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Bunnings could buy Masters sites from Woolworths Limited

Photo credit: AS 1979

Bunnings owner Wesfarmers Ltd (ASX: WES) has confirmed it’s interested in about 15 Masters sites. Masters is of course the home improvement chain owned by supermarket giant Woolworths Limited (ASX: WOW).

As you can see from the chart below, it’s been a tough start to the year for both companies, with Wesfarmers down 0.3%, and Woolworths down 9%:

(Source: Google Finance)

Both companies are suffering from the expansion of discount supermarket chain Aldi, which is increasing its pressure by expanding the fresh groceries sections in a bid to win a bigger slice of the fresh food market.

Aldi’s strategy is aimed at curtailing the number of its shoppers who buy their dry goods at its supermarkets, but then purchase their fruit and vegetables at other competitors, including local greengrocers.

Since launching its business in Australia in 2001 with two stores in Sydney, Aldi has grown its national network to more than 400 outlets and lifted its market share to around 10%.

Figures released by the company last year as part of a senate inquiry showed that in 2014 its sales had grown to around $5 billion, and it had generated a profit of around $260 million in that year.

In a further sign that Aldi really means business in Australia, figures released recently showed Aldi almost doubled its spending on advertising last year to $28.9 million from $15 million in 2014.

Data from research firm Neilsen showed Aldi’s advertising push has increased across television, newspapers, magazines, radio, out of home, cinema, online and direct mail.

Meanwhile, Coles’ marketing spend fell 25% to $53.6 million last year and Woolworths supermarkets cut back their advertising by 5.3% to $87.9 million, according to Nielsen.

In an effort to compete with Aldi and Woolworths, Bunning’s home improvement managing director John Gillam says he’s watching what will happen to Masters after Woolworths announced last month that it will either sell or mothball the loss-making DIY retailer.

Mr Gillam says Bunnings is interested in a small number of Masters properties.

“In rough terms, there are over 100 properties all up, 63 developed into stores and there are 15 or so that we are interested in,” he said.

“Some of those are in areas where we will have a long term plan to have a store, others are replacements. We think we will have strong competition. We don’t think for a second that we are the only ones looking at the opportunities here.”

He said if Masters were to close and undergo a fire sale it would have a short-term impact on Bunnings.

“It is too early to predict the impact or how it would play out (because) there is no clarity around the quantum or the disposal approach,” he said.

“It looks like that will present a bump or two in the road in the second half.”

Bunnings will expand to the United Kingdom with the acquisition of British DIY chain Homebase.

Homebase’s parent company Home Retail Group will put Wesfarmers’ $700 million takeover offer to a shareholder vote soon.

Bunnings had a strong first half with revenue jumping 10.9% to $5.5 billion in the six months to December 31.

The retailer’s earnings before interest and tax rose 13.4% to $701 million.

Its strong result combined with Coles’ strong performance in the half helped lift Wesfarmers’ net profit 1.2% to around $1.4 billion.

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