It’s all over for Woolworths’ great blue hope.
MASTERS is gone and shareholders are celebrating.
Woolworths shares are up 5.1 per cent on Monday at lunchtime as investors celebrate the removal of the big blue barnacle slowing Woolies down.
Woolworths snuck out a press release early on Monday announcing its struggling hardware chain would be wound up or sold.
Over at Bunnings, they are celebrating too. Their sole rival has raised the white flag. The stock price of Bunnings’ parent company Wesfarmers is up 3.0 per cent.
But the story of Masters is about the worst case scenario for people who actually buy hardware.
When Masters opened in 2011, it intensified tremors running through the hardware sector. Many independent local stores went from struggling to dying. One near my house closed, to be replaced with a health food store selling quinoa. An analyst predicted 6000 independent hardware stores would close in the next 10 years.
With the fall of Masters, it may not get that bad. But small stores have taken so many bad years it is doubtful they can now surge to take on Bunnings.
The most likely scenario is Bunnings — which added 29 new locations last year — now expands even faster. This is bad news for competition.
Today is a great day for Bunnings. Picture: Alison WyndSource:News Corp Australia
Bunnings has a cut-price reputation but its margins are far healthier than many discount stores.
It has EBIT (earnings before interest and tax) margins of 11.4 per cent. For comparison, Target has EBIT margins of 2.6 per cent and Coles has 4.7 per cent.
The company brandishes its reputation for cheapness with stores that are very much unpolished, and ads that appear cheap and cheerful, even though they seem to pop up in prime time.
Bunnings’ famous price match guarantee adds to the discount image while potentially discouraging competition from smaller stores. Why would a small hardware operation advertise a sale when they know people can use that to get discounts at Bunnings?
With less and less competition, Bunnings is now free to run riot.
Imagine Ford without Holden, Liberal without Labor, the dark side of the force without the light side. Bunnings’ market power will be something to behold, and the Australian Competition and Consumer Commission will no doubt be watching closely.
The best thing that could happen is Woolworths finds a buyer willing to overlook Masters staggering run of losses. Perhaps a retailer with real skills will invest in the chain and start running it successfully.
Masters could be bought up by a foreign retailer — perhaps one from the UK keen to send Bunnings a message about what it can expect as it expands over there.
Masters could be a tempting acquisition for retailers around the world. With the Aussie dollar falling to record lows recently, we probably look quite cheap in US dollar terms or in Euros.
Another scenario is a private equity firm snaps up Masters. The kind of private equity firm that bought Dick Smith from Woolworths three years ago, for example. They might do a “turnaround strategy” to improve the business and launch Masters back onto the sharemarket.
But in the wake of the disaster that was Dick Smith, such an audacious play might not work — even if it were a real turnaround and not a mirage. Once bitten, twice shy.
Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine.
Follow Jason on Twitter @Jasemurphy
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