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Store wars: Jack Cadeaux on why Masters was a disaster for Woolworths

February 16, 2016

​​​​​​​​​​​For starters, there was no obvious market gap for a new entrant

It was a master plan that turned into a DIY disaster. Retailing giant Woolworths hoped to take on the might of Bunnings with its own chain of hardware stores, called Masters. Seven years on, 63 stores down, and Woolies now plans to exit the business, having lost nearly $3 billion. Julian Lorkin spoke with UNSW Business School associate professor Jack Cadeaux, head of the school of marketing, about how the company could make such a huge error.

An edited transcript of the interview follows.

BusinessThink: This is surely an object lesson that business schools the world over will be using as a case study for many years. How did Woolworths make such a large mistake?

Jack Cadeaux: I think what they did wrong was to enter the market in the first place. It was not perhaps an opportunity for this company – or any entrant. After all, Bunnings had been well established for many years, and there were also many well-established competitors – such as Mitre 10, located more in country locations than the city and suburbs, but they did succeed in gaining some significant penetration.

In fact, at an earlier stage Bunnings had acquired some of the larger Mitre 10 stores – and went through a long history of store expansion and development. So it took a while before Bunnings arrived at its strong position in the market. For any entrant to expect to compete head to head with an established entrenched competitor like Bunnings, as well as Mitre 10, would be difficult. There wasn't [an obvious] gap in the market at the time.

BT: So it's surprising that Woolworths wanted to get into the market when there were other international retailers eyeing the Australian hardware market. Why did Woolies get in and nobody else?

‘​I think what they did wrong was to enter the market in the first place’         ​

– Jack Cadeaux

Cadeaux: You would think it was surprising, especially considering the success of Aldi and Costco in this market. In the first instance, you [could ask] why wouldn't Home Depot – the leading big box hardware company in the US and North America – try to do this. But in fact they are pretty reluctant to get into any international market. They did try to get into China, but pulled out. [And] even though [Australia] is a large market they didn't feel comfortable with understanding the local needs and requirements. You would think that's maybe understandable in China, but why wouldn't Australia be more like Canada or Mexico in terms of language and culture?

But there are some peculiarities [in Australia] in terms of what a DIY person can do compared with a tradesman. Tradies play a particularly strong role here, both traditionally and in terms of regulation. Take something very simple, such as installing a tap. Tap installation here is not a DIY feasible project. There are limitations on what you can do. I've tried it myself and I would not want to do it. Whereas in the US it is rather routine. You pop into a Kmart and pop it on yourself. A lot of things are like that.

BT: And if we look at the products Masters were trying to sell, it was an odd blend of white goods, mixed with gun safes –  even patio heaters in the summer heat of January. All the things that worked well for Masters' partner Lowe's in the US. Is this a question of a US retailer assuming its marketing strategy will work perfectly in another country, and falling flat on its face?

Cadeaux: White goods are certainly significant. Lowe's now stocks white goods, but that is not where they started. They started with more general DIY merchandise, focusing on a core business. After they established a loyal group of customers, with significant market penetration, with a large number of stores, then they entered the broader range of home appliances. White goods. Fridges. Which is an obvious sales volume extension. But it is not an entry point.

BT: And is trying to break into an established market where margins are slim a problem? Many people in business schools looking at this as a case study would suggest doing something completely different. And Masters did try to do somethings different from Bunnings. But Bunnings staff are given a lot of freedom. With Masters, it was done totally by the script. A classic US retailing tactic, but it went down very badly with the Australian customers.

Cadeaux: And it took Bunnings some time to reach that point. Learning curves and sales growth are slow in that business, like stock turnover. But when you build large stores you need to move fast to get to the break-even point. And it's not obvious that Masters' combination of volume, expectations of demand, and the slow market development strategy that is required in that industry, was the right combination.

If it had stuck around for 10 or 20 years it would have been a long haul and it's not obvious that Woolies would be in the position to do that.

And there is another thing we haven't touched on. And that is store location and the availability of good locations. It's critical in this business, and it is important both with supermarkets and DIY. Again it's not obvious they were in a good position to deal with the lack of good opportunities for good locations.

‘You have to have exactly what the customer needs for the particular situation, and a massively good selection. That’s critical’ 

– Jack Cadeaux

BT: And it's odd given that they had the cash to go out and buy the good locations. Was it simply that they didn't realise how important that was?

Cadeaux: Well, you'd have thought they would realise because it is crucial in the grocery business. So you would have thought they would have known that. The trouble is that Bunnings had penetrated the market so carefully, in some cases having stores so close to one another and then pruning back the weak locations to concentrate on the good ones. They acquired competitor stores to get their hands on good locations, but there wasn't a lot left for a large format store to work with. And Masters didn't open up that many stores, particularly in Sydney where they had very weak penetration at the fringe markets to say the least.

BT: And equally, they seemed to be confusing their customers as well with their logo with an M on blue, like Mitre 10. If you are drilling down in terms of lessons for a new entrant into an established market you seem to be saying, do the basics well, and be quite clear what you are offering. And sell low, just as Target did when they launched – sell the basics cheaply.​

Cadeaux: Price and promotions are not necessarily an advantage in a DIY market. Assortment and range, and even micro-assortment in categories, are tremendously important. You have to have exactly what the customer needs for the particular situation, and a massively good selection. That's critical. So it's not obvious that would have been the solution.

And in terms of branding, the store branding could have been tweaked, in terms of Mitre 10, but they weren't always competing head to head. Another branding issue is store brands, Lowe's in the US have a great many store brands and exclusives, and that is very important for developing loyal customers. It takes time. So many of these issues take time, and time is not in favour of Masters.

BT: And that's why Woolies is exiting the business. 

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