for products, with shoppers often conducting searches around a project, event or inspiration rather than typing in specific products.

AI tools such as Buddy – and “Joy” at Kmart – have also encouraged shoppers to buy more, Scott says, improving conversion rates and increasing basket sizes.

That has been crucial at a time when Australian customers have been feeling cost-of-living pressures from inflation and higher interest rates, which have squeezed spending and presented a challenge for many businesses.

“We are generally seeing the signs of cost-of-living challenges in lower basket sizes because they’re having to make choices, or customers ‘shopping down’ to entry price-point products to try to save money” Scott says. However, he noted that businesses such as Kmart, Bunnings and Officeworks – which focus on everyday low pricing – tend to benefit in relative terms in these circumstances.

Even as AI and online shopping become more widespread, Scott says physical stores still play a vital role in keeping customers coming back.

“A lot of our most avid online shoppers still love coming to our stores,” he says. “One of the dangers for retailers is if they only focus on the e-commerce and underinvest in their stores, then customers will stop going to their stores.”

Citi analysts said the Wesfarmers strategy presentation added details about how the company aimed to make the most of AI across its divisions, including through attempts to improve productivity and “monetise” its data assets.

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