Woolworths Limited (ASX: WOW) chairman Gordon Cairns has ruled out selling off Big W, because the retailer “would get nothing for it”.

Speaking at the company’s AGM, Mr Cairns said, “Big W made about $200 million two or three years ago, the truth of the matter is we’ve let it deteriorate, and if we were to try and sell it now, we’d probably get nothing for it.

In the 2013 financial year (FY13) it’s true that Big W generated $191.3 million in earnings before interest and tax (EBIT), but it’s been downhill from there. FY14 was lower at $152.9 million as was FY15 at $114.2 million, and last financial year Big W posted an EBIT loss of $14.9 million. Revenues have steadily been falling too, suggesting Big W is facing structural challenges.

Amazon, online retailers and competitors Kmart and Target have made life tough for Big W. Kmart and Target are owned by arch-rival Wesfarmers Ltd (ASX: WES), which also owns Coles. Kmart has successfully turned itself around by focusing almost exclusively on cheap, private label products, but Target is in the same boat as Big W – struggling to grow earnings.

The major issue faced by the discount variety stores (Big W, Kmart and Target) is that many of their products are sold online at lower prices, or they face rising competition from department stores like Myer Holdings Ltd (ASX: MYR) and David Jones which have faced their own near-death experience. There’s also the steady stream of overseas fashion retailers arriving in Australia and setting up shop.

Even budget stores like Reject Shop Ltd (ASX: TRS) are encroaching on the discount variety retailers turf and stealing market share.

Shareholders have feared that Big W was going to be another ‘Masters’ referring to the failed home hardware business that Woolworths has shut down, and sold off the assets. And it may still end up closing unless Woolworths can pull something out of its hat. Mr Cairns may even fix the Big W issues and then sell the business.

In a worrying sign, the recently appointed CEO for Big W, Sally McDonald, quit after just ten months in the role. Ms McDonald is a highly regarded retailer, having restored profit growth at luxury handbag retailer OrotonGroup Limited (ASX: ORL) between 2006 and 2013. Media reports suggest Ms McDonald quit because of a disagreement over the length of time to turn Big W around. Woolworths was aiming to make Big W profitable within 3-5 years.

Foolish takeaway

Given the increasing ‘irrelevance’ of discount variety stores, Woolworths may be better off just selling it now, rather than spending millions trying to turn it around first.

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.