Masters roll-out was 'too aggressive', says Woolworths' partner Lowe's

Woolworths' partner in its aborted DIY experiment says the chain opened too many stores without a format that worked.

American home improvement giant Lowe's says the introduction of its disastrous joint venture with Woolworths, Masters, was "too aggressive" and that it opened too many stores without first finding a successful format.

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Lowe's Companies Inc told Woolworths on Saturday it was pulling out of Masters, exercising a put option that required Woolworths to buy its 33.3 per cent share in the joint venture.

That led to Woolworths announcing on Monday it would pull out of home improvements entirely, saying it could not make the chain of 63 Masters stores profitable in the foreseeable future and that it couldn't sustain the losses of more than $200 million a year it was incurring.

Masters has lost more that $600 million in the past four years.
Masters has lost more that $600 million in the past four years. Photo: Chris Hopkins

Masters, which lost more that $600 million in the past four years, and Woolworths' other hardware chain, Home Timber and Hardware, will now either be sold as a going concerns or closed.

'Quickly opening up stores'

Lowe's serves about 16 million customers a week in the US, Canada and Mexico and generated sales of $81.6 billion in 2014.


It failed to replicate that success with Masters, and said on Tuesday that the venture had not met its profit expectations.

Colleen Penhall​, Lowe's vice president of corporate communications, said part of the problem was that the strategy and execution of Masters' introduction in 2011 had been "too aggressive".

Lowe's serves about 16 million customers a week in North America, but failed to replicate that success with Masters.
Lowe's serves about 16 million customers a week in North America, but failed to replicate that success with Masters.  Photo: Rohan Thomson

"I think overall, in terms of the roll-out of the stores and decisions that were made early on, the original Masters plan was too aggressive," she told Fairfax Media.

"We were quickly opening up stores before we had determined our optimal assortment mix to best meet the needs of the Australian consumer."

She said Masters had recently revised its offering to provide a better product range and improved customer experience, with positive results, but the path to profit was still below expectations.

Ms Penhall also said that Lowe's found itself in a unique position in Australia as a minority partner in Masters, in contrast to its international operations in Canada and Mexico.

I think overall, in terms of the rollout of the stores and decisions that were made early on, the original Masters plan was too aggressive.

Colleen Penhall

"In other markets where we have solely operated the business, we have seen a greater level of success," she said, declining to speculate on whether Masters would have succeeded had Lowe's controlled a bigger stake.

"We still believe that Australia offered a significant potential: we entered the Australian market with [a] great partner and high expectations, given the attractive fundamentals that were there."

Australia still attractive

Ms Penhall said Australia's fragmented home improvement market still offered long-term potential for multiple retail players, including in the big box format dominated by Bunnings, but said Lowe's had no plan to return to the country in the near future.

Lowe's invested a total of $US930 million ($1.3 billion) in Masters, but acknowledged on Monday night that its stake was now worth less than that.

It expects to book a non-cash impairment charge in the fourth quarter, ending on January 29.

The size of that charge will be determined by negotiations with Woolworths over how much it pays for Lowe's one-third stake in Masters, which needs to be agreed on within the next four days.

After that, independent expert valuers will be appointed to determine a price.

Woolworths chairman Gordon Cairns said on Monday that the process could take up to two months, with the final resolution of Masters being sold or liquidated potentially taking even longer.

Masters and Home Timber and Hardware are open for business in the meantime.

Bunnings' $600 million boon 

Macquarie Wealth Management said on Tuesday that if Masters closed, its $1.2 billion in sales would stay in the market and be picked up by competitors.

The biggest winner would be Bunnings, which would gain about $600 million in extra sales in both 2017 and 2018, analysts wrote in a note to clients. 

Macquarie said that if Mitre 10 owner Metcash bought Home Timber and Hardware, as widely tipped, it could increase its earnings by 15 to 20 per cent and earnings per share by 5 to 10 per cent. 

Goldman Sachs said dropping Masters was a positive step that would remove a capital drain and allow Woolworths CEO Grant O'Brien's yet-to-be-found replacement a clearer focus on operating the supermarket business.

Goldman Sachs analysts said Woolworths would see an upgrade in earnings before tax of between 2 and 4 per cent in the 2017 financial year thanks to the decision. But praise for the decision wasn't universal. 

Morgans warned that Woolworths would risk of becoming even more leveraged to its supermarket business – a low-growth industry being challenged by overseas competitors and structural change.

Morgan analysts had forecast Woolworths' compound earnings growth to be 7 per cent between 2017 and 2020, but revised that to 4.5 per cent. 

"We are disappointed to see [Woolworths] exit the Masters business," Morgans analysts wrote.

"With Coles well ahead of Woolworths in its customer value orientation and Aldi aggressively growing its national presence, we think the outlook for Woolworths is challenging."