Looked good on paper
In August 2009, Woolworths Limited announced that they were going to enter the $42bn home improvement sector. At the time, there was only one major player – Wesfarmers’ offering: Bunnings with only 17% market share. Another enticing factor tempting for Woolworths Limited was the fact that Wesfarmers’ Coles was seemingly struggling against Woolworths supermarkets. An entrance into the home improvement sector appeared opportune whilst competitor Wesfarmers wasn’t at their prime.
The Masters’ business model – how did it distinguish itself?
The initial plan was to provide quality service and excellent product knowledge from the staff. Additionally, Masters generally attempted to have nicer stores with polished concrete floors. Masters’ stores generally averaged 13 500 sqm in size, whereas competitor Bunnings averaged 8 000 sqm with almost 1.5x higher sales than Masters. Essentially, Woolworths had high hopes for the chain.
What went wrong?
Bunnings too well established
One of the most major issues that Masters faced was that Bunnings Warehouse has been so strongly established over more than half a century, being founded in 1952. Bunnings has had the market cornered with superior geographical locations and cheaper prices. With 324 stores as opposed to Masters’ 63, Woolworths Limited had entered into an extremely steep uphill battle.
Bunnings’ buying power
Additionally, Bunnings has had immense buying power considering the size of the home improvement giant meaning that its prices were difficult to compete with. They generally had a 11.5% margin on all of their products.
The initial outlay
Another significant issue from the outset was that the type of business required an astronomical outlay, which meant it would naturally take an extended period of time before profit would be seen. The total investment came out at $3.22bn over a six and a half year period. Over this whole time, Woolworths Limited had been operating at a loss and it was finally estimated that they would be only able to break even in 2020 – over a decade after their initial opening.
The expansion was not timely
One of the keys to Bunnings’ model was to secure some of the best geographical locations. So by the time Woolworths Limited had entered the market, under pressure to expand, the opening of stores was not as efficient as they could have been. The locations, demanding such huge plot of land, were often not as ideally placed.
What can we take away from this backfiring competitive move
As Woolworths Limited lost $600 million over just six years, Wesfarmers invests $700 million into expanding the Bunnings business model internationally into the UK. Clearly, Woolworths had identified an interesting market, but completely failed to execute the move. It now looks like the biggest mistake Woolworths made was underestimating the extremely steep barriers to entry into this new market.
So, make sure to do your homework before you start investing $3.22bn into a now seemingly flawed business model.
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