$3bn Masters disaster was all DIY by Woolworths

The slow-motion trainwreck of Woolworths’ Masters experiment is finally over.

Woolworths will sell of their Masters Home Improvements stores. Picture: Toby Zerna

The choice of Braybrook in Melbourne’s west as ground zero for Woolworths’ (WOW) grand home improvement experiment was always an odd one.

Sure, you have to start somewhere if you’ve got five years to develop 150 sites around the country.

But Braybrook? It’s in the top 10 of Victoria’s most disadvantaged suburbs.

What’s more, the location chosen by Woolies to open its first Masters store in 2011 was slap-bang in the middle of Bunnings territory — the Maribyrnong big box is only 3km away, and Sunshine is even closer.

For one hardware expert, though, it just didn’t feel right.

“The fitout was expensive, it oozed style, there was lots of space and light, and the products looked beautiful,” he said.

“It was designed to make women feel fantastic, but that’s not the market. It wasn’t going to work and it never did.”

On Monday, the full scale of the Masters debacle became ­apparent.

Having chewed through $3 billion, new Woolies chief executive Brad Banducci announced a three-pronged exit plan to raise $1.5bn, or a paltry $500 million after wind-down costs.

Ironically, 2016 was to be the year that Masters turned profitable.

Instead, after a seven-month sale process, Metcash will pay $165m for Home Timber & Hardware and fold it into the Mitre 10 business it already owns, while the Masters stock will raise $500m through auction house GA Australia, a unit of the big US auction house Great American Group.

The final leg of the deal, which is subject to the approval of Woolies’ one-third joint venture partner Lowe’s of the US, will see the property assets — including 61 Masters stores and 21 development sites — flogged to a group of rich listers.

Among them are Spotlight owners Zac Fried and Morry Fraid, and Chemist Warehouse proprietors Mario Verocci and Jack Gance.

In what could be the final insult for Woolies, Bunnings chief executive John Gillam gets to pick up 15 prime development sites from the consortium to execute his own expansion plans.

The word “could” is used advisedly, because there’s no guarantee that Lowe’s will approve the property deal.

Suffice to say that Lowe’s, based in Mooresville, North Carolina, has been taken aback at persistent suggestions in the Australian media that it bears most of the ­responsibility for the Masters ­disaster.

After ending his consultancy with Woolies in June, ex-chief executive Roger Corbett lashed out at Lowe’s, saying they were supposed to be the hardware experts but had failed in the most basic areas, such as recognising that the Masters range had to allow for seasonal differences between the northern and southern hemispheres.

But Woolies was always the dominant partner in the joint ­venture.

One retailer who knows the US scene well says Lowe’s, the second largest home improvement retailer in the world, “hasn’t taken too kindly to being thrown under the bus”.

“They’re very proud, conservative, god-fearing Southern boys who go to bed in a suit,” he says.

“It’s no surprise they’re still withholding their consent on the property deal. We’ll see what happens.”

When then-Woolies CEO Michael Luscombe launched the group’s hardware strategy in August 2009, the prospect of a slow-motion Masters trainwreck would never have entered his mind.

The strategy was presented as carefully planned and researched, drawing on “significant local and international industry expertise”, and would grow the $24bn hardware category by feeding the ­nation’s obsession with property.

It emerged that Luscombe’s wife had nicknamed him “Mr Deck” because of his love of do-it-yourself home improvement.

Behind the scenes, though, a different story was unfolding.

Far from adopting a cautious, measured approach, the Masters project had been dubbed Project Oxygen, so-called because its objective was to suffocate Bunnings.

Woolies head of business development Grant O’Brien, who would succeed Luscombe in 2011, was also going hell-for-leather.

The Supreme Court of Victoria heard allegations last year that Woolies wanted to dump a deal to build a Masters store in the Victorian regional city of Bendigo so it could pursue the Hume & Iser site that Bunnings was circling.

O’Brien told Woolies head of property Richard Champion via email that he wanted Woolies to be ready to move on Hume & Iser and other sites “tomorrow/ASAP/pronto/now!!

“I will provide whatever is needed to make this happen,” O’Brien said in the email.

“Even if we expose ourselves to the cost of the unknowns I don’t want us waiting.”

Woolies’ hyper-aggression in 2009 and before, years before it would open its first store in Braybrook, telegraphed its intentions to Bunnings.

Caution had effectively been thrown to the wind — this was a full-scale assault, not the usual practice of building a pilot store and expanding when you can be reasonably confident that you’ve got the property, logistics and range spot-on.

Accounting firm Ferrier Hodgson’s retail practice partner James Stewart puts it this way: “You can’t invade Normandy if you’re doing it by boat because the Germans will see you coming.

“Competition for Bunnings is a valid proposition, but it all comes down to execution.

“Bunnings has a tightly run management team, they’re a nimble competitor and they had plenty of time to surround the tool shed with sandbags.”

A well-credentialed retailer says Woolies failed to learn the myriad lessons from its debut store in Braybrook.

“They exponentially leveraged the errors so that poor performance was hard-baked into the network,” he says.

It was a stunning misstep for a retailer that aspires to be world-class.

Woolies arguably has a superiority complex, fed by a long ascendancy over Coles that came to an abrupt end once its grocery rival acquired competent management through the Wesfarmers takeover in 2007.

So rather than being world-class, the record could more accurately state that the company did a serviceable job against a poorly managed rival, and that its retail skills have not been honed by sustained competitive intensity.

Masters churned through a long list of chief executives, including both local and Lowe’s talent, as the joint venture repeatedly failed to achieve its projections.

It started with the moustachioed Texan Don Stallings, who proudly showed off the diamond-studded ring of senior Lowe’s staff when he chaperoned the media through the Braybrook store a few days before it opened in 2011.

Lowe’s executives apparently get an extra diamond every time they meet a target, so it’s doubtful that Stallings’s experience at Masters enhanced the value of his ring.

In 2013, he returned to the US to resume his Lowe’s career.

His replacement, chief operating officer Melinda Smith, entered Masters folklore with a bizarre investor presentation in July of the same year, where she seemed torn between reassuring analysts that Woolies was right on top of the hardware thing and conceding it still had a lot to learn.

Woolies, she said, had a great track record of building businesses like Masters, such as Big W, petrol and liquor, where significant upfront investments had been made for handsome, subsequent returns.

But not a minute later, Smith detailed the unanticipated problems. “With a new business as a start-up, a lot of these things, including the stock that you need to order, including every single process that we write, including what does the store manager do with the keys at the end of the day.

“It’s all built from scratch, and so there’s a lot you don’t know.”

Then there were the stocking challenges from that hellish variability in seasons.

“When it’s Christmas time over there (in the US) it’s also winter,” Smith said.

“Our Christmas time lines up with spring and Father’s Day, so it’s a different seasonal curve and there’s no doubt a heap of opportunities to better capitalise on that.

“We didn’t have the right stock in some instances and we left quite a lot of opportunities on the table.”

Finally, having stressed the importance of achieving critical mass from a network of 90-100 stores, the Masters boss said it was “good news” that the company was opening fewer stores in 2013 “because it gives us an opportunity to really start to bed down our existing stores and make further enhancements to our operating model”.

Woolies stock hit a 10-month high in 2009 after it revealed its hardware plans.

Broking firms pumped out wildly optimistic forecasts, with RBS predicting Woolies could generate $3.5bn in sales and $330m in joint-venture earnings before interest and tax if it could achieve its plan of 150 stores.

But the writing was on the wall by the time Smith made her presentation in 2013.

Woolies stock closed that week in July at $33.32, about one-third above its current level of $25.

The time to sell was then. If not well before.