Former Woolworths chairman John Dahlsen says Woolworths' exit from the $45 billion home improvement market could boost competition if regulators approve a merger between wholesalers Mitre 10 and Danks and clamp down on Bunnings' expansion.
Mr Dahlsen, who owns Australia's largest independent trade hardware chain, has urged the Australian Competition and Consumer Commission to veto Bunnings from buying Masters stores in markets where it already has a presence, saying the retailer's dominance of the DIY sector is "not good for competition".
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Mr Dahlsen also urged the ACCC to give the green light if Metcash's Mitre 10 offers to buy Woolworths' Danks and Home Timber & Hardware businesses, even though a merged group would dominate distribution markets.
"It's important for Mitre 10 and Home to combine their buying power and get better deals out of suppliers to help independents compete with Bunnings," Mr Dahlsen told Fairfax Media.
"If Metcash doesn't buy Home it might be even worse for independents. There's no equilibrium in the DIY market because of Bunnings' massive share. A Home/Mitre 10 link-up is pro-competitive and is desperately needed to help independents," he said.
Industry players believe Woolworths is unlikely to sell Masters as a going concern and the stores will be closed down and sold off to big-box retailers, such as Bunnings, Costco, IKEA and Harvey Norman.
Overseas retailers would likely be put off by the fact that Woolworths' partner Lowe's, the second largest home improvement retailer in the US, was unable to make a success of Australia. Kingfisher, the largest player in the UK home improvement market, is focusing on Europe and neighbouring countries, such as Turkey and Russia, and has ruled out expanding into Australia.
"You're not going to get anyone big to buy enough of those Masters stores to compete with Bunnings," Mr Dahlsen said.
"If no overseas player comes it's very important that all steps are taken to help the remaining independents."
Bunnings, which accounts for 19 per cent of the total home improvement market and well over 30 per cent of the "core" and DIY markets, is believed to be interested in buying between 15 and 25 Masters stores in areas where it doesn't currently have a presence.
Mitre 10, which accounts for 3 per cent of the market, is believed to be keen to merge with Danks/Home, which has a 2 per cent share. The merged group would have annual sales around $2 billion and would supply almost 900 stores.
However, the timing of Woolworths' exit from the sector is not ideal, as Mitre 10's parent, Metcash, is currently focused on fixing its food and grocery operations and has been selling off non-core assets to reduce debt.
There's no equilibrium in the DIY market because of Bunnings' massive share.Former Woolworths chairman John Dahlsen
ACCC chairman Rod Sims said the commission would closely scrutinise Masters store acquisitions by Bunnings, but would have an "open mind" about a merger of Mitre 10 and Home.
"We've given it a little bit of thought and we haven't yet had any engagement with Woolworths – that's something we should do," Mr Sims said.
"Obviously we'd prefer they sold Masters to a new entrant – that would be the preferable outcome," he said. "We'd be concerned if these stores were sold to Bunnings."
"If they have to sell them store by store, we'd much rather they sell to independents or to Mitre 10, wherever possible."
As Bunnings' warehouse-style stores are destination stores, the ACCC would take into account the impact on competition in local markets using a 10 kilometre radius, rather than the ACCC's usual three to five kilometre radius.
"If [Bunnings] started buying Masters they could well get into a situation where they're in the same footprint and that would cause concern," Mr Sims said. "It would be less of a concern in markets where they didn't have stores."
However, Mr Dahlsen said the ACCC, under current competition guidelines, would be powerless to stop Bunnings buying stores in local markets where it did not currently operate.
The ACCC has never stopped Bunnings from opening a store or buying a site in the past. Ironically, the ACCC stopped Woolworths from buying a store in Ballarat, where it also planned to open a Masters store, even though its share of the total market is only 2 per cent.