Is Woolworths Limited digging itself into an even BIGGER hole?

If the retailer is propping up its hardware division at the expense of its supermarket division the long-term consequences may not be great.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of the great things for consumers about a capitalist society is that businesses making big profits find that competitors arrive to vie for a slice of those profits. This capitalist trait is generally a positive for consumers as it leads to more choice and lower prices.

When it comes to large, highly profitable businesses in Australia look no further than hardware chain Bunnings. The retailer has a market-leading position and enjoys very high margins and returns on capital. At first glance it appears hard to believe, but in terms of earnings contribution to its owner Wesfarmers Ltd (ASX: WES), Bunnings provided $948 million in the last half year. In comparison the Coles food and liquor business provided earnings of $1.6 billion – not bad for a hardware store!

Given the high profits flowing to Wesfarmers thanks to Bunnings it is hardly surprising that Woolworths Limited (ASX: WOW) has entered the hardware market with the aim of grabbing itself a slice of the profit pie.

What is perhaps surprising however are the troubles Australia's leading retailer appears to be having in rolling-out and gaining traction with its Masters format. According to a report in The Australian Financial Review, to counter this problem, analysts from broker Citigroup believe that Woolworths has been raising prices within its supermarket chain to offset mounting losses within the hardware business.

The worry for shareholders is what the long-term effects of current decisions will be. Investors have witnessed the challenges now facing smaller rival Metcash Limited (ASX: MTS) and the importance of a constantly renewed offering and lowest prices. If Woolworths begins jeopardising its supermarket offering to support its fledgling hardware offering then investors will need to tread carefully.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »