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 relatively 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.
The profit warning for Masters 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, from previous guidance of 4 per cent to 6 per cent. Its sale last year of Dick Smith would realise total proceeds of $94 million and allow it to book a profit on the deal of $7.9 million.
Shares in Woolworths 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%
Frequently Asked Questions about this Article…
Woolworths admitted Masters struggled with basic operational issues and early mistakes — from a blowout in wages and selling unwanted stock to optimistic sales projections and lower margins. Executives said building the business from scratch, plus not fully understanding the local seasonal curve, contributed to losses rising beyond initial forecasts.
Masters’ hardware losses were revised up to $139 million for 2012–13 (from a $81 million forecast). The chain is now expected to record a pre‑tax loss of about $157 million for the last financial year (versus an original target of $119 million). The article also lists Masters with 25 stores and hardware sales of about $1.24 billion.
Woolworths said its US joint venture partner Lowe’s experience didn’t prevent early mistakes because seasonal timing differs — Christmas is in winter in the US but summer in Australia. Masters hadn’t yet learnt the Australian seasonal curve (Christmas aligning with spring and Father’s Day), which limited its ability to stock and capitalise on key selling periods.
At the time of the article Masters had 25 stores and about 26,000 average households per store, with around $1.24 billion in hardware sales. Bunnings had 211 stores, hardware sales of about $7.162 billion, an $841 million profit and over 40,000 average households per store. Market share on the $42 billion home‑improvement market was listed as Bunnings 19%, Mitre 10 4% and Woolworths (Masters) 3%.
The Masters profit warning overshadowed an improved group outlook: Woolworths’ group profits were revised to grow around 5–6% (up from previous guidance of 4–6%). The sale of Dick Smith was expected to realise $94 million in proceeds and a $7.9 million profit on the deal. Woolworths shares fell about 1.1% to $33.32 following the update.
Executives pointed to relatively higher wage costs tied to new store openings, lower product margins and costs associated with selling unwanted stock. These higher operating costs and tighter margins dragged Masters further from its earnings targets.
Masters chief Melinda Smith described the chain as a start‑up where many processes had to be written from scratch — including basic operational details such as ordering stock, daily store procedures and even what store managers should do with the keys at the end of the day. She acknowledged there was a lot they didn’t know when launching the business.
The article highlights that entering a new sector can bring unexpected operational and seasonal challenges, larger-than-expected start‑up costs and aggressive incumbent competition (like Bunnings). For investors, it underscores the importance of monitoring management updates, revised guidance, and how quickly a new venture can scale and fix operational issues before expecting steady profits.
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