Masters brand proves to be a tough sell

Woolworths’ core supermarkets business is growing steadily, helped by an impressive rise in online sales, but Big W and Masters are real trouble spots.

In his core food and liquor businesses Woolworths’ Grant O’Brien would be increasingly confident that he can continue to deliver the kind of incremental but steady progress and momentum he has targeted. He won’t be quite as happy about other aspects of the group’s numbers and the continuing unresolved issues in two important businesses.

The supermarket division, which includes Woolworths’ Australian liquor business as well as its New Zealand supermarkets, produced sales growth of 6.2 per cent for the first half. The Australian food and liquor group had comparable stores sales growth of 3 per cent but the rate of growth was trending up through the half.

While that might appear only a modest increase, the sales growth in the local food and liquor business represents an additional $1 billion of sales relative to the same period of the previous year and it is the performance of his main business that enables O’Brien to be confident he will deliver on his full-year earnings guidance of a 4 per cent to 7 per cent increase on 2012-13.

Underlying that sales growth is continuing growth in customer numbers, basket sizes, the volume of items sold and the yield from the division’s floor space. Woolworths is devoting a lot of effort and money to improving and exploiting the insights it has into its customer base to improve customer loyalty and spend. It is paying off.

O’Brien would also be very pleased, maybe excited, that for calendar year 2013 Woolworths generated online sales of more than $1 billion and its first-half and second-quarter online sales growth was more than 40 per cent ahead of the previous corresponding periods. Woolworths is as advanced as any major Australian retailer – and ahead of almost all of them – in creating a meaningful online channel.

He still has, however, some continuing trouble spots.

The Big W discount department store business has been an erratic performer in recent years. It’s not alone – almost the entire discount department store sector has struggled since the financial crisis, impacted by the commoditisation of key categories, the strength of the Australian dollar, the growth of online purchases – and the disruptive and remarkably successful reinvention of Kmart under Guy Russo.

Big W’s comparable stores sales fell 2.3 per cent – they were flat overall – in the face of continuing strong competition, price deflation and discounting. Woolworths continues to rationalise and reorient its range but is yet to produce any positive momentum in the division.

Perhaps of greater concern is that, while its Masters hardware business produced sales growth that at face value appeared impressive – a 49.4 per cent increase – the rate of growth tapered in the second quarter even though Woolworths is continuing to roll out new stores.

It would appear that sales per store have stalled, or even fallen, but in any event are well short of what Woolworths needs if the business is to break even at a store level.

With 18 new stores and a further $560 million investment in the chain scheduled for this year – and a starting point of last year’s $139 million of losses – it’s not surprising that Masters is getting new leadership, with UK home improvement executive Matt Tyson hired to lead the division.

The current stores have traded, on average, for 15 months. The first group of stores Woolworths opened have traded long enough to be mature and to provide a real sense of whether the brand can be viable with its current offer.

A key concern for O’Brien, and the market, is that Tyson may determine that the Masters format and range can’t succeed against the dominant Bunnings group and that the brand and its retail strategies have to be radically repositioned.

By the end of this year Masters will have almost 50 stores open and a lot more in the pipeline. It would be a very costly business to reinvent the brand and its offering and, given that Woolworths has forecast that the chain will break even in 2016, it has considerable credibility as well as the dollars on the line.

When Woolworths issues its first-half earnings numbers at the end of the month there will be intense interest from the market in the Masters’ losses and whether or not Woolworths has been able to stabilise them.