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Masters dumped by Woolworths
The dumping of Masters, Woolworths' household hardware chain, may make 10,000 employees jobless. We asked shoppers their opinion of the troubled chain.
It has been strangled by a hard-headed new Woolworths board led by Scotsman Gordon Cairns, who simply couldn't stomach tipping any more funds into the Masters hardware chain, after $3 billion-plus had leaked into the drains outside its 63 stores across Australia.
Masters was conceived in 2009, at a time when the Woolworths boardroom was over-confident and a certain arrogance had permeated the upper echelons of the company.
Woolworths had been convinced its magic touch in supermarkets, where the retailer had so out-pointed fierce rival Coles for so long in the previous decade, could be replicated in Australia's $45 billion hardware market.
It flexed its muscles, but in the end the public voted with their feet. The chain that began life as a way of putting extra financial pressure on the new owner of Coles, Western Australian-based conglomerate Wesfarmers, which also operates the dominant No.1 player in hardware, Bunnings, has failed spectacularly.
What was designed to try to cripple Wesfarmers has severely damaged Woolworths instead.
The supreme irony of Wesfarmers announcing on Monday official confirmation of its $705 million acquisition of British home-improvement chain Homebase clearly underlines who has won the hammers and angle grinders battle in Australia.
Too far behind
Masters has racked up combined losses of more than $600 million, including an annual loss of $245 million in 2015.
Capital spending on the business, including finding sites and building the 63 stores, had ballooned to more than $3 billion.
Experts say Masters simply started too far behind Bunnings, which already had a dominant network across Australia in 2009, with the prime sites in capital cities, and that it was doomed to fail.
The influence of United States hardware retailer Lowe's, which held a 33.3 per cent stake in the Masters hardware venture, has also been criticised heavily.
Critics pointed to the Australian market being different to the US and Masters stocking too many products Australians didn't want to buy from hardware stores, including washing machines and vacuum cleaners.
Its early marketing and the look of the stores was deliberately portrayed as being more female-friendly, but this alienated the bevy of tradesmen, who stayed loyal customers at Bunnings.
Masters was forced to settle for too many second-best property locations to set up its stores, because Bunnings had already snared most of the best sites.
Barriers to entry high
IBISWorld senior industry analyst Spencer Little says the barriers to entry for Masters were very high because of the dominance of Bunnings when it set out to build a network quickly, and the high costs of labour and set-up costs ran well ahead of revenue from the stores.
"The dominance of the existing player acts as a large entry barrier," Little says.
Woolworths kept persisting and "the costs just kept mounting and mounting", he says.
It was the catalyst of a fresh set of eyes at Woolworths after the new chairman came in, along with some fresh directors, that altered the strategic thinking.
There had been a heavy decline in the Woolworths share price over the past year, as big investors lost confidence in the company because the Masters losses had taken the focus away from the core Woolworths supermarkets, which had also lost their way against a resurgent Coles.
In early 2014, Woolworths had a market capitalisation of $48 billion. For Woolworths' 245,000 shareholders it was galling to see it at $29 billion at the end of last week.
Cairns, who started a review into the future of Masters on September 1, 2015, on his first official day heading the boardroom at Woolworths' Bella Vista headquarters after taking over from Ralph Waters, was reluctant to talk on Monday about whether it had been a bad decision by the Woolworths board in 2009 to move into hardware.
'Look at the future'
"There's no upside in that," Cairns says. Instead, he wanted to look forward. "What you've got to do is look at the future," he says.
The chairman of Woolworths at the time of the decision to expand into hardware was James Strong, a former chief executive of Qantas.
Strong died in early 2013 from complications from surgery, and had been suffering health problems. He had been chairman of Woolworths for more than a decade.
Michael Luscombe was the Woolworths chief executive who triumphantly announced that the retailer would be attacking Bunnings and was aiming to expand the entire hardware market on what has turned out to be a fateful day on August 25, 2009.
It was the first public airing of Woolworths' hardware ambitions. The centrepiece was the establishment of a new chain from scratch, to be called Masters.
Luscombe also announced that Woolworths was buying out Danks, a hardware distributor supplying the Home Timber & Hardware chain and the Thrifty Link hardware stores.
Luscombe spoke in August 2009 of the love affair with property and renovations in Australia, and how hardware was dominated by "one major big-box player" and that Woolworths wanted to provide a clear choice to consumers.
"The Australian love of property and high levels of home ownership mean that maintaining and improving homes is an important part of everyday life. There is a real opportunity to increase the overall size of the sector," he said.
One of the main drivers of the hardware expansion at Woolworths was Grant O'Brien, who was director of business development at the time of the strategy's formulation.
After the green light was given by the Woolworths board in 2009 to dive headlong into hardware, O'Brien had the task of overseeing the early roll-out. But by October 2011 he was chief executive of Woolworths.
Project Oxygen, as it had been dubbed internally at Woolworths, was designed to suck the oxygen out of Wesfarmers by tackling head-on the dominant Bunnings chain, at the same time as Wesfarmers was attempting to revive the Coles supermarket chain after buying the entire Coles Group, which included Kmart and Target, for $19 billion in late 2007.
Woolworths at that point was trouncing Coles in the supermarket sector, but through the "Down Down" lower prices campaign at Coles and a foolish decision by Woolworths to keep profit margins high in its supermarkets, which eventually filtered through to many customers becoming annoyed at the higher prices and shopping elsewhere, the momentum shifted markedly in 2014 and 2015.
O'Brien was a surprise choice when he was elevated to chief executive of Woolworths in late 2011, completing a remarkable rise from humble beginnings when he left school at 16 to begin his working life as an apprentice electrician in Tasmania.
On Monday he was also reluctant to delve into past decision-making, but did reiterate that the original goal was to reach a break-even point by 2016.
"Our ambition from the get-go was five years," he says.
Losses still high
The first Masters store opened in the outer-western suburb of Braybrook on September 1, 2011, and now there are 63. But not for much longer. Analysts believe it will be extremely difficult for the company to sell the business as a going concern, because the losses are still high and are showing little sign of reaching that break-even point.
O'Brien fell on his sword in June 2015, as a result of the twin evils of heavy losses at Masters and a spluttering supermarket business.
But strangely he is still the chief executive in name at Woolworths while the board searches for a replacement.
He has stayed on for almost seven months, and acknowledged on Monday that it was a tough call to close the Masters chain.
"It's a tough decision for the people involved at Masters."
The original managing director of Masters was Don Stallings, who returned to the United States in early 2014, after being replaced by British executive Matt Tyson, who had worked with British home-improvement retailer Kingfisher.
Masters was fine-tuned, its store roll-out was slowed, but the red ink remained a stubborn companion.
The sharp jump in Woolworths' share price on Monday, on a day when the overall sharemarket was being sold off again, shows that investors are right behind the decision to swing the focus squarely back to groceries and the fruit and vegetable aisles that are the cornerstone of Woolworths, and away from drill bits and paint.
Now read: Woolies pulls the pin two years too late