Tuesday, January 19, 2016

Woolworths pulls the plug on Masters

The decision by Australian supermarket chain Woolworths to throw in the towel on its attempt to build a hardware chain to rival Bunnings did not come as a surprise. It all proved just too hard.

Nine years ago, Woolworths under CEO Roger Corbett had the then second ranking Coles' group on the ropes. Coles had been bigger and more successful, but had suffered from lack of strategic investment and from corporate games. In 2007, the then industrial conglomerate Wesfarmers made an opportunistic bid for Coles. At the time it was seen as a gamble, but it proved to be be a successful move.

The seeds for later problems are often sown during periods of apparent success. Under Mr Corbett, Wooloworths had modeled itself to some degree on the US Walmart chain then seen as the global retail success story. However, and I am now speaking from a customer perspective, the company had under-invested in its existing stores, many of which seemed old and tired.

At the time of the Coles purchase, Wesfarmers already owned the Bunnings hardware chain.Since its acquisition in 1994, Wesfarmers had grown the Bunnings chain through further acquisitions and investment in big wharehouse stores.  In doing so, it overtook the previous market leader, Mitre 10, establishing a dominant market position.

The decision by Woolworths to establish Masters in conjunction with the American hardware chain Lowes had known risks. By the time of the launch of the first Masters store in 2011, Bunnings was very well established indeed. The new venture faced two practical problems. The first was simply finding suitable space for the stores. The second linked problem was building volume to get stock costs down and margins up. In the end, Woolworths was failing on both counts, leading to continuing losses. .

The move to close or dispose of Masters has been welcomed by investors and commentators. I'm not so sure. I would have thought that a for a new venture of this type you have to be prepared to adopt a really long term time horizon. Clearly Woolworths could not afford to do so. The real losers in all this are not just Masters staff, but also the suppliers who opted to supply Masters as an alternative to Bunnings.


Another view on the strategic errors involved in the Masters matter - and another..  

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