Bunnings may mop up some Masters disasters
The ACCC could allow Bunnings to take over the stores of its major competitor Masters Home Improvements, following Woolworths’ decision to dump all 63 stores of the ailing hardware chain.
Dotted around mainland capital cities and regional centres, many Masters Home Improvement and Home Timber and Hardware stores may end up in the retail armoury of Wesfarmers-owned Bunnings.
In a statement to the stock exchange, Woolworths indicated on Monday it would begin an “orderly process” to sell the business, or shut down if a buyer couldn’t be found.
The Masters experiment was a disaster for Woolies, with the group losing $600 million since it took on the fast-running Bunnings in 2011.
The more it spent on Masters, the more it lost, with last year alone finding it in the red to the tune of $200 million – this financial year it might lose another $250 million.
It all got too much for Woolies’ management with chairman Gordon Cairns saying on Monday “it would take many years for Masters to become profitable” and “we cannot continue to sustain ongoing losses from this business”.
Wesfarmers chief executive Richard Goyder could have a good crack at Masters. Photo: AAP
The share market loved the news, pushing Woolworths shares up 4.3 per cent to $23.65, while Bunnings owner Wesfarmers also rose by 2.2 per cent.
Woolies is buying out its UK-based 33.3 per cent Masters partner Lowe and then says it will either sell the business or close it down.
Strangely, it could be Bunnings that comes to the rescue of its major competitor.
The ACCC confirmed to The New Daily that the company could be bought by Bunnings, under a very specific set of circumstances, and according to comments made by Wesfarmers CEO Richard Goyder, such an option may not be completely out of the question.
Here’s what Mr Goyder said in October when asked if he would consider buying some Masters sites: “I’d say present the economic case for doing it. But our operating assumption is Masters continues to operate and improves itself. If that (situation) changes then, you know, we’ll have a look at it, but any investment we make, particularly an investment of that sort of size, has got to get past (chief financial officer Terry Bowen), then me.”
At the time of the comments, Masters was under review but no decision on its future had been made.
When asked for comment following Monday’s shock announcement, Wesfarmers released the following statement.
“We acknowledge there has been another announcement today from Woolworths regarding Masters and it’s obviously a difficult day and period ahead for their team members. However, we have only recently seen this announcement and therefore we won’t be making any further comment on it today.”
Who could buy Masters?
Lincoln Indicators research group analyst Jon Fernie said “Masters might be difficult to sell in its entirety”, given the losses it has been making and Gordon Cairns’ view that the situation won’t change any time soon.
While Mr Goyder simply acknowledged the news from Masters, Bunnings will undoubtably be circling the Masters wreck and its interest will present a conundrum for national regulator, the Australian Competition and Consumer Commission (ACCC).
The official position at the ACCC is it cannot okay any moves that will substantially lessen competition and it would not be inclined to let Bunnings swallow the lot.
DIY is a big part of the hardware-store experience. Photo: Getty
Things are different with individual stores in locations without a Bunnings nearby – those they could buy without competition concerns.
A really interesting situation would emerge if there was no other buyer and Masters was facing closure. Then the thinking within the ACCC is that a closure of Masters would represent a significant lessening of competition and Bunnings could be then able to add most of the 63 Masters stores to its existing 324 outlets.
With Bunnings currently adding 20 new stores to its portfolio every year, the hardware group would really spread its tentacles across the Australian home improvement market and presumably have greater power to raise prices. It could also put the squeeze on remaining independent operators.
Canstar’s Simon Downes said Masters shoppers “complain about the product range, prices and service” but most of these concerns could be described as “niggling”.
“Masters actually does fairly well but it never gets enough people through the door,” Mr Downes said.
The troubled Dick Smith group, by contrast, rated badly for years among shoppers who complained about “value, range and service”.
“The writing was on the wall for a long time and that was not so at Masters,” Mr Downes said.
What were Masters’ mistakes?
Hardware is profitable when done right. Photo: AAP
Strategically, the move was bad, distracting Woolies from the profitable parts of its own business. In trying to expand too quickly Masters chose too many poor sites putting it at a competitive disadvantage.
It also made merchandising mistakes in the early days when it entered the competitive whitegoods market and failed to pay enough attention to the more profitable basic hardware area.
It also couldn’t match Bunnings’ knowledgable and helpful staff or the in-store experience that makes Bunnings such a popular family destination.
They were expensive mistakes, with analysts estimating Woolies might have to spend another $1 billion to get out of Masters.
Bunnings off to the UK
Bunnings, on the other hand, is on a roll having just paid $705 million for British hardware group Homebase.
Over the next five years it will spend over $1 billion refurbishing and rolling out its Bunnings brand through the group’s 265 stores in the UK and Ireland.
“The Bunnings team has done a lot of work to make sure it understands the market and the opportunity, including having visited hundreds of stores, spending significant time researching the market and closely studying international retail expansions into the UK and other markets,” Mr Goyder said in a statement.
– with ABC