This morning, Woolworths (ASX: WOW) announced growing losses from its Masters hardware stores. Whilst sales were up 24% to $930m, the chain lost $245.6m.
Last week, Masters’ major competitor Bunnings revealed a profit of $1.1bn on sales of $9.5bn, up 11.6%. A car park in Lismore in northern NSW reveals the extent of Woolies’ problem.
In February, Masters opened a new store in the town, right next door to Bunnings. This morning, I went to take a look (see above).
The problem was obvious before entering the store. There were just 49 vehicles, only three of which were UTEs. Oddly, more than half were parked well away from the entrance. My guess is that employees from the industrial estate across the road were taking advantage of fresh, unoccupied concrete.
The Bunnings car park isn’t far away, just a small leap across a drainage gully and a climb over a wooden barrier that stops tradies driving into it. A third of the size of Masters, it contained about 150 vehicles, 22 of which were UTEs. The place was buzzing.
Presumably, when Woolworths committed to Masters it had a strategy in mind but for the life of me I cannot work out what it might have been.
Although from the outside Masters looks more inviting than Bunnings, neither is going to win an architectural award. Nor will customers care. First and foremost, this market is about price.
Inside, Masters looks tidier, more polished and well organised, which may be down to the fact that employees don’t have the inconvenience of customers.
Masters doesn’t appear cheaper than Bunnings, nor are its locations hand picked to avoid competition and take advantage of market growth. In fact, if the company has a strategy at all it seems to have been to screw with Wesfarmers (ASX: WES), owners of Bunnings and Coles.
There may have been some sense in that. Back when the Masters decision was made, Woolworths was riding high at Coles’ expense.
The idea of making life even tougher for it through the launch of Masters may have had some appeal. When you’ve got a fire raging in one part of your business the last thing you need is a competitor pouring diesel on another.
But with Wesfarmers adroitly turning Coles around and committing to further expansion of Bunnings, which last year opened 29 new outlets alone (Masters has 53 in total), Woolworths is now the one on fire.
Masters may not break even until 2020 but Bunnings has already achieved its goal. After investing in lowering prices, lifting customer service levels and expanding its range, Bunnings’ return on capital still surpasses 30%.
Unless it wants to lose even more money, Masters is never going to expand to the point where it can seriously dent Bunnings’ performance.
That explains why Woolworths has announced a slowdown in Masters’ expansion. Why lose even more money than you have to?
So, what next? Whoever takes over from Grant O’Brien will have Masters at the top of their to-do list.
An expansion in the network, at least beyond a business of sufficient scale to breakeven, is unlikely. A trade sale is a possibility, if only to recover management time now being wasted on what remains a small part of the Woolworths’ business.
As for writedowns, the Masters car park tells it all. I’d say they’re a near certainty.