Why I would have kept Masters if I was Woolworths

Woolworths Limited (ASX: WOW) announcement today that it was going to sell off or disband its Master home hardware business is bittersweet to me.

On one hand, it means the Woolworths group is at least $200 million in earnings better off annually, but it also means the company will have to stump up the cash to buy out 33.3% shareholder Lowes, potentially writedown the value of its Masters assets and then wear the cost of shutting down Masters – unless it can find a trade buyer.

But it also means that Woolworths has given up on the $42 billion home hardware market – perhaps for good – and where the company is going to generate growth outside its supermarkets division is anyone’s guess.

For some time now, I’ve argued that Woolworths got its Masters’ strategy completely wrong – with the wrong products, targeting the wrong demographic and the wrong locations (right next door to rival and market leader Bunnings – are you kidding me?). That has resulted in the Masters brand a joke at best and an utter failure at worst.

Do-it-yourself (DIY) weekend warriors – the main customers of home improvement stores like Bunnings, owned by Woolworths rival Wesfarmers Ltd (ASX: WES) – and trade contractors were never that keen on the products that Masters sold. A lack of high-quality trade tools compared to Bunnings and the wrong product mix kept the DIY customers away from Masters. Hardware does not mean home decorating items such as kitchenware, paintings, art and craft items or cushions.

Woolworths says that a strategic review of the hardware business revealed that Masters wouldn’t be profitable for years, which is no real surprise with its current profile.

Half of Woolworths home improvement division was Home Timber & Hardware – which was profitable at an earnings before interest and tax (EBIT) level. It also scored the highest customer satisfaction awards in a recent Roy Morgan survey. I’ve previously suggested that to fix Masters, Woolworths needed to take a number of steps, including rebranding Masters stores as Home Timber & Hardware.

Additionally, Bunnings seems to hire ex-tradespeople, with years of experience – where I’ve personally found Masters staff to have a lack of knowledge of the products they were selling. The difference is like chalk and cheese.

If Woolworths had basically copied Bunnings’ strategy and format (similar to Woolworths supermarkets versus Coles), it more than likely wouldn’t have found itself in this position now.

Foolish takeaway

Despite Woolworths’ view that Masters is years away from becoming profitable, a couple of simple steps could dramatically improve the time horizon. Now we’ll probably never find out what strategy would work for Masters.

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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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