Australia’s major supermarket group Woolworths is looking for new strategies to overcome a poor performance by its Masters home improvements division. Woolworths is battling the strong market dominance of the Wesfarmers-owned Bunnings group. Wesfarmers also owns major supermarket rival Coles.

Woolworths has dropped its previous profitability predictions for this financially hemorrhaging part of the Woolworths business but is saying it will ‘refocus’ the store rollout of the troubled Masters Home Improvements business.

Woolworths said it would not meet its earlier guidance that losses in its Home Improvement business for the 2014 financial year would not exceed the 2013 financial year, and announced that it expected ‘break even’ for the Home Improvement business would not be achieved during 2016.

Masters sales were $752 million in the 2014 financial year, an increase of 42.2 per cent on the previous year. Woolworths said sales were lower than expected and were impacted by a “highly competitive market and the Federal Budget’s impact on consumer confidence”. Losses before interest and tax were higher than anticipated.

Woolworths said Masters remained in its “development phase”, with stores having traded, on average, for 17 months at the end of financial year 2014. The current store network includes a number of stores in regional and future growth areas, which Woolworths said would take longer to mature.

According to Woolworths, Home Timber and Hardware EBIT was impacted by higher costs following financial year 2013 property disposals and a highly competitive market..

Woolworths ‘remains confident’ in profitability of Masters

Woolworths CEO Grant O’Brien said that although Woolworths was disappointed not to reach its earlier guidance, the Company remained confident that the Home Improvement business would be a material profit contributor for Woolworths and would deliver an acceptable return on investment.

“Our Home Improvement business has made a good start,” Mr O’Brien said. “We have established a solid foundation and remain confident that it will become a material profit contributor for the Group. We have a strong track record in developing new growth businesses, for example our successful Liquor business,” he said.

“The rationale for entering this market remains strong,” Mr O’Brien said. “It is a $45 billion market, with 5 per cent annual growth and one significant retailer with approximately 17 per cent market share. It is a fragmented market that is in the process of consolidation as demonstrated by the 42 per cent Masters sales growth in financial year 2014,” he said.

Mr O’Brien said US-based hardware business Lowe’s continued to be a “supportive” Joint Venture partner, with Lowe’s reaffirming its commitment the Joint Venture through amending the terms of its put option.

New Managing Director for Home Improvement to ‘refine’ business model

Mr O’Brien said Woolworths’ Home Improvement business was “entering its next phase of growth, from start-up to a scalable, profitable business”.

“We recruited Matt Tyson, an outstanding home improvement retailer, for his direct experience in building young big box format businesses to maturity to lead this next phase,” Mr O’Brien said. “Following Matt’s appointment, we asked him to look objectively at the market, and how we build on our current foundations to take advantage of the opportunities available. We will continue to refine the model as we grow this business to profitability,” he said.

Mr Tyson, Managing Director Home Improvement said the business had made a “strong start” in a short period of time.

“With 49 Masters stores and a growing Home Timber and Hardware store network, Home Improvement generated more than $1.5 billion in sales in financial year 2014,” Mr Tyson said.

“The next stage of our development will include a refocused store roll out plan, and an enhanced store format and range,” Mr Tyson said. “We will continue to learn and adapt and will take the steps necessary to ensure we create a compelling customer offer and sustainable, profitable business,” he said.

Refocused store roll out plan

To develop its footprint as rapidly as possible,  Woolworths said it took opportunities to open new stores as they arose, moving at pace in Victoria and Queensland where planning approvals were achieved quickly. Woolworths reported that this had resulted in uneven national store coverage and a less efficient supply chain at this stage of development.

Going forward, Woolworths said it would focus on key metropolitan areas and selectively fill the gaps in its store network. In the coming months Woolworths will open two Adelaide stores, an area where Masters currently does not have any presence. Woolworths said it was also focused on bringing more stores to metropolitan areas in New South Wales and Queensland.

As a result of this refocused approach, Woolworths said it expected to open fewer new stores over the next two years and would not deliver the previously communicated target of 90 stores by the end of financial year 2016. Woolworths said it planned to open around 10-15 Masters stores per year for the next few years to add to its existing base of 49 stores.

Woolworths said it would continue to selectively grow its Home Timber and Hardware store network. This includes its recent agreement to acquire Hudson Building Supplies. The acquisition will include 15 sites (10 in New South Wales and five in Queensland).

‘Enhanced ranges and format refinement’

While Masters has strong national brand awareness, Woolworths said it was working on increasing customer traffic and conversion rates.

To address this, Woolworths said it was changing specific areas of its in-store offer to “take better account of the opportunities that will increase the revenue of each store”. Woolworths said it would give more space to categories that drove customer visits, such as Hardware, and aim to further differentiate Masters in project categories like Kitchens and Bathrooms, where performance to date was ahead of expectations.

Woolworths said these changes would take some time to roll out fully into all of its existing stores and as a result, the Company did not expect to see the full benefit in the short term.

Change to the terms of Lowe’s put option

Woolworths said it also continued to have a supportive Joint Venture partner in US-based hardware company Lowe’s. Lowe’s ongoing commitment to the Masters business has recently been further demonstrated through a modification to the terms of their put option.

The opening date for the put option exercise period has been deferred indefinitely. From October 2015, Lowe’s can issue a notice setting an exercise date for the option triggering a 13 month notice period after which the option can be exercised.

Woolworths said that as Masters transitions into a new phase of growth, the Company would update the market on its progress at Full Year and Half Year Results.