Woolworths finally closed its disastrous Masters hardware venture on Monday after bleeding cash since it opened in 2011.
The end means some 63 stores nationwide will close and some 7000 employees could lose their jobs if a suitable buyer is not found.
However, documents uncovered in recent days say the idea of another hardware chain competing in the already crowded $18.5 billion a year hardware market was a bad idea from the beginning.
In 2009 investment banking firm Merrill Lynch ran the ruler over the prospective business and quickly warned shareholders the idea was one big dog – some two years before the first store even opened.
The analysis at the time reported: “We believe that Woolworths entering the hardware market will dilute returns on investment for its shareholders and will not provide the company with the growth platform that clearly its management team so strongly craves.”
It estimated each store would cost Woolies $25 million to build and return only $20 million in sales (although the time period was not disclosed.) On this evidence alone Merrill Lynch concluded, “Woolworths return on investment in entering the hardware market it likely to be poor – in our view, it is going to destroy shareholder value.”
The bank agreed that Woolies’ grocery and liquor businesses were “outstanding” but “we are concerned that the company is starting to show less discipline in some financial decisions and we see a move (to launch Masters) as an example”.
However, Merrill Lynch appears ecstatic about Woolies’ management’s decision to close the struggling business last Monday. It described its chairman Gordon Cairns as a “man of action” and called the chain’s closure a “momentous day” for shareholders.
Cairns has said in the media that having ditched hardware the grocer would go back to battling its old food foes Coles and ALDI, with another round of price-cutting expected.
So what exactly killed of the Masters chain? All the reports are that it struggled to attract a following from the beginning and its range and pricing was poor in what is a highly competitive market. On top of the might of Bunnings, the Australian hardware market has a host of players including Mitre 10, Home Timber & Hardware, on top of a raft of independents.
Masters’ biggest problem was that it was in a fight with arguably Australia’s most popular retailer – the Bunnings chain.
Simon Downes from retail rating firm Canstar believed Masters had an image problem from the very beginning which arguably stemmed from an association with Woolworths who have a reputation for being expensive
“There are few retailers in the country that can challenge the popularity of Bunnings,” Downes told News.com.au
“It seems to be an accumulation of different complaints, although in terms of overall satisfaction it actually does fairly well for value — better than Mitre 10, better than Home Timber & Hardware.
“It just can’t shake off its image problem, which [could be] the Woolworths factor,” he said.
Downes added that all the research was that Masters’ customers were largely happy with their shopping experience, the problem was that most of their customers were shopping at rival Bunnings.