A bad bricks and mortar lesson from Masters

Everyone can learn from Woolworths’ successes and mistakes.

On the positive side, Australia’s largest retailer is throwing itself into the online space and can clearly see that this is where there is significant growth. Every retailer in the country will need to get its online trading right. Many will fail. My guess is that Woolworths will set the success benchmark.

On the negative side, in the last four years Woolworths has spent $3 billion on property development – with almost half of it developing the Masters home improvement chain. After investing almost $1.5 billion on Masters’ property development over four years and losing almost $250 million over the last two years, Woolworths expects to treble its number of stores by 2016 and make a profit in that year.

Investment will not treble because the sites have been purchased but by 2016 investment will soar way beyond $2 billion. I can smell massive writedowns because, while there may be profits in 2016, they will not be at a level to justify the property investment. And, in any event, Masters will become more and more an online operation – that’s how it can win. Woolworths will not be the only retailer/retail centre owner facing writedowns. The growth of online shopping will affect many retail operations because many Australian bricks and mortar retailers will be among the hardest hit in the world. On July 1, 2014 our unique, big rises in retail shift allowances and penalty rates will erode the economics of those retail stores that are sub-economic. To justify the higher staff costs, retailers need greater turnover (Australia faces a humiliating retail calamity, November 12).

Woolworths went into Masters for all the wrong reasons. Stephen Bartholomeusz explains some of the things that went wrong (A jack of all trades but a Masters of none?, November 26).

It was conceived as a project to hit Wesfarmers’ Bunnings, so as to prevent Wesfarmers developing Coles. But that attack started a massive investment in bricks and mortar by both sides. Bunnings won hands down and gained great returns from its investment. But I suspect Masters will do much better in the next round, not via its stores but via online trading.

One of the weaknesses in Australian business is that too few show courage and develop into new fields. The Qantas-Jetstar operation in Asia is one of the few.

Woolworths’ Masters experience will deter others. The good news for Woolworths’ shareholders is that the $3 billion spent on bricks and mortar has not stopped them going into the growth arena with gusto.

But imagine what Woolworths could have done had the company attacked Bunnings online rather than getting into a property development race.

All Woolworth’s executives should travel from Melbourne airport to the Melbourne CBD at least once in the next 12 months. As you head into the city look to the left and you will see the massive The Age newspaper printing press building. It was the last major broadsheet classified press erected in the world. It is closing and has been written down.

The Masters chain will also be the last major new bricks and mortar chain built in the developed world. It won’t close down but in 10 years’ time it will have to have succeeded in online trading and the property investment will need to have been reduced to a level that can be serviced.