Woolworths fails to master nuts and bolts
The chief of the loss-making Masters chain, Melinda Smith, said not even the experience and reach of its US joint-venture partner Lowe's had prevented it from making early mistakes - with the fact that Christmas in Australia fell in summer, and not winter as in America, just another headache it had to contend with.
"With a new business as a start-up, a lot of these things, including the stock that you need to order, including every single process that we write ... including what does the store manager do with the keys at the end of the day ... It's all built from scratch, and so there's a lot that you don't know," said Ms Smith.
"We didn't know a lot about the seasonal curve. We've got a great joint venture partner in America but when it's Christmas time over there it's also winter.
"Our Christmas time lines up with spring and Father's Day so it's quite a different seasonal curve and there's no doubt there's a heap of opportunities to better capitalise on that." Ms Smith and Woolworths finance director Tom Pockett were forced to lay out all the challenges besetting Masters to analysts on Thursday, admitting actual losses would be more than expected when the chain was launched two years ago. Woolworths chief executive Grant O'Brien did not attend the investor update, where the market was advised that hardware losses would rise to $139 million from a forecast $81 million for 2012-13. Mr O'Brien is thought to be travelling overseas for work. Masters is now expected to record a pre-tax loss of $157 million for the last financial year against an original target of $119 million.
The business ran foul of optimistic sales projections for its stores that were up and trading as it went into fiscal 2013, while higher wage costs for new store openings and lower margins had dragged Masters further away from its earnings targets.
Danks, Woolworths' wholesale hardware business, has also suffered from similar factors and would see its 2012-13 pre-tax profit more than halve to $18 million.
It overshadowed an actual improved guidance for the Woolworths group, with profits now forecast to grow in the range of 5 per cent to 6 per cent.
Woolworths shares fell 1.1 per cent to $33.32.
Masters - Stores 25
Hardware sales
$1.24 billion
Loss
$139 million
Ave households per store
26,000
Bunnings - Stores 211
Hardware sales
$7.162 billion*
Profit
$841 million*
Ave households per store
40,000+
Market share
Home improvement
$42 billion
Bunnings 19%
Mitre 10 4%
Woolworths 3%
SOURCE : Company accounts 2012*
Frequently Asked Questions about this Article…
Masters has admitted to basic operational problems such as a blowout in wages, selling unwanted stock, unclear day‑to‑day processes (even down to what store managers should do with the keys), and challenges building the business from scratch which led to early mistakes.
Woolworths told investors that hardware losses for 2012–13 would rise to $139 million (up from a forecast $81 million). Masters is now expected to record a pre‑tax loss of $157 million for the last financial year versus an original target of $119 million.
Higher wage costs for new store openings and lower margins, along with optimistic early sales projections, dragged Masters further away from its earnings targets and contributed materially to the increased losses.
Although Woolworths upgraded group guidance to forecast profit growth of about 5–6%, the Masters issues overshadowed the update and Woolworths shares fell about 1.1% to $33.32 after the investor briefing.
According to the company figures: Masters had 25 stores and hardware sales of $1.24 billion with roughly 26,000 households per store. By contrast Bunnings had 211 stores, hardware sales of $7.162 billion, profit of $841 million and more than 40,000 households per store. In the $42 billion home improvement market, Bunnings held about 19% share while Woolworths (Masters) was around 3%.
Masters chief Melinda Smith said even Lowe’s US experience didn’t prevent early mistakes because Australia’s seasonal curve is different – Christmas here is in summer (matching spring and Father’s Day) while it’s winter in the US – so product and timing assumptions didn’t translate directly.
Danks is Woolworths’ wholesale hardware business. It has faced similar pressures to Masters and was expected to see its 2012–13 pre‑tax profit more than halve to $18 million.
Masters chief Melinda Smith and Woolworths finance director Tom Pockett laid out the challenges to analysts at the investor update. Woolworths CEO Grant O’Brien did not attend the briefing; he was thought to be travelling overseas for work.
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