Woolworths’ “anatomy of disaster”

By John Rice, University of New England, and Nigel Martin, Australian National University

MastersMasters, of Woolworths, has died at the age of five after a long illness. Its passing was a surprise to few. It will live on in the memory and superannuation accounts of Woolworths investors and, it is hoped, in the boardrooms of Australia forever.

Masters was a surprise offspring of the well-matured Woolworths family. Many rightly speculated it was conceived in response to the wonderfully successful Bunnings, from Woolworths’ corporate nemesis, Wesfarmers. It was an odd motivation for the venerable Woolworths family to bring into this world another sibling for such an established brood. With the benefit of hindsight, Woolworths would have been better to focus its time and energy on what was working well, rather than bringing into the world a business that could never thrive.

The adjective “prodigal” seems apt for Masters. Perhaps most associated with the Prodigal Son, the offspring who partied away his father’s wealth and then returned in sorrow. Masters consumed so much time, energy and money from Woolworths that it left Woolworths exhausted, demoralised and financially frustrated.

An anatomy of a disaster

Masters was never intended to succeed on its own merits. It was both spoiled and a spoiler from the start. Woolworths hoped to sap the financial strength of Wesfarmers by reducing Bunnings’ operating margins – little did it know a much smarter operator (Aldi) was about the play the same trick on Woolworths’ main grocery and alcohol business – albeit much more successfully.

Rather than Masters weakening Woolworths’ corporate enemies, the reverse is true. Bunnings has grown from strength to strength and will now make even greater profits for its parent, Wesfarmers. Wesfarmers shares rose as much as 4% on the news. The Masters debacle has clearly reduced overall competition in hardware retail, and its exit will not reverse this.

Woolworths’ retail competitors will also be carefully looking at the Masters stores that Woolworths will now abandon at great cost. Could these emerge as new locations for the next Bunnings, Costco and the like? If so, this would be the second free kick by Woolworths with long-term consequences. Many Masters stores, however, are doomed to lay dormant and empty for many years as many Masters locations were simply duds.

In hindsight, it is worth pondering what might have been had Woolworths tried to replicate the success of Costco, building something new for Australian retail customers, rather than trying to wreck Bunnings’ success. There were always better options to pursue.

The damage by Masters has been both direct and indirect. The direct financial losses are huge, and yet to be finally quantified. Woolworths and its one-third partner Lowe’s have poured perhaps A$3.5 billion into Masters over the last six years. Lowe’s, with great prescience, negotiated an exit option that shifted much of the risk to Woolworths. This has cauterised Lowes’ losses to perhaps US$500 million – at the expense of Woolworths shareholders.

In the final analysis, the direct losses to Woolworths shareholders may be around A$2 billion when all is said and done. This is far from small change – but it is around the market capitlaisation growth that happened when Woolworths shares spiked by more than 6% after today’s announcement. Over the long term, however, much greater costs will emerge.

Costs yet to come

Extricating itself from long-term, yet newly established, leases will keep property lawyers busy for a while. How well these leases were negotiated by Woolworths will tell us much about how self-deluded Woolworths was about the viability of Masters.

The massive financial and managerial distraction created by Masters has left little time and money to focus on the core grocery business. This has been especially problematic as Aldi has been triumphantly focused on rolling out new stores across Australia. Reinvigorating Woolworths’ core business is an immediate and pressing challenge.

Combating the resurgent Wesfarmers, and the emergent Aldi, means life in general is about to get a whole lot more challenging for Woolworths’ management. Wesfarmers decision to purchase the UK Homebase business  for around A$700 million will assist it in building global supply scale economies – adding impetus to higher margins for its Bunnings business.

Most prosaically, Masters has destroyed reputations and careers. Ironically, those most to blame have already exited with huge payouts . It is the lives of Masters workers and their families that we should consider most. They, and Woolworths shareholders, will carry the burden for Masters far after the last store shuts its doors.

John Rice is a Professor of Management at University of New England.

Nigel Martin is a lecturer at the College of Business and Economics, Australian National University

This article was originally published on The Conversation.

Read the original article.

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  1. Peter posted on January 19, 2016

    The people that designed and set up Masters were totally drunk on money. From the start Masters had illusions of grandeur, every area they dabbled in was more of a token gesture as there were far larger better equipped specialty stores around them. They didn't ask the question "Why are people shopping at Bunnings"? If they had asked that question then the store format and variety of products would have completely changed before the first store rolled out. Give credit where it's due Bunnings have created more than just a hardware store, they have created a store that Aussies like to visit and an image that Aussies can associate with. There is room for a 2nd big box hardware store but Master's was not it. R.I.P.

  2. Phil posted on January 19, 2016

    Thank you for mentioning that it's the Masters team members and their families who are the real and innocent victims here. Presumably Woolworths have now put on hold their recent blanket TV coverage of the David Warner "great careers at Woolworths" adverts.

  3. Peter posted on January 19, 2016

    Very good point Phil. What amazes me how can two big companies with virtually unlimited resources and so many so called "Degree advisers" make such a tremendous mistake, any average person could see that the format wouldn't work especially after the first few stores opened. Clearly there are people that made huge money off this even though it failed.

  4. Steve posted on January 21, 2016

    I feel really angered that some of those responsible have already been appointed to high paying roles with other companies . Can you imagine the interviews in which they clearly must blame anyone but themselves. I really hope most people get jobs within woolies group

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